[Federal Register Volume 69, Number 109 (Monday, June 7, 2004)]
[Rules and Regulations]
[Pages 31725-31731]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-12787]


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DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

7 CFR Part 996

[Docket No. FV03-996-2 FIR]


Minimum Quality and Handling Standards for Domestic and Imported 
Peanuts Marketed in the United States

AGENCY: Agricultural Marketing Service, USDA.

ACTION: Final rule.

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SUMMARY: The Department of Agriculture (USDA) is adopting as a final 
rule, without change, an interim final rule that changed peanut quality 
and handling standards for domestic and imported peanuts marketed in 
the United States. These provisions are intended to maximize handling 
efficiency and to provide peanut producers, handlers, and importers 
with flexibility in meeting current and new market demands, while 
maintaining peanut quality and wholesomeness for consumers.

EFFECTIVE DATE: June 8, 2004.

FOR FURTHER INFORMATION CONTACT: Dawana Clark or Kenneth G. Johnson, DC 
Marketing Field Office, Marketing Order Administration Branch, Fruit 
and Vegetable Programs, AMS, USDA, 4700 River Road, Room 2A04, Unit 
155, Riverdale, Maryland 20737; telephone (301) 734-5243, Fax: (301) 
734-5275 or George J. Kelhart, Technical Advisor, Marketing Order 
Administration Branch, Fruit and Vegetable Programs, AMS, USDA, 1400 
Independence Avenue SW., Stop 0237, Washington, DC 20250-0237; 
telephone (202) 720-2491, Fax: (202) 720-8938; or E-mail: 
[email protected], [email protected] or 
[email protected].
    Small businesses may request information on complying with this 
rule by contacting Jay Guerber, at the same DC address as above, or E-
mail: [email protected].

SUPPLEMENTARY INFORMATION: This rule is issued under section 1308 of 
the Farm Security and Rural Investment Act of 2002 (Pub. L. 107-171), 7 
U.S.C. 7958, hereinafter referred to as the ``Act.''
    This rule has been determined to be not significant for purposes of 
Executive Order 12866 and has not been reviewed by the Office of 
Management and Budget.
    This rule has been reviewed under Executive Order 12988, Civil 
Justice Reform. This rule is not intended to have retroactive effect. 
This rule will not preempt any State or local laws, regulations, or 
policies, unless they present an irreconcilable conflict with this 
rule.
    There are no administrative procedures, which must be exhausted 
prior to any judicial challenge to the provisions of this rule.

Background

    This rule is based on recommendations of the Peanut Standards Board 
(Board) and comments received from its members and other industry 
sources. The standards and the Board were established by the Department 
of Agriculture (USDA), pursuant to section 1308 of the Farm Security 
and Rural Investment Act of 2002. This rule continues the following: 
Screen sizes specified in the outgoing quality standards to allow 
smaller peanut kernels of all varieties to be used in edible markets; 
provisions in the text of the standards specifying that financially 
interested persons may appeal quality inspection results and that 
``holders of the title'' to any lot of peanuts may appeal aflatoxin 
test results; provisions allowing peanut lots which meet fall through, 
minimum damage and minor defects standards prior to blanching, but fail 
for some other reason, to be exempt from fall through, minimum damage 
and minor defects standards upon re-inspection after blanching; and the 
increase to 10 percent in the quantity of sound whole kernels that may 
be contained in a lot of splits for specified peanut varieties.
    Section 1308 of the Act requires that USDA take several actions 
with regard to peanuts marketed in the United States: Ensure mandatory 
inspection on all peanuts marketed in the United States; establish the 
Board comprised of industry representatives to advise USDA; and develop 
peanut quality and handling standards; and to modify those quality and 
handling standards when needed. An interim final rule was published in 
the Federal Register (67 FR 57129) on September 9, 2002, terminating 
the previous peanut programs and establishing standards in Part 996 to 
ensure the continued inspection of 2002 crop year peanuts and 
subsequent crop year peanuts, 2001 crop year peanuts not yet inspected, 
and 2001 crop year failing peanuts that had not yet met disposition 
standards. The initial Board was selected and announced on December 5, 
2002. A final rule finalizing the interim final rule was published in 
the Federal Register (68 FR 1145) on January 9, 2003, to continue 
requiring all domestic and imported peanuts marketed in the United 
States to be handled consistent with the handling standards and

[[Page 31726]]

officially inspected against the quality standards of the new program. 
The provisions of this new program continue in force and effect until 
modified, suspended, or terminated.
    Pursuant to the Act, USDA consulted Board members in the review of 
the handling and quality standards for the 2003 and subsequent crop 
years. USDA conducted a meeting with Board members on April 30, 2003. 
The changes were raised and supported by Board members. In addition to 
the meeting, USDA received written comments from Board members and 
others on recommended changes to the peanut handling and quality 
standards.
    This rulemaking action continues unchanged: (1) Screen sizes 
specified in the outgoing quality standards to allow smaller peanut 
kernels of all varieties to enter edible channels; (2) provisions in 
the text of the standards specifying that financially interested 
persons may appeal quality inspection results and that ``holders of the 
title'' to any lot of peanuts may appeal aflatoxin test results; (3) 
provisions allowing peanut lots which meet fall through, minimum damage 
and minor defects standards, but fail for other reasons, prior to 
blanching, to be exempt from fall through, minimum damage and minor 
defects standards upon re-inspection after blanching; and (4) the 
increase to 10 percent of sound whole kernels that may be contained in 
lots of splits for specified peanut varieties. These provisions are 
intended to maximize handling efficiency and to provide producers, 
handlers, and importers with flexibility to meet current and new market 
demands, while maintaining peanut quality and wholesomeness for 
consumers.
    The quality and handling standards are intended to assure that 
satisfactory quality and wholesome peanuts are used in domestic 
markets. All peanuts intended for human consumption must be officially 
inspected and graded by the Federal or Federal-State Inspection Service 
and undergo chemical testing by a USDA laboratory or a private 
laboratory approved by USDA. The maximum allowable presence of 
aflatoxin is 15 parts per billion (ppb), the same standard as required 
under the three previous peanut programs. This tolerance has been in 
effect for more than 15 years and was in effect at the time the 
previous peanut programs were terminated. Once certified as meeting 
outgoing quality standards, peanuts may not be commingled with any 
other peanuts that have failed outgoing quality standards or any 
residual peanuts from reconditioning operations.
    The interim final rule implementing these changes was effective 
August 8, 2003 (68 FR 46919; August 7, 2003). A correction to a table 
specifying minimum quality standards in that rule was published 
September 11, 2003 (68 FR 53490).

Small Kernel Usage

    Prior to establishing the quality standards that were applied 
during the 2002-03 crop year, a few peanut handler members of the Board 
suggested changing the shape and size of the holes in screens used to 
sort out small kernels. The changes discussed would have increased the 
number of smaller kernels that rode the screens and that could have 
entered edible channels.
    The shape of the opening, slotted vs. round, is a significant 
factor in the number of smaller kernels that fall through or ride the 
screens. Slotted screens resemble the shape of peanuts and allow 
kernels to fall through as they move down the screen during the sorting 
process. Kernels fall through round openings only when striking the 
opening on end or ``standing up'' as they move down the screen. When 
more kernels ride the screen, more are available for edible channels.
    Proponents of smaller kernel use claimed that end product 
manufacturers now have markets for smaller, whole kernels. They also 
claimed that modern, electronic color sorting technologies can sort out 
smaller kernels that are moldy or defective. Opponents, including some 
handlers and grower representatives, claimed that the benefits of 
increased use of small kernels were not worth the increased risk of 
aflatoxin contamination. Based on studies conducted by the Agricultural 
Research Service (ARS) going back to at least 1979, the industry was 
aware that there is a higher incidence of aflatoxin contamination in 
smaller peanut kernels.
    Most Board members agreed that new research was needed on small 
kernel sizes and aflatoxin contamination before any change was made. 
USDA decided not to change screen sizes for the 2002-03 crop year and 
asked ARS to conduct another analysis of the incidence of aflatoxin in 
small peanut kernels. ARS peanut size and aflatoxin studies using 2002 
crop Segregation 3 farmers' stock runner type peanuts from the 
Southeast (the peanuts and region most likely to have aflatoxin 
contamination) measured the contamination of kernels that rode a 16/64 
inch slotted screen and those that rode a 17/64 inch round screen. The 
completed results, received by Fruit and Vegetable Programs on January 
21, 2003, indicated that there was a small, but not significant, 
increase of aflatoxin associated with the smaller peanut kernel size.
    Past research has demonstrated that three farmers stock grade 
components are associated with aflatoxin. These are damage, loose-
shelled kernels, and small or other kernels, and are often called the 
aflatoxin risk components in farmers' stock peanuts. Very little 
aflatoxin is associated with high quality farmers stock peanuts 
associated with the farmers stock grade referred to as sound mature 
kernels and sound splits. Studies conducted by sampling 120 
contaminated farmers stock lots, published in 1998, showed that these 
three risk components accounted for 93.1 percent of the total aflatoxin 
in a farmers stock lot, but only 18.4 percent of the lot kernel mass. 
Aflatoxin in sound mature kernels and sound splits, small and other 
kernels, loose shelled kernels, and damaged kernels represented 6.9, 
7.9, 33.3, and 51.9 percent, respectively, of the total aflatoxin. The 
small and other kernels had the lowest risk of the three risk 
components. The findings of research performed in previous years were 
similar.
    ARS believes that the results of the past studies are consistent 
with the current studies presented to the Board in April 2003. The 
peanuts that rode the 17/64 inch round screen were a mix of sizes from 
small to large (not only small kernels as in the past studies). The mix 
of sizes was used to better duplicate sheller milling lines and 
processing practices. The aflatoxin impact was minimal because small 
and other kernels have the lowest aflatoxin risk of the three risk 
components and the small kernels composed a small percentage of the 
different sizes riding the 17/64 inch round screen. The higher the 
percentage of small kernels riding a 17/64 inch round screen, the 
greater the aflatoxin impact that small kernels will have on the lot in 
question. The percentage of small kernels that fell through the 16/64 
inch slotted screen and rode the 17/64 inch round screen varied greatly 
from lot to lot in the studies presented to the Board. They averaged 
about 7 and 21 percent in the current study, respectively. In the final 
analysis, the aflatoxin impact of the smaller kernels was not 
significant according to ARS.
    The Board discussed the peanut size and aflatoxin study at its 
April 30, 2003, meeting, and recommended relaxation of quality 
standards to allow smaller peanut kernels to be used for human 
consumption because the increase in aflatoxin in small kernels was not 
determined to be significant. All Board members agreed that quality and

[[Page 31727]]

wholesomeness are paramount for producers, handlers, and importers, but 
the industry believes it can continue to provide buyers with high 
quality and wholesome peanuts with changed screen sizes.
    Compliance officers report that out of approximately 70 shelling 
plants, a total of 60 have electronic sorting technology to sort out 
defective small kernels and further improve peanut quality and 
wholesomeness. The 10 plants without electronic sorting technology only 
shell seed peanuts, which are used for planting and not for shipment to 
the edible market. Based on more recent information, these numbers have 
been updated from those in the interim final rule.
    As shown in the table in Sec.  996.31(a) Minimum Quality Standards: 
Peanuts for Human Consumption--Whole Kernels and Splits: Maximum 
Limitations, this action continues in effect the change the screen size 
for Runner peanuts from a \16/64\ inch by \3/4\ inch slotted to a \17/
64\ inch round opening. These were the sizes and peanut variety used in 
the study presented to the Board.
    Because Virginia, Spanish, and Valencia varieties do not routinely 
experience high aflatoxin content, smaller kernels of those varieties 
also are not expected to have significantly increased aflatoxin 
contamination. Therefore, for Virginia variety peanuts, the screen size 
continues to be a \17/64\ inch round opening (previously the opening 
was \15/64\ inch by 1 inch slotted). For the Spanish and Valencia 
varieties of peanuts, the change from a \15/64\ inch by \3/4\ inch 
slotted opening to a \16/64\ inch round opening also is continued.
    Corresponding changes are continued under the ``Lots of splits'' 
category for ``Sound whole kernels''. For Runner variety split lots, 
the screen opening was changed from a \15/64\ inch by 1 inch slotted 
opening to a \17/64\ inch round opening. For Virginia variety split 
lots, the \14/64\ inch by 1 inch slotted opening was changed to a \17/
64\ inch round opening. For the Spanish and Valencia varieties, the 
screen opening was changed from a \13/64\ inch by \3/4\ inch slotted 
opening to a \16/64\ inch round opening.
    Previously, the table included three columns for fall through. The 
first two columns included a maximum 3 percent tolerance for ``Sound 
Split and Broken Kernels'' and ``Sound Whole Kernels'', and the third 
column included a total tolerance of 4 percent for these categories of 
peanuts, except all three columns allowed 6 percent for ``No. 2 
Virginia''. A comment received from a handler association subsequent to 
the Board meeting suggested combining the three columns into one column 
and establishing a total tolerance of 6 percent for sound split, 
broken, and small kernels allowed in any lot to bring the tolerances 
into conformity with the U.S. Grade Standards for the various types of 
peanuts grown and marketed in the United States. These recommendations 
were adopted by USDA and implemented in the interim final rule.
    This final rule continues the relaxation in the utilization of 
small peanut kernels for edible consumption by changing the screens 
from slotted to round holes for sound whole kernels and splits as 
noted. This relaxation is expected to increase market share for U.S. 
peanuts by enabling handlers to sell smaller peanuts to buyers who 
purchase less expensive peanuts from other origins for manufacturing 
into peanut butter and paste, or similar products.
    The screen changes are being implemented at shelling facilities 
with minimal or no additional cost to the shellers--either large or 
small. The screens with smaller openings were already being used for 
split lots and no additional investment for screens should be 
necessary. Any adjustments to the packing line as far as screens are 
concerned should be easily implemented.
    According to Federal-State Inspection Service, all plants in 
Georgia shelling Runners and Spanish and Valencia varieties were 
already using 17/64 round screens on the Runners and 16/64 screens on 
the Spanish and Valencia varieties. The Inspection Service has a supply 
of screens for smaller peanut kernels to cover the five new shelling 
plants which were expected to begin operations by January 2004. In 
addition, the Inspection Service will provide screens for peanut 
shellers that need them at a cost per screen of $55.00, plus shipping.

Appeal Procedures

    This action also continues in effect in Sec.  996.40(c) provisions 
specifying that the ``holder of the title'' to any lot of peanuts may 
request an appeal inspection if it is believed that the original 
aflatoxin analysis is in error. Appeals for aflatoxin are handled 
following procedures specified in the Inspection Service's Instructions 
for Milled Peanuts. The aflatoxin sample would be drawn by Federal or 
Federal-State Inspection Service inspectors and the appeal analysis 
would be performed, and the aflatoxin certificate issued, by USDA or 
USDA-approved laboratories.
    This action also continues to specify in this section that any 
financially interested person may request an appeal inspection if it is 
believed that the original quality inspection was in error. These 
appeals also would continue to be handled following procedures 
specified in the Inspection Service's Instructions for Milled Peanuts. 
Federal or Federal-State Inspection Service inspectors would sample and 
inspect the peanuts following procedures in the milled peanut 
instructions.
    All costs involved in conducting appeal inspections are for the 
account of the ``holder of the title'' or the financially interested 
person requesting the appeal. Under the appeal process, appeals may be 
requested verbally. A written request is not necessary.

Re-Inspection of Blanched Lots

    Peanut lots which meet quality (grade) standards, including fall 
through, damage and minor defects, but which fail on aflatoxin may be 
blanched to remove the contaminated kernels. Under the previous 
standards, blanched lots had to be re-inspected for damage and minor 
defects. In some cases, a peanut lot will pass aflatoxin requirements 
but fail damage and minor defect tolerances because the removal of the 
skins in the blanching process may expose additional instances of 
damage or minor defects that were hidden prior to blanching.
    Previously, Sec.  996.50(d) provided that peanut lots certified as 
meeting the ``fall through'' standards prior to blanching do not have 
to meet ``fall through'' standards when re-inspected after blanching. 
The Board recommended that a similar exception be applied for damage 
and minor defects to reduce handler-operating costs and to avoid a 
possible loss of peanuts. This action finalizes that rulemaking action.

Allow Handlers To Purchase Higher Moisture Peanuts

    Section 996.30(b) Moisture specifies that ``No handler or importer 
shall receive or acquire farmers stock peanuts for subsequent 
disposition to human consumption outlets containing more than 10.49 
percent moisture: Provided, That peanuts of a higher moisture may be 
received and dried to not more 10.49 percent moisture prior to storing 
or milling: Provided further, That Virginia-type peanuts used for seed 
may be received or acquired containing up to 11.49 percent moisture.''
    Handlers may receive high moisture peanuts, but cannot acquire 
them. Because of this, any high moisture deliveries from a producer 
cannot be mixed with other high moisture

[[Page 31728]]

deliveries. The inability to commingle high moisture peanut deliveries 
for drying slows producer deliveries and raises drying costs. It also 
raises inspection fees because the peanuts need to be inspected a 
second time to verify their moisture levels prior to acquisition.
    The Board requested that the 10.49 percent moisture standard be 
changed to allow handlers to acquire farmers stock peanuts with a 
moisture content up to 25 percent. The Board also recommended the 
addition of a provision requiring the producer and handler both to 
agree to the sale and acquisition of the high moisture peanuts. The 
moisture requirements for Virginia type peanuts for seed were not 
recommended for change.
    According to some Board members, such a change could make a 
significant difference in the efficient acquisition and warehousing of 
farmers' stock peanuts each fall. Allowing the acquisition of high 
moisture peanuts would allow the handlers to accumulate a number of 
loads and batch dry them at the same time. These Board members indicted 
that this could speed up the drying, grading, and movement of peanuts 
at harvest, which would be especially important when adverse weather 
conditions during harvest could cause peanut quality to deteriorate. It 
would also reduce drying and inspection costs.
    After considering this request and input from the Inspection 
Service, USDA continues to believe that the Board's recommendation 
needs further review and analysis. The Inspection Service has indicated 
that its current shelling equipment cannot properly shell peanuts with 
a moisture content higher than 16 to 18 percent, and that it would have 
difficulty grading such peanuts. Under currentinspection procedures, 
such peanuts are further dried by the producer before incoming 
inspection is completed.
    Accordingly, USDA believes that the current standards and 
procedures should continue to allow the USDA, Board, and peanut 
industry time to study this issue further.
    The Board met again on this issue in February 2004 and submitted 
another recommendation for 2004 and subsequent crop year peanuts. USDA 
is now reviewing that recommendation.

Increase Sound Whole Kernel Tolerance

    This final rule continues to provide in Sec.  996.31(a) that the 
sound whole tolerance for Runner, Spanish, and Valencia peanuts be not 
less than 10 percent splits, to bring all the tolerances for sound 
whole kernels in lots of splits into conformity with the tolerance for 
Virginia variety peanuts. These tolerances are in the Minimum Quality 
Standards table for split kernel lots in that paragraph. Previously, 
the sound whole kernel content for Runner, Spanish, and Valencia 
variety peanuts in lots of splits was four percent. Continuation of 
this change is expected to result in fewer split lot rejections for 
Runner, Spanish, and Valencia variety peanuts, and reduce handlers' 
reconditioning costs.

Effective Time

    Section 996.75, Effective time, is finalized to apply to 2003 and 
subsequent crop year peanuts, to 2002 and 2001 crop year peanuts not 
yet inspected, and to failing peanuts that have not yet met disposition 
standards.

Final Regulatory Flexibility Analysis

    Pursuant to requirements set forth in the RegulatoryFlexibility 
Analysis Act (RFA) the Agricultural Marketing Service (AMS) has 
considered the economic impact of this action on small entities. 
Accordingly, AMS has prepared this final regulatory flexibility 
analysis.
    The purpose of the RFA is to fit regulatory actions to the scale of 
business subject to such actions in order that small businesses will 
not be unduly or disproportionately burdened. The following discussion 
addresses RFA concerns and some of the numbers used in the interim 
final rule have been changed to reflect the availability of more recent 
data.
    There are approximately 55 peanut shelling entities, operating 
approximately 70 shelling plants, and 25 importers subject to 
regulation under the peanut program. An estimated two-thirds of the 
handlers and nearly all of the importers may be classified as small 
entities, based on the documents and reports received by USDA. Small 
agricultural service firms, which include handlers and importers, are 
defined by the Small Business Administration (13 CFR 121.201), as those 
having annual receipts of less than $5,000,000.
    An approximation of the number of peanut farms that could be 
considered small agricultural businesses under the SBA definition (less 
than $750,000 in annual receipts from agricultural sales) can be 
obtained from the 1997 Agricultural Census, which is the most recent 
information on the number of farms categorized by size. There were 
10,505 peanut farms with sales valued at less than $500,000 in 1997, 
representing 86 percent of the total number of peanut farms in the U.S. 
(12,221). Since theAgricultural Census does not use $750,000 in sales 
as a category, $500,000 in sales is the closest approximation. Assuming 
that most of the sales from those farms are attributable to peanuts, 
the percentage of small peanut farms in 1997 (less than $750,000 in 
sales) was likely a few percentage points higher than 86 percent, and 
may have shifted a few percentage points since then. Thus, the 
proportion of small peanut farms is likely to bebetween 80 and 90 
percent.
    The two-year average peanut production for the 2001 and 2002 crop 
years was 3.799 billion pounds, harvested from 1.354 million acres, 
yielding 2,806 pounds per acre. The average value of production for the 
two-year period was $797.469 million, as reported on the National 
Agricultural Statistics Service (NASS) Web site (http://www.nass.usda.gov:81/idepd/report.htm) in December 2003. The average 
grower price over the two-year period was $0.21 per pound, and the 
average value per harvested acre was $588. Dividing the two year 
average value of production ($797.469 million) by the estimated 12,221 
farms (1997 Agricultural Census) yields an estimated revenue per farm 
of approximately $65,254.
    The Agricultural Census presents farm sizes in ranges of acres, and 
median farm size in 1997 was between 50 and 99 acres. The median is the 
midpoint ranging from the largest to the smallest. Median farm size in 
terms of annual sales revenue was between $100,000 and $250,000.
    Several producers may own a single farm jointly, or, conversely, a 
producer may own several farms. In the peanut industry, there is, on 
average, more than one producer per farm. Dividing the two year average 
value of production of $797.469 million by an estimated 25,000 
commercial producers (2003 Agricultural Statistics, USDA, Table 11-10) 
results in an estimate of average revenue per producer of approximately 
$31,899. The figures in this paragraph were adjusted from those in the 
interim final rule to reflect more recent information.
    The current 14 custom blanchers, 8 custom remillers, 4 oilmill 
operators, 4 USDA and 15 USDA-approved private chemical (aflatoxin) 
laboratories are subject to this rule to the extent that they must 
comply with reconditioning provisions under Sec.  996.50 and reporting 
and recordkeeping requirements under Sec.  996.71. These requirements 
are applied uniformly to these entities, whether large or small. In 
addition, there are currently 10 State inspection

[[Page 31729]]

programs (Inspection Service) that will perform inspection under this 
peanut program.
    Importers of peanuts cover a broad range of business entities, 
including fresh and processed food handlers and commodity brokers who 
buy agricultural products on behalf of others. Under the 2003 import 
quotas, approximately 25 business entities have only imported 
approximately 44 percent of the 126.6 million pounds of low duty quota 
peanuts (sometimes called duty free quota peanuts) compared with 37 
entities which had imported 100 percent of the quotas by April 5, 2002. 
The current import quota period began January 2, 2003, for Mexico, 
April 1, 2003, for Argentina and ``Other countries'', and September 23, 
2003, for Israel. Some large, corporate handlers are also importers of 
peanuts. AMS is not aware of any peanut producers who imported peanuts 
during any of the recent quota years. The majority of peanut importers 
have annual receipts under $5,000,000. Some importers use customs 
brokers' import services. These brokers are usually held accountable by 
the importer to see that entry requirements under Sec.  996.60 and 
reporting and recordkeeping requirements under Sec.  996.71 are met. 
These requirements are not applied disproportionately to small customs 
brokers.
    In view of the foregoing, it can be concluded that the majority of 
peanut producers, handlers, importers, and above mentioned entities may 
be classified as small businesses. Also, financially interested persons 
who may appeal quality inspection results, and ``holders of the title'' 
to any lot of peanuts who may appeal aflatoxin test results may include 
small entities.

Smaller Kernel Sizes

    Changing screen sizes used in handling peanuts will allow smaller 
kernels of all varieties to be used for edible purposes. Proponents of 
smaller kernel use claim that manufacturers of peanut products now have 
markets for smaller whole kernels, and that this rule change will 
enable them to take advantage of this recent shift in the marketplace. 
Market share for U.S. peanuts is expected to rise because the rule 
enables handlers to sell smaller peanuts to buyers who would otherwise 
purchase less expensive peanuts from other origins for manufacturing 
into peanut butter and paste, and other similar products. This rule 
continues to implement a relaxation in the utilization of small peanut 
kernels by changing the screens used for sorting sound whole kernels 
and kernels with splits from a slotted screen to one with round holes. 
The equipment for this change is currently in use for split lots in 
most shelling facilities. This change should therefore require little 
or no additional investment for most shellers, large or small.
    The Inspection Service has a supply of screens for smaller peanut 
kernels to cover the five new shelling plants which were expected to 
begin operations by January 2004. In addition, the Inspection Service 
will provide screens for peanut shellers who need them, at a cost per 
screen of $55.00, plus shipping.
    Although the chances of aflatoxin contamination in small kernels is 
not significant, proponents of the rule change claim that modern 
electronic color sorting technologies can sort out the moldy or 
defective kernels, thus ensuring that the new screens will not have a 
negative impact on the quality and wholesomeness of peanuts entering 
edible food channels. Shellers that already have this technology will 
have little or no additional cost.
    Compliance officers report that out of approximately 70 shelling 
plants only 10 do not have electronic sorting technology. These latter 
plants only shell seed peanuts, which are used for planting and are not 
for shipment to the edible market.

Re-Inspection of Blanched Lots

    This rule continues to allow shelled lots that are being 
reconditioned to be excluded from re-inspection for fall through, 
damaged kernels, and minor defects standards if the lot originally met 
these quality standards, but failed for aflatoxin. Such lots may be 
blanched to remove the aflatoxin contaminated kernels and do not have 
to be graded for fall through, damaged kernels, and minor defects upon 
reinspection. The primary benefit of this final rule is to reduce 
handler operating costs and avoid an additional loss of peanuts.

Allow Handlers To Acquire High Moisture Peanuts

    This rule also maintains the longstanding maximum moisture 
tolerance for farmers stock peanuts received or acquired by handlers at 
10.49 percent: Provided, That peanuts of a higher moisture content may 
be received and dried to not more than 10.49 percent prior to storing 
or milling; and Provided further, that Virginia-type peanuts used for 
seed may be received or acquired containing up to 11.49 percent 
moisture. As mentioned earlier, the Board met again to review this 
matter in February 2004 and made another recommendation to allow high 
moisture peanuts to be acquired. This recommendation is being reviewed 
by USDA.

Increased Sound Whole Kernel Tolerance

    The Minimum Quality Standards table in Sec.  996.31(a) provides 
standards for split kernel lots by specifying the maximum percentage of 
sound whole kernels permitted in a lot. For Virginia variety peanuts, 
sound whole kernel content has been limited to 10 percent of the lot by 
weight. For Runner, Spanish, and Valencia varieties, the sound whole 
kernel content had been limited to four percent prior to the issuance 
of the interim final rule.
    The interim final rule relaxed the Sound Whole Kernel tolerance for 
Runner, Spanish, and Valencia variety peanuts to 10 percent, the same 
tolerance that has applied to Virginia variety peanuts. The primary 
benefit of this rule change would be to lower costs and increase sales 
revenue by rejecting fewer lots of the Runner, Spanish, and Valencia 
varieties for splits. No adverse financial impact is expected from 
making this standard uniform for all four varieties.
    The impact of this change is not expected to be different between 
large and small entities.

Appeal Procedures

    Continuing the addition of procedures allowing handlers, shellers, 
buyers or manufacturers to appeal aflatoxin test results and any 
financially interested person to appeal quality inspection results will 
be useful to those requesting appeals and to the inspectors drawing the 
samples and performing the inspections and tests. With specified appeal 
procedures, all parties involved should benefit.
    USDA has considered alternatives to the suggested changes to the 
quality and handling standards. The Act requires USDA to consult with 
the Board on these standards. An alternative would have been to 
continue the 2002-03 crop year standards for the 2003-04 crop year 
without finalizing any of the recommended changes suggested by the 
Board at its April 30, 2003, meeting. The Board's meeting was widely 
publicized throughout the peanut industry and as a public meeting both 
large and small entities were allowed to attend and express their 
views.
    Because of the anticipated benefits of some of the Board's 
recommended changes, USDA believes that finalizing those changes is 
preferable to continuing without any changes.
    USDA has not identified any relevant Federal rules that duplicate, 
overlap, or conflict with this final rule. A small

[[Page 31730]]

business guide on complying with AMS' fresh fruit, vegetable, and 
specialty crop programs similar to this peanut program may be viewed at 
the following Web site: http//www.ams.usda.gov/fv/moab.html. Any 
questions about the compliance guide or compliance with this program 
should be sent to Jay Guerber at the previously mentioned address in 
the FOR FURTHER INFORMATION CONTACT section.
    The interim final rule concerning these changes was published in 
the Federal Register (68 FR 46919) on August 7, 2003. A document 
correcting the table specifying minimum quality standards was published 
in the September 11, 2003, issue of the Federal Register (68 FR 53490). 
Copies of the rule were provided to all Board members and peanut 
handlers. In addition, the rule was posted on the AMS web site 
specified above and was available through the Internet by the Office of 
the Federal Register. The interim final rule provided that comments 
received by September 8, 2003, would be considered in finalizing the 
rulemaking action.
    Four comments were received from a peanut shellers' association, a 
peanut sheller, a growers' cooperative marketing association, and a 
manufacturer of peanut products.
    The representative of the peanut shellers' association stated that 
while the association supported the Board's recommendation allowing 
handlers to acquire farmers stock peanuts with a moisture content up to 
25 percent, provided they were dried to not more than 10.49 percent 
moisture prior to storing or milling, they understood USDA's concern 
about problems of grading efficiency from too high a level of moisture. 
The commenter urged the Secretary to allow up to 16 percent moisture. 
USDA continues to believe that further industry dialogue is needed on 
this matter. The Board met in February 2004 to further discuss this 
matter and made another recommendation. USDA is reviewing that 
recommendation.
    The peanut product manufacturer believes that the proposal to allow 
smaller peanut kernels of all varieties to enter the edible channels is 
a move in the wrong direction. The commenter is concerned that an added 
quantity of small kernels in each lot will increase the aflatoxin ``hot 
spots'' and add to manufacturer risk and processing costs. Secondly, 
this commenter expressed concern that a greater incidence of off 
flavors in peanut products is likely to result from increased 
quantities of small kernels and that this will give product 
manufacturers reasons to reformulate their products using fewer 
peanuts. The representative of the peanut growers cooperative marketing 
association also mentioned the flavor characteristics of small kernels 
as a potential industry marketing problem.
    The ARS study cited previously in this rule addressed the potential 
for increased aflatoxin arising from allowing more small kernels to be 
marketed for edible products. That study found that the aflatoxin 
impact of the smaller kernels was not significant enough to warrant 
concern.
    With regard to the off flavor of small kernels, several industry 
representatives at last year's Board meeting also cited the flavor of 
small kernels as a quality factor that should weigh against the use of 
smaller peanut kernels. Such concerns were not mentioned or addressed 
at this year's Board meeting. However, as experience with the use of 
small kernels develops, further review of the matter may be 
appropriate.
    The growers' association representative also reiterated concerns 
raised in writing to AMS in June 2003. The commenter contended that the 
farmers would not benefit from allowing smaller kernels because the 
rule change only applied to outgoing quality standards and not to 
incoming farmers stock.
    This commenter believes that the screen sizes for incoming farmers 
stock peanuts should be changed to benefit producers. Currently, 
farmers stock peanuts are sampled and graded, resulting in a percentage 
of sound mature kernels and a percentage of other kernels. Under the 
outgoing screen size changes, some of the ``other kernels'' are allowed 
to be used by the sheller for edible higher valued purposes. The 
commenter stated that if the same screen sizes were applied to the 
farmers stock grade, then some of the ``other kernels'' which had been 
classified as such would become ``sound mature kernels'', and what were 
once 7 cents per pound peanuts would become 23-25 cents per pound 
peanuts as ``sound mature kernels''. That would substantially benefit 
the producer. The implementation of screen size changes for incoming 
farmers stock peanuts is outside the scope of this rulemaking action. 
Further, USDA believes that the Board should further review this issue.
    An additional concern expressed by this commenter was that the 
benefit of additional small kernels purchased by handlers could be 
somewhat offset by subsequent reduced purchases of farmers stock 
peanuts, leading to forfeitures of peanuts under loan and increased 
government expenditures. The commenter estimated such a loss at over 
$18 million. However, USDA views this scenario as unlikely. The 
additional quantities of smaller kernels acquired by shellers are 
expected to be fully used by manufacturers to meet additional market 
needs, without offsetting other peanut sales. Accordingly, USDA 
continues to believe that the rule change will return a net benefit to 
the industry
    This commenter also reiterated earlier concerns raised in writing 
to AMS in June 2003 concerning the reinspection of blanched peanuts and 
the potential for allowing poor quality peanuts to enter edible 
consumption channels. The commenter contended that these changes would 
allow pickouts with any amount of damage or undersize kernels to meet 
requirements for human consumption. There are appropriate safeguards in 
the program procedures to prevent such occurrences. There is a paper 
trail that ties the pickouts resulting after blanching back to the 
original lot. This would help prevent a new lot of pickouts with any 
content of excess damage, undersized kernels, or other defects to be 
used for human consumption.
    This commenter also questioned the fact that the changes 
implemented by the interim final rule applied to 2002 and 2001 crop 
year peanuts not yet inspected and to failing peanuts that had not yet 
met disposition standards. This commenter believes that the standards 
should be applied on a crop year basis, rather than on a continuing 
basis.
    With application on a crop year basis, the commenter believes that 
handlers with old crop inventories would not benefit from the changes 
for the new crop, and those who have disposed of their inventories 
would not be unfairly treated. Under the prior peanut marketing 
agreement program, regulations were effective on a crop year basis. 
However, in implementing section 1308 of the 2002 Farm Bill, USDA 
concluded that a continuing regulation rather than one effective on a 
crop year basis would better serve the peanut industry. Not only would 
this allow industry members to better plan their business activities 
but also changes could be made if deemed appropriate at any given time. 
Accordingly, no change is made based upon this comment.
    Finally, the commenter expressed concern that comments from all 
persons received by AMS must be considered. USDA considers all 
available information from any interested person and source in our 
deliberations concerning this program. Such information was taken into 
consideration in this action.

[[Page 31731]]

    The sheller comment correctly pointed out several mistakes in the 
Minimum Quality Standards table following paragraph (a) in Sec.  
996.31. These errors were corrected in a document published in the 
Federal Register on September 11, 2003 (68 FR 53490).

Information Collection

    The Act specifies in section 1604(c)(2)(A) that the standards 
established pursuant to the Act, may be implemented without regard to 
the Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35). 
Furthermore, this rule does not change the existing information 
collection burden.
    After consideration of all relevant material presented, including 
the Board's recommendations, comments received, and other information, 
the interim final rule as published in the Federal Register on August 
7, 2003 (68 FR 46919), together with the corrections published on 
September 11, 2003 (68 FR 53490) is finalized without change.

List of Subjects in 7 CFR Part 996

    Food grades and standards, Imports, Peanuts, Reporting and 
recordkeeping requirements.

PART 996--MINIMUM QUALITY AND HANDLING STANDARDS FOR DOMESTIC AND 
IMPORTED PEANUTS MARKETED IN THE UNITED STATES

0
Accordingly, the interim final rule amending 7 CFR Part 996 which was 
published at 68 FR 46919 on August 7, 2003, and corrected at 68 FR 
53490 on September 11, 2003, is adopted as a final rule without change.

    Dated: June 2, 2004.
A.J. Yates,
Administrator, Agricultural Marketing Service.
[FR Doc. 04-12787 Filed 6-4-04; 8:45 am]
BILLING CODE 3410-02-P