[Federal Register Volume 67, Number 16 (Thursday, January 24, 2002)]
[Proposed Rules]
[Pages 3540-3572]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-1423]



[[Page 3539]]

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Part II





Department of Agriculture





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Agricultural Marketing Service



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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 Written Exceptions to Proposed Amendment of 
Marketing Agreement and Order No. 930; Proposed Rule

  Federal Register / Vol. 67, No. 16 / Thursday, January 24, 2002 / 
Proposed Rules  

[[Page 3540]]


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DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

7 CFR Part 930

[Docket Nos. AO-370-A7; FV00-930-1]


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 to 
proposed amendments to the marketing agreement and order for tart 
cherries grown in Michigan, New York, Pennsylvania, Oregon, Utah, 
Washington and Wisconsin. The amendments are based on those proposed by 
the Cherry Industry Administrative Board (Board), which is responsible 
for local administration of the order. The amendments include making 
districts producing more than 6 million pounds per year subject to 
volume regulations (rather than 15 million pounds); making shipments of 
cherry juice and juice concentrate to certain markets eligible to 
receive diversion credit; changing provisions related to alternate 
Board members serving for absent members at Board meetings; making all 
processed cherries subject to assessments; and eliminating the 
requirement that different assessment rates be established for 
different cherry products. Remaining amendments pertain to allocation 
of Board membership; clarification of order provisions relating to 
exemption and diversion; release of cherries in the inventory reserve; 
and the use of crop estimates other than the official USDA crop 
estimate in developing the Board's marketing policy. 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 13, 2002.

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, DC 20250-0200; telephone: (202) 720-2491, or Fax: 
(202) 720-8938. Small businesses may request information on compliance 
with this regulation by contacting Jay Guerber, Marketing Order 
Administration Branch, Fruit and Vegetable Programs, AMS, USDA, PO Box 
96456, room 2525-S, Washington, DC 20090-6456; telephone (202) 720-
2491; Fax (202) 720-8938.

SUPPLEMENTARY INFORMATION: Prior document in this proceeding: Notice of 
Hearing issued on March 17, 2000, and published in the March 23, 2000, 
issue of the Federal Register (65 FR 15580).
    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 the order is based on the record of a 
public hearing held in Rochester, New York on March 27 and 28, 2000; in 
Grand Rapids, Michigan on March 29, 30, and 31, 2000; in Kennewick, 
Washington on April 4 and 5, 2000; and in Salt Lake City, Utah on April 
6, 2000. Notice of the hearing was published in the Federal Register on 
March 23, 2000. The notice of hearing contained numerous proposals 
submitted by the Board, and one proposed by the Agricultural Marketing 
Service (AMS).
    The Board's proposed amendments included making all districts 
subject to volume regulations, rather than only those districts 
producing more than 15 million pounds per year; making shipments of 
cherry juice and juice concentrate to certain markets eligible to 
receive diversion credit; changing provisions related to alternate 
Board members serving for absent members at Board meetings; making all 
cherry shipments subject to assessments; and eliminating the 
requirement that different assessment rates be established for 
different cherry products. Other amendments proposed by the Board 
pertain to allocation of Board membership; clarification of order 
provisions relating to exemption and diversion; release of cherries in 
the inventory reserve; and the use of crop estimates other than the 
official USDA crop estimate in developing the Board's marketing policy.
    The Fruit and Vegetable Programs of AMS proposed to allow such 
changes as may be necessary to the order, if any of the proposed 
amendments are adopted, so that all of the order's provisions conform 
with the effectuated amendments.
    Ninety-five witnesses testified at the hearing. These witnesses 
represented tart cherry growers, processors and marketers throughout 
the production area. Some witnesses supported the Board's proposed 
amendments, while others were opposed to some of the recommended 
changes. Most witnesses addressed the issue of whether all districts 
should be subject to volume regulation rather than only those with 
production in excess of 15 million pounds. Other amendments that 
generated considerable interest at the hearing were providing diversion 
credits for cherry juice and juice concentrate to certain markets and 
allowing additional alternates to serve at Board meetings when both a 
member and his or her alternate are unable to attend.
    At the conclusion of the hearing, the Administrative Law Judge 
fixed July 7, 2000, 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 July 31, 2000, and then further extended to September 15, 2000. Two 
briefs were filed. A brief in support of the proposed amendments was 
filed by the Board. A brief in opposition to several of the proposed 
amendments was filed by the Oregon Tart Cherry Association.

[[Page 3541]]

Material Issues

    The material issues of record addressed in this decision are as 
follows:
    (1) Whether all districts in the production area should be subject 
to volume regulation rather than only those with annual production in 
excess of 15 million pounds;
    (2) Whether Board membership should be allocated among districts 
based on levels of production and whether a corresponding change should 
be made in quorum requirements;
    (3) Whether the Board should be able to designate any alternate to 
serve for a member at a Board meeting in the event that member and his 
or her alternate are unavailable;
    (4) Whether the diversion and exemption provisions of the order 
should be clarified by eliminating cross references among those 
provisions and adding general rulemaking authority to implement handler 
diversion provisions;
    (5) Whether specific authority should be added to the order to 
exempt or provide diversion credit for cherries exported to designated 
markets;
    (6) Whether diversion credit should be provided for shipments of 
cherry juice and juice concentrate to established diversion markets;
    (7) Whether to add specific authority for the transfer of diversion 
credits among handlers;
    (8) Whether grower diversions that take place in districts that are 
subsequently exempt from volume regulation should qualify for diversion 
credit;
    (9) Whether cherries in the inventory reserve should be able to be 
released for use in only certain designated markets;
    (10) Whether the 10-percent reserve release for market expansion 
should only apply during years when volume regulations are in effect;
    (11) Whether assessments should be paid on all cherries handled, 
except for those that are diverted by destruction at a handler's 
facility and those covered by grower diversion certificates;
    (12) Whether to eliminate the requirement that differential 
assessment rates be established for various cherry products based on 
the volumes of cherries needed to produce those products and their 
relative market values; and
    (13) Whether the Board should be able to use estimates other than 
the official USDA crop estimate in developing its marketing policy.

Findings and Conclusions

    The following findings and conclusions on the material issues are 
based on evidence presented at the hearing and the record thereof. In 
the presentation of its findings and conclusions, the Department takes 
official notice, where appropriate, of certain facts and figures that 
were not available at the time of the hearing. These include statistics 
relative to the 2000 and 2001 tart cherry crops, free and restricted 
percentages established for those years, and changes that have been 
made in Board membership since the hearing.

Material Issue Number 1--Districts Subject to Volume Regulation

    The order should be amended to provide that all districts in the 
production area with annual production in excess of 6 million pounds be 
subject to volume regulation, rather than only those with annual 
production in excess of 15 million pounds.
    The order currently covers cherries grown in Michigan, New York, 
Pennsylvania, Oregon, Utah, Washington and Wisconsin. For purposes of 
regulation and allocation of Board membership, the seven-State 
production area is divided into nine districts. Michigan, the largest 
producing State, is divided into three districts--Northern Michigan, 
Central Michigan, and Southern Michigan. Each of the other States 
constitutes a single district.
    A principal feature of the tart cherry marketing order is supply 
management through the use of volume regulations. 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 
the primary market. This can be accomplished by either placing the 
cherries into handlers' inventory reserves or by diverting them. 
Cherries may be diverted by leaving them unharvested in the orchard or 
by destruction at the processing plant; or by using them in secondary 
markets. These secondary markets include exports (except to Canada or 
Mexico), new products, new market development, experimental purposes, 
and charitable contributions. Shipments of restricted percentage 
cherries to these specified markets receive diversion credits which 
handlers use to fulfill their restricted obligation.
    Section 930.52 of the order provides that volume regulations only 
apply to cherries grown in districts in which average annual production 
of cherries over the prior 3 years has exceeded 15 million pounds. 
Additionally, paragraph (d) of Sec. 930.52 provides that any district 
producing a crop which is less than 50 percent of the average annual 
processed production in that district in the previous 5 years would be 
exempt from any volume regulation in the year of the short crop.
    The Board proposed eliminating the 15-million pound threshold, and 
subjecting all 9 districts to volume regulation. No proposal was made 
to change the provision of Sec. 930.52(d).
    Most witnesses at the hearing addressed this issue. Growers and 
processors in Michigan, Utah and Wisconsin testified in support of the 
Board's proposal. Opposition was primarily from growers and handlers in 
Pennsylvania and Oregon. Some growers and processors in New York and 
Washington testified in support of the Board's proposal, while others 
were opposed to a change in the 15-million pound threshold.
    The record shows that production levels in the nine districts vary 
considerably, with Northern Michigan consistently producing the largest 
volume of tart cherries, and Oregon the least. The following table 
shows tart cherry production by district for the 5 years 1997 through 
2001 (all figures are in million pound units). The data for the first 3 
years (1997 through 1999) were introduced on the hearing record. The 
statistics for 2000 and 2001 became available subsequent to the hearing 
and may be found in reports compiled by the Board and retained by the 
Department.

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                    District                         1997         1998         1999         2000         2001
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No. Michigan...................................        140.7        187.8        107.7        107.5        182.0
Central Mich...................................         68.7         58.2         47.2         70.8         84.0
So. Michigan...................................         14.4         17.4         28.6         20.3         30.1
New York.......................................         13.3         13.1         16.9         16.5         14.6

[[Page 3542]]

 
Oregon.........................................          2.4          2.2          5.1          4.0          2.2
Pennsylvania...................................          5.6          4.0          6.9          5.3          3.5
Utah...........................................         17.5         32.5         14.5         32.5         12.0
Washington.....................................         11.8         13.7         16.6         17.4         25.2
Wisconsin......................................         11.2         14.7          7.9          9.7         12.7
                                                ----------------------------------------------------------------
    Total......................................        285.4        343.6        251.4        284.0        366.3
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    Using the above figures, the following 3-year averages (used to 
determine which districts are subject to volume regulation) were 
computed.

 
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                                                                  Average      Average      Average
                           District                               1997-99      1998-00      1999-01
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No. Michigan..................................................        145.4        134.3        132.4
Central Mich..................................................         58.0         58.7         67.3
So. Michigan..................................................         20.1         22.1         26.3
New York......................................................         14.4         15.5         16.0
Oregon........................................................          3.2          3.8          3.8
Pennsylvania..................................................          5.5          5.4          5.2
Utah..........................................................         21.4         26.5         19.7
Washington....................................................         14.0         15.9         19.7
Wisconsin.....................................................         11.3         10.8         10.1
                                                               -------------------------------------------------
    Total.....................................................        293.5        293.0        300.6
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    The above table shows that for each of the 3-year periods, the 
three Michigan districts and Utah consistently exceeded the 15-million 
pound threshold. Production in Oregon, Pennsylvania and Wisconsin was 
below the threshold in all periods, while New York and Washington each 
exceeded the 15-million pound threshold in two out of three of the 
periods.
    The order became effective in 1996, based on a series of hearings 
that began in December 1993 and ended in January 1995. Proponents of 
the order supported the 15-million pound threshold as a criteria for 
determining which districts would be subject to volume regulation. At 
the time the order was implemented, the three Michigan districts, New 
York and Utah had average annual production in excess of 15 million 
pounds. These five districts accounted for 92 percent of U.S. 
production in 1995, and 89 percent of U.S. production in 1996.
    Proponents of the order also supported a provision that a district 
not meeting the 15-million pound threshold would become covered by 
regulation when it reached a production level equal to 150 percent of 
its average annual production during the period 1989 through 1992. The 
purpose of this provision was to catch surges in production that 
occasionally occur in order to more equitably distribute the burden of 
supply control. It was also to make sure that when smaller producing 
districts expand production capacity, they do not take advantage of the 
system and become free riders. This was intended to prevent a district 
from benefitting from the program without contributing to the effort to 
reduce surplus supplies.
    After considering the record evidence in support of this provision, 
the Department decided not to include it in the order. The provision, 
as proposed, seemed to be overly complicated to administer and would 
possibly be inequitable to tart cherry growers and handlers. In 
addition, proponents indicated that it was not their intent to regulate 
States with small production volumes since their aggregate volume is 
not a critical amount when compared to the total volume of tart 
cherries produced.
    Several witnesses at the amendatory hearing suggested that, had the 
150 percent rule been incorporated into the initial order, the 
amendment to eliminate the 15-million pound threshold would now be 
unnecessary.
    The following table shows production in the initially unregulated 
districts during the period 1989 through 1992.

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                                        1989         1990         1991         1992       Average    150 percent
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Pennsylvania......................          6.0          3.5         11.5          6.0          6.7         10.0
Wisconsin.........................          7.6          4.8          7.8          9.1          7.3         10.9
Oregon............................         15.0          7.5          7.5          9.5          9.9         14.8
Washington........................          6.4          7.4          9.8         12.8          9.1         13.6
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    The record shows that neither Pennsylvania nor Oregon have reached 
a level of production equal to 150 percent of their production during 
this base period. Wisconsin first exceeded production of 10.9 million 
pounds (150 percent of its average annual production in the base 
period) in 1997, and Washington exceeded production of 13.6 million 
pounds (150 percent of its production during the base period) in 1998.
    If the order were implemented as proposed by the proponents during 
the promulgation, all districts but Pennsylvania and Oregon would 
currently be regulated. As it is, for the 2001 season, Wisconsin is 
also unregulated. In the 1999 crop year, Pennsylvania and Oregon 
together accounted for 4.9 percent of the U.S. tart cherry crop. In 
2000, they accounted for 3.3 percent of the total, and in 2001, only 
1.6 percent. Adding production in Wisconsin during those years brings 
the percentages in the 3 years 1999 to 2001

[[Page 3543]]

to 8 percent, 7 percent and 5 percent respectively.
    With respect to New York, witnesses concurred that with the 15-
million pound threshold, that district would likely be subject to 
regulation only about 50 percent of the time in the future. That is 
because production in that State is close to the threshold, ranging 
from 13.1 to 16.9 million pounds over the last 5 seasons. Concern was 
also expressed that Utah could fall below the established threshold in 
upcoming years and become unregulated. Washington was expected to 
continue to increase its production and become subject to regulation in 
the near future. (Washington did exceed the threshold during the period 
1998-2000, and will be subject to any volume regulation implemented for 
the 2001 crop). Witnesses agreed that production in Oregon, 
Pennsylvania and Wisconsin was likely to remain below 15 million 
pounds.
    The conclusion by proponents of the Board's proposal was that with 
the order as currently written, a greater proportion of U.S. production 
could become unregulated. This would dilute the effectiveness of the 
program and, more importantly, increase the amount of regulation 
imposed on the remaining regulated districts.
    Since the order became operational, volume regulations have been 
implemented for three crop years--1997, 1998, and 2000. A volume 
regulation has also been recommended for the 2001 crop, but not yet 
effectuated. No regulation was deemed necessary for the 1999 crop. The 
following table shows the level of regulation implemented (or, in the 
case of 2001, recommended) in 1997, 1998, 2000 and 2001. With the 
exception of the restricted percentages, all figures are in million 
pound units.

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                                                               1997          1998          2000          2001
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U.S. Crop................................................       285.0         344.0         284.0          366.3
Carry-in.................................................        70.0          38.8          87.0           39.0
                                                          ------------------------------------------------------
    Total Available Supply...............................       355.0         382.8         371.0          405.3
                                                          ======================================================
3-Year Average Sales.....................................       269.9         288.6         277.0          217.0
Target Carry-out.........................................         0.0           0.0           0.0            0.0
Economic Adjustment......................................       (23.0)        (31.4)        (22.0)          50.0
Optimum Supply...........................................       246.9         257.2         257.0          267.0
Surplus..................................................       108.1         125.6         116.0          138.3
Production in Regulated Districts........................       240.0         309.0         232.0          335.9
Restricted Percentage....................................          45            41            50             41
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    If all districts had been subject to regulation, the surplus would 
have been divided by total production rather than by production in the 
regulated districts. Had this been done, the restricted percentage in 
1997 would have been 38 percent rather than 45 percent; the restricted 
percentage in 1998 would have been 37 percent rather than 41 percent; 
the restricted percentage in 2000 would have been 41 percent rather 
than 50 percent; and the restricted percentage recommended for 2001 
would have been 39 percent instead of 41 percent. The difference is 
relatively small for the 2001 crop year because production in Utah (12 
million pounds) was less than 50 percent of its prior 5-year average, 
so that district will be unregulated in the 2001 crop year.
    One of the primary arguments made by supporters of the Board's 
proposed amendment was that of fairness. These witnesses stated that 
all tart cherry growers benefit from the operation of the order, but 
the burden of regulation is borne only by those in the regulated 
districts. They testified that revenues received by growers of similar 
size varied considerably due solely to where a particular grower's farm 
was located. They concluded that no growers in the regulated districts 
receive gross returns equal to those received in non-regulated 
districts.
    To illustrate, an agricultural economist from Michigan State 
University (who was a witness testifying in support of the Board's 
amendment) presented an analysis of the economic impacts of the program 
on growers in regulated versus non-regulated districts. This analysis 
compared gross farm income for growers of the same size in regulated 
and non-regulated districts. It assumed a grower who produces 200 tons 
on 40 acres, or 10,000 pounds per acre. Estimates of likely returns for 
the 1998 crop were used.
    For purposes of this analysis, it was assumed that the grower in 
the non-regulated district could sell all of his or her production in 
primary market outlets. In the case of the grower in the regulated 
district, it was assumed that his or her crop utilization would be 
allocated in accordance with the overall industry averages in 1998. For 
example, about 3 percent of the tonnage would be placed in the 
inventory reserve, 11 percent would be exported, and 13 percent would 
be diverted through non-harvest.
    Prices for free market cherries were USDA estimates of 14 cents per 
pound for the regulated districts and 13.5 cents per pound for the non-
regulated districts.
    Returns for market growth factor cherries were expected to be 
somewhat lower (12 cents per pound) because these cherries tend to be 
sold later in the year, or perhaps in a subsequent year. A conservative 
figure of 6 cents per pound was used for reserve cherries because of 
the many uncertainties as to what those cherries might return (for 
example, the timing of their release and prevailing prices that might 
exist). Export sales were estimated by industry leaders to average 
about 9 cents per pound in 1998. For new product development, an 
estimate of 11 cents per pound was used, taking into account the 
considerable variation of returns for new cherry products depending 
upon the processor and the circumstances surrounding the new products. 
For non-harvested cherries, a savings of 3 cents per pound in variable 
costs (e.g., harvesting and trucking) was used. Finally, no return was 
recorded for cherries diverted through at-plant diversion.
    The income for a grower in a regulated district, based on the 
analysis of the witness, is shown below:

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                                                                  Lbs.          %          Price        Income
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Open Market.................................................      240,000           60        $0.14      $33,600

[[Page 3544]]

 
Market Growth...............................................       36,000            9         0.12        4,320
Inventory Reserve...........................................       12,000            3         0.06          720
Exports.....................................................       44,000           11         0.09        3,960
New Products................................................        8,000            2         0.11          880
Non-Harvest.................................................       52,000           13         0.03        1,560
At-Plant Diversion..........................................        8,000            2         0.00            0
                                                             ---------------------------------------------------
    Total Production........................................      400,000          100  ...........      45,040
  For a grower in a non-regulated district, income was estimated as follows:
Open Market.................................................      400,000          100       $0.135      $54,000
----------------------------------------------------------------------------------------------------------------

    In summary, the grower in the non-regulated district would receive 
revenues of $54,000, about 20 percent more than the grower in the 
regulated district. Both growers would benefit from any strengthening 
of prices through the use of volume regulations.
    Opposition to the Board's proposal was expressed primarily by 
industry members in unregulated districts. One of the arguments made 
was that growers in these districts would be much more severely 
impacted by a volume regulation because yields in those districts are 
so low compared to those in regulated districts.
    One witness used the analysis given above, but used different 
yields per acre. For the grower in a regulated district, he used 40 
acres with a yield of 7,400 pounds per acre. This resulted in total 
production for that grower of 296,000 pounds and revenues of about 
$33,330. For the grower in a non-regulated district, he again used 40 
acres, but used a yield of 2,400 pounds per acre. This provided total 
production of 96,000 pounds and revenues of only $2,960. Had the second 
grower been subject to volume regulation, his or her revenues would 
have been even lower.
    The following table shows yields per acre in the States covered by 
the order for the years 1997 through 2000. The annual yields are from 
USDA statistics, while the average yield for Washington for the 4-year 
period was obtained from a processor survey in that State. All figures 
are in pounds per acre.

----------------------------------------------------------------------------------------------------------------
                     State                           1997         1998         1999         2000       Average
----------------------------------------------------------------------------------------------------------------
Utah...........................................        6,250       11,790        5,360       11,800        8,800
Michigan.......................................        7,920        9,260        6,580        7,020        7,695
New York.......................................        5,580        5,380        6,850        7,550        6,340
Pennsylvania...................................        5,420        3,500        6,000        5,080        5,000
Wisconsin......................................        4,670        6,580        4,350        4,350        4,988
Oregon.........................................        2,850        2,150        4,080        3,380        3,115
Washington.....................................           NA           NA           NA           NA       14,000
----------------------------------------------------------------------------------------------------------------

    The above table shows that average yields do vary among the cherry 
producing States. It also shows that yields within the States vary 
considerably from year to year.
    Witnesses stated that the use of average yields for an entire State 
is misleading. Michigan, for example, has a 4-year average yield of 
about 7,600 pounds per acre. The average yields for the three districts 
that comprise Michigan are quite different. In Northern Michigan, 
yields averaged about 13,000 pounds per acre, while in Central Michigan 
they averaged 5,000 pounds per acre and in Southern Michigan only 4,000 
pounds per acre.
    This witness further went on to state that variations in yields 
within a geographic district exceed the variations among the districts. 
He gave a personal example. The witness is a processor in Central 
Michigan. His organization deals with about 20 growers. Yields for 
those growers in 1998 ranged from 1,000 to 15,000 pounds per acre.
    Therefore, it is reasonable to assume that the State in which a 
grower farms is not necessarily a good indicator of an individual 
grower's potential yield per acre. While weather conditions affect 
yields (e.g., susceptibility to freezes), weather conditions can vary 
as much within a district as between districts. Also, there are many 
other variables that contribute to a grower's yield per acre. These 
include the density of trees planted per acre, the age of the trees, 
and cultural practices undertaken by individual growers to care for 
their orchards. However, the table showing yields per acre does 
indicate that there is a definite difference in yields among the 
various States.
    Regarding the age of trees, the record indicates that tart cherry 
trees start losing optimum productivity at about 20 years. Growers 
testified that they typically replant their trees when they are between 
20 and 25 years old. The following table shows the percentage of 
acreage in each State that was comprised of older trees in 1998.

------------------------------------------------------------------------
                                     Percent      Percent
              State                acreage  21-   acreage     Total  21+
                                     25 years    26+ years      years
------------------------------------------------------------------------
Michigan.........................           15            6           21
Utah.............................            8            1            9
New York.........................           24            7           31
Wisconsin........................           20           15           35
Washington.......................           18            5           23
Pennsylvania.....................           30            6           36
Oregon...........................           30           48           78
------------------------------------------------------------------------


[[Page 3545]]

    Oregon, consistently the lowest yielding producing district, has 
substantially more older trees planted than other States. Because older 
trees tend to produce less fruit, and Oregon has a high percentage of 
older trees, this is likely to explain in part why Oregon's yields are, 
on average, lower than in other areas. Pennsylvania had the second 
largest percentage of older trees.
    Another argument against eliminating the 15 million-pound threshold 
was that unregulated districts like Oregon and Pennsylvania had already 
``done their part'' to reduce the surplus of tart cherries by reducing 
their acreage. Any continued surpluses were attributable to the major 
producing State, Michigan. It was therefore argued that State should 
bear the consequences of its actions and not impose its problems on the 
smaller districts.
    The record shows that U.S. tart cherry bearing acreage had declined 
from a high of 50,050 acres in 1987, to 39,880 acres in 2000. All 
producing States recorded acreage reductions during this period. On a 
percentage basis, the greatest reduction was in New York (down 52 
percent), followed by Oregon (down 36 percent), Utah (down 30 percent), 
Pennsylvania (down 25 percent), Washington (down 24 percent), and 
Wisconsin (down 17 percent). Michigan had the lowest percentage 
decrease (down 15 percent), but the largest decline in total number of 
acres (a reduction of 5,140 acres).
    The record evidence is that acreage in all districts have declined 
over the past decade. Decisions to reduce acreage were made by 
individual growers based on their assessments of the best use of their 
land. While opportunities for alternative land uses vary somewhat by 
State, they also vary within the States.
    In determining whether a surplus of tart cherries exists, total 
U.S. supplies are compared to total demand in the primary market. 
Production in each district contributes to the total supply, and thus 
to any surplus that may exist. However, Michigan accounts for such a 
large proportion of the total, that production in that State alone can 
warrant a volume regulation. Additionally, the evidence is that 
production in the smallest producing State--Oregon--is negatively 
correlated to production in Michigan. That is, when production in 
Michigan is high, production in Oregon is generally low. Thus, it is 
likely that with elimination of the production threshold, Oregon would 
be regulated in years when its production is below normal. This could 
result in a heavier burden being placed on growers in Oregon as a 
result of volume regulation than is true in the other producing 
districts.
    Additionally, the record shows that the benefits of the supply 
management provisions of the order accrue to the entire U.S. tart 
cherry industry. The short run benefits arise when surplus supplies are 
reduced, and market prices (due to the inelastic demand for tart 
cherries) rise to levels that are closer to growers' typical costs of 
production. Longer range gains are also expected from the encouragement 
to expand market demand through new market and new product development.
    The aggregate short run benefits to the industry's growers from the 
use of volume regulation in 1997 and 1998 have been estimated to be at 
least $20 million per year. This has resulted because the smaller 
market surpluses have resulted in stronger grower prices which are 
estimated to be 7 to 9 cents per pound greater during those years.
    The record shows that tart cherries, regardless of where grown in 
the U.S., are sold into markets that are essentially national markets 
with similar, closely interrelated prices throughout the country. 
Therefore, the somewhat higher prices that have resulted from the 
order's supply management features have accrued to all tart cherry 
growers in the United States.
    However, the history of the order and the evidence on the record 
support the premise that the smallest producing districts should not be 
subject to volume regulation under the tart cherry marketing order. 
Further, there is an argument to be made for reducing the current 15 
million pound threshold. After considering all the testimony and other 
record evidence, the Department has concluded that a threshold of 6 
million pounds would be more reasonable. This would result in all 
districts that have increased production over the past decade being 
subject to regulation, consistent with the original intent of the 
proponents of the order.
    The record shows that the two districts that would not be regulated 
under a 6-million pound threshold--Oregon and Pennsylvania--produce 
insignificant volumes of tart cherries compared with total U.S. 
production. Production in these districts has not grown, nor is it 
anticipated that it will in the future. The evidence supports claims 
that these smaller producing districts would be more impacted by a 
volume regulation than other districts. Costs may be higher to growers 
in those areas than in others because they tend to have lower yields. 
Also, processing capacity in those districts tends to be limited, 
supporting the argument that production is unlikely to increase. In 
addition, processors in the smaller producing districts testified that 
they would have to shut down their facilities if those districts were 
subject to volume regulation because they would not be able to get 
sufficient supplies of cherries to run their operations efficiently. If 
the smaller producing districts do increase their production, they 
would become regulated once they reach the 6-million pound threshold.
    The proponent evidence showed that while volume regulations have 
helped strengthen overall cherry prices, there are costs involved with 
complying with these regulations. Such costs include reduced returns 
for cherries that cannot be sold in primary markets. Imposing those 
costs on the smallest producing districts would not result in any 
higher overall price for tart cherries. Additionally, regulating the 
two smallest States would not reduce the volume of regulation imposed 
on cherries grown in the other States because of their low levels of 
production. In the four years that restricted percentages have been 
recommended by the Board, the percentage would not have changed at all 
in two of four years (by not including Pennsylvania and Oregon) and 
would have been marginally reduced in the other two years. Thus, it 
appears that the costs of regulating these minor districts would not be 
outweighed by any accrued benefits.
    The Department is proposing that Sec. 930.52 of the order be 
amended by changing the threshold for regulation from 15 million pounds 
to 6 million pounds.

Material Issue Number 2--Allocation of Board Membership

    The order should be amended to allocate Board membership based on a 
district's production level, rather than have a set number of members 
per district. Corresponding changes should be made in quorum 
requirements.
    Section 930.20 of the order provides for a Cherry Industry 
Administrative Board, appointed by the Secretary to locally administer 
the program. 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 to represent growers and handlers 
in that district. One additional Board member is selected to represent 
the general public, and need not be from any specific area.
    As originally constituted (and as was true at the time of the 
hearing), the

[[Page 3546]]

Board consisted of 18 members: 17 tart cherry growers and handlers, and 
1 public member. Five of the nine districts, including all districts 
initially subject to volume regulation, were allocated more than one 
member. Those five districts were 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 were Oregon, Pennsylvania, Washington and Wisconsin.
    Section 930.20 further provides that if a district with a single 
member becomes subject to volume regulation because it exceeds the 15-
million pound production threshold, that district is entitled to a 
second Board member position. There is no specific requirement that a 
district must lose a seat if it falls below the 15 million pound 
threshold and is no longer subject to regulation. However, this could 
be accomplished through informal rulemaking under the authority in 
Sec. 930.21 which allows for the reestablishment of districts and the 
redistribution of membership among those districts.
    Effective July 11, 2001, the Board was increased in size from 18 to 
19 members [66 FR 35889, July 10, 2001]. A second member was added to 
represent the State of Washington (District 8) because, following 
harvest of the 2000 crop, it was determined that that district's annual 
average production for the 3 years 1998 to 2000 exceeded the 15-million 
pound threshold required for districts to become regulated. This is the 
only change that has been made in Board membership since the order's 
inception.
    The Board proposed amending Sec. 930.20 to provide that membership 
for each district be based on the average annual production for that 
district over the previous 3 years. Districts with up to and including 
10 million pounds would be represented by one Board member; districts 
with more than 10 and up to and including 40 million pounds would have 
two members; districts with more than 40 and up to and including 80 
million pounds would have three members; and districts with more than 
80 million pounds would have four members.
    The record shows that each district should have at least one Board 
member to ensure that the interests of all regions of the production 
area are represented in Board deliberations and decisions. Additional 
members should be allocated among districts based on their production 
levels. This would recognize that the larger districts should have a 
greater voice in Board decisions because they are more greatly impacted 
by those decisions. Additionally, the record shows that the number of 
growers and handlers operating in a district is related to the volume 
of production in that district. For example, the three Michigan 
districts account for about 75 percent of total annual tart cherry 
production. About 71 percent of the growers, and almost half of the 
handlers operate in Michigan. The number of growers and handlers in the 
other districts are also related to the volume of production in those 
districts. Thus, the production levels among the districts are a good 
indication of the constituencies in those districts, and those 
districts with larger constituencies should have more representation on 
the Board.
    The allocation of industry membership between growers and handlers 
would remain unchanged under this amendment. For districts with one 
member, that member could be either a grower or a handler. Districts 
with two members would have one grower and one handler member position. 
Districts with three members would have one grower member and one 
handler member, and the third position would alternate between a grower 
and handler member. Districts that are allocated four members would be 
entitled to two grower members and two handler members.
    The major benefit of this amendment is that it would allow Board 
membership to be reallocated annually, and thereby more closely reflect 
changing production trends in the industry. This would include having 
representation of a district decrease when conditions so warrant.
    The following table shows the difference that would have occurred 
in Board membership for the term of office that began July 1, 2001, if 
the proposed amendment were in effect compared to the actual 
representation under current order provisions.

------------------------------------------------------------------------
                                                           Number of
                                    Number of members    members under
             District                 under current         proposed
                                        provision          amendment
------------------------------------------------------------------------
1--Northern Michigan..............                  4                  4
2--Central Michigan...............                  3                  3
3--Southern Michigan..............                  2                  2
4--New York.......................                  2                  2
5--Oregon.........................                  1                  1
6--Pennsylvania...................                  1                  1
7--Utah...........................                  2                  2
8--Washington.....................                  2                  2
9--Wisconsin......................                  1                  2
                                   -------------------------------------
    Total number of industry                       18                 19
     members......................
------------------------------------------------------------------------

    If the proposed amendment had been in effect, industry 
representation on the Board would have increased from 18 to 19 members. 
Total membership (including the public member) would have increased 
from 19 to 20 members. Wisconsin would have been entitled to two 
members rather than one member. Representation of the other eight 
districts would not have changed.
    One witness testified in opposition to this proposal, stating that 
it would give Michigan more power in Board decisions. However, as the 
above table shows, Michigan would have gone from having 9 of 18 
industry members (50 percent) to 9 of 19 industry members (47 percent). 
Looking at total membership (including the public member), Michigan 
would have gone from 9 of 19 seats (47 percent) to 9 of 20 seats (45 
percent).
    Committee members serve 3-year terms of office. The terms are 
staggered so that about one-third of the members are selected each 
year. The terms of office begin July 1 of each year. Final production 
figures for a crop year are typically available in September, and 
nominations are conducted early in the calendar year (January or 
February) for

[[Page 3547]]

the term that begins the following July 1. If this amendment is 
adopted, the Board as constituted at the time of the amendment would 
remain in effect. Reallocation of membership would take place prior to 
the next regularly scheduled round of nominations. If, for example, the 
amendment were to become effective in September 2002, reallocation 
would take place prior to the nominations scheduled for January or 
February 2003, for the term of office beginning July 1, 2003.
    If a district were to lose a seat, and none of its members' terms 
were expiring, it would be necessary to determine which member would 
need to be removed from the Board. Testimony at the hearing suggested 
that the members of the district in question would likely be able to 
agree among themselves who should resign. If that proves not to be the 
case, the Board could recommend rules and regulations concerning how to 
determine which Board position should be abolished. To provide for this 
possibility, USDA is recommending that a new paragraph (i) be added to 
Sec. 930.20 to authorize the establishment of any rules and regulations 
needed to implement the provisions of that section.
    In determining which member should resign, however, it would be 
necessary to comply with the provisions of Sec. 930.20 pertaining to 
allocation of membership between grower and handler positions. For 
example, if a district's representation was reduced from four members 
(two grower and two handler positions) to three members (two grower 
positions and one handler position), one of the handler member 
positions would have to be vacated.
    In a related matter, Sec. 930.32 of the order provides that 12 
members of the Board constitute a quorum, and that two-thirds of the 
total membership must vote in favor of any Board action for it to pass.
    With the Board initially established at 18 members and with the 
two-thirds voting requirement, a 12-member quorum was logical (since 
two-thirds of 18 is 12). However, the proposed revision to Sec. 930.20 
would result in a varying number of Board members over time. In the 
example shown above, the Board would have been expanded to 20 members 
(19 industry members and 1 public member). The two-thirds voting 
requirement in that case would require the affirmative votes of at 
least 14 members to pass any Board action. It would not be reasonable 
to have the quorum remain at 12 members, since that number of members 
would not be able to pass a vote. Therefore, it is recommended that 
Sec. 930.32 be amended to provide that two-thirds of the Board 
membership constitutes a quorum.

Material Issue Number 3--Board Designation of a Temporary Alternate To 
Act for an Absent Board Member

    The order should be amended to provide more flexibility for a Board 
member to designate someone to act in his or her place when that member 
and his or her alternate are unable to attend a Board meeting. However, 
this discretion should not be given to the Board or its chairperson in 
the event the member in question chooses not to designate another 
alternate to serve in his or her place.
    As previously discussed, the Board is composed of 19 members, with 
the industry members allocated among nine geographic districts. Each 
Board member has an alternate who has the same qualifications as the 
member. Industry Board members and alternates are nominated by their 
peers in the district they represent.
    Section 930.28 of the order provides that if a Board member is 
absent from a meeting, his or her alternate shall act in that member's 
place. There is no provision for a situation in which both the member 
and that member's alternate are unavailable.
    The Board has proposed changing Sec. 930.28 as follows. If both a 
member and his or her alternate cannot attend a Board meeting, the 
member or the alternate (in that order) could designate another 
alternate member to act in their stead. If neither the member nor the 
alternate choose to make such a designation, the Board's chairperson 
would be free to do so with the concurrence of a majority of present 
members.
    In support of the Board's proposal, witnesses stated that it is 
important to have a full contingency of members present at each Board 
meeting to ensure full consideration of and deliberation upon program 
issues. Further, an empty seat constitutes a ``no'' vote, which could 
hamper Board decision-making. This is because all Board actions require 
the approval of at least two-thirds of its members. One witness 
suggested that without this proposed amendment, Board expenses could 
increase because additional meetings might be needed due to vacant 
member seats and the inability to garner the requisite number of votes 
for Board action.
    Witnesses in opposition to this proposal opined that it is very 
important to maintain representation of all districts at each Board 
meeting. They stated that Board representation is allocated among the 
districts because the conditions in those districts vary. The record 
shows that there have been very few instances where Board members (and 
their alternates) have been unable to attend a meeting. The few times a 
seat was empty was when the member from district 5 (Oregon) or district 
8 (Washington) was unable to be present due to airline delays because 
of bad weather or due to personal emergencies. Since most Board 
meetings are held in Michigan, it is likely that if the Board's 
proposed amendment had been in place, a person from Michigan would have 
been asked to fill the empty position. Witnesses from outside the State 
of Michigan strongly objected to this scenario.
    The Department agrees that full participation at Board meetings 
should be encouraged. However, we also believe there is merit in 
allocating membership among districts, and that the conditions in one 
district may vary considerably from those in another. Further, growers 
and handlers in each district nominate the people they want to 
represent them at Board meetings. For these reasons, we conclude that a 
Board member should be able to choose another alternate to serve in his 
or her place when that member and that member's alternate are 
unavailable. However, this choice should remain with the member. If he 
or she chooses not to name someone to fill his or her seat and cast 
votes on his or her behalf, the choice should not then revert to the 
Board or its chairperson.
    The record supports the conclusion that this proposal is not 
intended to change the composition of the Board with respect to grower 
versus handler representation. Therefore, a modification to the 
proposed amendment is made providing that in naming an additional 
alternate to act on his or her behalf, a Board member should designate 
an alternate from the same group (grower or handler) as that member. 
This would ensure appropriate grower and handler representation on the 
Board.
    The proposed amendment of Sec. 930.28 has been changed accordingly. 
Also, we have deleted the requirement that a member must choose an 
alternate ``from another district'' to act in his or her place. This 
would enable a member who is from a district with more than one member 
position to designate another alternate from the same district to act 
in his or her stead. The member would not be required to name an 
alternate from a different district to fill his or her seat.

Material Issue Number 4--Clarification of Diversion and Exemption 
Provisions

    The diversion and exemption provisions of the order should be

[[Page 3548]]

clarified by eliminating certain cross references among those 
provisions and adding general rulemaking authority to implement handler 
diversion provisions.
    As previously discussed, a primary feature of the tart cherry 
marketing order is supply management through the establishment of free 
and restricted percentages. These percentages are applied to each 
regulated handler's acquisitions of cherries. Free percentage cherries 
may be sold in any market, while restricted percentage cherries may be 
diverted by a grower or handler or placed in the inventory reserve.
    Section 930.58 of the order provides for grower diversions. Under 
this section, growers may receive diversion certificates for cherries 
used for animal feed and cherries left unharvested in the orchard. 
Growers may also receive diversion certificates for ``uses exempt under 
Sec. 930.62.'' A grower's diversion certificates can then be 
transferred to that grower's handler and used to meet the handler's 
restricted obligation. This part of Sec. 930.58 would not change.
    Section 930.59 provides for handler diversions. Handlers may 
receive diversion credits for cherries used in such forms as the Board 
may designate, with approval of USDA. These forms may include 
destruction at the handler's facility; use in Board approved food banks 
or other approved charitable organizations; acquisition of grower 
diversion certificates; and uses exempt under Sec. 930.62. Handlers 
desiring to use the first three forms must notify the Board prior to 
diverting cherries. Use of the fourth form requires application to and 
approval by the Board prior to diversion.
    Section 930.62 provides that certain cherries may be exempt from 
volume regulation upon Board recommendation and USDA approval. Such 
cherries would also be exempt from assessment obligations and any 
established quality standards. Section 930.62 currently provides that 
exemptions may be provided for cherries diverted in accordance with 
Sec. 930.59 (Handler diversion privilege); used for new product and new 
market development; or used for experimental purposes or for any other 
use designated by the Board, including cherries processed into products 
for markets for which less than 5 percent of the preceding 5-year 
average production of cherries were utilized.
    The record indicates that the industry supports continuation of 
both the authority to exempt certain cherries from regulation, and the 
authority to provide diversion credits for cherries used for certain 
purposes. The application of each provision is different, however. An 
example provided at the hearing illustrates the difference. Assume a 
restricted percentage of 20 percent has been established, a regulated 
handler acquires 10 million pounds of cherries, and that handler uses 2 
million pounds of those cherries for new market development. This 
handler would have a restricted obligation of 2 million pounds of 
cherries (20 percent of the 10 million pounds of cherries acquired).
    If cherries used for new market development received diversion 
credit, this handler would have met his or her restricted obligation by 
using 2 million pounds for that purpose. The handler could thus market 
the remaining 8 million pounds of his or her cherries as free 
percentage cherries in any outlet he or she chose. If, however, 
cherries used for new market development were exempt from regulation, 
the restricted percentage would be applied to that handler's total 
acquisitions (10 million pounds), less the volume of cherries exempt 
from regulation (2 million pounds). Thus, this handler would have a 
restricted obligation of 1.6 million pounds (20 percent of 8 million 
pounds), which would have to be diverted in forms approved by the Board 
as eligible for diversion credit.
    Cross references between Secs. 930.59 and 930.62 have proved to be 
confusing. Thus, these sections are proposed to be amended by deleting 
those cross references. Also, uses listed under Sec. 930.62 as possible 
exempt uses are being listed under Sec. 930.59 as possible uses 
eligible for handler diversion credit. Rulemaking would be required to 
designate whether a particular use would be exempt from regulation or 
would constitute an approved diversion outlet. Such rulemaking would be 
based on Board recommendations, following its assessment of the impact 
exemptions or diversions would have on the tart cherry industry.
    Proponent witnesses asked that the authority in Sec. 930.58 for 
growers to receive diversion certificates for uses exempt under 
Sec. 930.62 remain in the order. This authority has been in the order 
from the time it became effective and would need to be implemented 
through rulemaking. Presently, grower diversion rules provide for two 
types of diversion: leaving cherries unharvested and in-orchard tank 
diversion. It could be possible for the Board to provide (with USDA 
approval) for a form of grower diversion that would be the same as an 
exempt use utilized by handlers under Sec. 930.62. The intent would be 
to encourage growers to find new uses and new markets for their 
cherries.
    To retain this authority, a conforming change is needed in 
Sec. 930.62. That section of the order is proposed to be changed by, 
among other things, stating that diversion certificates shall not be 
issued for cherries used for exempt purposes. This revision was 
intended to apply to handlers and not to growers seeking diversion 
certificates for exempt uses. Thus, a clarification is being proposed 
in the regulatory text of Sec. 930.62.
    The Department is also proposing a conforming change in Sec. 930.50 
relating to the Board's marketing policy. That provision of the order 
specifies how free and restricted percentages are to be calculated. The 
order currently sets forth an ``optimum supply formula'' (OSF) which 
the Board must follow in its consideration of annual volume 
regulations. First, the Board considers the available supply of tart 
cherries, which is the sum of the 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, a surplus exists, calling for the use of 
supply controls.
    The optimum supply is defined as 100 percent of the average sales 
of the prior 3 years, reduced by the average sales that represent 
dispositions of restricted percentage cherries qualifying for diversion 
credit for the same 3 years. There is no mention of how cherries used 
for exempt purposes should figure into the equation.
    Witnesses testifying at the hearing explained that exempt cherries 
should be treated in the same way as cherries qualifying for diversion 
credit in the OSF. That is, they should be deducted from the total 
sales figure. Paragraph (a) of Sec. 930.50 is proposed to be revised 
accordingly.
    Section 930.59 currently states that in some cases, handlers must 
notify the Board of their intent to divert cherries, while in other 
cases they must apply for and receive Board approval prior to diverting 
cherries. This decision proposes revising this section to provide that 
in all cases, handlers must notify the Board of their plans to divert 
cherries. This change was proposed by the Board, and is intended to 
simplify current procedures. It should be noted, however, that should 
additional safeguards be needed to ensure compliance with handler 
diversion procedures (i.e., that cherries receiving diversion credits 
are actually utilized in approved outlets), the Board has authority to 
recommend additional rules

[[Page 3549]]

and regulations. Such rules and regulations would require USDA approval 
through the informal rulemaking process.
    The authority for this additional rulemaking is currently provided 
in Secs. 930.30 and 930.31 of the order. These sections set forth the 
Board's powers and duties, which include recommending rules and 
regulations needed to effectively administer the provisions of the 
order. As a clarifying change, a new paragraph (f) is proposed to be 
added to Sec. 930.59 to specify that the Board may establish (with USDA 
approval) rules and regulations necessary and incidental to the 
administration of the handler diversion provisions of the order.
    One final conforming change is being proposed by the Department 
relative to the provisions concerning diversions and exemptions. At the 
hearing, it was clearly stated that if certain uses of cherries were 
exempt from regulation, handlers should be able to use cherries from 
their inventory reserves for those uses at any time. While this is 
currently permitted under the terms of Sec. 930.62, we are proposing a 
clarifying change in Sec. 930.54, Prohibition on the use or disposition 
of inventory reserve cherries. That section is also being proposed to 
be revised by deleting a reference to a nonexistent paragraph (b) of 
that section.

Material Issue Number 5--Exemption or Diversion Credit for Export 
Shipments

    The order should be amended to provide specific authority to 
designate shipments to certain export markets as exempt or eligible for 
diversion credit.
    As discussed in the previous material issue, Secs. 930.59 and 
930.62 provide for handler diversions and exemptions, respectively. 
Certain uses of cherries are listed as being eligible for diversion 
credit or exemptions. Under the authority in these sections 
(specifically, that for market development), diversion credits have 
been made available to handlers in recent crop years for shipments to 
export markets, excluding Canada and Mexico. Canada and Mexico were not 
included because of their proximity to the United States and concern 
about compliance matters.
    The record indicates that allowing export shipments to receive 
diversion credits has resulted in stronger export sales. Exports in 
1997-98 were unusually high (around 50 million pounds), although they 
declined during the next season to 34 million pounds. Witnesses stated 
that the tart cherry industry needs to expand demand for its product 
through, among other things, development of new markets.
    The Board proposed adding specific authority to Secs. 930.59 and 
930.62 to allow diversion credits or exemptions for such export markets 
as recommended by the Board and approved by the Secretary. This is a 
clarifying change only.

Material Issue Number 6--Diversion Credit for Juice and Juice 
Concentrate

    The order should be amended to provide that sales of cherry juice 
and juice concentrate may receive diversion credits if those sales are 
in outlets that have been designated as eligible for receipt of 
diversion credits.
    Section 930.59 of the order relates to how handlers may receive 
diversion credits to offset their restricted obligations. Paragraph (b) 
of that section states that diversion may not be accomplished by 
converting cherries into juice or juice concentrate.
    The Board recommended that the order be amended by deleting the 
proviso in Sec. 930.59 (b) so that shipments of cherry juice and juice 
concentrate to approved diversion outlets may be eligible for diversion 
credit.
    The record indicates that in the promulgation proceeding, handlers 
from Oregon and Washington were concerned that juice concentrate could 
be established as a use eligible for diversion credit. Those handlers 
indicated that they processed all or a majority of their cherries into 
juice concentrate. Cherries produced in the Pacific Northwest have a 
high brix (sugar content) level desirable for juice concentrate. 
Concern was expressed that if the Board decided to allow diversion 
credit for juice concentrate, an increase in the volume of juice in the 
marketplace could have resulted in an accompanying reduction in prices 
for juice. This could have unduly harmed the industry in Washington and 
Oregon. USDA therefore inserted a provision in Sec. 930.59 to prohibit 
the use of juice or juice concentrate for diversion credit.
    However, the use of juice and juice concentrate for export was 
allowed under the exemption provisions of the order for the 1997-98 
season. The 1997-98 season was the first season of operation for the 
cherry order, and its provisions were new to the industry and complex 
to administer. Handlers unfamiliar with the order's diversion 
provisions had exported or contracted to export tart cherry juice or 
juice concentrate to eligible countries with the intention of applying 
for and receiving diversion certificates for those exports. If those 
handlers had been prohibited from receiving diversion certificates for 
those sales, the handlers would have incurred financial difficulties. 
Thus, the prohibition against exports of juice and juice concentrate 
was suspended for the 1997-98 season only.
    The record shows that until 1997, the juice market was distressed. 
One reason was that there had been large volumes of concentrate 
produced in the preceding years in the Western United States--volumes 
that exceeded market demand. In 1995 particularly, there was a very 
large crop of tart cherries (a record 395.6 million pounds), and a 
large portion of that crop was processed into concentrate. An 
oversupply situation occurred, which led to low prices and a large 
carry-over of concentrate.
    Witnesses claimed that the operation of the order has helped 
address the cherry oversupply situation, including the surplus of 
juice. Allowing exports of juice to receive diversion credits in 1997-
98 was quite successful. The industry exported more than 4 million 
pounds (raw product equivalent) of juice concentrate that year, 
comprising about 10 percent of total exports qualifying for credit. At 
9 cents per pound for the raw fruit, growers received about $382,500 in 
revenue from these sales. Handlers, whose value added component is 
about $5.00 per gallon (or $.056 per pound), received $236,000 in 
revenue. In total, the industry gained at least $618,000 from export 
sales of juice concentrate in 1997-98.
    Providing diversion credits for exports of juice concentrate by 
handlers in the regulated districts encouraged more exports of this 
product. The higher levels of exports of concentrate helped reduce 
heavy inventories and reduced the supplies available in the domestic 
market. This led to an increase in the domestic price for juice 
concentrate of about $4.00--$6.00 per gallon. Producers whose cherries 
were processed into concentrate benefitted from the strengthening of 
domestic juice prices.
    In 1998, diversion credits were no longer authorized for exports of 
juice and juice concentrate. Witnesses stated that this hurt the U.S. 
cherry industry. Demand for juice concentrate in Europe was strong, but 
domestic processors could not export juice concentrate in a way that 
was economically feasible. Some processors exported raw juice stock to 
Europe so the raw stock could be juiced overseas. This meant that the 
added value of converting the stock to juice concentrate was lost to 
U.S. processors. It also meant higher freight costs for the raw product 
(versus concentrate). When juice stock was exported, the freight cost 
to Europe was

[[Page 3550]]

about 10 cents per pound. Growers received little for cherries exported 
as raw juice stock, while grower returns for exported juice concentrate 
were positive.
    Further, this restriction resulted in shorting the export juice 
market. Witnesses stated that if you are unable to supply a market 
consistently, that market looks for a more reliable source of supplies. 
When a market is lost to the U.S. industry for this reason, it is 
difficult to regain. This is particularly detrimental to the tart 
cherry industry as it seeks to expand markets for its heavy supplies of 
product.
    As previously indicated, the prohibition on diversion credits for 
juice and juice concentrate was in response to concerns expressed by 
the industry in the Northwest. At the time the order was promulgated, 
it was represented that more than 85 percent of the crop in Washington 
was processed into juice. During recent years, less than half of the 
Washington crop was used for juice. Most of the rest of the crop was 
used for 5 + 1 cherries (25 pounds of cherries to 5 pounds of sugar). 
Additionally, the record shows that in 1993 there were 7 pitters in the 
State; by 2000, that number had grown to 20. This supports the 
conclusion that processors in Washington are able to pack a wider 
variety of finished products. Cherries grown in Washington have 
increasingly been processed into products other than juice and juice 
concentrate.
    Also, production in the State of Washington has grown, and a number 
of witnesses at the hearing held in early 2000 expressed their belief 
that Washington would soon produce in excess of 15 million pounds 
annually and thus would become subject to volume regulation. In fact, 
production in Washington for the 3 years 1998 to 2000 averaged 15.9 
million pounds, and Washington became subject to volume regulation in 
2001. It was important that handlers in Washington be able to receive 
diversion credits for exports of juice and juice concentrate. This was 
particularly true because 5+1 cherries do not generally sell in export 
markets because they contain sugar and are thus subject to increased 
tariffs when exported. For these reasons, the Board unanimously 
recommended suspension of the prohibition on receiving diversion credit 
for exports of cherry juice and juice concentrate. This suspension 
became effective August 1, 2001 [66 FR 39409, July 31, 2001].
    An additional benefit of allowing diversion credits for exported 
juice and juice concentrate is that it would ensure that the domestic 
market is adequately supplied in short crop years. In years when the 
crop is small, most available tart cherries will be used to supply 
higher value finished products rather than juice concentrate. If the 
industry does not have a supply of concentrate in reserve, the juice 
markets, both domestic and foreign, could go unsatisfied. In order to 
have supplies available in short crop years, there needs to be an 
incentive to have tart cherries stored as juice concentrate. Making 
juice and juice concentrate eligible for diversion credit would create 
an incentive to produce and store concentrate, which would ensure that 
markets for those products are adequately supplied. It could also 
result in fewer cherries being diverted in the orchard. This would 
benefit growers through enhanced revenues, because they receive more 
for cherries that are processed and sold than for cherries that are 
diverted in the orchard.
    It should be noted that the intent of this amendment proposal is to 
make sales of juice and juice concentrate eligible for diversion credit 
only if those sales are in outlets that have been approved for 
diversion credit. Sales of juice and juice concentrate in the primary 
market would not be eligible for diversion credit. This would prevent 
the influx of heavy supplies of juice into primary markets, which would 
have the potential to harm processors who rely on a healthy juice 
market.
    The Department is proposing that Sec. 930.59 be amended by deleting 
the proviso in paragraph (b) of that section. We are also proposing a 
clarifying change in that paragraph to state that shipments of juice 
and juice concentrate would only be eligible for diversion credit if 
they are used in markets specifically approved as diversion outlets.

Material Issue Number 7--Handler Transfers of Diversion Credits

    The order should be amended to provide specific authority for 
handlers to be able to transfer diversion credits.
    Section 930.59 of the order provides for handler diversion credits. 
Those diversion credits are used by handlers to meet their restricted 
obligations. That provision of the order is silent with respect to the 
ability of handlers to transfer diversion credits among themselves to 
meet their restricted obligations.
    The Board proposed adding a new paragraph (e) to Sec. 930.59 to 
provide that a handler who acquires diversion certificates representing 
diverted cherries during any crop year may transfer such certificates 
to another handler or handlers.
    The record shows that this authority would provide additional 
flexibility to tart cherry growers and handlers in meeting program 
requirements, without changing the amount of tart cherries available to 
be marketed as free percentage cherries. This authority could also 
result in the processing of the highest quality cherries available in 
any crop year, which would benefit the industry as a whole.
    One witness at the hearing explained as an example that Handler A 
may acquire a very high quality of tart cherries in a given year, and 
would want to process and sell a higher percentage of those cherries 
than his or her free percentage would allow. Handler B may be in a 
situation where he or she receives more diversion credits than needed 
because most of that handler's pack is for export. (We are assuming 
that export sales are eligible for diversion credits.) Handler B might 
want to transfer those excess credits to Handler A.
    Additionally, there may be a situation in which Handler C's growers 
have low quality cherries due to adverse growing conditions. These 
growers may choose to use in-orchard diversion to a greater extent than 
they normally would. Handler C could wind up with more diversion 
credits than needed and may want to transfer those credits to Handler 
A. A simple example to illustrate this situation follows. In this 
example, we will assume a restricted percentage of 40 percent has been 
established.

----------------------------------------------------------------------------------------------------------------
                                                                                            Excess
                                       Receipts    Restricted    Exports       Grower     diversions
              Handler                  (pounds)    obligation    (pounds)    diversion     credits
                                                    (pounds)                  (pounds)     (pounds)
----------------------------------------------------------------------------------------------------
A..................................      100,000       40,000            0            0     (40,000)
B..................................      100,000       40,000       70,000            0       30,000

[[Page 3551]]

 
C..................................      100,000       40,000            0       50,000       10,000
----------------------------------------------------------------------------------------------------------------

    In this case, Handler A needs diversion credits totaling 40,000 
pounds to meet his or her restricted obligation, while Handlers B and C 
have excess credits representing 40,000 pounds of cherries. If Handler 
A could receive Handler B's and C's excess diversion credits, he or she 
could use them to fulfill Handler A's restricted obligation. Otherwise, 
Handler A would have to divert 40,000 pounds of cherries (by destroying 
them, for example) or put them in the inventory reserve. With the 
ability to transfer diversion credits, Handler A could acquire excess 
credits from Handlers B and C. Handler A would benefit by being able to 
process all of his or her cherries for free use. Handlers B and C (and 
their growers) would benefit by being compensated for their diversions, 
including those above the required amount.
    Both the transferring handlers' and the receiving handler's growers 
would benefit. Also, the overall quality of the crop marketed could be 
improved. This would serve to increase consumer confidence and 
acceptance, thereby strengthening demand for tart cherries. This would 
benefit the U.S. tart cherry industry as a whole.
    Additionally, if the transfer of diversion credits were not 
allowed, the market could be shorted. This would have a detrimental 
impact on the tart cherry industry. Again, we will use the above 
illustration and assume these three handlers comprise the entire 
industry.

----------------------------------------------------------------------------------------------------------------
                                                                                             ``Free'' sales
                                                               Restricted     Excess   -------------------------
                    Handler                        Receipts    obligation   diversions      With       Without
                                                                                         transfers    transfers
----------------------------------------------------------------------------------------------------------------
A..............................................      100,000       40,000     (40,000)      100,000       60,000
B..............................................      100,000       40,000      30,000        30,000       30,000
C..............................................      100,000       40,000      10,000        50,000       50,000
                                                ----------------------------------------------------------------
    Total......................................      300,000      120,000           0       180,000      140,000
----------------------------------------------------------------------------------------------------------------

    With a 60 percent free percentage, it would be expected that 
180,000 pounds of cherries would be available for sale as free 
percentage cherries (60 percent of total receipts of 300,000 pounds). 
As shown above, without the ability to transfer diversion credits, the 
total volume of ``free'' cherries available to market would be only 
140,000 pounds. This would be well below the 180,000 pounds deemed 
necessary to meet market demand. This would hamper the industry's 
efforts to expand markets for its products.
    The Board's proposal included the statement that transfers of 
handler diversion credits be allowed ``Within such restrictions as may 
be prescribed in rules and regulations, including but not limited to 
procedures for transfer of diversion credit and limitations on the type 
of certification eligible for transfer * * *'' Testimony at the hearing 
indicated that rules to implement this transfer authority may be 
needed. The only example given was that uniform reporting requirements 
may be necessary (i.e., to make sure that handlers record transfers in 
the same way so that diversion credits are not counted to offset more 
than one handler's restricted obligation). No witnesses gave any 
examples of limitations on transfers that may be needed, but they 
wanted the flexibility to do that in the future if the need arises.
    No opposition to this proposal was stated at the hearing or in the 
briefs filed.
    This amendment would be implemented by adding a new paragraph (e) 
to Sec. 930.59 to specifically authorize the transfer of handler 
diversions certificates.

Material Issue Number 8--Grower Diversion Certificates

    The order should be amended to provide that diversion certificates 
issued by the Board to a grower remain valid even if that grower's 
district subsequently becomes exempt from volume regulation under 
Sec. 930.52(d).
    Section 930.58 provides that a grower may voluntarily choose to 
divert all or a portion of his or her cherries. Typically, this is 
accomplished by leaving cherries in the orchard unharvested, although 
other means are provided as well. Upon diversion in accordance with 
order provisions, the Board issues the grower a diversion certificate 
which the grower may then offer to handlers in lieu of delivering 
cherries. Handlers may then redeem those certificates to meet their 
restricted obligations.
    Section 930.52(d) of the order provides that any district producing 
a crop which is less than 50 percent of the average annual processed 
production in that district in the previous 5 years is exempt from any 
volume regulation in that year. This provision was included in the 
order to help relieve a district from the burdens of the order in a 
year in which its processors and growers are already suffering from a 
severely short crop.
    The Board proposed an amendment to Sec. 930.58(a) to provide that 
any grower diversions completed in a district subsequently exempt from 
regulation under Sec. 930.52(d) will qualify for diversion credit.
    Witnesses at the hearing testified that this is a needed change to 
the order to reduce the risk growers face in deciding whether or not to 
divert all or a portion of their crops. The reason such risk exists is 
primarily due to the difference between the time diversions must take 
place and the time a district's final production figure is known.
    The Board is required to meet on or about July 1 of each crop year 
to develop its marketing policy and recommend preliminary free and 
restricted percentages (if crop conditions so warrant). The marketing 
policy meeting is typically held a week or two after the release of the 
official USDA tart cherry crop estimate in late June. Final free and 
restricted percentages are not recommended until after the actual crop 
production figure is available. This is typically not until September, 
after harvest is complete.

[[Page 3552]]

This is also when a final determination is made as to whether a 
district will be covered by regulation in accordance with 
Sec. 930.52(d).
    The record shows that the tart cherry crop is harvested in late 
June or July. Growers must, therefore, make decisions as to whether to 
undertake diversion activities before they are certain whether or not 
their district will be covered by regulation. This occurred in 
Southwest Michigan in 1997. Based on the USDA estimate, it was expected 
that this district would be covered by volume regulation during the 
upcoming crop year. However, the actual crop came in at less than 50 
percent of the prior 5-year average production in that district, and it 
Southwest Michigan (District 3) was exempt from regulation.
    Witnesses testified that growers who divert their crops in 
anticipation of a volume regulation should not be penalized for that 
decision because the USDA crop estimate indicates their district will 
be regulated, but it turns out it is not. If those growers' diversion 
certificates become invalid, they receive nothing for the cherries they 
diverted. If their diversions continue to qualify for credit, however, 
handlers who accept those diversion certificates compensate the growers 
for them.
    Without this amendment, the record shows that growers in some 
districts (where application of volume regulation is uncertain) could 
be forced into harvesting their crops. This would be contrary to the 
program objective of balancing tart cherry supplies with market demand.
    There was no opposition to this proposed amendment expressed at the 
hearing or in the briefs filed after the hearing.
    To implement this proposal, it is recommended that Sec. 930.58(a) 
be revised by adding a sentence to that paragraph.

Material Issue Number 9--Release of Cherries in the Inventory Reserve

    The order should be amended to provide that cherries in the 
inventory reserve may be released either for use in any market or for 
use in only certain designated markets, depending on prevailing market 
conditions.
    Section 930.51 of the order authorizes the issuance of volume 
regulations for tart cherries in the form of free and restricted 
percentages. Section 930.50(i) provides that a handler's restricted 
percentage cherries must be placed in an inventory reserve or diverted 
through non-harvest, destruction at a handler's facilities, or shipment 
into approved secondary outlets.
    The order specifies three possible releases of inventory reserves 
under Secs. 930.50 (g) and (j) and 930.54 (a). The first, under 
Sec. 930.50 (g), releases an additional 10 percent (above the optimum 
supply level) of the average of the prior 3 years sales if such 
inventory is available. This release is for market expansion purposes, 
and is discussed more fully under Material Issue Number 10.
    The second release, under Sec. 930.50 (j) occurs in years when the 
expected availability from the current crop plus expected carry-in does 
not fulfill the optimum supply (100 percent of the average annual sales 
in the prior 3 years plus the desirable carry-out). This release is 
made to all handlers holding primary inventory reserves and is a 
required release to be made by the Board if the above conditions are 
met and reserve cherries are available. This provision is intended to 
assure that inventory reserves are utilized to stabilize supplies 
available on the market. Under this authority, cherries released from 
the reserve can be sold in any market.
    The third release is authorized under Sec. 930.54 (a) which allows 
the Board to recommend to the Secretary a release of a portion or all 
of the primary (and secondary) reserve. To make this release, the 
Boards needs to determine that the total available supplies for use in 
commercial outlets do not equal the amount needed to meet the demand in 
such outlets.
    The Board recommended an amendment to Sec. 930.54 to provide a 
fourth option for a reserve release. Specifically, it proposed that a 
portion or all of the primary and/or secondary inventory reserve may be 
released for sale in certain designated markets.
    Witnesses at the hearing suggested that the industry (through the 
Board) needs more flexibility in determining how to utilize inventory 
reserves. One witness opined that limited releases of reserves during 
years of non-regulation may be necessary to maintain markets that are 
available for diversion credits during years of regulation. The example 
given dealt with sales to export markets other than Canada and Mexico. 
In years of volume regulation, sales of cherries to these markets are 
eligible for diversion credits that handlers may use to meet their 
restricted obligations.
    In developing its marketing policy and determining whether a 
surplus exists, the optimum supply is compared with available supplies. 
The optimum supply is defined as average sales over the last 3 years, 
minus sales qualifying for diversion credit. Thus, the optimum supply 
measures the volume of cherries needed to fill demand in the primary 
market. If anticipated supplies exceed demand in the primary market, a 
volume regulation may be issued. Restricted percentage cherries are 
then used to fill these secondary markets.
    If anticipated supplies are reasonably in balance with demand in 
the primary market, no volume regulation would be issued. Since all of 
a handler's cherries would then be ``free'' percentage cherries, he or 
she would likely attempt to sell all those cherries in the primary 
market because returns tend to be higher in that market. This could 
result in few cherries being made available for sale in secondary 
markets (such as exports).
    The record shows that the tart cherry industry needs to continue 
its efforts to expand markets. A critical aspect of this effort is to 
ensure that supplies are available to fill needs in developing markets. 
If, for example, an export market is developed over the course of time, 
and then cherries are not available to supply that market, that market 
may be lost to the industry. The Board's proposal would allow a release 
of inventory reserves to meet the needs of these specific markets. This 
should contribute to the long run health of the industry.
    Another witness suggested that a limited release should also be 
possible for specific types of cherry products. He stated that over 
time, the mix of products offered by the tart cherry industry has 
changed considerably. New product development should continue to be 
encouraged to expand marketing opportunities for the industry. Releases 
of inventory reserves can play a part in this endeavor.
    The witness gave a hypothetical situation using dried cherries as 
an example. He said that if demand for dried cherries was very strong, 
and supplies of that product from the current year's crop were 
insufficient to meet that demand, releases of that product from the 
inventory reserve should be authorized.
    There was no opposition to this proposed amendment.
    The Department is recommending this proposal be implemented by 
adding a new paragraph (b) to Sec. 930.54 to say that reserve cherries 
may be released for sale in certain designated markets. We are proposed 
adding a sentence to that new paragraph to state that these designated 
markets may be defined in terms of the use or form of cherries.

Material Issue Number 10--Ten Percent Reserve Release for Market 
Expansion

    The order should be amended to provide that the 10-percent reserve 
release for market expansion apply only

[[Page 3553]]

during years when volume regulations are in effect.
    Section 930.51 of the order authorizes the issuance of volume 
regulations for tart cherries in the form of free and restricted 
percentages. Section 930.50(i) provides that a handler's restricted 
percentage cherries must be placed in an inventory reserve or diverted 
through non-harvest, destruction at the handler's facility, or shipment 
into approved secondary outlets.
    Section 930.50 provides that any volume regulation make available 
as free percentage cherries an ``optimum supply'' of tart cherries. The 
optimum supply is defined as the average sales of the prior 3 years 
(minus sales of cherries qualifying for diversion credit) plus a 
desired carry-out. Section 930.50(g) further provides that in addition 
to the optimum supply of free market tonnage percentage cherries, the 
Board must make available tonnage equal to 10 percent of the average 
sales of the prior 3 years for market expansion.
    The Board proposed amending Sec. 930.50(g) to specify that the 10-
percent reserve release only apply during years when volume regulations 
are in effect.
    The record shows that the 10-percent reserve release provision was 
made a part of the order in large part due to USDA policy guidelines. 
The Secretary's Guidelines for Fruit, Vegetable, and Speciality Crop 
Marketing Orders (Guidelines) state that, under volume control 
programs, primary markets should have available a quantity equal to 110 
percent of recent years' sales in those outlets before the Secretary 
would approve secondary market allocation or pooling. This is to assure 
plentiful supplies for consumers and for market expansion while 
retaining the mechanism for dealing with burdensome supply situations.
    Witnesses in support of the Board's proposal stated that allowing 
for and encouraging market growth in years of surplus supplies is 
sensible. In fact, several witnesses stated that an important objective 
of the tart cherry industry and the marketing order program is to 
expand markets for tart cherries. This is supported, for example, by 
the authorization of diversion credits for new product and new market 
development.
    Several witnesses spoke against the 10-percent release during years 
of no volume regulation, however. Two concerns were expressed in this 
regard. First, the release of inventories in a year in which supplies 
and market demand are reasonably in balance results in an oversupply 
situation. This can be accompanied by reduced grower prices. Second, 
and probably more importantly, industry reserves can be depleted. One 
objective of keeping an inventory reserve is to aid in stabilizing 
annual supply fluctuations and safeguard against the detrimental 
impacts of a short crop year.
    The record shows that the tart cherry industry experiences cycles 
in acreage and production. During the phase of the cycle with less 
bearing acreage and shorter supplies, a short crop year can result in 
significant shortages of available market supplies. This can curtail 
continued market demand and market growth. When supplies are short, 
they can be supplemented by reserve cherries. This would mitigate 
spikes in prices, which hinder long term market demand. Food 
manufacturing customers in particular demand a stable supply of product 
at reasonable prices. Absent a reliable supply, these customers tend to 
substitute other fruits in their products.
    The use of the inventory release option also provides that some 
surplus supplies in a large crop year with low prices can be carried 
over to short crop, high price years. This results in improved revenues 
for growers and processors. The use of the inventory reserve option 
also provides an alternative to grower diversion (i.e., non-harvest).
    Several witnesses used the 1999-2000 crop year to show the affects 
of a reserve release during a year of no regulation. During that year, 
the crop was 251.0 million pounds which, when added to a carryover from 
the previous crop year of 38.0 million pounds, yielded total available 
supplies of 289.0 million pounds. With the optimum supply at 285.0 
million pounds, the Board found that supplies were reasonably in line 
with market demand, and recommended no volume regulation be 
implemented.
    At the beginning of the crop year, industry reserves totaled 28.4 
million pounds. Four million pounds were released early in the crop 
year to meet unanticipated demand, leaving 24.4 million pounds in the 
reserve when it came time for the release for market expansion. Ten 
percent of the 3-year average sales figure meant that 28.5 million 
pounds should have been released for market expansion; however, there 
were only 24.4 million pounds in the inventory reserve, so the entire 
reserve was released.
    Witnesses claimed that the release of reserves in the current crop 
year may result in a surplus supply of cherries in the marketplace. 
This could put a downward pressure on price, and could result in a 
higher carryover into the next crop year. This could mean a greater 
surplus in 2000-2001, which could result in a higher restricted 
percentage and greater probability of cherries being left in the 
orchard unharvested.
    Ultimately, these releases could result in less economic incentive 
to place cherries in the reserve because they could be released at the 
wrong time and return little to growers. With less incentive to 
participate in the inventory reserve, more cherries would likely be 
diverted by growers through non-harvest. Overall grower returns would 
be lower, and long term market losses may occur.
    There was no opposition to this Board proposal expressed at the 
hearing or in the briefs filed.
    The Department recommends amending Sec. 930.50(g) to specify that 
when restricted percentages are established, the Board shall make 
available tonnage equivalent to an additional 10 percent, if available, 
of the average sales of the prior 3 years for market expansion. This 
release would not be required in years when restricted percentages are 
not established.

Material Issue Number 11--Assessments on All Cherries Handled

    The order should be amended to provide that assessments be imposed 
on all cherries processed and sold by handlers. The only cherries that 
would not be assessed would be those diverted by handlers by 
destruction at their facilities and those diverted by growers in the 
orchard.
    Section 930.40 of the order authorizes the Board to incur such 
expenses as the Secretary finds are reasonable and necessary for it to 
administer the tart cherry marketing order program. Section 930.40 
further provides that the Board's expenses be covered by income from 
handler assessments.
    Section 930.41 provides that handlers pay their pro rata share of 
the Board's expenses. Each handler's share is determined by applying 
the established assessment rate(s) to the volume of cherries each 
handler handles during a crop year. Section 930.41 further provides 
that handlers are exempt from paying assessments on cherries that are 
diverted in accordance with Sec. 930.59, including cherries represented 
by grower diversion certificates issued under Sec. 930.58. Cherries 
devoted to exempt uses under Sec. 930.62 are also free from 
assessments.
    The Board recommended that Sec. 930.41 be amended to provide that 
all cherries processed and sold by handlers be subject to assessments. 
The only cherries that would be exempt from assessments would be those 
diverted in-orchard by growers, and those diverted by handlers through 
destruction at their plants.

[[Page 3554]]

    Proponent witnesses testifying in support of this change stated 
that all processed cherries should be subject to assessments because 
handlers profit from the sale of these cherries. This is because each 
pound of fruit processed increases the handler's overall profitability 
by reducing the per unit cost of processing. This is true even if the 
cherries are used in an outlet approved for diversion credit.
    The record shows that handlers have different ways of meeting their 
restricted obligations. Their decisions are based on their own 
marketing strategies. Some handlers take advantage of marketing their 
products in eligible diversion outlets, while others either cannot or 
do not do so. Witnesses suggested that providing an exemption from 
assessments to handlers who choose to divert their cherries through 
sales in those designated outlets creates a competitive advantage over 
their competitors who do not do so. If a substantial volume of cherries 
is diverted by certain handlers, the burden of financing the program 
increases on other handlers. It was concluded that subjecting all 
processed cherries to the assessment provisions of the order would 
eliminate this unintended advantage.
    Additionally, the record shows that a large portion of the Board's 
annual expenses are incurred for oversight of compliance activities 
related to diversion credits. For example, for those export sales 
eligible for diversion credit, handlers are required to submit proof of 
export. The documentation typically consists of warehouse receipts, 
bills of lading, overseas bills of lading, and other documents proving 
the cherries were exported. The Board staff reviews the documentation 
submitted by each handler for sufficiency, requests additional 
documentation if necessary, and issues diversion certificates upon 
proof of compliance with order requirements. Similar activities are 
undertaken with respect to sales in other designated diversion markets 
(e.g., new product development). Witnesses stated that those handlers 
who take advantage of these order provisions should pay their share of 
the costs of enforcing those provisions.
    One witness also stated that an advantage of this amendment would 
be that it would broaden the assessment base under the order. This 
would lower the assessment rate needed to effectively administer the 
program.
    No objections were raised at the hearing or in the briefs 
concerning this amendment.
    The Department proposes that Sec. 930.41(c) be revised to state 
that assessments are due on all cherries handled except for those that 
are diverted by destruction at a handler's facility or are represented 
by valid grower diversion certificates. A conforming change is proposed 
in Sec. 930.62 of the order which relates to exempt shipments. A 
conforming change is also proposed in Sec. 930.51(c) which refers to 
diverted cherries being exempt from assessments.

Material Issue Number 12--Uniform Assessment Rate

    The order should be amended to eliminate the requirement that 
different assessment rates be established for cherries used for 
manufacturing different products.
    As discussed in the preceding material issue, Secs. 930.40 and 
930.41 of the order provide that the Board may incur certain expenses, 
and that the funds to defray those expenses be paid by handlers through 
assessments. Section 930.41 also provides, among other things, that the 
assessment rate(s) recommended by the Board and approved by the 
Secretary must compensate for the differences in the amounts of 
cherries used for various cherry products and the relative market 
values of those products.
    The Board recommended that Sec. 930.41 be amended to provide that a 
uniform assessment rate be established for cherries used in any or all 
products. This would be true unless the Board decided to consider the 
volumes of cherries used for various products and their relative 
values; if that were the case, the Board could recommend differential 
assessment rates if warranted.
    The record shows that at the time the order was promulgated, 
proponents of the program supported different assessment rates being 
established for cherries used for various products. In their testimony, 
they suggested that high value products such as frozen, canned or dried 
cherries be assessed at one rate, and low value products such as juice 
concentrate and puree be assessed at one-half that rate.
    Proponents of the Board's recommended amendment stated that the 
order should not require one rate for certain products and twice that 
rate for others. They stated that while a two-tiered assessment rate 
scheme may be appropriate in some years, it may not be in others. They 
cited the fact that the absolute and relative market values of various 
tart cherry products fluctuate from year to year.
    One witness testified, for example, that producer returns for 
cherries used for juice concentrate are comparable to those for other 
products. He stated that cherry juice concentrate was selling for about 
$17 per gallon. Subtracting estimated handling charges of $5.81 per 
gallon, the net return to the grower would be an estimated $11.19. In 
Washington, where about 50 pounds are required to make a gallon of 
concentrate, growers would receive 22 cents per pound. In Michigan, 
where it take approximately 90 pounds of cherries to make a gallon of 
concentrate, growers would receive 12 cents per pound. This witness 
stated that grower returns in this range are comparable to returns 
available for other products.
    The conclusion of the proponent witnesses was that the Board should 
have discretion in determining appropriate rates of assessment. They 
did not believe a two-tiered approach should be mandated.
    An opponent of the proposed change stated that the order should 
continue to require the Board to consider the volume of raw product 
used in producing various cherry products as well as the relative value 
of those products in recommending annual assessment rates. He stated 
that he did not necessarily support two levels of assessment rates, but 
believed the Board should be required to give due consideration to 
relevant factors in making its recommendations.
    The Department concludes that while there may be justification for 
establishing different assessment rates for different products, it 
should not be required under the order. Thus, the recommended amendment 
to Sec. 930.41 provides that in its deliberations pertaining to 
appropriate levels of assessment rates, the Board should consider the 
volume of cherries used in making various products and the relative 
market value of those products. The assessment rate established may be 
uniform or may vary among products, based on the Board's analysis. 
Paragraph (f) of Sec. 930.41 has been revised accordingly.

Material Issue Number 13--Crop Production Estimate

    The order should be amended to provide that the Board may use 
estimates other than the official USDA crop estimate in developing its 
annual marketing policy.
    Section 930.50 of the order requires the Board to develop an annual 
marketing policy. This policy serves as the basis for determining the 
level of volume regulation needed in a given crop year. First, the 
Board determines the ``optimum supply'' which is defined as the average 
sales of cherries in the past three years plus the desirable carry-

[[Page 3555]]

out. Next, the Board takes the crop forecast for the upcoming year and 
subtracts from it the optimum supply (less the carry-in). If the 
remainder is positive, it represents a surplus in supplies, supporting 
the use of volume regulation. Section 930.50 prescribes that the Board 
must use the official USDA crop estimate as its crop forecast.
    The Board's amendment proposal would allow the Board to use a crop 
estimate other than the official USDA crop estimate in its marketing 
policy.
    The record shows that USDA bases its pre-harvest estimate on two 
methods. In Michigan, an objective yield survey is done by the State. 
Such a survey is based on the actual count of fruit on the tree, the 
number of trees per acre, and the acres in production. In the other 
producing States, subjective yield surveys are done by the States. This 
method entails canvassing tart cherry growers and handlers to obtain 
their assessment of the upcoming year's crop.
    The Michigan crop survey costs a total of $60,000 per year. Of this 
total, the Board pays $24,000. The Board's share was expected to 
increase to half of the total in 2001. Concern was expressed at the 
hearing that if the industry decides to no longer contribute to the 
cost of the Michigan State survey, that State would likely discontinue 
its objective yield surveys and turn to subjective yield surveys. This 
could result in a less reliable crop estimate than is currently 
available. This is of particular concern because Michigan produces over 
70 percent of the U.S. tart cherry crop.
    Witnesses in support of this proposal stated that, in some years, 
USDA's pre-harvest crop estimate may not be accurate enough due to 
quickly changing crop conditions. They stated that current order 
provisions prohibit the Board from using any other estimate even if the 
majority of Board members, with their years of experience in the 
industry, believe USDA's estimate in a given year is inaccurate. Using 
the most accurate crop estimate available in deriving preliminary free 
and restricted percentages is important because growers and handlers 
make decisions based in part on those percentages. For example, growers 
decide whether to divert or harvest their crops; these decisions are 
irrevocable. Handlers also make pack and marketing plans based in part 
on the expected level of regulation. If actual harvest varies 
significantly from the pre-harvest estimate, growers and handlers could 
suffer economic harm. Using the most accurate information available is 
therefore necessary to enhance industry decision making.
    One witness pointed to the situation faced by district 3 (Southern 
Michigan) growers in 1997. As previously discussed under Material Issue 
Number 9, at the time the Board developed its marketing policy, 
indications were that district 3 would be regulated that year. 
Subsequent to harvest, however, it was determined that volume 
regulation would not apply to district 3 cherries that year. Growers 
who made decisions to divert their crops based on the Board's marketing 
policy estimates found themselves with diversion certificates that were 
of no value.
    No opposition was expressed regarding this proposed amendment 
authorizing the Board to use estimates other than the official USDA 
estimates.
    The Department is therefore recommending this change through a 
proposed amendment to Sec. 930.50(b).

Conforming Changes

    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. Necessary conforming changes have been 
identified and discussed in this Recommended Decision under the 
pertinent material issue.

Small Business Considerations

    Pursuant to the requirements set forth in the Regulatory 
Flexibility Act (RFA), AMS has considered the economic impact of this 
action on small entities. Accordingly, 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. 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.
    Small agricultural producers have been defined by the Small 
Business Administration (SBA) (13 CFR 121.201) as those having annual 
receipts of less than $750,000. 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 these 
amendments could result in additional regulatory requirements being 
imposed on some tart cherry handlers, while regulatory burdens on other 
handlers could be reduced. Overall benefits are expected to exceed 
costs.
    The record indicates that there are about 40 handlers regulated 
under Marketing Order No. 930. In addition, there are about 905 
producers of tart cherries in the production area.
    The record indicates that of the 41 tart cherry handlers operating 
during the 1999-2000 season, 7 had processed tonnage of more than 10 
million pounds (or 17 percent of all handlers); 8 had between 5.1 and 
10 million pounds (20 percent); 12 had between 2.1 and 5 million pounds 
(29 percent); and the remaining 14 had less than 2 million pounds of 
processed tonnage (34 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.
    Twenty handlers are located in Michigan--nine in district 1 
(Northern Michigan), eight in district 2 (Central Michigan) and three 
in district 3 (Southern Michigan). Of the remaining 21 handlers, 4 are 
in district 4 (New York), 3 are in district 5 (Oregon), 1 is in 
district 5 (Pennsylvania), 3 are in district 7 (Utah), 5 are in 
district 8 (Washington), and 5 are in district 9 (Wisconsin). Many 
handlers process cherries grown in more than one district.
    Of the 904 growers who produced cherries in 1999, 368 were in 
Northern Michigan (41 percent), 149 were in Southern Michigan (16 
percent), 129 percent in Central Michigan (14 percent), 84 in New York 
(9 percent), 65 in Wisconsin (7 percent), 38 in Utah (4 percent), 29 in 
Pennsylvania (3 percent), 27 in Oregon (3 percent), and 17 in 
Washington (2 percent).
    During the 3-year period 1999-2001, production of tart cherries 
averaged 300.6 million pounds. By district, Northern Michigan accounted 
for 44.0 percent of the production, followed by Central Michigan with 
22.4 percent, Southern Michigan with 8.7 percent, Utah and Washington 
each with 6.6 percent, New York with 5.3 percent, Wisconsin with 3.4 
percent, Pennsylvania with 1.7 percent, and Oregon with 1.3 percent.
    Dividing total production by the number of growers, the average 
grower produces about 332,500 pounds of cherries annually. With grower 
returns of about 20 cents per pound, average revenues would be $66,500. 
Thus, it is reasonable to conclude that most tart cherry growers are 
small entities.

[[Page 3556]]

    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 that was in 
effect at the time of the hearing. The evidence of record is that only 
13 growers (or less than 2 percent of the total number of growers) 
produced 2.5 million pounds or more during the 1999-2000 crop year. 
Five of those growers (or 38 percent) were located in Northern Michigan 
(district 1) and three operated (23 percent) in Central Michigan 
(district 2). The remaining five growers in this category (38 percent) 
were distributed among the remaining seven districts. The distribution 
of large growers is thus in proportion to the overall distribution of 
growers among the districts.
    A large majority (more than 98 percent) of the tart cherry growers 
falls into the previous SBA definition of a small entity (annual 
receipts of less than $500,000); it is reasonable to assume that an 
even greater majority qualify under the current SBA definition of a 
small grower (annual receipts of less than $750,000).
    During the 3 years 1999 to 2001, the average grower accounted for 
about 333,000 pounds of cherries. By district, average grower size 
varies considerably. The average grower in Washington accounts for 
roughly 1,159,000 pounds of cherries. Next in size is Central Michigan 
with 530,000 pounds, followed by Utah (518,000 pounds), Northern 
Michigan (360,000 pounds), New York (191,000 pounds), Pennsylvania 
(179,000 pounds), Southern Michigan (177,000 pounds), Wisconsin 
(155,000 pounds) and Oregon (141,000 pounds).
    This decision recommends that the order be amended: (1) To provide 
that all districts in the production area with annual production in 
excess of 6 million pounds be subject to volume regulation rather than 
only those with annual production in excess of 15 million pounds; (2) 
To allocate Board membership among districts based on levels of 
production and make a corresponding change in quorum requirements; (3) 
To authorize a Board member to designate any alternate to serve for 
that member at a Board meeting in the event the member and his or her 
alternate are unavailable; (4) To clarify the diversion and exemption 
provisions of the order by eliminating cross references among those 
provisions and adding general rulemaking authority to implement handler 
diversion provisions; (5) To add specific authority to the order to 
exempt or provide diversion credit for cherries exported to designated 
markets; (6) To provide diversion credit for shipments of cherry juice 
and juice concentrate to established diversion markets; (7) To add 
specific authority for the transfer of diversion credits among 
handlers; (8) To provide that grower diversions that take place in 
districts that are subsequently exempt from volume regulation qualify 
for diversion credit; (9) To allow cherries in the inventory reserve to 
be released for use in only certain designated markets; (10) To specify 
that the 10-percent reserve release for market expansion only applies 
during years when volume regulations are in effect; (11) To require 
assessments to be paid on all cherries handled, except for those that 
are diverted by destruction at a handler's facility and those covered 
by a grower diversion certificate; (12) To eliminate the requirement 
that differential assessment rates be established for various cherry 
products based on the relative market values of such products; and (13) 
To allow the Board should to use an estimate other than the official 
USDA crop estimate in developing its marketing policy.

Industry Background

    The principal demand for tart cherries is in the form of processed 
products. Tart cherries are dried, frozen, canned, juiced, and pureed. 
During the period 1995-96 through 1999-00, approximately 91 percent of 
the U.S. tart cherry crop, or 280.5 million pounds, was processed 
annually. Of the 280.5 million pounds of tart cherries processed, 62 
percent was frozen, 29 percent was canned, and 9 percent was utilized 
for juice.
    Based on National Agricultural Statistics Service data, acreage in 
the United States devoted to tart cherry production has been trending 
downward. In the ten-year period, 1987-88 through 1997-98, the tart 
cherry area decreased from 50,050 acres, to less than 40,000 acres. In 
1999-00, approximately 90 percent of domestic tart cherry acreage was 
located in four States: Michigan, New York, Utah and Wisconsin. 
Michigan leads the nation in tart cherry acreage with 70 percent of the 
total. Michigan produces about 75 percent of the U.S. tart cherry crop 
each year. In 1999-00, tart cherry acreage in Michigan decreased to 
28,100 acres from 28,400 acres the previous year.
    In crop years 1987-88 through 1999-00, tart cherry production 
ranged from a high of 396.0 million pounds in 1995-96 to a low of 189.9 
million pounds in 1991-92. The price per pound received by tart cherry 
growers ranged from a low of 7.3 cents in 1987 to a high of 46.4 cents 
in 1991. These problems of wide supply and price fluctuations in the 
tart cherry industry are national in scope and impact. Growers 
testified during the order promulgation process that the prices they 
received often did not come close to covering the costs of production. 
They also testified that production costs for most growers range 
between 20 and 22 cents per pound, which is well above average prices 
received during the 1993-1995 seasons.
    The industry demonstrated a need for an order during the 
promulgation process of the marketing order because large variations in 
annual tart cherry supplies tend to lead to fluctuations in prices and 
disorderly marketing. As a result of these fluctuations in supply and 
price, growers realize less income. The industry chose a volume control 
marketing order to even out these wide variations in supply and improve 
returns to growers. During the promulgation process, proponents 
testified that small growers and processors would have the most to gain 
from implementation of a marketing order because many such growers and 
handlers had been going out of business due to low tart cherry prices. 
They also testified that, since an order would help increase grower 
returns, this should increase the buffer between business success and 
failure because small growers and handlers tend to be less capitalized 
than larger growers and handlers.
    Aggregate demand for tart cherries and tart cherry products tends 
to be relatively stable from year-to-year. Similarly, prices at the 
retail level show minimal variation. Consumer prices in grocery stores, 
and particularly in food service markets, largely do not reflect 
fluctuations in cherry supplies. Retail demand is assumed to be highly 
inelastic which indicates that price reductions do not result in large 
increases in the quantity demanded. Most tart cherries are sold to food 
service outlets and to consumers as pie filling; frozen cherries are 
sold as an ingredient to manufacturers of pies and cherry desserts. 
Juice and dried cherries are expanding market outlets for tart 
cherries.
    Demand for tart cherries at the farm level is derived from the 
demand for tart cherry products at retail. In general, the farm-level 
demand for a commodity consists of the demand at retail or food service 
outlets minus per-unit processing and distribution costs incurred in 
transforming the raw farm commodity into a product available to 
consumers. These costs comprise what is known as the ``marketing 
margin.''
    The supply of tart cherries, by contrast, varies greatly. The 
magnitude

[[Page 3557]]

of annual fluctuations in tart cherry supplies are one of the most 
pronounced for any agricultural commodity in the United States. In 
addition, since most tart cherries are either canned or frozen, they 
can be stored and carried over from year-to-year. This creates 
substantial coordination and marketing problems. The supply and demand 
for tart cherries is rarely in equilibrium. As a result, grower prices 
fluctuate widely, reflecting the large swings in annual supplies. In an 
effort to stabilize prices, the tart cherry industry uses the volume 
control mechanisms under the authority of the Federal marketing order. 
This authority allows the industry to set free and restricted 
percentages.
    The primary purpose of setting restricted percentages is an attempt 
to bring supply and demand into balance. If the primary market is over-
supplied with cherries, grower prices decline substantially.
    The tart cherry sector uses an industry-wide storage program as a 
supplemental coordinating mechanism under the Federal marketing order. 
The primary purpose of the storage program is to warehouse supplies in 
large crop years in order to supplement supplies in short crop years. 
The storage approach is feasible because the increase in price--when 
moving from a large crop to a short crop year--more than offsets the 
cost for storage, interest, and handling of the stored cherries.
    The price that growers receive for their crop is largely determined 
by the total production volume and carry-in inventories. The Federal 
marketing order permits the industry to exercise supply control 
provisions, which allow for the establishment of free and restricted 
percentages for the primary market, and a storage program. The 
establishment of restricted percentages impacts the production to be 
marketed in the primary market, while the storage program has an impact 
on the volume of unsold inventories.
    The volume control mechanism used by the cherry industry would 
result in decreased shipments to primary markets. Without volume 
control the primary markets (domestic) would likely be over-supplied, 
resulting in low grower prices.
    Recent grower prices have been as high as $0.20 per pound. At 
current production levels, the cost of production is reported to be 
$0.20 to $0.22 per pound. Thus, the estimated $0.20 per pound received 
by growers is close to the cost of production. The use of volume 
controls is believed to have little or no effect on consumer prices and 
will not result in fewer retail sales or sales to food service outlets.
    Without the use of volume controls, the industry could be expected 
to continue to build large amounts of unwanted inventories. These 
inventories have a depressing effect on grower prices. The use of 
volume controls allows the industry to supply the primary markets while 
avoiding the disastrous results of over-supplying these markets. In 
addition, through volume control, the industry has an additional supply 
of cherries that can be used to develop secondary markets such as 
exports and the development of new products.
    The free and restricted percentages established under the order 
release the optimum supply and apply uniformly to all regulated 
handlers in the industry, regardless of size. There are no known 
additional costs incurred by small handlers that are not incurred by 
large handlers. The stabilizing effects of the percentages impact all 
handlers positively by helping them maintain and expand markets, 
despite seasonal supply fluctuations. Likewise, price stability 
positively impacts all producers by allowing them to better anticipate 
the revenues their tart cherries will generate.
    While the benefits resulting from operation of the marketing order 
program are difficult to quantify, the stabilizing effects of volume 
regulations impact both small and large handlers positively by helping 
them maintain markets even though tart cherry supplies fluctuate widely 
from season to season.

Districts Subject to Volume Regulation

    The order currently covers cherries grown in Michigan, New York, 
Pennsylvania, Oregon, Utah, Washington and Wisconsin. For purposes of 
regulation and allocation of Board membership, the seven-State 
production area is divided into nine districts. Michigan, the largest 
producing State, is divided into three districts--Northern Michigan, 
Central Michigan, and Southern Michigan. Each of the other States 
constitutes a single district.
    A principal feature of the tart cherry marketing order is supply 
management through the use of volume regulations. 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 
the primary market. This can be accomplished by either placing the 
cherries into handlers' inventory reserves or by diverting them. 
Cherries may be diverted by leaving them unharvested in the orchard or 
by destruction at the processing plant; or by using them in secondary 
markets. These secondary markets include exports (except to Canada or 
Mexico), new products, new market development, experimental purposes, 
and charitable contributions. Shipments of restricted percentage 
cherries to these specified markets receive diversion credits which 
handlers use to fulfill their restricted obligation.
    Section 930.52 of the order provides that volume regulations only 
apply to cherries grown in districts in which average annual production 
of cherries over the prior 3 years has exceeded 15 million pounds. 
Additionally, paragraph (d) of Sec. 930.52 provides that any district 
producing a crop which is less than 50 percent of the average annual 
processed production in that district in the previous 5 years would be 
exempt from any volume regulation in the year of the short crop.
    The Board proposed eliminating the 15-million pound threshold, and 
subjecting all 9 districts to volume regulation. No proposal was made 
to change the provision of Sec. 930.52(d).
    Most witnesses at the hearing addressed this issue. Growers and 
processors in Michigan, Utah and Wisconsin testified in support of the 
Board's proposal. Opposition was primarily from growers and handlers in 
Pennsylvania and Oregon. Some growers and processors in New York and 
Washington testified in support of the Board's proposal, while others 
were opposed to a change in the 15-million pound threshold.
    The record shows that production levels in the nine districts vary 
considerably, with Northern Michigan consistently producing the largest 
volume of tart cherries, and Oregon the least. The following table 
shows tart cherry production by district for the 5 years 1997 through 
2001 (all figures are in million pound units). The data for the first 3 
years (1997 through 1999) were introduced on the hearing record. The 
statistics for 2000 and 2001 became available subsequent to the hearing 
and may be found in reports compiled by the Board and retained by the 
Department.

[[Page 3558]]



----------------------------------------------------------------------------------------------------------------
                    District                         1997         1998         1999         2000         2001
----------------------------------------------------------------------------------------------------------------
No. Michigan...................................        140.7        187.8        107.7        107.5        182.0
Central Mich...................................         68.7         58.2         47.2         70.8         84.0
So. Michigan...................................         14.4         17.4         28.6         20.3         30.1
New York.......................................         13.3         13.1         16.9         16.5         14.6
Oregon.........................................          2.4          2.2          5.1          4.0          2.2
Pennsylvania...................................          5.6          4.0          6.9          5.3          3.5
Utah...........................................         17.5         32.5         14.5         32.5         12.0
Washington.....................................         11.8         13.7         16.6         17.4         25.2
Wisconsin......................................         11.2         14.7          7.9          9.7         12.7
                                                ----------------------------------------------------------------
    Total......................................        285.4        343.6        251.4        284.0        366.3
----------------------------------------------------------------------------------------------------------------

    Using the above figures, the following 3-year averages (used to 
determine which districts are subject to volume regulation) were 
computed.

------------------------------------------------------------------------
                                     Average      Average      Average
             District                1997-99      1998-00      1999-01
------------------------------------------------------------------------
No. Michigan.....................        145.4        134.3        132.4
Central Mich.....................         58.0         58.7         67.3
So. Michigan.....................         20.1         22.1         26.3
New York.........................         14.4         15.5         16.0
Oregon...........................          3.2          3.8          3.8
Pennsylvania.....................          5.5          5.4          5.2
Utah.............................         21.4         26.5         19.7
Washington.......................         14.0         15.9         19.7
Wisconsin........................         11.3         10.8         10.1
                                  --------------------------------------
    Total........................        293.5        293.0        300.6
------------------------------------------------------------------------

    The above table shows that for each of the 3-year periods, the 
three Michigan districts and Utah consistently exceeded the 15-million 
pound threshold. Production in Oregon, Pennsylvania and Wisconsin was 
below the threshold in all periods, while New York and Washington each 
exceeded the 15-million pound threshold in two out of three of the 
periods.
    The order became effective in 1996, based on a series of hearings 
that began in December 1993 and ended in January 1995. Proponents of 
the order supported the 15-million pound threshold as a criteria for 
determining which districts would be subject to volume regulation. At 
the time the order was implemented, the three Michigan districts, New 
York and Utah had average annual production in excess of 15 million 
pounds. These five districts accounted for 92 percent of U.S. 
production in 1995, and 89 percent of U.S. production in 1996.
    Proponents of the order also supported a provision that a district 
not meeting the 15-million pound threshold would become covered by 
regulation when it reached a production level equal to 150 percent of 
its average annual production during the period 1989 through 1992. The 
purpose of this provision was to catch surges in production that 
occasionally occur in order to more equitably distribute the burden of 
supply control. It was also to make sure that when smaller producing 
districts expand production capacity, they do not take advantage of the 
system and become free riders. This was intended to prevent a district 
from benefitting from the program without contributing to the effort to 
reduce surplus supplies.
    After considering the record evidence in support of this provision, 
the Department decided not to include it in the order. The provision, 
as proposed, seemed to be overly complicated to administer and would 
possibly be inequitable to tart cherry growers and handlers. In 
addition, proponents indicated that it was not their intent to regulate 
States with small production volumes since their aggregate volume is 
not a critical amount when compared to the total volume of tart 
cherries produced.
    Several witnesses at the amendatory hearing suggested that, had the 
150 percent rule been incorporated into the initial order, the 
amendment to eliminate the 15-million pound threshold would now be 
unnecessary.
    The following table shows production in the initially unregulated 
districts during the period 1989 through 1992.

----------------------------------------------------------------------------------------------------------------
                                        1989         1990         1991         1992       Average    150 Percent
----------------------------------------------------------------------------------------------------------------
Pennsylvania......................          6.0          3.5         11.5          6.0          6.7         10.0
Wisconsin.........................          7.6          4.8          7.8          9.1          7.3         10.9
Oregon............................         15.0          7.5          7.5          9.5          9.9         14.8
Washington........................          6.4          7.4          9.8         12.8          9.1         13.6
----------------------------------------------------------------------------------------------------------------

    The record shows that neither Pennsylvania nor Oregon have reached 
a level of production equal to 150 percent of their production during 
this base period. Wisconsin first exceeded production of 10.9 million 
pounds (150 percent of its average annual production in the base 
period) in 1997, and Washington exceeded production of 13.6 million 
pounds (150 percent of its production during the base period) in 1998.
    If the order were implemented as proposed by the proponents during 
the promulgation, all districts but Pennsylvania and Oregon would 
currently be regulated. As it is, for the 2001 season, Wisconsin is 
also

[[Page 3559]]

unregulated. In the 1999 crop year, Pennsylvania and Oregon together 
accounted for 4.9 percent of the U.S. tart cherry crop. In 2000, they 
accounted for 3.3 percent of the total, and in 2001, only 1.6 percent. 
Adding production in Wisconsin during those years brings the 
percentages in the 3 years 1999 to 2001 to 8 percent, 7 percent and 5 
percent respectively.
    With respect to New York, witnesses concurred that with the 15-
million pound threshold, that district would likely be subject to 
regulation only about 50 percent of the time in the future. That is 
because production in that State is close to the threshold, ranging 
from 13.1 to 16.9 million pounds over the last 5 seasons. Concern was 
also expressed that Utah could fall below the established threshold in 
upcoming years and become unregulated. Washington was expected to 
continue to increase its production and become subject to regulation in 
the near future. (Washington did exceed the threshold during the period 
1998-2000, and will be subject to any volume regulation implemented for 
the 2001 crop). Witnesses agreed that production in Oregon, 
Pennsylvania and Wisconsin was likely to remain below 15 million 
pounds.
    The conclusion by proponents of the Board's proposal was that with 
the order as currently written, a greater proportion of U.S. production 
could become unregulated. This would dilute the effectiveness of the 
program and, more importantly, increase the amount of regulation 
imposed on the remaining regulated districts.
    Since the order became operational, volume regulations have been 
implemented for three crop years--1997, 1998, and 2000. A volume 
regulation has also been recommended for the 2001 crop, but not yet 
effectuated. No regulation was deemed necessary for the 1999 crop. The 
following table shows the level of regulation implemented (or, in the 
case of 2001, recommended) in 1997, 1998, 2000 and 2001. With the 
exception of the restricted percentages, all figures are in million 
pound units.

----------------------------------------------------------------------------------------------------------------
                                                                  1997         1998         2000         2001
----------------------------------------------------------------------------------------------------------------
U.S. Crop...................................................       285.0        344.0        284.0         366.3
Carry-in....................................................        70.0         38.8         87.0          39.0
                                                             ---------------------------------------------------
    Total Available Supply..................................       355.0        382.8        371.0         405.3
                                                             ===================================================
3-Year Average Sales........................................       269.9        288.6        277.0         217.0
Target Carry-out............................................         0.0          0.0          0.0           0.0
Economic Adjustment.........................................       (23.0)       (31.4)       (22.0)         50.0
Optimum Supply..............................................       246.9        257.2        257.0         267.0
Surplus.....................................................       108.1        125.6        116.0         138.3
Production in Regulated Districts...........................       240.0        309.0        232.0         335.9
Restricted Percentage.......................................          45           41           50            41
----------------------------------------------------------------------------------------------------------------

    If all districts had been subject to regulation, the surplus would 
have been divided by total production rather than by production in the 
regulated districts. Had this been done, the restricted percentage in 
1997 would have been 38 percent rather than 45 percent; the restricted 
percentage in 1998 would have been 37 percent rather than 41 percent; 
the restricted percentage in 2000 would have been 41 percent rather 
than 50 percent; and the restricted percentage recommended for 2001 
would have been 39 percent instead of 41 percent. The difference is 
relatively small for the 2001 crop year because production in Utah (12 
million pounds) was less than 50 percent of its prior 5-year average, 
so that district will be unregulated in the 2001 crop year.
    One of the primary arguments made by supporters of the Board's 
proposed amendment was that of fairness. These witnesses stated that 
all tart cherry growers benefit from the operation of the order, but 
the burden of regulation is borne only by those in the regulated 
districts. They testified that revenues received by growers of similar 
size varied considerably due solely to where a particular grower's farm 
was located. They concluded that no growers in the regulated districts 
receive gross returns equal to those received in non-regulated 
districts.
    To illustrate, an agricultural economist from Michigan State 
University (who was a witness testifying in support of the Board's 
amendment) presented an analysis of the economic impacts of the program 
on growers in regulated versus non-regulated districts. This analysis 
compared gross farm income for growers of the same size in regulated 
and non-regulated districts. It assumed a grower who produces 200 tons 
on 40 acres, or 10,000 pounds per acre. Estimates of likely returns for 
the 1998 crop were used.
    For purposes of this analysis, it was assumed that the grower in 
the non-regulated district could sell all of his or her production in 
primary market outlets. In the case of the grower in the regulated 
district, it was assumed that his or her crop utilization would be 
allocated in accordance with the overall industry averages in 1998. For 
example, about 3 percent of the tonnage would be placed in the 
inventory reserve, 11 percent would be exported, and 13 percent would 
be diverted through non-harvest.
    Prices for free market cherries were USDA estimates of 14 cents per 
pound for the regulated districts and 13.5 cents per pound for the non-
regulated districts.
    Returns for market growth factor cherries were expected to be 
somewhat lower (12 cents per pound) because these cherries tend to be 
sold later in the year, or perhaps in a subsequent year. A conservative 
figure of 6 cents per pound was used for reserve cherries because of 
the many uncertainties as to what those cherries might return (for 
example, the timing of their release and prevailing prices that might 
exist). Export sales were estimated by industry leaders to average 
about 9 cents per pound in 1998. For new product development, an 
estimate of 11 cents per pound was used, taking into account the 
considerable variation of returns for new cherry products depending 
upon the processor and the circumstances surrounding the new products. 
For non-harvested cherries, a savings of 3 cents per pound in variable 
costs (e.g., harvesting and trucking) was used. Finally, no return was 
recorded for cherries diverted through at-plant diversion.
    The income for a grower in a regulated district, based on the 
analysis of the witness, is shown below:

[[Page 3560]]



----------------------------------------------------------------------------------------------------------------
                                                                 Lbs.       Percent        Price        Income
----------------------------------------------------------------------------------------------------------------
Open Market................................................      240,000           60        $0.14       $33,600
Market Growth..............................................       36,000            9         0.12         4,320
Inventory Reserve..........................................       12,000            3         0.06           720
Exports....................................................       44,000           11         0.09         3,960
New Products...............................................        8,000            2         0.11           880
Non-Harvest................................................       52,000           13         0.03         1,560
At-Plant Diversion.........................................        8,000            2         0.00             0
                                                            ----------------------------------------------------
    Total Production.......................................      400,000          100  ............      45,040
  For a grower in a non-regulated district, income was estimated as follows:
Open Market................................................      400,000          100         0.135       54,000
----------------------------------------------------------------------------------------------------------------

    In summary, the grower in the non-regulated district would receive 
revenues of $54,000, about 20 percent more than the grower in the 
regulated district. Both growers would benefit from any strengthening 
of prices through the use of volume regulations.
    Opposition to the Board's proposal was expressed primarily by 
industry members in unregulated districts. One of the arguments made 
was that growers in these districts would be much more severely 
impacted by a volume regulation because yields in those districts are 
so low compared to those in regulated districts.
    One witness used the analysis given above, but used different 
yields per acre. For the grower in a regulated district, he used 40 
acres with a yield of 7,400 pounds per acre. This resulted in total 
production for that grower of 296,000 pounds and revenues of about 
$33,330. For the grower in a non-regulated district, he again used 40 
acres, but used a yield of 2,400 pounds per acre. This provided total 
production of 96,000 pounds and revenues of only $2,960. Had the second 
grower been subject to volume regulation, his or her revenues would 
have been even lower.
    The following table shows yields per acre in the States covered by 
the order for the years 1997 through 2000. The annual yields are from 
USDA statistics, while the average yield for Washington for the 4-year 
period was obtained from a processor survey in that State. All figures 
are in pounds per acre.

----------------------------------------------------------------------------------------------------------------
                     State                           1997         1998         1999         2000       Average
----------------------------------------------------------------------------------------------------------------
Utah...........................................        6,250       11,790        5,360       11,800        8,800
Michigan.......................................        7,920        9,260        6,580        7,020        7,695
New York.......................................        5,580        5,380        6,850        7,550        6,340
Pennsylvania...................................        5,420        3,500        6,000        5,080        5,000
Wisconsin......................................        4,670        6,580        4,350        4,350        4,988
Oregon.........................................        2,850        2,150        4,080        3,380        3,115
Washington.....................................           NA           NA           NA           NA       14,000
----------------------------------------------------------------------------------------------------------------

    The above table shows that average yields do vary among the cherry 
producing States. It also shows that yields within the States vary 
considerably from year to year.
    Witnesses stated that the use of average yields for an entire State 
is misleading. Michigan, for example, has a 4-year average yield of 
about 7,600 pounds per acre. The average yields for the three districts 
that comprise Michigan are quite different. In Northern Michigan, 
yields averaged about 13,000 pounds per acre, while in Central Michigan 
they averaged 5,000 pounds per acre and in Southern Michigan only 4,000 
pounds per acre.
    This witness further went on to state that variations in yields 
within a geographic district exceed the variations among the districts. 
He gave a personal example. The witness is a processor in Central 
Michigan. His organization deals with about 20 growers. Yields for 
those growers in 1998 ranged from 1,000 to 15,000 pounds per acre.
    Therefore, it is reasonable to assume that the State in which a 
grower farms is not necessarily a good indicator of an individual 
grower's potential yield per acre. While weather conditions affect 
yields (e.g., susceptibility to freezes), weather conditions can vary 
as much within a district as between districts. Also, there are many 
other variables that contribute to a grower's yield per acre. These 
include the density of trees planted per acre, the age of the trees, 
and cultural practices undertaken by individual growers to care for 
their orchards. However, the table showing yields per acre does 
indicate that there is a definite difference in yields among the 
various States.
    Regarding the age of trees, the record indicates that tart cherry 
trees start losing optimum productivity at about 20 years. Growers 
testified that they typically replant their trees when they are between 
20 and 25 years old. The following table shows the percentage of 
acreage in each State that was comprised of older trees in 1998.

------------------------------------------------------------------------
                                     Percent      Percent      Percent
              State                acreage  21-   acreage     total  21+
                                     25 years    26+ years      years
------------------------------------------------------------------------
Michigan.........................           15            6           21
Utah.............................            8            1            9
New York.........................           24            7           31
Wisconsin........................           20           15           35
Washington.......................           18            5           23
Pennsylvania.....................           30            6           36
Oregon...........................           30           48           78
------------------------------------------------------------------------


[[Page 3561]]

    Oregon, consistently the lowest yielding producing district, has 
substantially more older trees planted than other States. Because older 
trees tend to produce less fruit, and Oregon has a high percentage of 
older trees, this is likely to explain in part why Oregon's yields are, 
on average, lower than in other areas. Pennsylvania had the second 
largest percentage of older trees.
    Another argument against eliminating the 15 million-pound threshold 
was that unregulated districts like Oregon and Pennsylvania had already 
``done their part'' to reduce the surplus of tart cherries by reducing 
their acreage. Any continued surpluses were attributable to the major 
producing State, Michigan. It was therefore argued that State should 
bear the consequences of its actions and not impose its problems on the 
smaller districts.
    The record shows that U.S. tart cherry bearing acreage had declined 
from a high of 50,050 acres in 1987, to 39,880 acres in 2000. All 
producing States recorded acreage reductions during this period. On a 
percentage basis, the greatest reduction was in New York (down 52 
percent), followed by Oregon (down 36 percent), Utah (down 30 percent), 
Pennsylvania (down 25 percent), Washington (down 24 percent), and 
Wisconsin (down 17 percent). Michigan had the lowest percentage 
decrease (down 15 percent), but the largest decline in total number of 
acres (a reduction of 5,140 acres).
    The record evidence is that acreage in all districts have declined 
over the past decade. Decisions to reduce acreage were made by 
individual growers based on their assessments of the best use of their 
land. While opportunities for alternative land uses vary somewhat by 
State, they also vary within the States.
    In determining whether a surplus of tart cherries exists, total 
U.S. supplies are compared to total demand in the primary market. 
Production in each district contributes to the total supply, and thus 
to any surplus that may exist. However, Michigan accounts for such a 
large proportion of the total, that production in that State alone can 
warrant a volume regulation. Additionally, the evidence is that 
production in the smallest producing State--Oregon--is negatively 
correlated to production in Michigan. That is, when production in 
Michigan is high, production in Oregon is generally low. Thus, it is 
likely that with elimination of the production threshold, Oregon would 
be regulated in years when its production is below normal. This could 
result in a heavier burden being placed on growers in Oregon as a 
result of volume regulation than is true in the other producing 
districts.
    Additionally, the record shows that the benefits of the supply 
management provisions of the order accrue to the entire U.S. tart 
cherry industry. The short run benefits arise when surplus supplies are 
reduced, and market prices (due to the inelastic demand for tart 
cherries) rise to levels that are closer to growers' typical costs of 
production. Longer range gains are also expected from the encouragement 
to expand market demand through new market and new product development.
    The aggregate short run benefits to the industry's growers from the 
use of volume regulation in 1997 and 1998 have been estimated to be at 
least $20 million per year. This has resulted because the smaller 
market surpluses have resulted in stronger grower prices which are 
estimated to be 7 to 9 cents per pound greater during those years.
    The record shows that tart cherries, regardless of where grown in 
the U.S., are sold into markets that are essentially national markets 
with similar, closely interrelated prices throughout the country. 
Therefore, the somewhat higher prices that have resulted from the 
order's supply management features have accrued to all tart cherry 
growers in the United States.
    However, the history of the order and the evidence on the record 
support the premise that the smallest producing districts should not be 
subject to volume regulation under the tart cherry marketing order. 
Further, there is an argument to be made for reducing the current 15-
million pound threshold. After considering all the testimony and other 
record evidence, the Department has concluded that a threshold of 6 
million pounds would be more reasonable. This would result in all 
districts that have increased production over the past decade being 
subject to regulation, consistent with the original intent of the 
proponents of the order.
    The record shows that the two districts that would not be regulated 
under a 6-million pound threshold--Oregon and Pennsylvania--produce 
insignificant volumes of tart cherries compared with total U.S. 
production. Production in these districts has not grown, nor is it 
anticipated that it will in the future. The evidence supports claims 
that these smaller producing districts would be more impacted by a 
volume regulation than other districts. Costs may be higher to growers 
in those areas than in others because they tend to have lower yields. 
Also, processing capacity in those districts tends to be limited, 
supporting the argument that production is unlikely to increase. In 
addition, processors in the smaller producing districts testified that 
they would have to shut down their facilities if those districts were 
subject to volume regulation because they would not be able to get 
sufficient supplies of cherries to run their operations efficiently. If 
the smaller producing districts do increase their production, they 
would become regulated once they reach the 6-million pound threshold.
    The proponent evidence showed that while volume regulations have 
helped strengthen overall cherry prices, there are costs involved with 
complying with these regulations. Such costs include reduced returns 
for cherries that cannot be sold in primary markets. Imposing those 
costs on the smallest producing districts would not result in any 
higher overall price for tart cherries. Additionally, regulating the 
two smallest States would not reduce the volume of regulation imposed 
on cherries grown in the other States because of their low levels of 
production. In the four years that restricted percentages have been 
recommended by the Board, the percentage would not have changed at all 
in two of four years (by not including Pennsylvania and Oregon) and 
would have been marginally reduced in the other two years. Thus, it 
appears that the costs of regulating these minor districts would not be 
outweighed by any accrued benefits.

Allocation of Board Membership

    Section 930.20 of the order provides for a Cherry Industry 
Administrative Board, appointed by the Secretary to locally administer 
the program. Among the Board's responsibilities is recommending 
regulations to implement marketing order authorities. The Board 
consists of 19 members: 18 tart cherry growers and handlers, and 1 
public member.
    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. Six 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), Utah (two members), and Washington 
(two members). The three districts with one member each are Oregon, 
Pennsylvania, and Wisconsin. The nineteenth Board member is selected to 
represent the general public, and need not be from any specific area.

[[Page 3562]]

    Section 930.20 further provides that if a district with a single 
member becomes subject to volume regulation, that district will get a 
second Board member position. There is no specific requirement that a 
district must lose a seat if it falls below the 15 million pound 
threshold and is no longer subject to regulation.
    The Board proposed amending Sec. 930.20 to provide that membership 
for each district be based on the average annual production for that 
district over the previous 3 years. Districts with up to and including 
10 million pounds would be represented by one Board member; districts 
with more than 10 and up to and including 40 million pounds would have 
two members; districts with more than 40 and up to and including 80 
million pounds would have three members; and districts with more than 
80 million pounds would have four members.
    The record shows that this amendment could result in a larger 
number of Board members. Using average annual production figures for 
the years 1999 through 2001, one district (Wisconsin) would have been 
entitled to an additional Board member position for the term of office 
that began July 1, 2000. Thus, the total number of Board members under 
this proposed amendment would have increased to 20 members (versus 19 
members under the provisions currently in effect).
    An increase in the number of Board members would result in a 
marginal increase in Board expenses. This is because the Board 
reimburses members for costs incurred in attending Board meetings 
(travel costs, etc.). Since Board expenses are funded through handler 
assessments, all handlers would be impacted by slightly higher 
assessments.
    However, these slight cost increases will be offset by better 
industry representation on the Board. Reallocating membership on an 
annual basis will allow membership to more closely reflect changing 
production trends in the industry. This should lead to better decision 
making by a more representative administrative body.

Designation of a Temporary Alternate To Act for an Absent Board Member

    As previously discussed, the Board is composed of 19 members, with 
the industry members allocated among nine districts. Each Board member 
has an alternate who has the same qualifications as the member. 
Industry Board members and alternates are nominated by their peers in 
the district they represent.
    Section 930.28 of the order provides that if a Board member is 
absent from a meeting, his or her alternate shall act in that member's 
place. There is no provision for a situation in which both the member 
and that member's alternate are unavailable.
    The Board has proposed changing Sec. 930.28 as follows. If both a 
member and his or her alternate cannot attend a Board meeting, the 
member or the alternate (in that order) could designate another 
alternate member to act in their stead. If neither the member nor the 
alternate choose to make such a designation, the Board's chairperson 
would be free to do so (with the concurrence of a majority of present 
members).
    The record supports the concept of allowing more flexibility for 
alternates to fill in for absent Board members. However, the Department 
is recommending a revision in the Board's proposal. This decision 
proposes allowing a Board member to designate an additional alternate 
to act in his or her place when that member and that member's alternate 
are unable to attend a Board meeting. However, if the member chooses 
not to name an additional alternate, that decision would not then 
revert to the Board or its chairperson.
    This proposed amendment would allow more flexibility for Board 
members who cannot attend a Board meeting. It should also encourage a 
full contingency of voting members at Board meetings, while maintaining 
adequate representation among the districts comprising the production 
area. No additional costs should be incurred as a result of this 
change.

Clarification of Diversion and Exemption Provisions

    As previously discussed, a primary feature of the tart cherry 
marketing order is supply management through the establishment of free 
and restricted percentages. These percentages are applied to each 
regulated handler's acquisitions of cherries. Free percentage cherries 
may be sold in any market, while restricted percentage cherries must be 
diverted by a grower or handler or placed in the inventory reserve.
    Section 930.58 of the order provides for grower diversions. Under 
this section, growers may receive diversion certificates for cherries 
used for animal feed and cherries left unharvested in the orchard. 
Growers may also receive diversion certificates for ``uses exempt under 
Sec. 930.62.'' A grower's diversion certificates can then be 
transferred to that grower's handler and used to meet the handler's 
restricted obligation.
    Section 930.59 provides for handler diversions. Handlers may 
receive diversion credits for cherries used in such forms as the Board 
may designate, with approval of USDA. These forms may include 
destruction at the handler's facility; use in Board approved food banks 
or other approved charitable organizations; acquisition of grower 
diversion certificates; and uses exempt under Sec. 930.62. Handlers 
desiring to use the first three forms must notify the Board prior to 
diverting cherries. Use of the fourth form requires application to and 
approval by the Board prior to diversion.
    Section 930.62 provides that certain cherries may be exempt from 
volume regulation upon Board recommendation and USDA approval. Such 
cherries would also be exempt from assessment obligations and any 
established quality standards. Section 930.62 currently provides that 
exemptions may be provided for cherries diverted in accordance with 
Sec. 930.59 (Handler diversion privilege); used for new product and new 
market development; or used for experimental purposes or for any other 
use designated by the Board, including cherries processed into products 
for markets for which less than 5 percent of the preceding 5-year 
average production of cherries were utilized.
    The record indicates that the industry supports continuation of 
both the authority to exempt certain cherries from regulation, and the 
authority to provide diversion credits for cherries used for certain 
purposes. The application of each provision is different, however. An 
example provided at the hearing illustrates the difference. Assume a 
restricted percentage of 20 percent has been established, a regulated 
handler acquires 10 million pounds of cherries, and that handler uses 2 
million pounds of those cherries for new market development. This 
handler would have a restricted obligation of 2 million pounds of 
cherries (20 percent of the 10 million pounds of cherries acquired).
    If cherries used for new market development were eligible for 
diversion credit, this handler would have met his or her restricted 
obligation by using 2 million pounds for that purpose. The handler 
could thus market the remaining 8 million pounds of his or her cherries 
as free percentage cherries in any outlet he or she chose. If, however, 
cherries used for new market development were exempt from regulation, 
the restricted percentage would be applied to that handler's total 
acquisitions (10 million pounds), less the volume of cherries exempt 
from

[[Page 3563]]

regulation (2 million pounds). Thus, this handler would have a 
restricted obligation of 1.6 million pounds (20 percent of 8 million 
pounds), which would have to be diverted in forms approved by the Board 
as eligible for diversion credit.
    Cross references between Secs. 930.59 and 930.62 have proved to be 
confusing. Thus, these sections are proposed to be amended by deleting 
those cross references. Also, uses listed under Sec. 930.62 as possible 
exempt uses are being listed under Sec. 930.59 as possible uses 
eligible for handler diversion credit. Rulemaking would be required to 
designate whether a particular use would be exempt from regulation or 
would constitute an approved diversion outlet. Such rulemaking would be 
based on Board recommendations, following its assessment of the impact 
exemptions or diversions would have on the tart cherry industry.
    This proposed amendment is a clarification of the current order and 
its operation. It would not introduce new or different concepts. To the 
extent that it makes the order easier for growers and handlers to 
understand, it should be of benefit to the industry.

Exemption or Diversion Credit for Export Shipments

    As discussed in the previous material issue, Secs. 930.59 and 
930.62 provide for handler diversions and exemptions, respectively. 
Certain uses of cherries are listed as being eligible for diversion 
credit or exemptions. Under the authority in these sections 
(specifically, that for market development), diversion credits have 
been made available to handlers during recent crop years for shipments 
to export markets, excluding Canada and Mexico. Canada and Mexico were 
not included because of their proximity to the United States and 
concern about compliance matters.
    The record indicates that allowing export shipments to receive 
diversion credits resulted in stronger export sales. Exports in 1997-98 
were unusually high (around 50 million pounds), although they declined 
during the next season to 34 million pounds. Witnesses stated that the 
tart cherry industry needs to expand demand for its product through, 
among other things, development of new markets.
    The Board proposed adding specific authority to Secs. 930.59 and 
930.62 to allow diversion credits or exemptions for such export markets 
as recommended by the Board and approved by the Secretary. This is a 
clarifying change only. It would impose no new or different regulatory 
requirements on the tart cherry industry.

Diversion Credit for Juice and Juice Concentrate

    Section 930.59 of the order relates to how handlers may receive 
diversion credits to offset their restricted obligations. Paragraph (b) 
of that section states that diversion may not be accomplished by 
converting cherries into juice or juice concentrate.
    The Board recommended that the order be amended by deleting the 
prohibition in Sec. 930.59 (b) that shipments of cherry juice and juice 
concentrate to approved diversion outlets be eligible for diversion 
credit.
    The record indicates that in the promulgation proceeding, handlers 
from Oregon and Washington were concerned that juice concentrate could 
be established as a use eligible for diversion credit. Those handlers 
indicated that they processed all or a majority of their cherries into 
juice concentrate. Cherries produced in that area of the country have a 
high brix (sugar content) level desirable for juice concentrate. 
Concern was expressed that if the Board decided to allow diversion 
credit for juice concentrate, an increase in the volume of juice in the 
marketplace and an accompanying reduction in juice prices could result. 
This would unduly harm the industry in the Washington and Oregon. USDA 
therefore inserted the provision to prohibit the use of juice or juice 
concentrate for diversion credit.
    However, the use of juice and juice concentrate for export was 
allowed under the exemption provisions of the order for the 1997-98 
season. The 1997-98 season was the first season of operation for the 
cherry order, and its provisions were new to the industry and complex 
to administer. Handlers unfamiliar with order's diversion provisions 
had exported or contracted to export tart cherry juice or juice 
concentrate to eligible countries with the intention of applying for 
and receiving diversion certificates for those exports. If those 
handlers had been prohibited from receiving diversion certificates for 
those sales, the handlers would have incurred severe financial 
difficulties. Thus, the prohibition against exports of juice and juice 
concentrate was suspended for the 1997-98 season only.
    The record shows that until 1997, the juice market was distressed. 
One reason was that there had been large volumes of concentrate 
produced in the preceding years in the Western United States--volumes 
that exceeded market demand. In 1995 particularly, there was a very 
large crop of tart cherries (a record 395.6 million pounds), and a 
large portion of that crop was processed into concentrate. An 
oversupply situation occurred, which led to low prices and a large 
carry-over of concentrate.
    Witnesses claimed that the operation of the order has helped 
address the cherry oversupply situation, including the surplus of 
juice. Allowing exports of juice to receive diversion credits in 1997-
98 was quite successful. The industry exported more than 4 million 
pounds (raw product equivalent) of juice concentrate that year, 
comprising about 10 percent of total exports qualifying for credit. At 
9 cents per pound for the raw fruit, growers received about $382,500 in 
revenue from these sales. Handlers, whose value added component is 
about $5.00 per gallon (or $.056 per pound), received $236,000 in 
revenue. In total, the industry gained at least $618,000 from export 
sales of juice concentrate in 1997-98.
    Providing diversion credits for exports of juice concentrate by 
handlers in the regulated districts encouraged more exports of this 
product. The higher levels of exports of concentrate helped reduce 
heavy inventories and reduced the supplies available in the domestic 
market. This led to an increase in the domestic price for juice 
concentrate of about $4.00--$6.00 per gallon. Producers whose cherries 
were processed into concentrate benefitted from the strengthening of 
domestic juice prices.
    In 1998, diversion credits were no longer authorized for exports of 
juice and juice concentrate. Witnesses stated that this hurt the U.S. 
cherry industry. Demand for juice concentrate in Europe was strong, but 
domestic processors could not export juice concentrate in a way that 
was economically feasible. Some processors exported raw juice stock to 
Europe so the raw stock could be juiced overseas. This meant that the 
added value of converting the stock to juice concentrate was lost to 
U.S. processors. It also meant higher freight costs for the raw product 
(versus concentrate). When juice stock was exported, the freight cost 
to Europe was about 10 cents per pound. Growers received little for 
cherries exported as raw juice stock, while grower returns for exported 
juice concentrate were positive.
    Further, this restriction resulted in shorting the export juice 
market. Witnesses stated that if you are unable to supply a market 
consistently, that market looks for a more reliable source of supplies. 
When a market is lost to the

[[Page 3564]]

U.S. industry for this reason, it is difficult to regain. This is 
particularly detrimental to the tart cherry industry as it seeks to 
expand markets for its heavy supplies of product.
    As previously indicated, the prohibition on diversion credits for 
juice and juice concentrate was in response to concerns expressed by 
the industry in the Northwest. At the time the order was promulgated, 
it was represented that more than 85 percent of the crop in Washington 
was processed into juice. During recent years, less than half of the 
Washington crop was used for juice. Most of the rest of the crop was 
used for 5+1 cherries (25 pounds of cherries to 5 pounds of sugar). 
Additionally, the record shows that in 1993 there were 7 pitters in the 
State; by 2000, that number had grown to 20. This supports the 
conclusion that processors in Washington are able to pack a wider 
variety of finished products. Cherries grown in Washington have 
increasingly been processed into products other than juice and juice 
concentrate.
    Also, production in the State of Washington has grown, and a number 
of witnesses at the hearing held in early 2000 expressed their belief 
that Washington would soon produce in excess of 15 million pounds 
annually and thus would become subject to volume regulation. In fact, 
production in Washington for the 3 years 1998 to 2000 averaged 15.9 
million pounds, and Washington became subject to volume regulation in 
2001. It was critical for handlers in Washington to be able to receive 
diversion credits for exports of juice and juice concentrate. This was 
particularly true because 5+1 cherries do not generally sell in export 
markets because they contain sugar and are thus subject to increased 
tariffs when exported. For these reasons, the Board unanimously 
recommended suspension of the prohibition on receiving diversion credit 
for exports of cherry juice and juice concentrate. This suspension 
became effective August 1, 2001 [66 FR 39409, July 31, 2001].
    An additional benefit of allowing diversion credits for exported 
juice and juice concentrate is that it would ensure that the domestic 
market is adequately supplied in short crop years. In years when the 
crop is small, most available tart cherries will be used to supply 
higher value finished products rather than juice concentrate. If the 
industry does not have a supply of concentrate in reserve, the juice 
markets, both domestic and foreign, could go unsatisfied. In order to 
have supplies available in short crop years, there needs to be an 
incentive to have tart cherries stored as juice concentrate. Making 
juice and juice concentrate eligible for diversion credit would create 
an incentive to produce and store concentrate, which would ensure that 
markets for those products are adequately supplied. It could also 
result in fewer cherries being diverted in the orchard. This would 
benefit growers through enhanced revenues, because they receive more 
for cherries that are processed and sold than for cherries that are 
diverted in the orchard.
    This proposed amendment would result in additional options for 
handlers in meeting their restricted obligations under the order. It 
would also encourage expansion of markets for U.S. tart cherry 
products, which should benefit the industry as a whole. It would not 
adversely impact the sale of juice and juice concentrate in primary 
markets; in fact, it could tend to strengthen prices in those markets. 
This is because more juice would likely be exported, which would reduce 
the supply available in the domestic market.

Handler Transfers of Diversion Credits

    Section 930.59 of the order provides for handler diversion credits. 
Those diversion credits are used by handlers to meet their restricted 
obligations. That provision of the order is silent with respect to the 
ability of handlers to transfer diversion credits among themselves to 
meet their restricted obligations.
    The Board proposed adding a new paragraph (e) to Sec. 930.59 to 
provide that a handler who acquires diversion certificates representing 
diverted cherries during any crop year may transfer such certificates 
to another handler or handlers.
    The record shows that allowing transfers of diversion certificates 
provides additional flexibility to tart cherry growers and handlers in 
meeting program requirements, without changing the amount of tart 
cherries available to be marketed as free percentage cherries. This can 
also result in the processing of the highest quality cherries available 
in any crop year, which would benefit the industry as a whole.
    One witness at the hearing explained as an example that Handler A 
may acquire a very high quality of tart cherries in a given year, and 
would want to process and sell a higher percentage of those cherries 
than his or her free percentage would allow. Handler B may be in a 
situation where he or she receives more diversion credits than needed 
because most of that handler's pack is for export. (We are assuming 
that export sales are eligible for diversion credits.) Handler B might 
want to transfer those excess credits to Handler A.
    Additionally, there may be a situation in which Handler C's growers 
have low quality cherries due to adverse growing conditions. These 
growers may choose to use in-orchard diversion to a greater extent than 
they normally would. Handler C could wind up with more diversion 
credits than needed and may want to transfer those credits to Handler 
A. A simple example to illustrate this situation follows. In this 
example, we will assume a restricted percentage of 40 percent has been 
established.

----------------------------------------------------------------------------------------------------------------
                                                                                                        Excess
                                                   Receipts    Restricted    Exports       Grower     diversion
                    Handler                        (pounds)    obligation    (pounds)    diversions    credits
                                                                (pounds)                  (pounds)     (pounds)
----------------------------------------------------------------------------------------------------------------
A..............................................      100,000       40,000            0            0     (40,000)
B..............................................      100,000       40,000       70,000            0      30,000
C..............................................      100,000       40,000            0       50,000      10,000
----------------------------------------------------------------------------------------------------------------

    In this case, Handler A needs diversion credits totaling 40,000 
pounds to meet his or her restricted obligation, while Handlers B and C 
have excess credits representing 40,000 pounds of cherries. If Handler 
A could receive Handler B's and C's excess diversion credits, he or she 
could use them to fulfill Handler A's restricted obligation. Otherwise, 
Handler A would have to divert 40,000 pounds of cherries (by destroying 
them, for example) or put them in the inventory reserve. With the 
ability to transfer diversion credits, Handler A could acquire excess 
credits from Handlers B and C. Handler A would benefit by being able to 
process all of his or her cherries for free use.

[[Page 3565]]

Handlers B and C (and their growers) would benefit by being compensated 
for their diversions, including those above the required amount.
    Both the transferring handlers' and the receiving handler's growers 
would benefit. Also, the overall quality of the crop marketed could be 
improved. This would serve to increase consumer confidence and 
acceptance, thereby strengthening demand for tart cherries. This would 
benefit the U.S. tart cherry industry as a whole.
    Additionally, if the transfer of diversion credits were not 
allowed, the market could be shorted. This would have a detrimental 
impact on the tart cherry industry. Again, we will use the above 
illustration and assume these three handlers comprise the entire 
industry.

----------------------------------------------------------------------------------------------------------------
                                                                                             ``Free'' Sales
                                                               Restricted     Excess   -------------------------
                    Handler                        Receipts    obligation   diversions      With       Without
                                                                                         transfers    transfers
----------------------------------------------------------------------------------------------------------------
A..............................................      100,000       40,000     (40,000)      100,000       60,000
B..............................................      100,000       40,000      30,000        30,000       30,000
C..............................................      100,000       40,000      10,000        50,000       50,000
                                                ----------------------------------------------------------------
    Total......................................      300,000      120,000           0       180,000      140,000
----------------------------------------------------------------------------------------------------------------

    With a 60 percent free percentage, it would be expected that 
180,000 pounds of cherries would be available for sale as free 
percentage cherries (60 percent of total receipts of 300,000 pounds). 
As shown above, without the ability to transfer diversion credits, the 
total volume of ``free'' cherries available to market would be only 
140,000 pounds. This would be well below the 180,000 pounds deemed 
necessary to meet market demand. This would hamper the industry's 
efforts to expand markets for its products. Allowing transfers of 
diversion certificates therefore has a positive impact on the industry.

Grower Diversion Certificates

    Section 930.58 provides that a grower may voluntarily choose to 
divert all or a portion of his or her cherries. Typically, this is 
accomplished by leaving cherries in the orchard unharvested, although 
other means are provided as well. Upon diversion in accordance with 
order provisions, the Board issues the grower a diversion certificate 
which the grower may then offer to handlers in lieu of delivering 
cherries. Handlers may then redeem those certificates to meet their 
restricted obligations.
    Section 930.52(d) of the order provides that any district producing 
a crop which is less than 50 percent of the average annual processed 
production in that district in the previous 5 years is exempt from any 
volume regulation in that year. This provision was included in the 
order to help relieve a district from the burdens of the order in a 
year in which its processors and growers were already suffering from a 
severely short crop.
    The Board proposed an amendment to Sec. 930.58(a) to provide that 
any grower diversions completed in a district subsequently exempt from 
regulation under Sec. 930.52(d) will qualify for diversion credit.
    Witnesses at the hearing testified that this is a needed change to 
the order to reduce the risk growers face in deciding whether or not to 
divert all or a portion of their crops. The reason such risk exists is 
primarily due to the difference between the time diversions must take 
place and the time a district's final production figure is known.
    The Board is required to meet on or about July 1 of each crop year 
to develop its marketing policy and recommend preliminary free and 
restricted percentages (if crop conditions so warrant). The marketing 
policy is typically a week or two after the release of the USDA tart 
cherry crop estimate in late June. Final free and restricted 
percentages are not recommended until after the actual crop production 
figure is available. This is typically not until September, after 
harvest is complete. This is also when a final determination is made as 
to whether a district will be covered by regulation in accordance with 
Sec. 930.52(d).
    The record shows that the tart cherry crop is harvested in late 
June or July. Growers must, therefore, make decisions as to whether to 
undertake diversion activities before they are certain whether or not 
their district will be covered by regulation. This occurred in 
Southwest Michigan in 1997. Based on the USDA estimate, it was expected 
that this district would be covered by volume regulation during the 
upcoming crop year. However, the actual crop came in at less than 50 
percent of the prior 5-year average production in that district, and 
Southwest Michigan (District 3) was exempt from regulation.
    Witnesses testified that growers who divert their crops in 
anticipation of a volume regulation should not be penalized for that 
decision because the USDA crop estimate indicates their district will 
be regulated, but it turns out it is not. If those growers' diversion 
certificates become invalid, they receive nothing for the cherries they 
diverted. If their diversions continue to qualify for credit, however, 
handlers who accept those diversion certificates compensate the growers 
for them.
    Without this amendment, the record shows that growers in some 
districts (where application of volume regulation is uncertain) could 
be forced into harvesting their crops. This would be contrary to the 
program objective of balancing tart cherry supplies with market demand.
    This amendment should benefit tart cherry growers who choose to 
divert cherries in anticipation of a volume regulation. It should also 
contribute to the supply management objectives of the program, which 
would benefit the U.S. tart cherry industry as a whole.

Release of Cherries in the Inventory Reserve

    Section 930.51 of the order authorizes the issuance of volume 
regulations for tart cherries in the form of free and restricted 
percentages. Section 930.50(i) provides that a handler's restricted 
percentage cherries must be placed in an inventory reserve or diverted 
through non-harvest, destruction at a handler's facilities, or shipment 
into approved secondary outlets.
    The order specifies three possible releases of inventory reserves 
under Secs. 930.50 (g) and (j) and 930.54(a). The first, under 
Sec. 930.50(g), releases an additional 10 percent (above the optimum 
supply level) of the average of the prior 3 years sales if such 
inventory is available. This release is for market expansion purposes.
    The second release, under Sec. 930.50(j) occurs in years when the 
expected availability from the current crop plus

[[Page 3566]]

expected carry-in does not fulfill the optimum supply (100 percent of 
the average annual sales in the prior 3 years plus the desirable carry-
out). This release is made to all handlers holding primary inventory 
reserves and is a required release to be made by the Board if the above 
conditions are met and reserve cherries are available. This provision 
is intended to assure that inventory reserves are utilized to stabilize 
supplies available on the market. Under this authority, cherries 
released from the reserve can be sold in any market.
    The third release is authorized under Sec. 930.54 (a) which allows 
the Board to recommend to the Secretary a release of a portion or all 
of the primary (and secondary) reserve. To make this release, the 
Boards needs to determine that the total available supplies for use in 
commercial outlets do not equal the amount needed to meet the demand in 
such outlets.
    The Board recommended an amendment to Sec. 930.54 to provide a 
fourth option for a reserve release. Specifically, it proposed that a 
portion or all of the primary and/or secondary inventory reserve may be 
released for sale in certain designated markets.
    Witnesses at the hearing suggested that the industry (through the 
Board) needs more flexibility in determining how to utilize inventory 
reserves. One witness opined that limited releases of reserves during 
years of non-regulation may be necessary to maintain markets that are 
available for diversion credits during years of regulation. The example 
given dealt with sales to export markets other than Canada and Mexico. 
In years of volume regulation, sales of cherries to these markets are 
eligible for diversion credits that handlers may use to meet their 
restricted obligations.
    In developing its marketing policy and determining whether a 
surplus exists, the optimum supply is compared with available supplies. 
The optimum supply is defined as average sales over the last 3 years, 
minus sales qualifying for diversion credit. Thus, the optimum supply 
measures the volume of cherries needed to fill demand in the primary 
market. If anticipated supplies exceed demand in the primary market, a 
volume regulation may be issued. Restricted percentage cherries are 
then used to fill these secondary markets.
    If anticipated supplies are reasonably in balance with demand in 
the primary market, no volume regulation would be issued. Since all of 
a handler's cherries would then be ``free'' percentage cherries, he or 
she would likely attempt to sell all those cherries in the primary 
market because returns tend to be higher in that market. This could 
result in few cherries being made available for sale in secondary 
markets (such as exports).
    The record shows that the tart cherry industry needs to continue 
its efforts to expand markets. A critical aspect of this effort is to 
ensure that supplies are available to fill needs in developing markets. 
If, for example, an export market is developed over the course of time, 
and then cherries are not available to supply that market, that market 
may be lost to the industry. The Board's proposal would allow a release 
of inventory reserves to meet the needs of these specific markets. This 
should contribute to the long run health of the industry.
    Another witness suggested that a limited release should also be 
possible for specific types of cherry products. He stated that over 
time, the mix of products offered by the tart cherry industry has 
changed considerably. New product development should continue to be 
encouraged to expand marketing opportunities for the industry. Releases 
of inventory reserves can play a part in this endeavor.
    The witness gave a hypothetical situation using dried cherries as 
an example. He said that if demand for dried cherries was very strong, 
and supplies of that product from the current year's crop were 
insufficient to meet that demand, releases of that product from the 
inventory reserve should be authorized.
    This proposed amendment should contribute to the industry's efforts 
to balance tart cherry supplies with market demand. It will give the 
Board more flexibility in determining when inventory reserve cherries 
should be released for use. It will not impose any additional 
regulatory requirements on tart cherry handlers.

Ten Percent Reserve Release for Market Expansion

    Section 930.51 of the order authorizes the issuance of volume 
regulations for tart cherries in the form of free and restricted 
percentages. Section 930.50(i) provides that a handler's restricted 
percentage cherries must be placed in an inventory reserve or diverted 
into approved secondary outlets.
    Section 930.50 provides that any volume regulation make available 
as free percentage cherries an ``optimum supply'' of tart cherries. The 
optimum supply is defined as the average sales of the prior 3 years 
(minus sales of cherries qualifying for diversion credit) plus a 
desired carry-out. Section 930.50(g) further provides that in addition 
to the free market tonnage percentage cherries, the Board must make 
available tonnage equal to 10 percent of the average sales of the prior 
3 years for market expansion.
    The Board proposed amending Sec. 930.50(g) to specify that the 10 
percent reserve release only apply during years when volume regulation 
is in effect.
    The record shows that the 10 percent reserve release provision was 
made a part of the order in large part due to USDA policy guidelines. 
The Secretary's Guidelines for Fruit, Vegetable, and Speciality Crop 
Marketing Orders (Guidelines) state that, under volume control 
programs, primary markets should have available a quantity equal to 110 
percent of recent years' sales in those outlets before the Secretary 
would approve secondary market allocation or pooling. This is to assure 
plentiful supplies for consumers and for market expansion while 
retaining the mechanism for dealing with burdensome supply situations.
    Witnesses in support of the Board's proposal stated that allowing 
for and encouraging market growth in years of surplus supplies is 
sensible. In fact, several witnesses stated that an important objective 
of the tart cherry industry and the marketing order program is to 
expand markets for tart cherries. This is supported, for example, by 
the authorization of diversion credits for new product and new market 
development.
    Several witnesses spoke against the 10 percent release during years 
of no volume regulation, however. Two concerns were expressed in this 
regard. First, the release of inventories in a year in which supplies 
and market demand are reasonably in balance results in an oversupply 
situation. This can be accompanied by reduced grower prices. Second, 
and probably more importantly, industry reserves can be depleted. One 
objective of keeping an inventory reserve is to aid in stabilizing 
annual supply fluctuations and safeguard against the detrimental 
impacts of a short crop year.
    The record shows that the tart cherry industry experiences cycles 
in acreage and production. During the phase of the cycle with less 
bearing acreage and shorter supplies, a short crop year can result in 
significant shortages of available market supplies. This can curtail 
continued market demand and market growth. When supplies are short, 
they can be supplemented by reserve cherries. This would mitigate 
spikes in prices, which hinder long term market demand. Food 
manufacturing customers in particular demand a stable supply of product 
at reasonable prices. Absent a reliable supply, these customers tend to 
substitute other fruits in their products.

[[Page 3567]]

    The use of the inventory release option also provides that some 
surplus supplies in a large crop year with low prices can be carried 
over to short crop, high price years. This results in improved revenues 
for growers and processors. The use of the inventory reserve option 
also provides an alternative to grower diversion (i.e., non-harvest).
    Several witnesses used the 1999-2000 crop year to show the affects 
of a reserve release during a year of no regulation. During that year, 
the crop was 251.0 million pounds which, when added to a carryover from 
the previous crop year of 38.0 million pounds, yielded total available 
supplies of 289.0 million pounds. With the optimum supply at 285.0 
million pounds, the Board found that supplies were reasonably in line 
with market demand, and recommended no volume regulation be 
implemented.
    At the beginning of the crop year, industry reserves totaled 28.4 
million pounds. Four million pounds were released early in the crop 
year to meet unanticipated demand, leaving 24.4 million pounds in the 
reserve when it came time for the release for market expansion. Ten 
percent of the 3-year average sales figure meant that 28.5 million 
pounds should have been released for market expansion; however, there 
were only 24.4 million pounds in the inventory reserve, so the entire 
reserve was released.
    Witnesses claimed that the release of reserves in the current crop 
year may result in a surplus supply of cherries in the marketplace. 
This could put a downward pressure on price, and could result in a 
higher carryover into the next crop year. This could mean a greater 
surplus in 2000-2001, which could result in a higher restricted 
percentage and greater probability of cherries being left in the 
orchard unharvested.
    Ultimately, these releases could result in less economic incentive 
to place cherries in the reserve because they could be released at the 
wrong time and return little to growers. With less incentive to 
participate in the inventory reserve, more cherries would likely be 
diverted by growers through non-harvest. Overall grower returns would 
be lower, and long term market losses may occur.
    This proposed amendment should contribute to the industry's efforts 
to balance tart cherry supplies with market demand. It will give the 
Board more flexibility in determining when inventory reserve cherries 
should be released for use. It will not impose any additional 
regulatory requirements on tart cherry handlers.

Assessments on All Cherries Handled

    Section 930.40 of the order authorizes the Board to incur such 
expenses as the Secretary finds are reasonable and necessary for it to 
administer the tart cherry marketing order program. Section 930.40 
further provides that the Board's expenses be covered by income from 
handler assessments.
    Section 930.41 provides that handlers pay their pro rata share of 
the Board's expenses. Each handler's share is determined by applying 
the established assessment rate(s) to the volume of cherries each 
handler handles during a crop year. Section 930.41 further provides 
that handlers are exempt from paying assessments on cherries that are 
diverted in accordance with Sec. 930.59, including cherries represented 
by grower diversion certificates issued under Sec. 930.58. Cherries 
devoted to exempt uses under Sec. 930.62 are also free from 
assessments.
    The Board recommended that Sec. 930.41 be amended to provide that 
all cherries processed and sold by handlers be subject to assessments. 
The only cherries that would be exempt from assessments would be those 
diverted in-orchard by growers, and those diverted by handlers through 
destruction at their plants.
    Proponent witnesses testifying in support of this change stated 
that all processed cherries should be subject to assessments because 
handlers profit from the sale of these cherries. This is because each 
pound of fruit processed increases the handler's overall profitability 
by reducing the per unit cost of processing. This is true even if the 
cherries are used in an outlet approved for diversion credit.
    The record shows that handlers have different ways of meeting their 
restricted obligations. Their decisions are based on their own 
marketing strategies. Some handlers take advantage of marketing their 
products in eligible diversion outlets, while others either cannot or 
do not do so. Witnesses suggested that providing an exemption from 
assessments to handlers who choose to divert their cherries through 
sales in those designated outlets creates a competitive advantage over 
their competitors who do not do so. It was their opinion that if a 
substantial volume of cherries is diverted by certain handlers, the 
burden of financing the program increases on other handlers. Those in 
support of assessing all processed cherries concluded that subjecting 
all processed cherries to the assessment provisions of the order would 
eliminate this unintended advantage.
    Additionally, the record shows that a large portion of the Board's 
annual expenses are incurred for oversight of compliance activities 
related to diversion credits. For example, for those export sales 
eligible for diversion credit, handlers are required to submit proof of 
export. The documentation typically consists of warehouse receipts, 
bills of lading, overseas bills of lading, and other documents proving 
the cherries were exported. The Board staff reviews the documentation 
submitted by each handler for sufficiency, requests additional 
documentation if necessary, and issues diversion certificates upon 
proof of compliance with order requirements. Similar activities are 
undertaken with respect to sales in other designated diversion markets 
(e.g., new product development). Witnesses stated that those handlers 
who take advantage of these order provisions should pay their share of 
the costs of enforcing those provisions.
    One witness also stated that an advantage of this amendment would 
be that it would broaden the assessment base under the order. This 
would lower the assessment rate needed to effectively administer the 
program.
    This amendment would increase assessment obligations on handlers 
who choose to divert their restricted percentage cherries in approved 
outlets. However, it would also tend to result in a more reasonable 
assessment system.

Uniform Assessment Rate

    As discussed in the preceding section, Secs. 930.40 and 930.41 of 
the order provide that the Board may incur certain expenses, and that 
the funds to defray those expenses be paid by handlers through 
assessments. Section 930.41 also provides, among other things, that the 
assessment rate(s) recommended by the Board and approved by the 
Secretary must compensate for the differences in the amounts of 
cherries used for various cherry products and the relative market 
values of those products.
    The Board recommended that Sec. 930.41 be amended to provide that a 
uniform assessment rate be established for cherries used in any or all 
products. This would be true unless the Board decided to consider the 
volumes of cherries used for various products and their relative 
values; if that were the case, the Board could recommend differential 
assessment rates if warranted.
    The record shows that at the time the order was promulgated, 
proponents of the program supported different assessment rates being 
established for cherries used for various products. In

[[Page 3568]]

their testimony, they suggested that high value products such as 
frozen, canned or dried cherries be assessed at one rate, and low value 
products such as juice concentrate and puree be assessed at one-half 
that rate.
    Proponents of the Board's recommended amendment stated that the 
order should not require one rate for certain products and twice that 
rate for others. They stated that while a two-tiered assessment rate 
scheme may be appropriate in some years, it may not be in others. They 
cited the fact that the absolute and relative market values of various 
tart cherry products fluctuate from year to year.
    One witness testified, for example, that producer returns for 
cherries used for juice concentrate are comparable to those for other 
products. He stated that cherry juice concentrate was selling for about 
$17 per gallon. Subtracting estimated handling charges of $5.81 per 
gallon, the net return to the grower would be an estimated $11.19. In 
Washington, where about 50 pounds are required to make a gallon of 
concentrate, growers would receive 22 cents per pound. In Michigan, 
where it take approximately 90 pounds of cherries to make a gallon of 
concentrate, growers would receive 12 cents per pound. This witness 
stated that grower returns in this range are comparable to returns 
available for other products.
    The conclusion of the proponent witnesses was that the Board should 
have discretion in determining appropriate rates of assessment. They 
did not believe a two-tiered approach should be mandated.
    An opponent of the proposed change stated that the order should 
continue to require the Board to consider the volume of raw product 
used in producing various cherry products as well as the relative value 
of those products in recommending annual assessment rates. He stated 
that he did not necessarily support two levels of assessment rates, but 
believed the Board should be required to give due consideration to 
relevant factors in making its recommendations.
    The Department concludes that while there may be justification for 
establishing different assessment rates for different products, it 
should not be required under the order. Thus, the recommended amendment 
to Sec. 930.41 provides that in its deliberations pertaining to 
appropriate levels of assessment rates, the Board should consider the 
volume of cherries used in making various products and the relative 
market value of those products. The assessment rate established may be 
uniform or may vary among products, based on the Board's analysis.
    Implementation of this amendment could result in a single, uniform 
assessment rate applicable to all cherries. Such action would likely 
increase the rate established for cherries used for juice concentrate 
and puree, and could result in a lower rate for cherries used for other 
products. The impact of any such action would be analyzed by the Board 
and USDA prior to its effectuation.

Crop Production Estimate

    Section 930.50 of the order requires the Board to develop an annual 
marketing policy. This policy serves as the basis for determining the 
level of volume regulation needed in a given crop year. First, the 
Board determines the ``optimum supply'' which is defined as the average 
sales of cherries in the past three years plus the desirable carry-out. 
Next, the Board takes the crop forecast for the upcoming year and 
subtracts from it the optimum supply (less the carry-in). If the 
remainder is positive, it represents a surplus in supplies, supporting 
the use of volume regulation. Section 930.50 prescribes that the Board 
must use the official USDA crop estimate as its crop forecast.
    The Board's amendment proposal would allow the Board to use a crop 
estimate other than the official USDA crop estimate in its marketing 
policy.
    The record shows that USDA bases its pre-harvest estimate on two 
methods. In Michigan, an objective yield survey is done by the State. 
Such a survey is based on the actual count of fruit on the tree, the 
number of trees per acre, and the acres in production. In the other 
producing States, subjective yield surveys are done by those States. 
This method entails canvassing tart cherry growers and handlers to 
obtain their assessment of the upcoming year's crop.
    The Michigan crop survey costs a total of $60,000 per year. Of this 
total, the Board pays $24,000. The Board's share was expected to 
increase to half of the total in 2001. Concern was expressed at the 
hearing that if the industry decides to no longer contribute to the 
cost of the Michigan State survey, that State would likely discontinue 
its objective yield surveys and turn to subjective yield surveys. This 
could result in a less reliable crop estimate than is currently 
available. This is of particular concern because Michigan produces over 
70 percent of the U.S. tart cherry crop.
    Witnesses in support of this proposal stated that, in some years, 
USDA's pre-harvest crop estimate may not be accurate enough due to 
quickly changing crop conditions. They stated that current order 
provisions prohibit the Board from using any other estimate even if the 
majority of Board members, with their years of experience in the 
industry, believe USDA's estimate in a given year is inaccurate. Using 
the most accurate crop estimate available in deriving preliminary free 
and restricted percentages is important because growers and handlers 
make decisions based in part on those percentages. For example, growers 
decide whether to divert or harvest their crops; these decisions are 
irrevocable. Handlers also make pack and marketing plans based in part 
on the expected level of regulation. If actual harvest varies 
significantly from the pre-harvest estimate, growers and handlers could 
suffer economic harm. Using the most accurate information available is 
therefore necessary to enhance industry decision making.
    One witness pointed to the situation faced by district 3 (Southern 
Michigan) growers in 1997. As previously discussed under Material Issue 
Number 9, at the time the Board developed its marketing policy, 
indications were that district 3 would be regulated that year. 
Subsequent to harvest, however, it was determined that volume 
regulation would not apply to district 3 cherries that year. Growers 
who made decisions to divert their crops based on the Board's marketing 
policy estimates found themselves with diversion certificates that were 
of no value.
    The record shows that the USDA estimate should be used by the Board 
unless two things happen. The first would be that the Board would have 
to agree that the USDA estimate was inaccurate. The second would be 
that the Board would have to agree on another estimate or estimates to 
use. Both these actions would require concurrence by at least two-
thirds of the Board members. This would safeguard against the 
possibility of some members attempting to manipulate the crop estimate 
to impact the level of volume restriction.
    In addition, witnesses testified that other estimates used by the 
Board would have to be from other reliable, independent sources, and 
would be averaged in with the USDA estimate. Currently available is an 
annual estimate made by the Michigan Food Processors Association. Other 
possible sources include the Michigan Agricultural Cooperative 
Marketing Association and individual State grower associations.
    This proposed amendment provides the Board with more flexibility in 
developing its marketing policy and

[[Page 3569]]

recommending preliminary free and restricted percentages. To the extent 
that the Board's decision making improves, the entire U.S. tart cherry 
industry would 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 20-day comment period is provided to allow interested persons to 
respond to this proposal. Twenty 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 the 
previously issued amendment thereto. 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 amended, and as hereby 
proposed to be further 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 amended, and as hereby 
proposed to be further 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 amended, and as hereby 
proposed to be further 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;
    (4) The marketing agreement and order, as amended, and as hereby 
proposed to be further amended, prescribe, insofar as practicable, such 
different terms applicable to different parts of the production area as 
are necessary to give due recognition to the differences in the 
production and marketing of tart cherries grown in the production area; 
and
    (5) All handling of tart cherries grown in the production area as 
defined in the marketing agreement and order, as amended, and as hereby 
proposed to be further 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. Amend Sec. 930.20 as follows:
    a. By revising paragraphs (a), (b), (d) and (e);
    b. Redesignating paragraphs (f) and (g) as paragraphs (g) and (h); 
and
    c. Adding new paragraphs (f) and (i).
    The additions and revisions read as follows:


Sec. 930.20  Establishment and membership.

    (a) There is hereby established a Cherry Industry Administrative 
Board, the membership of which shall be calculated in accordance with 
paragraph (b) of this section. The number of Board members may vary, 
depending upon the production levels of the districts. All but one of 
these members shall be qualified growers and handlers selected pursuant 
to this part, each of whom shall have an alternate having the same 
qualifications as the member for whom the person is an alternate. One 
member of the Board shall be a public member who, along with his or her 
alternate, shall be elected by the Board from the general public.
    (b) District representation on the Board shall be based upon the 
previous

[[Page 3570]]

three year average production in the district and shall be established 
as follows:
    (1) Up to and including 10 million pounds shall have 1 member;
    (2) Greater than 10 and up to and including 40 million pounds shall 
have 2 members;
    (3) Greater than 40 and up to and including 80 million pounds shall 
have 3 members;
    (4) Greater than 80 million pounds shall have 4 members; and
    (5) Allocation of the seats in each district shall be as follows 
but subject to the provisions of paragraphs (d), (e) and (f) of this 
section:

------------------------------------------------------------------------
                                                   Grower      Handler
                 District type                   members or    members
------------------------------------------------------------------------
Up to and including 10 million pounds.........            1            1
More than 10 and up to 40 million pounds......            1            1
More than 40 and up to 80 million pounds......            1            2
More than 80 million pounds...................            2            2
------------------------------------------------------------------------

* * * * *
    (d) The ratio of grower to handler representation in districts with 
three members shall alternate each time the term of a Board member from 
the representative group having two seats expires. During the initial 
period of the order, the ratio shall be as designated in paragraph (b) 
of this section.
    (e) Board members from districts with one seat may be either grower 
or handlers members and will be nominated and elected as outlined in 
Sec. 930.23.
    (f) If the 3-year average production of a district changes so that 
a different number of seats should be allocated to a district, then the 
Board shall be reestablished by the Secretary, and such seats shall be 
filled according to the applicable provisions of this part.
* * * * *
    (i) The Board, with the approval of the Secretary, may establish 
rules and regulations necessary and incidental to the administration of 
this section.
    3. Revise Sec. 930.28 to read as follow:


Sec. 930.28  Alternate members.

    An alternate member of the Board, during the absence of the member 
for whom that member serves as an alternate, shall act in the place and 
stead of such member and perform such other duties as assigned. 
However, if a member is in attendance at a meeting of the Board, an 
alternate member may not act in the place and stead of such member. In 
the event a member and his or her alternate are absent from a meeting 
of the Board, such member may designate, in writing and prior to the 
meeting, another alternate to act in his or her place: Provided, that 
such alternate represent the same group (grower or handler) as the 
member. In the event of the death, removal, resignation or 
disqualification of a member, the alternate shall act for the member 
until a successor is appointed and has qualified.
    4. Amend Sec. 930.32 by revising paragraph (a) to read as follows:


Sec. 930.32  Procedure.

    (a) Two-thirds of the members of the Board, including alternates 
acting for absent members, shall constitute a quorum. For any action of 
the Board to pass, at least two-thirds of the entire Board must vote in 
support of such action.
* * * * *
    5. Amend Sec. 930.41 by revising paragraphs (c) and (f) to read as 
follows:


Sec. 930.41  Assessments.

* * * * *
    (c) As a pro rata share of the administrative, inspection, 
research, development, and promotion expenses which the Secretary finds 
reasonable and likely to be incurred by the Board during a fiscal 
period, each handler shall pay to the Board assessments on all cherries 
handled, as the handler thereof, during such period: Provided, a 
handler shall be exempt from any assessment only on the tonnage of 
handled cherries that either are diverted by destruction at the 
handler's facilities according to Sec. 930.59 or are cherries 
represented by grower diversion certificates issued pursuant to 
Sec. 930.58(b) and acquired by handlers as described in Sec. 930.59.
* * * * *
    (f) Assessments shall be calculated on the basis of pounds of 
cherries handled. The established assessment rate may be uniform, or 
may vary dependent on the product the cherries are used to manufacture. 
In recommending annual assessment rates, the Board shall consider:
    (1) The differences in the number of pounds of cherries utilized 
for various cherry products; and
    (2) The relative market values of such cherry products.
* * * * *
    6. Amend Sec. 930.50 by revising paragraphs (a), (b) and (g) 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 
average sales that represent dispositions of exempt cherries and 
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 exempt and restricted 
percentage cherries, to which shall be added a desirable carry-out 
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.
    (b) Preliminary percentages. On or about July 1 of each crop year, 
the Board shall establish a preliminary free market tonnage percentage 
which shall be calculated as follows: From the optimum supply computed 
in paragraph (a) of this section, the Board shall deduct the carry-in 
inventory to determine the tonnage requirements (adjusted to a raw 
fruit equivalent) for the current crop year which will be subtracted 
from the current year USDA crop forecast or by an average of such other 
crop estimates the Board votes to use. If the resulting number is 
positive, this would represent the estimated over-production which 
would be the restricted tonnage. This restricted tonnage would then be 
divided by the sum of the crop forecast(s) for the regulated districts 
to obtain a preliminary restricted percentage, rounded to the nearest 
whole number, for the regulated districts. If subtracting the current 
crop year requirement, computed in the first sentence from the current 
crop forecast, results in a negative number, the Board shall establish 
a preliminary free market tonnage percentage of 100 percent with a 
preliminary restricted percentage of zero. The Board shall announce 
these preliminary percentages in accordance with paragraph (h) of this 
section.
* * * * *
    (g) Additional tonnage to sell as free tonnage. In addition, the 
Board, in years when restricted percentages are established, shall make 
available tonnage equivalent to an additional 10 percent, if available, 
of the average sales of the prior 3 years, as defined in

[[Page 3571]]

paragraph (a) of this section, for market expansion.
* * * * *
    7. Amend Sec. 930.51 by revising paragraph (c) to read as follows:


Sec. 930.51  Issuance of volume regulations.

* * * * *
    (c) That portion of a handler's cherries that are restricted 
percentage cherries is the product of the restricted percentage imposed 
under paragraph (a) of this section multiplied by the tonnage of 
cherries, originating in a regulated district, handled, including those 
diverted according to Sec. 930.59, by that handler in that fiscal year.
* * * * *
    8. Amend Sec. 930.52 by revising paragraph (a) to read as follows:


Sec. 930.52  Establishment of districts subject to volume regulation.

    (a) The districts in which handlers shall be subject to any volume 
regulations implemented in accordance with this part shall be those 
districts in which the average annual production of cherries over the 
prior 3 years has exceeded 6 million pounds. Handlers shall become 
subject to volume regulation implemented in accordance with this part 
in the crop year that follows any 3-year period in which the 6-million 
pound average production requirement is exceeded in that district.
* * * * *
    9. Revise Sec. 930.54 to read as follows:


Sec. 930.54  Prohibition on the use or disposition of inventory reserve 
cherries.

    Cherries that are placed in inventory reserve pursuant to the 
requirements of Sec. 930.50, Sec. 930.51, Sec. 930.55, or Sec. 930.57 
shall not be used or disposed of by any handler or any other person 
except as provided in Sec. 930.50 or in paragraphs (a), (b), or (c) of 
this section.
    (a) If the Board determines that the total available supplies for 
use in commercial outlets are less than the amount needed to meet the 
demand in such outlets, the Board may recommend to the Secretary that a 
portion or all of the primary and/or secondary inventory reserve 
cherries be released for such use.
    (b) The Board may recommend to the Secretary that a portion or all 
of the primary and/or secondary inventory reserve cherries be released 
for sale in certain designated markets. Such designated markets may be 
defined in terms of the use or form of the cherries.
    (c) Cherries in the primary and/or secondary inventory reserve may 
be used at any time for uses exempt from regulation under Sec. 930.62.
    10. Amend Sec. 930.58 by revising paragraph (a) to read as follows:


Sec. 930.58  Grower diversion privilege.

    (a) In general. Any grower may voluntarily elect to divert, in 
accordance with the provisions of this section, all or a portion of the 
cherries which otherwise, upon delivery to a handler, would become 
restricted percentage cherries. Upon such diversion and compliance with 
the provisions of this section, the Board shall issue to the diverting 
grower a grower diversion certificate which such grower may deliver to 
a handler, as though there were actual harvested cherries. Any grower 
diversions completed in accordance with this section, but which are 
undertaken in districts subsequently exempted by the Board from volume 
regulation under Sec. 930.52(d), shall qualify for diversion credit.
* * * * *
    11. Revise Sec. 930.59 to read as follows:


Sec. 930.59  Handler diversion privilege.

    (a) In general. Handlers handling cherries harvested in a regulated 
district may fulfill any restricted percentage requirement in full or 
in part by acquiring diversion certificates or by voluntarily diverting 
cherries or cherry products in a program approved by the Board, rather 
than placing cherries in an inventory reserve. Upon voluntary diversion 
and compliance with the provisions of this section, the Board shall 
issue to the diverting handler a handler diversion certificate which 
shall satisfy any restricted percentage or diversion requirement to the 
extent of the Board or Department inspected weight of the cherries 
diverted.
    (b) Eligible diversion. Handler diversion certificates shall be 
issued to handlers only if the cherries are diverted in accordance with 
the following terms and conditions or such other terms and conditions 
that the Board, with the approval of the Secretary, may establish. Such 
diversion may take place in any form which the Board, with the approval 
of the Secretary, may designate. Tart cherry juice and juice 
concentrate may receive diversion credit but only if diverted in forms 
approved under the terms of this section. Such forms may include, but 
are not limited to:
    (1) Contribution to a Board-approved food bank or other approved 
charitable organization;
    (2) Use for new product and new market development;
    (3) Export to designated destinations; or
    (4) Other uses or disposition, including destruction of the 
cherries at the handler's facilities.
    (c) Notification. The handler electing to divert cherries through 
means authorized under this section shall first notify the Board of 
such election. Such notification shall describe in detail the manner in 
which the handler proposes to divert cherries including, if the 
diversion is to be by means of destruction of the cherries, a detailed 
description of the means of destruction and ultimate disposition of the 
cherries. It shall also contain an agreement that the proposed 
diversion is to be carried out under the supervision of the Board and 
that the cost of such supervision is to be paid by the handler. Uniform 
fees for such supervision may be established by the Board, pursuant to 
rules and regulations approved by the Secretary.
    (d) Diversion certificate. The Board shall conduct such supervision 
of the handler's diversion of cherries under paragraph (c) of this 
section as may be necessary to assure that the cherries are diverted as 
authorized. After the diversion has been completed, the Board shall 
issue to the diverting handler a handler diversion certificate 
indicating the weight of cherries which may be used to offset any 
restricted percentage requirement.
    (e) Transfer of certificates. Within such restrictions as may be 
prescribed in rules and regulations, including but not limited to 
procedures for transfer of diversion credit and limitations on the type 
of certification eligible for transfer, a handler who acquires 
diversion certificates representing diverted cherries during any crop 
year may transfer such certificates to another handler or handlers. The 
Board must be notified in writing whenever such transfers take place 
during a crop year.
    (f) The Board, with the approval of the Secretary, may establish 
rules and regulations necessary and incidental to the administration of 
this section.
    12. Revise Sec. 930.62 to read as follows:


Sec. 930.62  Exempt uses.

    (a) The Board, with the approval of the Secretary, may exempt from 
the provisions of Sec. 930.41, Sec. 930.44, Sec. 940.51, Sec. 930.53, 
or Sec. 930.55 through Sec. 930.57 cherries for designated uses. Such 
uses may include, but are not limited to:
    (1) New product and new market development;
    (2) Export to designated destinations;
    (3) experimental purposes; or
    (4) for any other use designated by the Board, including cherries 
processed into products for markets for which less than 5 percent of 
the preceding 5-year

[[Page 3572]]

average production of cherries were utilized.
    (b) The Board, with the approval of the Secretary, shall prescribe 
such rules, regulations, and safeguards as it may deem necessary to 
ensure that cherries handled under the provisions of this section are 
handled only as authorized.
    (c) Diversion certificates shall not be issued for cherries which 
are used for exempt purposes; Provided, that growers engaging in such 
activities under the authority of Sec. 930.58 shall be issued diversion 
certificates for such activities.

    Dated: January 15, 2002.
A.J. Yates,
Administrator, Agricultural Marketing Service.
[FR Doc. 02-1423 Filed 1-23-02; 8:45 am]
BILLING CODE 3410-02-P