[Federal Register Volume 69, Number 50 (Monday, March 15, 2004)]
[Rules and Regulations]
[Pages 12053-12057]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-5708]



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  Federal Register / Vol. 69, No. 50 / Monday, March 15, 2004 / Rules 
and Regulations  

[[Page 12053]]



DEPARTMENT OF AGRICULTURE

Commodity Credit Corporation

7 CFR Part 1427

RIN 0560-AH03


Extra Long Staple Cotton Outside Storage and Strength Adjustment 
for Loan

AGENCY: Commodity Credit Corporation, USDA.

ACTION: Final rule.

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

SUMMARY: This rule revises and adopts as final an interim rule 
published on August 18, 2003. The Commodity Credit Corporation (CCC) 
uses these regulations to provide marketing assistance loans for extra 
long staple (ELS) cotton that is stored outside while pledged as loan 
collateral. This final rule revises the interim rule in three ways. 
First, it more generally states the rainfall requirement applicable to 
approved storage areas. Second, it makes warehouse-receipted ELS cotton 
ineligible for this loan. And third, it establishes that the loan rate 
provided for this outside-stored loan will be the national average loan 
rate without application of any premiums and discounts. This rule also 
establishes that, effective for the 2004 crop of cotton, ELS cotton 
must be of a strength, and other factors, specified in CCC's schedule 
of loan rates for ELS to be eligible for loans. The rule will allow CCC 
to adjust its ELS cotton loan rate to reflect market adjustments for 
strength and other factors so that loan collateral is marketed and 
forfeitures to CCC are minimized.

DATES: This rule is effective March 15, 2004.

FOR FURTHER INFORMATION CONTACT: John Johnson, Deputy Administrator for 
Farm Programs, Farm Service Agency, at (202) 720-3175, or via e-mail at 
[email protected]. Persons with disabilities who require 
alternative means for communication (Braille, large print, audiotape, 
etc.) should contact the USDA Target Center at (202) 720-2600 (voice 
and TDD).

SUPPLEMENTARY INFORMATION:

Background

    CCC is amending the existing regulations that allow outside storage 
of ELS loan collateral by producers. CCC regulations have historically 
required ELS loan collateral to be represented by a warehouse receipt 
and that such collateral be within an approved warehouse when a loan 
has been made on such cotton. The amended regulations provide that 
loans will be made on ELS cotton not represented by a warehouse receipt 
and stored outside but that otherwise meets the packaging and storage 
requirements of this rule.
    CCC is making this change to reduce the costs to producers of 
storing ELS cotton in areas of the country where outside storage is a 
cost-effective and accepted industry practice. CCC has determined that 
outside storage may be effective in lowering the costs of ELS cotton 
storage with minimal increased risk.
    CCC published an interim rule implementing this provision on August 
18, 2003 at 68 FR 49327. CCC received 36 timely letters containing 24 
different comments. Respondents included 5 national organizations, 6 
local organizations, and 25 individuals or companies. Comments were 
received from the States of California, Georgia, Tennessee, Washington, 
and the District of Columbia.
    In this rule, CCC is also amending regulations at 7 CFR part 1427 
to provide that ELS cotton must be of a strength, and other factors, 
specified in a schedule of loan rate premiums and discounts for loan 
and LDP eligibility. This regulation is effective for the 2004 and 
subsequent crops of ELS cotton.
    This regulatory change arises from the availability of a new ELS 
hybrid variety that is high-yielding but that has an elevated incidence 
of low-strength. ELS cotton comes from the species Gossypium 
barbadense, which varies from upland cotton primarily in staple length 
and strength. According to United States standards, cotton is 
considered to be ELS cotton if it is 1\3/8\ inch long or longer. 
Generally, ELS cotton strength and uniformity measurements are also 
considerably higher than those of upland cotton. Because of these 
special characteristics, ELS cotton generally commands a market price 
above that of upland cotton and is provided a higher loan value by CCC. 
There is concern that this new variety may be less marketable than 
other ELS cotton because of its lower strength.
    Production of the new ELS hybrid is expected to expand due to its 
high yield. Because it may be less marketable than other ELS cotton, 
there is concern of increased forfeitures of this new cotton variety to 
CCC under the agency's loan program unless the CCC loan value for 
cotton can be adjusted to reflect market discounts for low strength. To 
address this concern, this rule establishes that to be eligible for a 
CCC loan, ELS cotton must be of a strength and other factors specified 
in the schedule of ELS loan rates and premiums and discounts. CCC will 
establish such loan adjustments based on market price observations of 
the Agricultural Marketing Service.

Discussion of Comments and Changes

    The comments received, and changes made to the interim rule, are 
addressed in the sequence of the final rule, are as follows:

Approved Packaging Materials

    Five comments urge USDA not to accept cotton as loan collateral 
unless it is packaged using materials approved by the Joint Cotton 
Industry Bale Packaging Committee (JCIBPC). JCIBPC has never 
specifically approved packaging materials or ties for outside storage. 
The respondents stated that USDA, for many years, has required the use 
of industry-approved materials as a condition for loan eligibility, and 
the adoption of the interim rule would end that assumed joint support 
for JCIBPC standards.
    CCC values the work of the JCIBPC but concludes that the testing 
and approval functions of the JCIBPC do not need to apply to outside-
stored cotton. This is because, under the terms of the revised 
regulations, the producer of the cotton, in requesting this loan, 
voluntarily assumes all responsibility and risk related to maintaining 
the quality of outside-stored cotton. This is different from the need 
for established packaging standards for warehouse-stored cotton where 
the packaging standards reduce CCC's risk related to

[[Page 12054]]

quality maintenance. CCC will continue to require that warehouse-stored 
cotton be packaged in materials approved by the JCIBPC.

Limit the Applicable Time and Area for Outside Storage

    Three comments request that area eligible for outside storage not 
be expanded and the program not be allowed beyond 2003. CCC plans to 
not expand the program beyond the initially approved areas. However, 
the program will be available in future years. A test period to 
evaluate this change serves no purpose since outside storage has 
already been demonstrated successfully. Therefore, CCC sees no need to 
test this change before implementing it or to limit it to the 2003 crop 
year.

Warehouse Receipts for ELS Cotton

    This rule also provides that CCC will offer outside-stored ELS 
loans only on the basis of the gin code, bale number, and bale weight, 
and will not permit another entity to hold negotiable warehouse 
receipts for loan collateral. This is consistent with CCC requirements 
for farm-stored grain, oilseed, and rice loans. These loans are similar 
to this new cotton loan in several respects, and for such loans CCC 
does not permit another entity to hold negotiable warehouse receipts. 
This is mainly because, for farm-stored loans, CCC does not inspect, 
and bears no legal responsibility for, the condition of the storage 
site; loan rates are based on the national average rate or local rates; 
and, warehouse receipts do not represent the collateral. CCC acceptance 
of a warehouse receipt as collateral for an outside-stored ELS loan 
program would imply CCC inspection and approval of storage locations 
and could imply to buyers that the cotton is in a warehouse. Thus, this 
final rule provides that warehouse-receipted ELS cotton is ineligible 
for an outside-stored cotton loan.
    One respondent stated that permitting collateral for this loan 
program to not have a warehouse receipt could cause marketing problems. 
CCC understands that the electronic warehouse receipt (EWR) is the 
basis of cotton trading and that cotton not so represented may be less 
marketable in some circumstances. However, even under the traditional 
loan requirements, some cotton, including upland cotton, has been 
directly marketed after ginning without being receipted by a warehouse. 
Producers engaged in direct cotton marketing have always been able to 
consider the need to have their cotton receipted, and CCC has never 
required receipting as a condition of eligibility for loan deficiency 
payments. Consistent with those past practices, CCC considers it 
appropriate to allow producers to weigh the marketing implications of 
receipting, without requiring receipting for all program benefits.

Standards for Approved Storage

    One respondent supports outside storage within a system that has 
been proven over many years, but is concerned about overly broad 
approval for all types of outside storage. Further, two respondents 
stated that the interim rule failed to provide appropriate engineering 
standards for either the outside location or the packaging materials. 
One respondent presented material concerning an outside packaging and 
storage system that has been commercially successful for many years, 
and urged CCC to adopt similar standards. CCC agrees with these 
respondents, and, as a result, the final rule allows outside storage 
only under conditions that have been commercially successful. CCC has 
adopted, within the rule, standards for the storage area and packaging 
that have been successfully used for outside-stored cotton for many 
years.
    One respondent stated that allowing any commercial entity to self-
certify that they meet the storage standards is not sufficient to 
protect CCC's financial interests. CCC disagrees with this view. The 
rule specifies in section 1427.10 that the producer must certify to 
several requirements for outside storage sites in the loan application. 
For many years, producer certification of storage suitability for loan 
collateral has been used for CCC farm-stored loans for grains and rice, 
and this certification process has been adequate. CCC concludes that 
the storage savings and marketing benefits of this loan should not be 
denied to producers willing to assume the risks associated with outside 
storage of cotton.

Perfection of CCC Security Interest

    One respondent stated that if CCC does not hold title to loan 
collateral, CCC's risk is increased, as are opportunities for the 
cotton to be used more than once as loan collateral. CCC's legal 
interest in the cotton is the same whether the cotton itself serves as 
collateral or whether a warehouse receipt representing the cotton is 
held as collateral. As with other commodity loans, CCC will file 
financing statements following state law procedures. Further, CCC's 
risk from this rule is consistent with other farm-stored program crops. 
Under this cotton loan, CCC will further reduce its risk by calculating 
the settlement value of forfeited collateral based on its delivered 
quality. Also, the collateral for these loans will be subject to spot 
inspections. Thus, this comment was not adopted in the final rule.

Maximum Rainfall and Limiting Program to ELS

    A respondent stated that CCC did not sufficiently support its 
decision to restrict outside storage to areas with 10-inches per year 
maximum rainfall, and to ELS cotton. The respondent stated that, as a 
result, the rule contains restrictive provisions that are arbitrary and 
vulnerable to a legal challenge. The respondent provided no technical 
information that would contradict the CCC determination and support 
extending this program for upland cotton, in higher rainfall or 
humidity areas.
    After careful consideration, CCC limited this new loan to ELS 
cotton in low-rainfall areas, and excluded upland cotton, after 
concluding that humidity levels, rainfall amounts, and bale packaging 
practices in upland cotton producing areas may make outside storage 
impractical for such cotton. Additionally, all other comments opposed 
expanding the program beyond that prescribed in the interim rule. 
Nonetheless, the final rule is revised so that the rainfall threshold 
for approved storage areas may or may not be defined as entire 
counties. National rainfall data shows that such records are not always 
established by county borders, as CCC assumed in the interim rule. 
These records may reflect the area near the weather station and not 
necessarily county average rainfall. Accordingly, in the final rule 
specific references to 10 inches have been removed to ease 
administration of this standard. CCC anticipates that this rule will be 
implemented by limiting approved storage areas to areas for which the 
official 10-year average annual rainfall is 10 inches or less.

Liability to the Producer

    The interim rule provides that a producer certify as to the 
packaging, storage, and handling requirements of the rule. One comment 
states that producers cannot certify to requirements that are beyond 
their control, or to standards that do not exist. CCC does not feel 
that this is a problem. Under this option, the required producer 
certifications relate to technical requirements of the ginner or 
storage provider selected by the producer. Gins and entities providing 
storage are able to inform producers if their services meet the 
standards proscribed by the rule. Therefore, as

[[Page 12055]]

with all other commodity loans, CCC feels that certification by the 
producer is appropriate, and sufficient. As in other farm-stored loan 
programs, producers must maintain the quality of the commodity; thus, 
it is reasonable for producers to acquire the required bagging, 
storage, and handling services just as they have done under ordinary 
warehouse loans.
    The interim rule at section 1427.5(b)(10) requires that materials 
approved by the JCIBPC may be used, and that JCIBPC approval is not 
required for outside-stored cotton. This section requires only that 
packaging materials used for outside storage must meet industry 
standards for bag characteristics such as size, tear and impact 
resistance, and tie characteristics such as elongation, and break and 
joint strength.
    In a related comment, a respondent stated that some producers will 
not maintain either the cotton or the facility as specified by 
regulations, and suggested withdrawing the rule. CCC does not expect 
producers to knowingly place their production at risk under this new 
loan option any more than they would under other loan programs. CCC 
does not deny loan eligibility to warehouse-stored loan cotton even 
though there are occasional lapses by gins or warehouses to meet 
storage and bagging requirements, so long as CCC has determined that 
its interests are protected. Therefore, this comment was not adopted.
    Based upon the comments received, and consistent with CCC 
management of other farm-stored commodity loans, it is appropriate that 
producers who apply for this loan fully understand that they must 
accept the risk of quality maintenance of outside stored cotton. These 
risks are contained in the producer certification that must be signed 
as part of the note and security agreement for this loan. Consistent 
with the terms of this loan, the final rule is amended in Sec.  
1427.18(k)(2) to provide a more complete list of certifications 
required to be made by the producer to obtain an outside-stored ELS 
loan.

Bale Sampling

    One respondent stated that sampling a hermetically sealed bag will 
void the bag seal, requiring re-bagging of the bale. CCC does not feel 
that sampling will be a problem. Under conventional ginning and bale-
sampling procedures, initial bale sampling occurs at the gin before the 
bale is bagged and sealed. Any subsequent sampling required by CCC 
would occur after the bale has been moved inside an approved cotton 
warehouse. A broken seal, in such location, would not cause the cotton 
quality to deteriorate.

Guaranteed Minimum Loan Rate

    Another respondent stated that the transfer of risks to the 
individual ELS cotton producer may undermine the CCC ``guaranteed 
minimum loan rate'' because charges on forfeited cotton may exceed the 
loan value. Assumption of risk by producers has not undermined other 
farm-stored type loans and CCC does not see this risk transfer as 
affecting its responsibilities under the program. CCC loans do not 
guarantee that a minimum loan value is provided on an individual basis. 
Thus, CCC does not expect this loan to reduce the average loan value of 
ELS cotton.

Outside Storage Is Inadequate

    One respondent states that CCC's requirement that forfeited 
collateral must be delivered into a warehouse is an admission that 
outside storage is inadequate to protect CCC's interests. The 
respondent feels that such cotton is more likely to be forfeited. 
Further, they stated that the program has no financial security 
arrangements, as with warehouses, to address the increased risk and 
ensure that the owners of storage areas fulfill their obligations under 
the regulation. A related comment, from another respondent, was that 
there will be weather damage to outside-stored cotton and collecting 
damages from the gin or grower will be impossible.
    CCC has determined that outside storage of ELS cotton is a viable 
option as provided in this rule. The agency has a long history of 
providing commodity marketing assistance loans on collateral that is 
not warehouse-stored. Under such loans, the risk of quality maintenance 
is primarily borne by the producer. When loan collateral is warehouse-
stored, the risk is borne by the warehouse and the producer. In neither 
case does CCC bear the responsibility for maintaining the quality of 
the loan collateral prior to any forfeiture that may occur. CCC will 
protect its interests under this loan because any value loss is 
restored though the loan settlement process.
    CCC's experience with farm-stored loans is that forfeiture 
decisions are based on market price levels. Quality loss resulting from 
poor producer storage management has not been shown to increase 
forfeitures. Participating producers must certify that their storage 
meets the regulatory requirements and assume the risk for the cotton 
while stored outside. Any obligation by the owners of a storage area to 
fulfill their obligations under this regulation would be obligations to 
the producer. CCC has no reason to regulate agreements between 
producers and outside storage providers. CCC anticipates that producers 
and merchants alike understand the specialized bagging and handling 
needed to protect outside-stored cotton. Collection of any loan 
overages on damaged cotton will be no more problematic for CCC than are 
such collections under existing farm-stored loans for other 
commodities. However, based on the comments received, the final rule is 
revised to emphasize that producer certifications are required with a 
loan application, and that producers are responsible for maintaining 
the quality of loan collateral stored outside.

Other General Comments

    Three respondents stated that the approval process of the rule 
lacks objectivity, and thus fails to meet minimum standards for 
administrative rulemaking. During the comment period, CCC received 
considerable evidence that, as provided by the provisions of this 
program, ELS cotton can be successfully stored outside. Thus, the 
agency feels that it has sufficient basis for promulgating this rule.
    Four comments state that commercial entities have invested in 
warehouses under existing loan eligibility requirements that were 
created to protect cotton, and that inside storage of cotton remains a 
valid purpose today. Two additional respondents stated that the rule 
creates an unfair competitive advantage due to lower costs incurred by 
those who store cotton outside. Outside storage has been successfully 
demonstrated under carefully managed circumstances. CCC's past policy 
of requiring inside storage as a condition of loan eligibility has 
imposed increased costs on cotton where, in limited circumstances, 
lower-cost storage can be used. This result is contrary to the program 
objective of assisting commodity marketings of producers.
    Six comments state that bypassing traditional protections and 
oversight by the JCIBPC is counter to demonstrating quality control in 
export markets. Quality reductions will reduce the industry's 
reputation for quality in export markets and reduce the ability to 
obtain quality premiums, if not export volume. To reduce these 
concerns, CCC will not allow outside storage, or relaxed packaging 
standards, for all types of cotton or all production areas. CCC 
established requirements for this loan that restrict its availability. 
CCC's view is that this loan will not reduce exports, and may even 
increase exports

[[Page 12056]]

if it helps producers reduce marketing costs.
    CCC received 24 comments that this rule will insure protection of 
cotton and afford an opportunity to reduce costs in areas where such 
storage is accepted practice. Those respondents further state that the 
rule provides a voluntary alternative to reduce costs in areas where 
producers are economically disadvantaged.
    One respondent stated that processing loans under this rule will 
initially require a manual process and any automation modifications 
will not be timely for 2003-crop loan applications. CCC acknowledges 
that until automation revisions occur, such loans will be processed 
based on the weight of the cotton and the national average ELS loan 
rate. This manual process is immediately available and will not impede 
the administration of the program.
    One respondent supports the rule as written, and three respondents 
request that the rule be reconsidered or repealed. These comments were 
submitted without any additional explanations.

Notice and Comment

    Section 1601(c) of the Farm Security and Rural Investment Act of 
2002 (2002 Act) provides that the regulations needed to implement Title 
I of the 2002 Act, which include those involved here, may be 
promulgated without regard to the notice and comment provisions of 5 
U.S.C. 553 or the Statement of Policy of the Secretary of Agriculture 
effective July 24, 1971, (36 FR 13804) relating to notices of proposed 
rulemaking and public participation in rulemaking. Because this rule 
involves technical storage and packaging requirements, it was 
determined that it was in the public's interest to solicit comments on 
the interim rule. The final rule is effective upon publication in order 
to provide its benefit to producers for 2003, and because the rule is 
consistent with successfully used commercial storage practices.

Executive Order 12866

    This rule has been has been designated ``not significant under 
Executive Order 12866'' and therefore has not been reviewed by the 
Office of Management and Budget.

Federal Assistance Programs

    This final rule applies to the following Federal assistance 
program, as found in the Catalog of Federal Domestic Assistance: 
10.051--Commodity Loans and Loan Deficiency Payments.

Regulatory Flexibility Act

    The Regulatory Flexibility Act does not apply to this rule because 
CCC is not required by 5 U.S.C. 553 or any other law to publish a 
notice of proposed rulemaking for the subject of this rule.

Environmental Assessment

    The environmental impacts of this rule have been considered under 
the National Environmental Policy Act of 1969 (NEPA), 42 U.S.C. 4321 et 
seq., the regulations of the Council on Environmental Quality (40 CFR 
parts 1500-1508), and regulations of the Farm Service Agency (FSA) of 
the Department of Agriculture (USDA) for compliance with NEPA, 7 CFR 
part 799. An environmental evaluation was completed and the action has 
been determined not to have the potential to significantly impact the 
quality of the human environment and no environmental assessment or 
environmental impact statement is necessary. A copy of the 
environmental evaluation is available for inspection and review upon 
request.

Executive Order 12778

    This rule has been reviewed under Executive Order 12778. This rule 
preempts State laws that are inconsistent with it and is not 
retroactive. Before judicial action may be brought concerning this 
rule, all administrative remedies must be exhausted.

Executive Order 12372

    This program is not subject to Executive Order 12372, which 
requires intergovernmental consultation with State and local officials. 
See the notice related to 7 CFR part 3015, subpart V, published at 48 
FR 29115 (June 24, 1983).

Unfunded Mandates

    Title II of the Unfunded Mandates Reform Act of 1995 (UMRA) does 
not apply to this rule because CCC is not required by 5 U.S.C. 553 or 
any other law to publish a notice of proposed rulemaking for the 
subject of this rule. Further, this rule contains no unfunded mandates 
as defined in sections 202 and 205 of UMRA.

Paperwork Reduction Act

    Section 1601(c) of the 2002 Act provides that these regulations may 
be promulgated and the programs administered without regard to chapter 
5 of title 44 of the United States Code (the Paperwork Reduction Act). 
Accordingly, these regulations and the forms and other information 
collection activities needed to administer the provisions authorized by 
these regulations are not subject to review by the Office of Management 
and Budget under the Paperwork Reduction Act.

Government Paperwork Elimination Act

    CCC is committed to compliance with the Government Paperwork 
Elimination Act, which requires Federal Government agencies to provide 
the public the option of submitting information or transacting business 
electronically to the maximum extent possible. Forms used under this 
regulation will be available on the agency's Internet web site. Loan 
forms may be submitted electronically by users that have met CCC 
electronic authentication requirements.

List of Subjects in 7 CFR Part 1427

    Agricultural commodities, Cottonseeds, Price support programs, 
Warehouses.


0
Accordingly, the interim rule amending 7 CFR part 1427 which was 
published at 68 FR 49327 on August 18, 2003, is adopted as a final rule 
with the following changes:

PART 1427--COTTON

0
1. The authority citation for part 1427 is revised to read as follows:

    Authority: 7 U.S.C. 7231-7237 and 7931-7939; and 15 U.S.C. 714b 
and 714c.


0
2. Amend Sec.  1427.5 by revising paragraph (c)(1) to read as follows:


Sec.  1427.5  General eligibility requirements.

* * * * *
    (c) * * *
    (1) Be of a grade, strength, staple length, and other factors 
specified in the schedule of loan rates for ELS cotton;
* * * * *

0
3. Amend Sec.  1427.10 by revising paragraphs (e)(1) and (e)(3) to read 
as follows:


Sec.  1427.10  Approved storage.

* * * * *
    (e) * * *
    (1) At a commercial entity that is involved in the handling or 
storage of cotton in a county or area determined and announced by CCC 
as approved for outside storage of loan collateral;
    (2) * * *
    (3) As otherwise provided in the loan agreement. The collateral for 
such loan shall be as specified in the loan agreement and may include 
the actual bale of cotton.

0
4. Amend Sec.  1427.18 by revising paragraph (k)(2)(i) to read as 
follows:

[[Page 12057]]

Sec.  1427.18  Liability of the producer.

* * * * *
    (k) * * *
    (2) * * *
    (i) Certify the quantity of such cotton on the loan application; 
certify the cotton is packaged in a hermetically sealed bag with an 
internal humidity level established by the gin as appropriate to 
safeguard the cotton; certify that packaging materials meet or exceed 
industry minimum standards; certify that the storage area is suitable 
for cotton storage and is in an area approved by CCC; certify that the 
storage area is constructed to prevent water accumulation under the 
cotton and is outside a 100-year floodplain; and certify that the 
storage area is serviced by bale handling and transport equipment that 
will not damage the sealed bag or degrade the storage area;
* * * * *

    Signed in Washington, DC, on March 4, 2004.
James R. Little,
Executive Vice President, Commodity Credit Corporation.
[FR Doc. 04-5708 Filed 3-12-04; 8:45 am]
BILLING CODE 3410-05-P