[Federal Register Volume 72, Number 58 (Tuesday, March 27, 2007)]
[Proposed Rules]
[Pages 14368-14391]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-5312]



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Part III





Department of Agriculture





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Agricultural Marketing Service



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7 CFR Part 984



 Walnuts Grown in California; Recommended Decision and Opportunity To 
File Written Exceptions to Proposed Amendments of Marketing Agreement 
and Order No. 984; Proposed Rule

  Federal Register / Vol. 72, No. 58 / Tuesday, March 27, 2007 / 
Proposed Rules  

[[Page 14368]]


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DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

7 CFR Part 984

[Docket No. AO-192-A7; FV06-984-1]


Walnuts Grown in California; Recommended Decision and Opportunity 
To File Written Exceptions to Proposed Amendments of Marketing 
Agreement and Order No. 984

AGENCY: Agricultural Marketing Service, USDA.

ACTION: Proposed rule and opportunity to file exceptions.

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SUMMARY: This recommended decision invites written exceptions on 
proposed amendments to Marketing Order No. 984, which regulates the 
handling of walnuts grown in California (Order). The amendments were 
proposed by the Walnut Marketing Board (Board), which is responsible 
for local administration of the order. The amendments included in this 
recommended decision would: Change the marketing year; include ``pack'' 
as a handler function; restructure the Board and revise nomination 
procedures; rename the Board and add authority to change Board 
composition; modify Board meeting and voting procedures; add authority 
for marketing promotion and paid advertising; add authority to accept 
voluntary financial contributions and to carry over excess assessment 
funds; broaden the scope of the quality control provisions and add the 
authority to recommend different regulations for different market 
destinations; add authority for the Board to appoint more than one 
inspection service; replace outdated order language with current 
industry terminology; and other related amendments.
    The Department of Agriculture (USDA) proposed three additional 
amendments: To establish tenure limitations for Board members, to 
require that continuance referenda be conducted on a periodic basis to 
ascertain producer support for the order, and to make any changes to 
the order as may be necessary to conform with any amendment that may 
result from the hearing.
    The proposed amendments are intended to improve the operation and 
functioning of the marketing order program.

DATES: Written exceptions must be filed by April 16, 2007.

ADDRESSES: Written exceptions should be filed with the Hearing Clerk, 
U.S. Department of Agriculture, room 1081-S, Washington, DC 20250-9200, 
Fax: (202) 720-9776, or via the Internet: http://www.regulations.gov. 
All comments should reference the docket number and the date and page 
number of this issue of the Federal Register. Comments will be made 
available for public inspection in the Office of the Hearing Clerk 
during regular business hours, or can be viewed at: http://www.regulations.gov.

FOR FURTHER INFORMATION CONTACT: Melissa Schmaedick or Kathleen M. 
Finn, 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] or [email protected].
    Small businesses may request information on this proceeding by 
contacting Jay Guerber, 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].

SUPPLEMENTARY INFORMATION: Prior documents in this proceeding: Notice 
of Hearing issued on April 18, 2006, and published in the April 24, 
2006, issue of the Federal Register (71 FR 20902).
    This 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. 984, which regulates the handling of 
walnuts grown in California, and the opportunity to file written 
exceptions thereto. Copies of this decision can be obtained from 
Melissa Schmaedick, whose address is listed above.
    This recommended decision 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 amendments are based on the record of a public hearing 
held on May 17 and 18, 2006, in Modesto, California. Notice of this 
hearing was published in the Federal Register on April 24, 2006 (71 FR 
20902). The notice of hearing contained proposals submitted by the 
Walnut Marketing Board (Board), which is responsible for local 
administration of the order, and by the Agricultural Marketing Service 
(AMS).
    The proposed amendments are the result of a committee appointed by 
the Board to conduct a review of the order. The committee met several 
times in 2005 and drafted proposed amendments to the order and 
presented them at industry meetings. The proposed amendments were then 
forwarded to the Board, which unanimously approved them. The amendments 
are intended to streamline organization and administration of the 
marketing order program. The Board's request for a hearing was 
submitted to USDA on March 3, 2006.
    The Board's proposed amendments to the order are summarized below.
    1. Amend the order to change the marketing year from August 1 
through July 31 to September 1 through August 31. This proposal would 
amend Sec.  984.7, Marketing year, and would result in conforming 
changes being made to Sec.  984.36, Term of office, and Sec.  984.48, 
Marketing estimates and recommendations.
    2. Amend the order by specifying that the act of packing walnuts is 
considered a handling function. This proposal would amend Sec.  984.13, 
To handle, as well as clarify the definition of ``pack'' in Sec.  
984.15 by including the term ``shell'' as a function of ``pack.''
    3. (a) Amend all parts of the order that refer to cooperative seats 
on the Board, redistribute member seats among districts, and provide 
designated seats for a handler handling 35 percent or more of 
production, if such handler exists. This proposal would amend Sec.  
984.35, Walnut Marketing Board, and Sec.  984.14, Handler.
    3. (b) Amend the Board member nomination process to reflect 
proposed changes in the Board structure, as outlined in 3(a). This 
proposal would amend Sec.  984.37, Nominations, and Sec.  984.40, 
Alternate.
    4. Require Board nominees to submit a written qualification and 
acceptance statement prior to selection by USDA. This proposal would 
amend Sec.  984.39, Qualify by acceptance.
    5. Change the name of the Walnut Marketing Board to the California 
Walnut Board. This proposal would amend Sec.  984.6, Board, and Sec.  
984.35, Walnut Marketing Board.
    6. Add authority to reestablish districts, reapportion members 
among districts, and revise groups eligible for representation on the 
Board. This

[[Page 14369]]

proposal would add a new paragraph (d) to Sec.  984.35, Walnut 
Marketing Board.
    7. Amend Board quorum and voting requirements to add percentage 
requirements, add authority for the Board to vote by ``any other means 
of communication'' (including facsimile) and add authority for Board 
meetings to be held by telephone or by ``any other means of 
communication'', providing that all votes cast at such meetings shall 
be confirmed in writing. This proposal would amend Sec.  984.45, 
Procedure, and would result in a conforming change in Sec.  984.48(a), 
Marketing estimates and recommendations.
    8. Amend the order to add authority to carry over excess assessment 
funds. This proposal would amend Sec.  984.69, Assessments.
    9. Amend the order by adding authority to accept voluntary 
financial contributions. This proposal would add a new Sec.  984.70, 
Contributions.
    10. Amend the order to clarify that members and alternate members 
may be reimbursed for expenses incurred while performing their duties 
and that reimbursement includes per diem. This proposal would amend 
Sec.  984.42, Expenses.
    11. Amend the order to add authority for the Board to appoint more 
than one inspection service as long as the functions performed by each 
service are separate and do not duplicate each other. This proposal 
would amend Sec.  984.51, Inspection and certification of inshell and 
shelled walnuts.
    12. (a) Amend the order by broadening the scope of the quality 
control provisions and by adding authority to recommend different 
regulations for different market destinations. This proposal would 
amend Sec.  984.50, Grade and size regulations.
    12. (b) Amend the order by adding authority that would allow for 
shelled walnuts to be inspected after having been sliced, chopped, 
ground, or in any other manner changed from shelled walnuts, if 
regulations for such walnuts are in effect. This proposal would amend 
Sec.  984.52, Processing of shelled walnuts.
    13. Amend the order by adding authority for marketing promotion and 
paid advertising. This proposal would amend Sec.  984.46, Research and 
development.
    14. Amend the order to replace the terms ``carryover'' with 
``inventory,'' and ``mammoth'' with ``jumbo,'' to reflect current day 
industry practices. This proposal would amend Sec.  984.21, Handler 
inventory, and Sec.  984.67, Exemption, and would also result in 
conforming changes being made to Sec.  984.48, Marketing estimates and 
recommendations, and Sec.  984.71, Reports of handler carryover.
    15. (a) Amend the order to clarify and to simplify the interhandler 
transfer provision, and to add authority for the Board to recommend to 
USDA regulations, including necessary reports, for administrative 
oversight of such transfers. This proposal would amend Sec.  984.59, 
Interhandler transfers.
    15. (b) Amend the order to clarify that the Board may require 
reports from handlers or packers that place California walnuts into the 
stream of commerce. This proposal would amend Sec.  984.73, Reports of 
walnut receipts.
    16. Update and simplify the language in Sec.  984.22, Trade demand, 
to state ``United States and its territories,'' rather than name 
``Puerto Rico'' and ``The Canal Zone''.
    17. Amend the order by adding language that would acknowledge that 
the Board may deliberate, consult, cooperate, and exchange information 
with the California Walnut Commission. Any information sharing would be 
kept confidential. This would add a new Sec.  984.91, Relationship with 
the California Walnut Commission.
    In addition, USDA proposed adding three provisions that would help 
assure that the operation of the program conforms to current Department 
policy and that USDA can make any necessary conforming changes. These 
provisions would:
    18. Establish tenure requirements for Board members. This proposal 
would amend Sec.  984.36, Term of office.
    19. Require that continuance referenda be conducted on a periodic 
basis to ascertain industry support for the order and add more 
flexibility in the termination provisions. This proposal would amend 
Sec.  984.89, Effective time and termination.
    20. Make such changes as may be necessary to the order to conform 
with any amendment thereto that may result from the hearing.
    Twenty-five witnesses testified at the hearing. These witnesses 
represented walnut growers and handlers. While all witnesses supported 
the Board's recommended changes, several witnesses opposed USDA 
recommendations to establish tenure requirements and require 
continuance referenda.
    Witnesses speaking in favor of the proposed changes addressed the 
need to change the structure of the Board to reflect recent changes in 
the industry, and the need to improve the administration, operation and 
functioning of the program in effect for walnuts grown in California. 
The order was established in 1948 and was last amended in 1976.
    Witnesses at the hearing further stated that the amendments being 
considered were designed to streamline the operation of the order based 
on accepted business procedures in the 21st century. Witnesses also 
stated that many of the proposed amendments would provide the program 
with the necessary flexibility for the future.
    At the conclusion of the hearing, the Administrative Law Judge 
stated that 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 would be 30 days after the posting of 
the hearing transcript on the USDA Web site, or July 6, 2006. One brief 
was filed. The brief clarified the intent of the Board's proposed 
amendments and offered general support.

Material Issues

    The material issues presented on the record of hearing are as 
follows:
    1. Whether to amend the order to change the marketing year from 
August 1 through July 31 to September 1 through August 31;
    2. Whether to amend the order by specifying that the act of packing 
walnuts is considered a handling function and by clarifying that the 
definition of ``pack'' should include the term ``shell'';
    3. (a) Whether to amend all parts of the order that refer to 
cooperative seats on the Board, redistribute member seats among 
districts, and provide designated seats for a major handler, if such 
handler exists (a major handler would have to handle 35 percent or more 
of the crop);
    3. (b) Whether to amend the Board member nomination process to 
reflect proposed changes in the Board structure, as outlined in 3(a);
    4. Whether to require Board nominees to submit a written 
qualification and acceptance statement prior to selection by USDA;
    5. Whether to change the name of the Walnut Marketing Board to the 
California Walnut Board;
    6. Whether to add authority to reestablish districts, reapportion 
members among districts, and revise groups eligible for representation 
on the Board;
    7. Whether to amend Board quorum and voting requirements to add 
percentage requirements, to add authority for the Board to vote by 
``any other means of communication'' (including facsimile), and to add 
authority for Board meetings to be held by telephone or by ``any other 
means of

[[Page 14370]]

communication'', providing that all votes cast at such meetings shall 
be confirmed in writing;
    8. Whether to amend the order to add authority to carry over excess 
assessment funds;
    9. Whether to amend the order by adding authority to accept 
voluntary financial contributions;
    10. Whether to amend the order to clarify that members and 
alternate members may be reimbursed for expenses incurred while 
performing their duties and that reimbursement includes per diem;
    11. Whether to amend the order to add authority for the Board to 
appoint more than one inspection service as long as the functions 
performed by each service are separate and do not duplicate each other;
    12. (a) Whether to amend the order by broadening the scope of the 
quality control provisions and by adding authority to recommend 
different regulations for different market destinations;
    12. (b) Whether to amend the order by adding authority that would 
allow for shelled walnuts to be inspected after having been sliced, 
chopped, ground, or in any other manner changed from shelled walnuts, 
if regulations for such walnuts are in effect;
    13. Whether to amend the order by adding authority for marketing 
promotion and paid advertising;
    14. Whether to amend the order to replace the terms ``carryover'' 
with ``inventory,'' and ``mammoth'' with ``jumbo,'' to reflect current 
industry procedures;
    15. (a) Whether to amend the order to clarify and to simplify the 
interhandler transfer provision and to add authority for the Board to 
recommend to USDA methods and procedures, including necessary reports, 
for administrative oversight of such transfers;
    15. (b) Whether to amend the order to clarify reports required 
regarding interhandler transfers;
    16. Whether to update and simplify the language in Sec.  984.22, 
Trade demand, to state ``United States and its territories,'' rather 
than name ``Puerto Rico'' and ``The Canal Zone'';
    17. Whether to amend the order by adding language that would 
acknowledge that the Board may deliberate, consult, cooperate, and 
exchange information with the California Walnut Commission;
    18. Whether to amend the order to limit the number of terms a 
member may serve on the Board at any one time to three consecutive, 
two-year terms; and,
    19. Whether to require that continuance referenda are held every 
six years to determine support for continuation of the order.

Findings and Conclusions

    The following findings and conclusions on the material issues are 
based on evidence presented at the hearing and the record thereof.

Material Issue Number 1--Marketing Year

    Section 984.7, Marketing year, should be amended to change the 
marketing year from August 1 through July 31 to September 1 through 
August 31.
    Under the current definition of the order, the California walnut 
marketing year begins August 1 and continues through July 31. While 
this marketing period was appropriate at the time of the order's 
promulgation in 1948, witnesses stated that it no longer reflects the 
current crop cycle. Witnesses explained that, over time, new varieties 
of walnuts have been introduced, and the areas in which walnuts are 
cultivated have shifted. The newer varieties mature later than the 
varieties grown at the time of the program's inception. At the same 
time, cultivation has slowly moved into areas that previously were not 
suited for walnut production. With differences in climate, soil, and 
water, witnesses explained that these new production areas have 
slightly later growing cycles. The proposed change in the marketing 
year would better reflect current crop cycles.
    Witnesses also advocated adding language to this section that would 
allow the Board to recommend, subject to USDA's approval, alternative 
marketing year periods. Witnesses stated that this authority would 
allow the industry to adjust to future changes in crop cycles without 
the need to undertake formal amendment of the marketing order language.
    Witnesses also stated that conforming changes should be made to 
Sec. Sec.  984.36, Term of office, and 984.48, Marketing estimates. 
According to the hearing record, Walnut Marketing Board member terms of 
office should be for a period of two years and should end on the same 
day as the marketing year. Currently a member's term ends one month 
prior to the end of the marketing year, or on June 30. If implemented, 
the amended term of office would end on August 31.
    Market estimates, which evaluate California walnut production and 
market activities, should also be amended to reflect current-day 
harvest cycles. If implemented, the amended market estimate would be 
calculated using handler beginning inventory on September 1, and ending 
inventory on August 31, and would coincide with the amended marketing 
year.
    According to the record, market estimates are typically calculated 
shortly after the beginning of the marketing year, prior to September 
20. The proposed amendment would change this requirement to calculate 
market estimates prior to October 20. This proposal would maintain the 
amount of time between the beginning of the amended marketing year and 
the required market estimate calculation as currently required under 
the order.
    Record evidence supports amending the marketing year for California 
walnuts from August 1 through July 31 to September 1 through August 31. 
This amendment would update the order's marketing year to reflect the 
industry's current growing cycle and would provide authority for the 
Board to recommend, with USDA approval, changes in future marketing 
year periods. Record evidence also supports conforming changes proposed 
to Sec. Sec.  984.36, Term of office, and 984.48, Marketing estimates. 
Section 984.36 would be amended so that the end of a Board member's 
term of office would coincide with the end of the amended marketing 
year (August 31) after a period of two years. Section 984.48 would be 
amended so that market estimates would be calculated using handler 
beginning and ending inventories coinciding with the amended marketing 
year. Market estimates would be required to be calculated prior to 
October 20.
    No testimony in opposition to this proposed amendment was given. 
For the reasons stated above, it is recommended that Sec.  984.7, 
Marketing year, be amended. Additionally, conforming changes to 
Sec. Sec.  984.36, Term of Office, and 984.48, Marketing estimates, 
should also be made.

Material Issue Number 2--Definition of ``Pack''

    Section 984.13, To handle, should be amended to include the act of 
packing walnuts as a handling function. In addition, Sec.  984.15, 
Pack, should be amended to include shelling, and should be modified so 
that packing is applicable to both inshell and shelled walnuts.
    According to the hearing record, the order currently defines ``to 
handle'' as to ``sell, consign, transport, or ship, or in any other 
way, to put walnuts into the current of commerce''. The definition does 
not include the specific act of packing. ``Pack'', as currently defined 
in the order means, ``to bleach, clean,

[[Page 14371]]

grade, or otherwise prepare inshell walnuts for market.'' Pack is not 
currently applicable to shelled walnuts.
    Witnesses stated that the proposed amendment to the definition of 
``handle'' would more accurately reflect current industry practices. 
Witnesses described present day situations where a grower may have his 
or her product cleaned by a packer. The packer cleans and grades the 
product to meet the standards specified under the order and prepares 
the product for market. Through the packing process, the product is 
typically inspected and certified to meet order requirements.
    Witnesses explained that because the current definition of 
``handle'' does not include the term ``to pack'' and the activities 
associated therewith, the packer is not subject to the reporting or 
assessment requirements under the order. Witnesses explained that 
because inspection and certification of the product is conducted under 
the care of the packer, subjecting the packer to reporting and 
assessment requirements of the order would result in a more efficient 
and accurate tracking system for California walnuts. Witnesses stated 
that packers should be responsible for reporting the amount of walnuts 
processed by their facility to the Board, and for paying assessments on 
those walnuts, as is currently required for walnut handlers. Witnesses 
also explained that if this amendment were implemented there would be 
approximately 5 packer entities that would qualify as handlers under 
the new definition.
    Witnesses stated that the definition of ``pack'' under the order 
should be revised to include the act of shelling and should apply to 
both inshell and shelled walnuts. Currently, the definition of ``pack'' 
only applies to activities preparing inshell walnuts for market.
    In the past, packers packed primarily inshell walnuts for sale 
during traditional holiday seasons and were not responsible for 
inspection certification prior to shipping product to market. At that 
time, shelled walnuts did not comprise a large portion of the market, 
and therefore were not included. According to the record, shelled 
walnuts have become increasingly important in terms of industry sales, 
specifically to the baking and confectionary industries. As a result, 
many packers now include the function of shelling as part of the 
activities undertaken to prepare walnuts for market. For this reason, 
witnesses stated that act of ``shelling'' should be included in the 
definition of ``pack.''
    Record evidence supports adding the act of packing to the 
definition of handle. This amendment would facilitate more accurate 
tracking of California walnuts prepared for market, including 
inspection and reporting requirements as they relate to the collection 
of assessments. Record evidence also supports adding the act of 
shelling to the definition of ``pack'' as it would modify the term to 
be applicable to both shelled and inshell walnuts.
    There was no opposition testimony given against this proposed 
amendment. For the reasons stated above, it is recommended that Sec.  
984.13, To handle, should be amended to include the act of packing 
walnuts as a handling function. In addition, Sec.  984.15, Pack, should 
be amended to include the term ``to shell'' and the definition should 
be modified so that packing is applicable to both inshell and shelled 
walnuts.

Material Issue Number 3a--Restructuring of the Board

    Sections 984.35, Walnut Marketing Board, and Sec.  984.14, Handler, 
should be amended to remove all references to cooperative membership on 
the Board, to redistribute member seats among districts, and to provide 
designated seats for any handler handling 35 percent or more of 
production, if such handler exists.
    Witnesses explained that when the order was established, a 
cooperative marketing association represented a majority share of 
California walnut production. Board structure accommodated 
representation of this large cooperative by allocating two grower and 
two handler seats out of a total of 10 member seats to cooperatives. 
The remaining seats were divided between the order's two districts, 
with one grower and one handler member being selected from each 
district, respectively, for a total of four non-cooperative member 
positions.
    An additional grower seat was awarded to cooperatives if they 
represented more than 50 percent of production. Otherwise, the 
additional grower seat was filled as an at-large non-cooperative member 
position. Only growers not affiliated with cooperatives were eligible 
to fill the at-large seat, and that member could be from either 
district. Lastly, the Board nominated a public member, who was not 
affiliated with the growing or handling of California walnuts. 
Provisions for Board structure in the absence of a large cooperative 
was not contemplated when the order was promulgated, and thus was not 
provided for in the order.
    According to the hearing record, the recent transition of the 
industry's largest cooperative from a cooperative entity to a publicly 
held company was the impetus for this proposal. Witnesses expressed the 
need to modify the Board structure to provide for representation that 
accurately reflects the current industry. Witnesses advocated that the 
Board structure should maintain the current number of Board members and 
alternates, and that the allocation of member seats between grower and 
handler positions should remain the same (meaning 4 handler member 
seats, five grower member seats and one public member). However, 
witnesses recommended modifying the allocation of Board representation 
according to two possible scenarios. The two scenarios include: (1) 
Membership allocation that accommodates the existence of a handler 
handling 35 percent or more of production and, (2) membership 
allocation in the absence of such handler.
    Witnesses stated that in the first scenario, a handler handling 35 
percent or more of the crop would be afforded a designated number of 
seats, and nominations for those seats would be conducted by the 
handler. The Board would conduct all other member nominations.
    In the second scenario, none of the Board membership positions 
would be allocated to a specific entity, and all nominations would be 
conducted by the Board. Proposed modifications to nomination procedures 
are further discussed under Material Issue No. 3b.
    Evidence presented at the hearing outlines the following Board 
structure and membership allocation in the event that a handler 
representing 35 percent or more of production exists:
    The Board would consist of 10 members and alternates, including one 
public member and alternate. Two handler members and two grower members 
would represent the handler handling 35 percent or more of production. 
Grower members filling these seats would be growers that deliver their 
product to that handler. Handler members would be either employees or 
officers of that handler.
    Two handler members would represent handlers that do not handle 35 
percent of production. Two grower members would be growers that do not 
market their product through the handler that handles 35 percent or 
more of the production. One grower member would represent District 1, 
and one grower would represent District 2.
    One member would be an at-large grower member who does not market 
his or her product through the handler that handles 35 percent or more 
of the production. A public member would be

[[Page 14372]]

nominated by the Board and would have no affiliations with the industry 
as a handler or grower.
    In the event that no handler handles 35 percent or more of the 
crop, the following Board structure is proposed:
    The Board would consist of 10 members and alternates, including one 
public member and alternate. Two handler members and two grower members 
would represent District 1. Two handler members and two grower members 
would represent District 2. One member would represent the production 
area at-large. A public member would be nominated by the Board and 
would have no affiliations with the industry as a grower or a handler.
    The proposed amendment and hearing record pertaining to this 
scenario does not specify whether the at-large member seat is allocated 
to a grower or handler. However, as previously discussed, witnesses 
advocated that the allocation of member seats between growers and 
handlers should not change as a result of the amendment. Current order 
language allocates the at-large seat to growers in all situations. In 
addition, scenario 1 of the proposed amendment allocates the at-large 
seat to growers. USDA therefore recommends modifying the proposed 
amendatory language to specify that the at-large seat under scenario 2 
be allocated as a grower seat. This would achieve the intent of the 
industry by making the number of grower and handler seats consistent 
with the allocation under current order requirements.
    Witnesses stated that 35 percent was determined to be a reasonable 
level at which a handler should be afforded designated seats on the 
Board. Witnesses also stated that the determination of whether or not a 
handler qualifies as handling 35 percent or more of the crop should be 
based on a calculation which averages the crop handled for the two 
years prior to the year in which the nominations are made.
    Witnesses recognized that the potential scale of the impact of 
Board recommendations increases with the volume of product handled, and 
that any entity holding a major interest at or above the proposed 35 
percent should be afforded representation. According to record 
evidence, there are 44 handlers that handle California walnuts. Current 
distribution of industry production among those handlers indicates that 
any handler handling 35 percent or greater of the total crop would be a 
major handler and therefore should be guaranteed representation on the 
Board.
    Witnesses also provided testimony regarding allocation of Board 
membership in the event that there were two or more handlers handling 
35 percent or more of production. Witnesses testified that the proposed 
language in Material Issue No. 6, Authority to Reestablish Districts 
and Change Board Structure, includes a provision that would allow the 
Board to make recommendations, subject to the Secretary's approval, to 
revise the groups eligible to be represented, if such situation 
occurred.
    In addition to amending Sec.  984.35, Walnut Marketing Board, 
witnesses identified necessary changes in Sec.  984.14, Handler. The 
current order definition of handler includes the term ``cooperative 
handler.'' Witnesses stated that a revised definition of the term 
handler would remove the distinction between cooperative and 
independent handlers and simplify the definition.
    No opposition to this proposed amendment was offered at the 
hearing. Record evidence supports the amendment of Sec.  984.35, Walnut 
Marketing Board, and therefore, Sec.  984.14, Handler, should be 
amended to remove all references to cooperative membership on the Board 
and to provide designated seats for a major handler, if such handler 
exists.
    This proposal should also be modified to clarify that the at-large 
seat proposed in the revised Board structure for the industry when a 
handler handling 35 percent or more of the crop does not exist should 
be allocated as an at-large grower seat.

Material Issue Number 3b--Nominations

    Sections 984.37, Nominations, and 984.40, Alternate, should be 
amended to reflect proposed changes in the Board structure, as outlined 
in Material Issue No. 3a.
    According to record evidence, current nomination procedures are 
designed to accommodate cooperative membership on the Board. As 
described in Material Issue No. 3a, above, Board membership is 
presently configured to include 4 cooperative seats (2 grower and 2 
handler), 4 non-cooperative seats (2 grower and 2 handler), one grower 
seat that is either a cooperative or non-cooperative seat, depending on 
the cooperative's share of production, and one public member seat.
    Current nomination procedures allow for all cooperative seat 
nominees to be selected by the cooperative and forwarded to the 
Secretary for approval and appointment. According to the record, 
current nomination procedures do not specify the method of nominee 
selection by the cooperative. The cooperative nominees selection 
process is independent of the Board.
    All noncooperative seat nominees are selected through a ballot 
nomination process overseen by the Board staff, and forwarded to the 
Secretary for approval and appointment. Board staff is responsible for 
identifying all parties interested in filling Board member seats. Once 
a list of nominee candidates is identified, nomination ballots are sent 
out to all growers and handlers not associated with the cooperative. 
Board member nominations are given to the parties receiving the highest 
and second highest number of votes for their District and member seat. 
The names of the nominees are then forwarded to USDA for approval and 
appointment by the Secretary.
    The public member is selected by the Board members, and then 
forwarded to the Secretary for approval and appointment.
    According to the hearing record, the revised nomination procedures 
would be as follows:
    In the event that a handler who handles 35 percent or more of the 
crop exists, nominees to fill Board seats designated for that handler 
would be selected by that handler and forwarded to the Board for 
approval. The Board would include those nominations with the other 
nominees and submit them to the Secretary for approval and appointment.
    Accordingly, based on the hearing record, USDA recommends modifying 
the proposed language in Sec.  984.37(c)(1) as published in the Notice 
of Hearing by removing the following language: ``In such a manner that 
is consistent with the requirements of nominations of growers conducted 
by the Board. The two persons receiving the highest number of votes for 
the grower positions attributed to that handler (Groups (b)(2) of Sec.  
984.35) shall be nominees. The two persons receiving the third and 
fourth highest number of votes shall be designated as alternates.'' The 
removed statement should be replaced with the following statement: 
``And the names of the nominees shall be forwarded to the Board for 
approval and appointment by the Secretary.'' The USDA also recommends 
modifying the proposed language in Sec.  984.37(c)(2) as published in 
the Notice of Hearing by removing the following language: ``In such a 
manner that is consistent with the requirements of nominations of 
handlers conducted by the Board. The two persons receiving the highest 
number of votes for the major handler positions shall be nominees. The 
two persons receiving the third and fourth

[[Page 14373]]

highest number of votes shall be designated as alternates.'' The 
removed statement should be replaced with the following statement: 
``And the names of the nominees shall be forwarded to the Board for 
approval and appointment by the Secretary.''
    Witnesses also stated that the determination of whether or not a 
handler qualifies as handling 35 percent or more of the crop should be 
based on a calculation which averages the crop handled for the two 
years prior to the year in which the nominations are made.
    Proposed language published in the Notice of Hearing does not state 
this requirement. Moreover, the hearing record does not state how the 
35 percent threshold should be applied for the nomination of new Board 
members if this proposed amendment were to be implemented in 2007, when 
a two year average calculation would capture the transition of the 
cooperative to a publicly traded company. For this reason, USDA 
recommends the following calculation and proposes to modify order 
language accordingly:
    If this proposed amendment is implemented, the 35 percent threshold 
for the first nominations held following implementation should be 
calculated using an average of the crop handled for the year in which 
nominations are made and the crop handled for the year prior to the 
nomination. This recommendation considers the recent transition of the 
industry's largest cooperative to a publicly held company. For all 
future nominations, the 35 percent crop handling calculation should be 
based on the average of the crop handled for the two years prior to the 
year in which nominations are made.
    Further, USDA also proposes adding the following language to the 
beginning of Sec.  984.37(c), as published in the Notice of Hearing: 
``A calculation to determine whether or not a handler who handles 35 
percent or more of the crop shall be made prior to nominations. For the 
first nominations held upon implementation of this language, the 35 
percent threshold shall be calculated using an average of crop handled 
for the year in which nominations are made and one year's handling 
prior. For all future nominations, the 35 percent handling calculation 
shall be based on the average of the two years prior to the year in 
which nominations are made.''
    Witnesses clarified that any grower delivering all of his or her 
production to the handler with designated grower seats would be 
considered eligible for nomination by that handler. Any grower 
delivering part of his or her production to the handler in question 
would have the option of selecting whether or not they would 
participate in that handler's nomination process and serve as a grower 
member nominated to fill that handler's grower representation on the 
Board. A grower would not be eligible for nomination as both a grower 
representative of a major handler and as an independent grower on the 
Board.
    According to the hearing record, owners, employees or officers of 
the handler handling 35 percent or more of the crop would be eligible 
as nominees for that handler's designated handler seats.
    All nominees for remaining, non-handler-designated seats (with the 
exception of the public member) would be selected through a ballot 
nomination process overseen by the Board staff (the current non-
cooperative nominee selection process, described above), and then 
forwarded to the Secretary for approval and appointment. The public 
member nominee would be selected by the Board and forwarded to the 
Secretary for approval and appointment.
    Record evidence states that in the event a handler handling 35 
percent or more of the crop does not exist, all Board nominees (with 
the exception of the public member) would be selected through a ballot 
nomination process (the current non-cooperative nominee selection 
process, described above). Nominees would then be forwarded to the 
Secretary for approval and appointment. The public member would be 
selected by the Board and then forwarded to the Secretary for approval 
and appointment.
    Regarding proposed amendments to Sec.  984.40, this section would 
be modified by removing all references to cooperative member seats in 
order to conform with the proposed changes to Sec.  984.37. USDA 
recommends modifying the amendatory text as published in the Notice of 
Hearing by removing the last sentence of paragraph (b) of this section 
that refers to qualification of handler Board members to serve as 
temporary alternate members for other handlers. It was not the 
intention of the Board to propose this language and it was published in 
the Notice of Hearing by error.
    No opposition to this proposed amendment was offered at the 
hearing. Record evidence supports the amendment of Sec.  984.37, 
Nominations, and 984.40, Alternate, to reflect proposed changes in the 
Board structure, as outlined in Material Issue No. 3a. Section 
984.37(c), and paragraphs Sec. Sec.  984.37(c)(1) and 984.37(c)(2) 
should also be modified as recommended by USDA above. The last sentence 
of Sec.  984.40 should also be removed, as recommended by USDA.

Material Issue Number 4--Qualify by Acceptance

    Section 984.39, Qualify by acceptance, should be amended to require 
Board nominees to submit a written qualification and acceptance 
statement prior to selection by USDA.
    This proposed amendment would modify the current acceptance 
procedure for persons nominated to serve on the Board. Currently, the 
acceptance procedure for persons nominated and selected to serve on the 
Board involves a two-step process. First, persons nominated for 
consideration and possible appointment to the Board by USDA are 
required to complete a form indicating their eligibility to sit as a 
member of the Board. Once appointed by USDA, nominees must then sign an 
additional form indicating their acceptance of the appointment. If this 
amendment were implemented, the two steps could be combined into one, 
thus resulting in less paperwork, a shorter acceptance procedure, and 
improved efficiency in the acceptance process. The change means that 
when a nominee submits a statement confirming their eligibility, the 
nominee will also in that statement agree to serve if the Secretary 
appoints the nominee to the Board.
    Record evidence supports this proposed change. No opposition to 
this proposed amendment was presented at the hearing. For the reasons 
outlined above, Sec.  984.39, Qualify by acceptance, should be amended.

Material Issue Number 5--California Walnut Board

    Sections 984.6, Board, and 984.35, Walnut Marketing Board, should 
be amended to change the name of the Walnut Marketing Board to the 
California Walnut Board.
    Witnesses explained that the current use of the word ``marketing'' 
in the Board's title is confusing to persons not familiar with federal 
marketing order programs. The Board's activities involve generic 
promotion of California walnuts. Witnesses stated that the proposed 
name of ``California Walnut Board'' would more accurately represent the 
Board's responsibilities.
    Witnesses also stated that identifying their industry's product as 
a product of California is particularly important in foreign markets, 
where the California name is often associated with a high level of 
quality.
    Record evidence supports this proposed change. No opposition to 
this proposed amendment was presented at the hearing. For the reasons 
outlined

[[Page 14374]]

above, Sec.  984.6, Board, should be amended.

Material Issue Number 6--Authority To Reestablish Districts and Change 
Board Structure

    A new paragraph (d) should be added to Sec.  984.35, Walnut 
Marketing Board, to add authority to the order to reestablish 
districts, reapportion members among districts, and revise groups 
eligible for representation on the Board. The intent of this proposal 
is to provide the Board with a tool to more efficiently respond to the 
changing character of the California walnut industry. In recommending 
to the Secretary any such changes, the following would be considered: 
(1) Shifts in acreage within districts and within the production area 
during recent years; (2) the importance of new production in its 
relation to existing districts; (3) the equitable relationship between 
Board apportionment and districts; (4) changes in industry structure 
and/or the percentage of crop represented by various industry entities 
resulting in the existence of two or more handlers handling 35 percent 
or more of the crop; and (5) other relevant factors.
    Testimony indicates that significant changes have occurred in both 
the production base and industry demographics of the California walnut 
industry since the order was implemented. These changes suggest that 
flexibility in adapting to the changing character of the industry is 
important to the administration of the order. Witnesses stated that the 
order's ability to remain effective over time would be reliant on its 
ability to change with the needs of the industry. In this regard, 
witnesses proposed adding authority to the order that would allow for 
certain aspects of the Board's structure to be reconsidered, including: 
Reestablishment of districts, reapportionment of members among 
districts, and revisions to groups eligible for representation on the 
Board.
    Witnesses stated that the authority to reapportion and redistrict 
districts within the production area would be important. According to 
the hearing record, walnut production has shifted over time. 
Competition between agriculture and urban growth for land has served as 
an incentive for walnut production to locate to areas previously not 
cultivated. Moreover, new varieties of walnuts have allowed growers to 
produce walnuts in areas that would not have been suited for 
traditional varieties of walnuts. Witnesses stated that the need to 
adjust district boundaries, or reallocate representation of Board seats 
among districts, would be important to maintain accurate representation 
of shifting production within the production area.
    According to the record, the authority to revise groups eligible 
for representation on the Board would include modifying the proportion 
of grower to handler seats on the Board, as well as modifying 
representation of entities either producing or handling a major portion 
of the crop.
    Witnesses testified that careful industry analysis would lead to 
sound recommendations to USDA regarding reapportionment of members 
among districts, reestablishment of districts, or revisions in groups 
eligible for representation on the Board. If this authority were added, 
the Board could, at regular meetings, review its current structure 
using the points of consideration mentioned above. Upon completing this 
analysis, the Board could make a recommendation to USDA for such 
changes described above. Implementation of this authority would allow 
these changes to be pursued through the informal rulemaking process.
    Given the changes that the California walnut industry has seen over 
time, flexibility to change the composition of the Board in step with 
the evolving needs of the industry would be an important tool. 
Witnesses stated that this authority would allow the Board to more 
effectively represent the industry as production and member 
representation demands shift. It would ensure that the Board 
appropriately represented the industry.
    There was no opposition to the above proposal. Record evidence 
supports amending the order to add authority to reestablish districts, 
reapportion members among districts, and revise groups eligible for 
representation on the Board. This amendment would allow the Board, 
given due analysis and consideration of key factors and USDA approval, 
to more quickly adapt to changes within the industry. Accordingly, USDA 
is proposing that a new paragraph (d) be added to Sec.  984.35, as 
proposed.

Material Issue Number 7--Voting Procedures

    Section 984.45, Procedure, should be amended to add percentage 
requirements to quorum and voting procedures, to add authority for 
Board meetings to be held by telephone or by ``any other means of 
communication'', and to add authority for the Board to vote by ``any 
other means of communication.'' This proposal would also add authority 
for the Board to recommend the minimum number of votes that must be met 
when voting by any of those methods, and any other necessary 
procedures. In addition, this proposal would result in a conforming 
change to Sec.  984.48(a), Marketing estimates and recommendations.
    Witnesses stated that references to the meeting quorum requirement 
in this section should be amended to include a percentage equivalent of 
the current six-out-of-10-member minimum, or sixty percent. In 
addition, witnesses supported modifying the order language regarding 
voting requirements to state that a sixty-percent super-majority vote 
of the members present at a meeting should be required of all Board 
decisions, except where otherwise specifically provided. The order 
currently states that a majority vote is needed, with no percentage 
equivalent specified.
    Witnesses stated that a conforming change should also be made to 
Sec.  984.48(a), Marketing estimates and recommendations. The proposed 
conforming change would change the current six-out-of-10-member minimum 
vote requirement for the adoption of a marketing policy to sixty 
percent of the Board.
    According to the record, the order currently requires that all 
Board meetings be held at a physical location. Witnesses stated that 
the order should be amended to allow for some meetings to be held using 
``other means of communication'', such as telephone or 
videoconferencing. Witnesses stated that use of new communication 
technology would result in time savings while still allowing the Board 
to conduct its business. For example, telephone or videoconferencing 
technology would be helpful in providing Board meeting flexibility 
during harvest season when Board members find it more challenging to 
take time away from the field.
    Additionally, short assembled meetings held to discuss non-
controversial or administrative issues do not justify Board members' 
time and travel expenses. For this reason, witnesses stated that the 
authority to meet via teleconference call or videoconference, or any 
other means of communication recommended by the Board, could result in 
a more effective use of each member's time.
    Witnesses stated that teleconferencing or videoconferencing should 
only be used as a method for conducting meetings when the meeting 
agenda does not contain issues that require a significant amount of 
deliberation, such as establishing the recommended rate of assessment.

[[Page 14375]]

    According to the record, voting requirements for meetings other 
than assembled meetings should be established through informal 
rulemaking by USDA upon recommendation of the Board. Witnesses stated 
that procedures specific to each different method of meeting may need 
to be established. For example, while videoconferencing involves 
technology that allows each member to see the other members in 
attendance at the meeting, witnesses stated that any voting should 
continue to be verified through a written accounting that confirms the 
original votes made at the meeting. Similarly, votes made by 
teleconference (or telephone) would need to be followed by the 
submission of signed votes to the Board office by mail, or by fax or e-
mail that contains a scanned copy of the original with the member's 
signature. Thus, witnesses stated that adding authority for the Board 
to recommend voting requirements and procedures would be important in 
order to ensure accurate and fair voting methods for each form of 
communication.
    Witnesses speaking in favor of this amendment identified a sentence 
in paragraph (c) of Sec.  984.45 as published in the Notice of Hearing 
that was not intended to be included in the proposed language. This 
sentence reads, ``When any proposition is to be voted on by any of 
these methods, one dissenting vote shall prevent its adoption.'' 
Witnesses stated that this sentence is part of the current order 
language and was intended to be replaced the following sentence: ``The 
Board, with the approval of the Secretary, shall prescribe the minimum 
number of votes that must be cast when voting is by any of these 
methods, and any other procedures necessary to carry out the objectives 
of this paragraph.''
    Witnesses stated that it is the intent of the Board that voting 
guidelines for all types of non-traditional meetings can be recommended 
and adopted as appropriate for each type of technology used. For this 
reason, USDA recommends modifying the proposed language for Sec.  
984.45 as published in the Notice of Hearing by removing the sentence 
erroneously left in the proposed language.
    There was no opposition testimony given against this proposed 
amendment. For the reasons stated above, Sec.  984.45, Procedure, 
should be amended to add percentage requirements to quorum and voting 
procedures, to add authority for the Board to vote by ``other means of 
communication'', and to add authority for Board meetings to be held by 
telephone or by ``any other means of communication.'' The Board would 
be authorized to recommend voting procedures for votes taken by means 
other than at traditional meetings. The proposed language for this 
section should be modified as recommended by USDA. This amendment 
should also result in a conforming change to Sec.  984.48(a), Marketing 
estimates and recommendations.

Material Issue Number 8--Carryover of Excess Assessment Funds

    Section 984.69, Assessments, should be amended to add authority to 
carryover excess assessment funds.
    According to the hearing record, the order currently states that 
any assessment funds held in excess of the marketing year's expenses 
must be refunded to handlers. Refunds are returned to handlers in 
accordance with the amount of that handler's pro rata share of the 
actual expenses of the Board.
    This proposed amendment would allow the Board, with the approval of 
the Secretary, to establish an operating monetary reserve. This would 
allow the Board to carry over to subsequent production years any excess 
funds in a reserve, provided that funds already in the reserve do not 
exceed approximately two years' expenses. If reserve funds do exceed 
that amount, the assessment rate could be reduced so as to cause 
reserves to diminish to a level below the two-year threshold.
    According to the record, reserve funds could be used to defray 
expenses during any production year before assessment income is 
sufficient to cover such expenses, or to cover deficits incurred during 
any fiscal period when assessment income is less than expenses. 
Additionally, reserve funds could be used to defray expenses incurred 
during any period when any or all of the provisions of the order are 
suspended, or to meet any other such costs recommended by the Board and 
approved by the Secretary.
    Record evidence supports that allowing a monetary reserve to be 
maintained would provide flexibility to the Board's in meeting its 
financial planning responsibilities. If the amendment were implemented, 
the Board would have the authority to decide, at regular Board 
meetings, whether or not to establish a monetary reserve. Currently, 
the Board may refund any excess assessment funds on a pro-rata basis to 
each handler or apply excess funds to defray administrative expenses. 
These options would remain available to the Board.
    Record evidence supports amending the order to add authority to 
carryover excess assessment funds as a financial reserve. There was no 
opposition testimony given against this proposed amendment. For the 
reasons stated above Sec.  984.69, Assessments, should be amended.

Material Issue Number 9--Contributions

    A new Sec.  984.70, Contributions, should be added to the order to 
allow the Board to accept voluntary contributions to pay for expenses 
incurred under Sec.  984.46, Research and development.
    Witnesses stated that the order currently does not provide 
authority to accept voluntary contributions of any kind. If 
implemented, this proposed amendment would grant authority to the Board 
to accept voluntary contributions. Contributions could only be used to 
pay for research and development activities, and would be free from any 
encumbrances by the donor. According to the hearing record, the Board 
would retain oversight of the application of such contributions.
    Witnesses supported this proposal by stating that it would provide 
the Board and the industry with valuable resources to enhance research 
and development activities. Record evidence indicates that any 
contributions used to further production research, market research and 
market development projects would not only benefit the industry, but 
also the consumer, through improved production technology and product 
information.
    There was no opposition testimony given against this proposed 
amendment. For the reasons stated above, a new Sec.  984.70, 
Contributions, should be added to the order to allow the Board to 
accept voluntary contributions.

Material Issue Number 10--Reimbursement of Expenses

    Section 984.42, Expenses, should be amended to clarify that members 
and alternate members may be reimbursed for expenses incurred while 
performing their duties.
    According to the hearing record, this proposed amendment would not 
have any impact on the current expense reimbursement activities of the 
Board. Rather, it would clarify and update order language to more 
clearly state that while Board members and alternates serve without 
compensation, expenses incurred while performing the duties of a Board 
member will be incurred.
    For the reasons outline above, Sec.  984.42, Expenses, should be 
amended. Record evidence supports this amendment, and no opposition to 
this proposal was offered at the hearing.

[[Page 14376]]

Material Issue Number 11--Alternative Inspection Services

    Section 984.51 of the order provides the Board with the authority 
to designate an inspection service for mandatory certification of 
product under the order. This section should be amended to allow the 
Board to designate more than one inspection service, as long as the 
functions performed by each service shall be separate so as not to 
duplicate each other. Inspection and certification requirements ensure 
compliance with any regulations in effect under the authority of Sec.  
984.50, Grade quality and size regulations.
    The purpose of this proposal is to allow handlers to take advantage 
of USDA's alternative inspection programs such as the Customer Assisted 
Inspection Program (CAIP) and the Partners in Quality Program (PIQ). 
Handlers who do not wish to use the alternative inspection services 
offered by USDA would continue to use the services of the Dried Food 
Administration of California (DFA) for traditional inspection services, 
such as end-line and lot inspections.
    The proposal also specifies that ``each service shall be separate 
so as to not conflict with each other'', meaning that each inspection 
service would offer distinct and different services (i.e. PIQ vs. lot 
inspections) that do not duplicate each other. Accordingly, USDA 
recommends modification of the proposed regulatory language to clarify 
that the two inspection services will not duplicate the services of 
each other.
    Witnesses speaking in favor of this proposal explained the 
importance of a handler's ability to take advantage of inspection 
services that would most economically fit the size and functions of his 
or her operation. Currently, all walnut product is inspected by DFA. 
While this inspection service has worked well for the industry for many 
years, the DFA inspection service does not accommodate inspection 
procedures that support larger handler economies of scale. Witnesses 
stated that USDA programs, such as PIQ and CAIP, are designed to fit 
larger scale handling operations, and therefore offer cost saving 
advantages that the DFA service does not. This proposal, if 
implemented, would allow handlers to use the alternative inspection 
programs offered by USDA.
    Since the order's inception, the California walnut industry has 
used end-line inspection services provided by DFA. Under this scenario, 
samples of packed walnuts are examined and certified by licensed DFA 
inspectors at the end of the handling and packing process.
    The Federal-State Inspection Service has developed effective, less 
costly alternatives to traditional end-line inspection programs. One 
alternative, the PIQ program, is a documented quality assurance system. 
Under this program, individual handlers must demonstrate and document 
their ability to handle and pack product that meets all relevant 
quality requirements. Effectiveness of the program is verified through 
periodic, unannounced audits of each handler's system by USDA-approved 
auditors.
    Under CAIP, USDA inspectors oversee the in-line sampling and 
inspection process performed by trained company staff. USDA oversight 
ranges from periodic visits throughout the day to a continuous on-site 
presence.
    Witnesses at the hearing testified that a California walnut handler 
should be provided the flexibility to use either the DFA for 
traditional inspections, such as end-line or lot inspections or 
alternative programs such as PIQ or CAIP offered by USDA. Either 
inspection service can determine whether walnuts meet the minimum order 
requirements.
    According to the hearing record, if this amendment was implemented, 
total industry savings of $1 million or more could be realized on an 
annualized basis. Financial impact calculations provided by the Board 
indicate that introducing the option of using USDA PIQ and CAIP 
programs could result in an average per handler savings of $156,067 for 
the industry's seven largest handlers. Given that the PIQ and CAIP 
programs are most beneficial for large handlers, as potential savings 
are correlated with economies of scale, it is unlikely that the smaller 
handlers would opt for these programs. Witnesses stated that no change 
in inspection costs is expected for handlers remaining with traditional 
DFA inspection services.
    The Agricultural Marketing Service is responsible for ensuring that 
all handlers regulated under a marketing order program are in 
compliance with any regulations that are in effect. Marketing order 
administrative bodies have the responsibility of locally administering 
marketing order programs, which includes monitoring industry's 
compliance with order requirements, and reporting any violations to the 
Department for enforcement measures.
    While the Department supports and encourages innovation and 
development of cost-saving procedures, it is important that the program 
maintain its integrity and that any quality or size regulations in 
effect are not compromised. For this reason, USDA supports providing 
the Board with authority to recommend rules and regulations to 
administer this proposed amendment. To this end, the last sentence of 
paragraph (a) of Sec.  984.51 should be modified to read as follows: 
The Board, with the approval of the Secretary, may prescribe procedures 
for the administration of this provision.
    According to the hearing record, the industry's commitment to 
comply with grade and size regulations would not be compromised by 
allowing the industry to take advantage of the inspection service that 
best meets their needs. The authority to designate more than one 
inspection service would be a practical tool for the industry. It would 
allow grade and size standards to be maintained, yet could allow for 
time and cost-saving opportunities.
    No opposition to this proposed amendment was offered at the 
hearing. Record evidence supports amending Sec.  984.51 to allow more 
than one inspection service to be designated by the Board to inspect 
California walnuts. This proposal should also be modified as 
recommended by USDA above.

Material Issue Number 12a--Quality Regulations and Different 
Regulations for Different Market Destinations

    Section 984.50, Grade and size regulations, should be amended to 
broaden the scope of quality regulations issued under the order. In 
addition, the authority for the Board to recommend different 
regulations for different market destinations should be added to this 
section.
    Currently the order provides for the establishment of minimum grade 
regulations, but does not specify authority for the Board to recommend 
other types of quality regulations. Witnesses stated that adding this 
authority to the order would be an important tool.
    Witnesses explained that the intent of this proposal is to broaden 
the scope of the order's authority to include the ability to regulate 
other factors of quality in addition to the current grade regulations, 
which reflect the U.S. Grade Standards for Walnuts. Quality standards, 
other than minimum grade, would be recommended by the Board for 
approval by USDA and would regulate certain product characteristics 
currently not regulated by U.S. Grade Standards for inshell or shelled 
walnuts. Other quality regulations could regulate, for example, 
moisture content or aflatoxin levels, if such proposed regulations were 
approved by USDA. These additional quality regulations could also 
regulate characteristics

[[Page 14377]]

currently regulated by U.S. Grade Standards at levels more stringent 
than existing grade regulations, if warranted for a specific market 
destination.
    According to the hearing record, the order currently allows for the 
establishment of more restrictive minimum grade standards. The proposed 
amendment would replace this language with language specifying the 
Board's authority to recommend other quality standards in addition to 
minimum grade. Witnesses explained that the proposed modification in 
the order language would clarify that any additional quality standards 
established under the order would be guidelines recommended by the 
Board and would be different from grade regulation based on USDA grade 
standards. Witnesses stated that this distinction would reduce possible 
confusion in the administration of such standards.
    According to the hearing record, the authority to establish 
different regulations for different market destinations would provide 
the Board with authority to formalize current trends in export market 
product specifications. Witnesses stated that many customers in export 
markets have unique product specifications in place to meet the 
consumer tastes and needs of their market. California walnut handlers 
shipping to those markets are already meeting those product 
specifications.
    Witnesses explained that this proposed authority would result in 
the Board's ability to recommend uniform standards for all California 
walnut handlers shipping to specific export markets, if such regulation 
is needed. Different regulations for different market destinations 
would ensure that all product shipped into a particular export market 
would meet the same requirements. Product uniformity among California 
handlers serving those markets would ensure uniform quality of product, 
and a level playing field for foreign customers who are comparing 
product services from multiple handlers.
    According to the hearing record, the addition of this authority is 
not intended to address any specific export market at this time. 
Witnesses stated that the market is currently functioning well, with 
quality product being shipped to consistently meet foreign customers' 
product specifications.
    Witnesses stated, however, that the export market has become 
increasingly important to the California walnut industry. Witnesses 
noted that export market demand for California walnuts has increased 
nearly 35 percent over the past 5 years, making up a large portion of 
the California walnut industry's ability to maintain positive producer 
returns within the context of increasing yields per acre and total 
industry production. Witnesses stated that ensuring product quality and 
uniformity is vital to the California walnut industry and its ability 
to maintain viable export market relationships. For this reason, 
witnesses stated that the authority to establish uniform guidelines for 
specific market destinations would be an important tool.
    According to the hearing record, any proposed regulation specific 
to different market destinations would require deliberation among the 
Board members and approval by USDA.
    Record evidence supports amending the order to broaden the scope of 
regulations issued under the order to include additional types of 
quality regulations. In addition, the authority for the Board to 
recommend different regulations for different market destinations 
should be added to this section. No opposition to this proposed 
amendment was offered at the hearing.

Material Issue Number 12b--Processing of Shelled Walnuts

    Section 984.52, Processing of shelled walnuts, should be amended by 
adding authority to allow for shelled walnuts to be inspected after 
having been sliced, chopped, ground, or in any other manner changed 
from shelled walnuts, if regulations for such walnuts are in effect. 
The Act allows for the regulation of processed walnuts. This proposal 
would establish authority for the Board to recommend such regulations, 
subject to approval by the Secretary.
    According to the hearing record, the order currently provides that 
handlers may only reprocess previously inspected walnuts that have been 
certified as meeting any size and grade regulations in effect. The 
order specifically provides that shelled walnuts may not be sliced, 
chopped, ground or otherwise altered unless such walnuts have been 
previously certified. Witnesses explained that this language was 
appropriate for the technology available to the industry when the order 
was promulgated. Such provisions were necessary in order to provide 
assurances that off-grade product did not enter into the stream of 
commerce.
    Witnesses explained that more effective technology, which relies on 
laser color sorters and highly automated screening processes to 
eliminate defects throughout the sorting process, is now widely used by 
the industry. This current technology provides handlers with a 
sophisticated system of assurances that product entering the market 
place meets minimum quality standards. For this reason, witnesses 
advocated amending the order language to allow the Board to recommend 
testing, certification, and minimum standards for processed walnuts. 
Witnesses stated that the reliability of current technology is such 
that provisions for handlers to inspect and certify product after 
further processing could be established, and that such provisions would 
facilitate flow of product through processing facilities yet maintain a 
minimum standard of quality.
    New walnut product forms are regularly requested by both domestic 
and foreign customers. In the last 20 years, the industry has become 
much more capable of producing at a considerably higher level quality 
and of developing more specific types of products that meet the 
differing needs of individual customers. To capitalize on this growing 
capability, a number of witnesses expressed the view that an important 
tool for increasing sales is the ability to establish standards for 
walnut products for which no USDA standards currently exist.
    The order currently requires shelled product to be certified as 
merchantable, that is, meeting the minimum USDA requirements prior to 
further processing. When handlers are processing for end users that 
require further processing, this certification represents a costly 
extra step. After the initial shelled walnut certification, the 
handlers employ their own quality control procedures to meet the higher 
customer specifications. This proposal would allow a single inspection 
at the end of the process that would serve both purposes. If 
implemented, this proposal would allow the Board to recommend 
modifications to allow certification of product after it has been 
modified or chopped, leading to cost savings in the handling process.
    According to the hearing record, the proposed language would allow 
for walnuts to be sliced, chopped, ground or in any other manner 
altered if quality for such walnuts were established under Sec.  
984.50(d), Additional grade, quality and size regulation, as discussed 
in Material Issue No. 12(a), above. This amendment would also establish 
a new paragraph (c) to Sec.  984.52, Processing of shelled walnuts, 
that would provide authority for the Board to establish any procedures 
as deemed necessary to insure that all walnuts are inspected prior to 
being placed into the stream of commerce. The proposed language would 
allow the Board to create guidelines that would ensure that processed 
walnut product would meet a

[[Page 14378]]

minimum standard, and that it would be certified as compliant with the 
regulation in effect under the order. Implementation of this authority 
would allow these changes to be pursued through the informal rulemaking 
process.
    Given the changes that the California walnut industry has seen over 
time, flexibility to recommend regulation regarding the further 
processing of shelled walnuts prior to inspection and certification 
would be an important tool. Witnesses explained that as consumer 
demands for further processed product grows, increases in efficiency of 
product flow through the processing facilities would enable handlers to 
handle product more quickly, better satisfy their customers, as well as 
potentially reduce costs.
    Record evidence supports amending the order to add authority to 
allow for shelled walnuts to be inspected after having been sliced, 
chopped, ground, or in any other manner changed from shelled walnuts. 
The record also supports amending the language to provide authority for 
the Board to recommend any necessary testing, certification or minimum 
quality standards for such product to ensure that the integrity of any 
California walnut product entering the stream of commerce is kept.
    There was no opposition to the proposed amendment offered at the 
hearing. For the reasons outlined above, Section 984.52, Processing of 
shelled walnuts, should be amended as proposed.

Material Issue Number 13--Paid Advertising and Promotion

    Amend the order by adding authority for marketing promotion and 
paid advertising. This proposal would amend Sec.  984.46, Research and 
development. This order provision currently authorizes only production 
research, marketing research and development activities.
    This authority would enable the Board to develop more efficient 
marketing and distribution techniques for walnuts produced in the 
production area. Promotional activities, including paid advertising, 
could lead to greater market exposure and consumer demand for 
California walnuts, thereby supporting increased returns for growers.
    According to the record, this authority would enable the Board to 
fund promotion efforts. Such activities could be conducted by the Board 
itself or be contracted out to other parties. Witnesses stated that it 
is important to include promotion and paid advertising under the 
Federal marketing order, as these activities are vital to increasing 
demand for walnuts which promotes the long-term health of the industry.
    The record evidence shows that walnut acreage in California has 
increased from 193,000 acres in 1997 to an estimated 219,000 acres in 
2005. In that same time period, overall tonnage of California walnuts 
increased from 269,000 tons to 355,000 tons, or an increase in average 
yield from 1.39 tons per acre to 1.62 tons per acre. Witnesses 
testified that acreage and production will continue to increase, making 
promotion and paid advertising all that more important.
    Witnesses explained that the California Walnut Commission 
(Commission), and other entities within the industry, has been 
responsible for past promotion and paid advertising activities. 
Demonstrated success of these promotion activities has led to industry 
support for adding this authority to the order. Testimony indicated 
that current marketing and promotion activities range from in-store 
promotion activities, to featured articles in magazines, inclusion of 
walnuts in cooking shows and promotion by celebrity chefs, and paid 
advertising.
    A representative of the Board testifying at the hearing stated 
that, since 2001, both volume and prices of California walnuts have 
shown annual increases. Increased market demand can be tied to the 
Commission's success in working with the market outlets, the retail 
sector and consumers, with domestic consumption increasing by over 34 
percent in the past 5 years. Witnesses attribute the industry's ability 
to successfully meet the challenge of increasing production to these 
promotion activities.
    Witnesses explained that the industry wants to further its ability 
to conduct these activities by adding promotion authority to the order. 
According to the hearing record, authority to conduct promotion and 
paid advertising under the order would ensure that those activities 
continue in a consistent manner. Board member input into the 
development of promotional programs would also ensure that these 
activities, and the use of assessment funds to support them, would 
remain responsive to industry needs. Witnesses also indicated that this 
authority would be equally beneficial to small and large grower and 
handler entities.
    According to the record, adding this authority to the order would 
provide the Board with the flexibility to use promotional activities, 
including paid advertising, to assist and improve the marketing, 
distribution and consumption of California walnuts. The use of 
assessments for such promotion would be an important component to 
increasing demand and consumption of California walnuts, and would be 
beneficial to all members of the industry. The industry does not 
contemplate using this provision immediately. However, it wants to have 
the ability to consider these activities in the future. The impacts of 
any increased assessments resulting from implementing any program would 
be considered before a recommendation is made.
    There was no opposition testimony on this issue. The record 
supports adding authority for promotion and paid advertising to Sec.  
984.46, Research and development.

Material Issue Number 14--Updating Order Terminology

    Section 984.21, Handler carryover, and Sec.  984.67, Exemptions, 
should be amended to replace the terms ``carryover'' with 
``inventory,'' and ``mammoth'' with ``jumbo,'' respectively, to reflect 
current day industry nomenclature. Conforming changes should also be 
made to Sec.  984.48, Marketing estimates and recommendations, and 
Sec.  984.71, Reports of handler carryover.
    Section 984.21, Handler carryover, defines the amount of California 
walnuts (both merchantable as well as the estimated quantity of 
merchantable walnuts to be produced from shelling stock and unsorted 
material), wherever located, held by California walnut handlers at any 
given time. Witnesses explained that the current term ``carryover'' is 
misleading in that the term implies the amount of inventory held by 
handlers from one marketing year to the next. Witnesses stated that the 
term ``inventory'' would more accurately convey the intent of this 
definition, and would also reflect current day calculations of walnut 
availability.
    According to the record, conforming changes should also be made to 
Sec.  984.48, Marketing estimates and recommendations, and Sec.  
984.71, Reports of handler carryover. Both of these sections make 
references to handler ``carryover.'' In order to provide consistency in 
the order's terminology, witnesses stated that these sections should 
incorporate the updated term ``inventory.''
    Section 984.67, Exemptions, of the order provides for situations 
under which California walnuts may be exempted from complying with 
order regulations. One exemption is applicable to lots of merchantable

[[Page 14379]]

inshell walnuts that are mammoth size or larger, as defined by the 
United States Standards for Walnuts in the Shell.
    Witnesses stated that given the new varieties currently being 
produced in the industry, the term ``mammoth'' no longer applies. New 
walnut varieties do not produce walnuts that fit this size description. 
According to record evidence, the current production's equivalent to 
``mammoth'' size is ``jumbo'' size, as defined by the Untied States 
Standards for Walnuts in the Shell. Thus, witnesses stated that the 
order language should be updated to reflect the industry's current 
terminology and size of walnuts being produced.
    Record evidence supports this proposed change. The term 
``carryover'' should be changed to ``inventory'', and the term 
``mammoth'' should be changed to ``jumbo.'' No opposition to this 
proposed amendment was presented at the hearing. For the reasons 
outlined above, Sec.  984.21, Handler carryover, and Sec.  984.67, 
Exemptions, should be amended. Conforming changes should also be made 
to Sec.  984.48, Marketing estimates and recommendations, and Sec.  
984.71, Reports of handler carryover.

Material Issue Number 15a--Interhandler Transfers

    Section 984.59, Interhandler transfers, should be amended to 
clarify the interhandler transfer provision of the order, and to add 
authority for the Board to recommend to USDA regulations, including 
necessary reports, for administrative oversight of such transfers.
    According to the hearing record, current order language specifies 
two scenarios under which certain provisions relating to interhandler 
transfers are regulated. These include: (1) Transfers of inshell 
walnuts for the purpose of packing or shelling; or, (2) interhandler 
transfers that are made to meet reserve obligations. In both scenarios, 
the receiving handler must comply with regulations that are in effect 
under the order. The order further provides that any interhandler 
transfers that is not included under the above two scenarios, the first 
handler of such walnuts shall comply with any regulations in effect 
under the order.
    Witnesses stated that it would be beneficial to simplify current 
order language so that all interhandler transfers were considered a 
``sale of inshell and shelled walnuts within the area of production by 
one handler to another.'' Witnesses explained that the proposed 
language restated the current application of this provision in walnut 
transactions in simpler terms.
    Witnesses also explained that authority for the Board to recommend 
rules and regulations, including necessary reports for such transfers, 
should be added to the order. This proposed authority would provide the 
Board with flexibility to adapt interhandler transfer rules and 
regulations as needed.
    Concurrent with the proposal to add this authority, witnesses 
stated that the sentence, ``The receiving handler shall comply with the 
regulations made effective to this part,'' as published in the Notice 
of Hearing, should be removed. Witnesses stated that the intent of this 
proposal was to replace the above sentence with the proposed authority 
for the Board to recommend such regulations. For this reason, USDA is 
recommending that this sentence be removed.
    No opposition to this proposed amendment was presented at the 
hearing. Record evidence supports this proposed change. The order 
provisions regarding interhandler transfers should be simplified, as 
proposed. The authority for the Board to make recommendations to 
establish methods and procedures, including reporting requirements, for 
overseeing interhandler transfers should also be added. The proposed 
language for this section should be modified as recommended by USDA.

Material Issue Number 15b--Reporting Requirements

    Section 984.73, Reports of walnut receipts, should be amended to 
clarify that the Board may require reports from handlers or packers 
that involve placing California walnuts into the stream of commerce.
    According to the hearing record, current authority provided in this 
section only applies to the reporting of handler walnut receipts from 
growers. Witnesses stated that this authority should be broadened to 
include interhandler transfer receipts, or any other entity as 
recommended by the Board and approved by the Secretary.
    Witnesses explained that this proposal is intended to support other 
proposed amendments to the order, such as the proposed clarification of 
interhandler transfer provisions discussed under Material Issue No. 
15(a), above, by further clarifying the Board's authority to recommend 
reporting provisions necessary to obtain accurate tracking information 
of California walnuts.
    No opposition to this proposed amendment was presented at the 
hearing. Record evidence supports this proposed change. The authority 
for the Board to request handler reports of walnut receipts should be 
broadened to include receipts from other handlers, entities or 
activities that involve placing California walnuts into the stream of 
commerce.

Material Issue Number 16--Trade Demand

    Section 984.22, Trade demand, should be amended to change the order 
language to state ``United States and its territories,'' rather than 
name ``Puerto Rico'' and ``The Canal Zone''.
    Under the marketing order, the Board is required to calculate a 
trade demand for all inshell and shelled walnuts. Calculation of 
domestic trade demand, or the anticipated amount of California inshell 
and shelled walnuts that are needed to satisfy the domestic market, is 
important in determining the need for volume regulation, and the amount 
of free versus reserve tonnage if volume regulation is in effect.
    Witnesses explained that the reference to ``Puerto Rico'' and ``The 
Canal Zone'' in the order is outdated. According to the record, this 
terminology was incorporated into the order at the time of 
promulgation. Witnesses stated that the order language should be 
updated to reference ``United States and its territories''.
    According to record evidence, this amendment would not impact trade 
demand calculations under the order since the purpose of the reference 
is to accurately identify the amount of shelled or inshell walnuts 
demanded by the Untied States, including its territories. Thus, while 
the terminology identifying the geographic regions included in the 
calculation would change, the intent of the original language would 
remain unchanged.
    Record evidence supports this proposed change. No opposition to 
this proposed amendment was presented at the hearing. For the reasons 
outlined above, Sec.  984.22, Trade demand, should be amended.

Material Issue Number 17--Relationship With the California Walnut 
Commission

    Witnesses supported the addition of Sec.  984.91, Relationship with 
the California Walnut Commission, by stating that the Board should have 
authority to deliberate, consult, cooperate and exchange information 
with the California Walnut Commission (CWC). Any sharing of information 
between the two organizations would be kept confidential in accordance 
with the provisions of section 10(i) of the Act.

[[Page 14380]]

    Record evidence indicates the CWC and the Federal marketing order 
program are currently administered out of the same office location and 
employ the same staff. Thus, this proposal, if implemented, would 
formalize the relationship that currently exists between the two 
entities. Witnesses stated that collaboration between the two programs 
leads to reduced administrative costs, as much of the information 
collected by each entity can be shared.
    For the reasons stated above, a new Sec.  984.91, Relationship with 
the California Walnut Commission, should be added. No opposition to 
this proposal was presented at the hearing.

Material Issue Number 18--Term Limits

    Section 984.36, Term of office, should be revised to establish a 
limit on the number of consecutive terms a person may serve as a member 
of the Board. Currently, the term of office of each member and 
alternate member of the Board is 2 years. There are no provisions 
related to term limits in the marketing order. Members and alternates 
may serve on the Board until their respective successors are selected 
and have qualified.
    The record evidence suggests that term limits for Board members 
could increase industry participation on the Board, provide for more 
diverse membership, provide the Board with new perspectives and ideas, 
and increase the number of individuals in the industry with Board 
experience.
    At the hearing, USDA proposed a period of 8 years as an appropriate 
limit to the number of years a member may serve consecutively. However, 
in other instances concerning Federal marketing orders containing term 
limit provisions, USDA has determined that a period of 6 years would be 
more appropriate. Accordingly, a limit of six years as the number of 
years that a member may serve consecutively would be in conformance 
with other marketing orders containing this provision and with 
established USDA practices regarding term limits. The proposed 
regulatory text has been modified to reflect this change.
    Since the current term of office for members and alternates is 2 
years, USDA is proposing that members serve no more than 3 consecutive 
two-year terms, or a total of 6 years. This proposal for term limits 
would not apply to alternate members. Once a member has served on the 
Board for 3 consecutive terms, or 6 years, the member could not serve 
as a member for least one year before being eligible to serve again. 
However, the individual could immediately begin serving as an alternate 
member after completing 3 consecutive terms as a member.
    Industry witnesses presented testimony in opposition to this 
proposal. Although they agreed that increased industry participation in 
the program is desirable, witnesses stated that the application of term 
limits could be problematic. Testimony indicated that finding 
California walnut growers to serve on the Board is difficult. Witnesses 
noted that there have been times in the past when filling Board member 
positions has been difficult, and that recruiting new members is not 
easily done. Moreover, witnesses stated that industry members who 
currently serve on the Board bring knowledge and experience to the 
Board that would be difficult to replace.
    USDA believes that any additional efforts necessary to find 
eligible growers and handlers who are willing to serve on the Board are 
offset by the benefits derived by broader industry participation in 
order operations. USDA recommends adding this requirement. Section 
984.35, Term of office, should be amended to include tenure 
requirements. The proposed language should also be modified to reflect 
a proposed term limit of a total of six years, as discussed above.

Material Issue Number 19--Continuance Referenda

    Section 984.89, Effective time and termination, should be amended 
to require that continuance referenda be conducted every six years to 
ascertain industry support for the order.
    Currently, there is no requirement in the order that continuance 
referenda be conducted on a periodic basis. The USDA believes that 
growers should have an opportunity to periodically vote on whether a 
marketing order should continue. Continuance referenda provide an 
industry with a means to measure grower support for the program. 
Experience has shown that programs need significant industry support to 
operate effectively.
    Under this proposal, USDA would consider termination of the order 
if continuance is not favored by at least two-thirds of those voting, 
or at least two-thirds of the volume represented in the referendum. 
This is the same as that for issuance and amendment of an order. 
Experience in recent years indicates that six years is an appropriate 
period to allow growers an opportunity to vote for continuance of the 
program. Therefore, the proposal sets forth that a referendum would be 
conducted six years after the year in which this amendment is effective 
and every sixth year thereafter.
    Several industry witnesses opposed periodic continuance referenda. 
They indicated that requiring unnecessary referenda would be costly and 
of little value to the industry or USDA.
    The USDA believes, however, that growers should have an opportunity 
to periodically vote on whether the marketing order should continue, 
and that the minimal industry costs in time and money are well worth 
the periodic grower feedback afforded to the Board and the USDA by such 
referenda. Accordingly, USDA recommends adding a requirement that such 
referenda be conducted.
    The USDA also proposed to make such changes as may be necessary to 
the order to conform to any amendment that may result from the hearing. 
All conforming changes have been identified and discussed in this 
document.

Small Business Considerations

    Pursuant to the requirements set forth in the Regulatory 
Flexibility Act (RFA), the Agricultural Marketing Service (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 growers are 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 $6,500,000.
    Interested persons were invited to present evidence at the hearing 
on the probable regulatory and informational impact on growers and 
handlers of the proposed amendments, and in particular the impact on 
small businesses. The record evidence shows that the proposed 
amendments are designed to enhance industry efficiencies and streamline 
administrative operations of the marketing order. The record evidence 
is that while some minimal costs may occur, those costs would be 
outweighed

[[Page 14381]]

by the benefits expected to accrue to the California walnut industry.

Walnut Industry Background and Overview

    According to the record, the California walnut industry currently 
has 44 handlers and approximately 5000 producers. The crop is produced 
in a region that spans approximately 400 miles in California's Central 
Valley.
    Fifteen grower witnesses and 7 handler witnesses testified at the 
hearing. Using the SBA definition ($750,000 in gross annual walnut 
sales), 7 of the grower witnesses identified themselves as large 
business entities and 6 as small business entities. All 7 handler 
witnesses identified themselves as being large business entities 
according to the SBA definition. Some of the handler witnesses were 
also growers. According to witnesses, 37 out of an industry total of 44 
handlers would qualify as small business entities under the SBA 
definition. Also, under the order amendments contained herein, it is 
estimated that five packers would be considered handlers, the majority 
of whom would be considered small entities.
    Based on information presented at the hearing, calculations 
describing an average California walnuts producer provide the 
following: Dividing 5000 producers by 219,000 bearing acres in 2005 
indicates an average of 44 bearing acres per producer. Dividing 5000 
producers by the two-year average crop value for 2003 and 2004 
($414,950) yields an average walnut revenue per producer estimate of 
about $83,000. According to the hearing record, more than 70 percent of 
California walnut producers would be classified as small producers 
according to the SBA definition.
    According to a study presented at the hearing, entitled ``Cost to 
Produce Walnuts in California'' (prepared by Dr. Karen Klonsky, 
Department of Agriculture and Resource Economics, University of 
California Davis, 2006), typical average costs for a walnut orchard in 
the Sacramento Valley are $2,460 per acre in full production. The costs 
are broken down as follows: (a) Land and trees, $678 (28 percent), (b) 
cultural costs, $667 (27 percent), (c) harvest, $538 (22 percent), (d) 
equipment and buildings, $302 (12%), and (e) cash overhead, $275 (11 
percent).
    At an average grower price in recent years of $0.62 per pound, a 
grower would need a yield of 2 tons per acre to break even, according 
to the study. The breakeven price at the State average yield of 1.5 
tons per acre is about $0.70 per pound, which is above the actual price 
received in most recent years, but equal to the 2004 average price 
received by growers.
    Individual grower costs can vary considerably due to such variables 
as horticultural practices and varieties grown, and also due to orchard 
location and year of acquisition, and water availability and cost.
    Although a majority of producers are considered small business 
entities, record evidence also indicates that producer revenue has 
increased over time. The National Agricultural Statistical Service 
(NASS) crop value estimate for 2004, $451.75 million, was 38 percent 
higher than in 1995, and was the sixth successive yearly increase. 
Average revenue per acre in 2004 reached a record $2,082.
    Record evidence also indicates that acreage and production are 
trending upward. Production did not exceed 300,000 tons until 2001, but 
has exceeded that level for 4 out of the last 5 years. Witnesses stated 
that the five-year average production for 1996-2000 was 244,000 tons, 
compared to the five-year average production (2001-2005), which was 
318,600 inshell tons.
    According to the hearing record, a number of factors have 
contributed to increased production in recent years. New acres have 
been planted at a rate of three to five thousand acres per year, some 
of which are new varieties with higher yields. Witnesses explained that 
older varieties may yield 1,500 to 3,000 pounds per acre, due to both 
planting patterns and the typical yield of the variety. New varieties, 
such as the Chandler, will yield up to 6,000 pounds per acre. Newer 
plantings have led to a reduction in the cyclical peaks and valleys 
associated with the alternate-bearing characteristic of tree nuts. 
This, in turn, has facilitated better inventory management and has made 
the walnut industry a more reliable ingredient supplier to the food-
processing industry.
    According to the hearing record, the growing season commences in 
March of each year with harvest occurring between September and 
November, depending upon the variety. Inshell California walnuts are a 
seasonal item with 95 percent of the volume shipped between the months 
of September and December. This represents roughly 25 percent of the 
industry's production. Inshell walnuts are marketed primarily as a 
winter holiday food. According to the hearing record, the purchase of 
significant quantities of inshell walnuts occurs due to the tradition 
in many markets of displaying them with other inshell nuts as part of 
winter holiday d[eacute]cor.
    Shelled walnuts are marketed on a year-round basis, and represent 
about 75 percent of utilization. Large handler infrastructure 
investments have contributed substantially to the growth of the year-
round shelled business, as well as the inshell business.
    Over the past ten years sophisticated laser-sorting equipment and 
new varieties such as the Chandler have contributed to improved 
quality. Higher customer expectations have accompanied the improvements 
in technology and quality, with more demand for high-quality, high-
specification California walnuts. Marketing success in Japan is cited 
as a prime example of this trend.
    According to the hearing record, shelled walnuts are utilized in a 
variety of ways, with commercial baking believed to be the single 
largest utilization category. Retail consumption of walnuts packaged 
for use in the home has increased dramatically over the past several 
years. Shelled walnuts may be sold in packages ranging from 2.75 ounce 
retail packages to large bulk containers of 25 pounds or more for 
industrial users, wholesalers, and distributors. The last 12 years have 
seen substantial increases in snack food uses of walnuts, in addition 
to expansion of ingredient use beyond baking and confectionery items to 
include usage with salads, rice, and pasta.
    A high degree of mechanization in the harvest has reduced the 
deleterious impact on nut quality from rain and other weather 
conditions. Once harvested, walnuts are taken to holding stations where 
a fibrous husk is removed, and the walnuts are then dried to 
approximately eight percent moisture. They are delivered to handlers 
for further processing, which includes cleaning, sorting, and shelling.
    According to the hearing record, California walnuts rank eighth in 
exports over all the commodities grown in the state. The top three 
inshell export markets are Spain, Italy, and Germany. Five-year average 
export value (2000/01-2004/05) is approximately $52 million, 
representing 63 percent of total export value for that five-year 
period. The key export markets for shelled-walnut utilization are: 
Japan, Germany, Spain, Israel, Korea, and Canada. Five-year average 
export value for those six countries is $91.8 million, which is about 
76 percent of the total value of shelled walnut exports.
    California walnuts compete with walnuts grown in China, Turkey, 
France, Italy, Chile, North Korea, India, Vietnam, Argentina, Brazil, 
and many

[[Page 14382]]

areas within the former Soviet Union including Kazakhstan, Ukraine, 
Hungary, and Moldova. Within the European Union the major competition 
comes from France and Eastern Europe. In the Pacific Rim, major 
competitors include China and India.

Material Issues

    The amendments included in this recommended decision would: change 
the marketing year; include ``pack'' as a handler function; restructure 
the Board and revise nomination procedures; rename the Board and add 
authority to change Board composition; modify Board meeting and voting 
procedures; add authority for marketing promotion and paid advertising; 
add authority to accept contributions, and to carry over excess 
assessment funds; broaden the scope of the quality control provisions 
and add the authority to recommend different regulations for different 
market destinations; add authority for the Board to designate more than 
one inspection service; replace outdated order language with current 
industry terminology; and other related amendments.
    The USDA proposed three additional amendments: To establish tenure 
limitations for Board members, to require that continuance referenda be 
conducted on a periodic basis to ascertain producer support for the 
order, and to make any changes to the order as may be necessary to 
conform with any amendment that may result from the hearing.
    All of the proposals are intended to streamline and improve the 
administration, operation, and functioning of the program. Many of the 
proposed amendments would up-date the language of the order, thus 
better representing and conforming to current practices in the 
industry. The proposed amendments are not expected to result in any 
significant cost increases for growers or handlers. More efficient 
administration of program activities may result in cost savings for the 
Board. A description of the proposed amendments and their anticipated 
economic impact on large and small entities is outlined below:

Designation of More Than One Inspection Service

    Proposal 11 would amend the order to add authority for the Board to 
designate more than one inspection service, as long as the functions 
performed by each service are separate and do not conflict with each 
other.
    To ensure that walnuts are properly graded and meet marketing order 
minimum standards, the Board currently arranges for inspection of 
walnuts prior to shipping for all walnut handlers. The marketing order 
currently authorizes contracting with one agency, the California-based 
Dried Fruit and Nut Association (DFA).
    DFA inspects all walnuts that leave California to certify that they 
meet marketing order minimum standards. Operating as an out-going 
inspection service, samples of packed walnuts are examined and 
certified by licensed DFA inspectors at the end of the handling and 
packing process.
    The following data representing current inspection costs, 
summarizing actual inspection cost data for 2004-05 for the entire 
industry (44 handlers), was presented at the hearing by Board 
representatives. According to the record, the 2004-05 cost to serve the 
44 handlers was $1.857 million, which is an average cost of just over 
$42,000 per handler.
    Since inspection costs depend largely on volume handled, the four 
largest handlers account for $1.282 million, or 69% of total inspection 
expenditure in the 2004-05 crop year. The 37 smaller handlers account 
for $412,172 in expenditure, about 22 percent of the total, averaging 
about $11,000 per handler.

                           Annual Walnut Inspection Costs Using DFA, 2004-05 Crop Year
----------------------------------------------------------------------------------------------------------------
                                                                                     Number of      Average per
                                                                     DFA cost        handlers         handler
----------------------------------------------------------------------------------------------------------------
Largest Handlers................................................      $1,282,362               4        $320,591
Additional Large Handlers.......................................         162,487               3          54,162
Other Handlers..................................................         412,172              37          11,140
All Handlers....................................................       1,857,021              44          42,205
----------------------------------------------------------------------------------------------------------------
Source: Walnut Marketing Board.

    The Federal-State Inspection Service (FSIS) has developed 
effective, less costly alternative inspection programs which do not 
require the continuous presence of a third party inspector at the end 
of the packing lines.
    The PIQ program is a documented quality assurance system. Under 
this program, individual handlers must demonstrate and document their 
ability to handle and pack product that meets all relevant quality 
requirements. Effectiveness of the program is verified through 
periodic, unannounced audits of each handler's system by USDA-approved 
auditors.
    Under the Customer Assisted Inspection Program, or CAIP, USDA 
inspectors oversee the in-line sampling and inspection process 
performed by trained company staff. USDA oversight ranges from periodic 
visits throughout the day to a continuous on-site presence.
    DFA does not offer inspection services that operate similarly to 
the PIQ and CAIP programs.
    Cost savings would occur by reducing the prevalence of double 
inspections under the current system. Currently, one inspection is 
undertaken to meet minimum USDA quality requirements specified in the 
marketing order. A second inspection is often required to meet the 
considerably higher standards of specific customers. Moving to a PIQ or 
CAIP program would greatly reduce inspection costs, because meeting 
higher standards under PIQ or CAIP would also ensure that an inspected 
lot met minimum marketing order standards.
    Witnesses at the hearing testified that the California walnut 
industry should allow handlers to take advantage of USDA's alternative 
inspection programs such as the CAIP and the PIQ. Handlers who do not 
wish to use the alternative inspection services offered by USDA would 
continue to use the services of the DFA for traditional inspection 
services, such as end-line and lot inspections.
    The proposal also specifies that ``each service shall be separate 
so as to not conflict with each other'', meaning that each inspection 
service would offer distinct and different services (i.e. PIQ vs. lot 
inspections) so that the integrity of both programs can be maintained.
    Witnesses speaking in favor of this proposal explained the 
importance of a handler's ability to take advantage of inspection 
services that would most economically fit the size and functions of his 
or her operation. Currently, all

[[Page 14383]]

walnut product is inspected by DFA. While this inspection service has 
worked well for the industry for many years, the DFA inspection service 
does not accommodate inspection procedures that support larger handler 
economies of scale. Witnesses stated that USDA programs, such as PIQ 
and CAIP, are designed to fit larger scale handling operations, and 
therefore offer cost saving advantages that the DFA service does not. 
This proposal, if implemented, would allow handlers to use the 
alternative inspection programs offered by USDA.
    Several witnesses indicated that lowering costs to handlers would 
benefit growers because they expect that the cost reduction would be 
reflected in increased payments to growers.
    Financial impact calculations provided by the Board (shown in the 
table below) indicate that introducing the option of using PIQ or CAIP 
programs could result in savings of $1.09 million, an average per 
handler savings of $156,067 for the industry's seven largest handlers. 
Due to the high volumes handled, most of the savings accrue to the four 
largest handlers, estimated at $1.05 million, or an average per handler 
of $263,169.

                        Walnut Inspection Cost Comparison: DFA vs USDA for Top 7 Handlers
----------------------------------------------------------------------------------------------------------------
                                                                                             Cost savings
                                                              DFA        USDA  PIQ/ ----------------------------
                                                                            CAIP          Total      Per handler
----------------------------------------------------------------------------------------------------------------
Largest 4 Handlers....................................      $1,282,362     $229,688      $1,052,674     $263,169
Additional 3 large handlers...........................         162,487      122,692          39,795       13,265
Largest 7 Handlers....................................       1,444,849      352,380       1,092,469     156,067
----------------------------------------------------------------------------------------------------------------
Source: Walnut Marketing Board.

    Data from NASS indicate that the two-year average value of the 2003 
and 2004 crops was about $415 million. The current DFA inspection cost 
($1.857 million) represents a very small proportion of crop value, 
about 0.4 percent. If the largest 7 handlers used USDA for inspection 
at a cost of $352,380 and the remaining 37 handlers continue to work 
with DFA at an estimated cost of $412,172, then the combined cost of 
$764,552 would represent 0.2 percent of the recent-year crop value.
    Witnesses emphasized the cost effectiveness of having an additional 
inspection agency. If implemented, this proposal would facilitate the 
streamlining of handler operations to utilize the inspection service 
best suited to their operations.
    Since potential savings are correlated with economies of scale, 
record evidence indicates that PIQ and CAIP programs would be most 
beneficial for large handlers. It is unlikely that the smaller handlers 
would initially opt for these programs. Smaller handlers that expand 
their operations in the future may realize benefits from switching to 
PIQ or CAIP. Witnesses stated that no change in inspection costs is 
expected for handlers remaining with traditional DFA inspection 
services. Therefore, no financial disadvantages are expected to result 
from this proposed amendment. If implemented, this proposal may result 
in an overall decrease in costs of inspection to the industry.

Inspection of Sliced, Chopped or Ground Shelled Walnuts

    Proposal 12b would add authority for shelled walnuts to be 
inspected after having been sliced, chopped, or ground or in any manner 
changed from shelled walnuts, if regulations for such walnuts are in 
effect.
    New walnut product forms are regularly requested by both domestic 
and foreign customers. In the last 20 years, the industry has become 
much more capable of producing at a considerably higher level of 
quality and of developing more specific types of products that meet the 
differing needs of individual customers. To capitalize on this growing 
capability, a number of witnesses expressed the view that an important 
tool for increasing sales is the ability to establish standards for 
these walnut products.
    The order currently requires shelled product to be certified as 
merchantable, that is, meeting the minimum USDA requirements prior to 
further processing. When handlers are processing for end users that 
require further processing, this certification represents a costly 
extra step. After the initial shelled walnut certification, the 
handlers employ their own quality control procedures to meet the higher 
customer specifications. This proposal would allow a single inspection 
at the end of the process that would serve both purposes. If 
implemented, this proposal would allow the Board to recommend 
modifications to allow certification of product after it has been 
modified or chopped, leading to cost savings in the handling process.
    Witnesses contended that current standards focus on visually 
observed characteristics that are significant for consumer acceptance, 
but often do not adequately address specific quality concerns important 
to various export markets, including Europe. Such concerns include, for 
example, moisture content or aflatoxin tolerances. If implemented, this 
proposal would allow the Board to review scientific data and develop 
inspection procedures for recommendation and approval by USDA to assure 
customers that walnuts meet their specified criteria.
    Any new quality standards recommended by the Board would be subject 
to thorough review prior to seeking approval from USDA. Witnesses 
supported this amendment as it would give the Board authority to pursue 
quality regulations in addition to existing grade standards, both of 
which are important to industry customers.
    Witnesses emphasized that this proposal would grant authority to 
the Board to recommend quality standards that could exceed current 
standards or to develop new standards for product characteristics not 
currently covered. Witnesses also stated that no specific modifications 
are currently requested, just flexibility to create them in the future.
    While this proposed amendment may result in some cost increases 
associated with administration and oversight of new quality 
regulations, it is also expected that some handlers may benefit from 
lower inspection costs if the inspection requirements for specific 
markets were modified. Any costs associated with the implementation of 
this proposal are expected to be outweighed by the overall benefits 
accrued to the industry.

Marketing Promotion and Paid Advertising

    Proposal 13 would amend the order by adding authority for marketing 
promotion and paid advertising.
    Current promotional activities for California walnuts are 
undertaken by

[[Page 14384]]

the California Walnut Commission (CWC). Witnesses stated that the CWCs 
activities have led to considerable success in increasing demand for 
the industry's product.
    Witnesses explained that with price inelastic demand for walnuts, 
recent increases in production could have driven down prices and total 
grower revenue. The CWCs successful promotional activities has helped 
mitigate that potential impact, keeping average grower prices and 
grower revenue steady or increasing for several years.
    According to the hearing record, adding authority for paid 
advertising and promotion under the order would benefit the industry by 
allowing the Board to engage in activities that are currently supported 
by the Commission. Small businesses would be the greatest beneficiaries 
of an expanded generic advertising program, because they have the least 
financial resources to devote to selling their products, according to a 
witness.
    While an increase in advertising and promotional activities may 
result in Board expenditures, witnesses were confident that the 
positive results of the Board's promotional activities on consumer 
demand for California walnuts would more than outweigh any increases in 
costs to the industry.

Impact of Remaining Amendment Proposals

    Remaining amendment proposals are largely administrative in nature 
and would impose no new significant regulatory burdens on California 
walnut growers or handlers. They should benefit the industry by 
improving the operation of the program and making it more responsive to 
industry needs.

Marketing Year

    Proposal 1 would amend the order to change the marketing year from 
August 1 through July 31 to September 1 through August 31. Under the 
current definition of the order, the California walnut marketing year 
begins August 1 and continues through July 31. Witnesses explained 
that, over time, new varieties of walnuts have been introduced, and the 
areas in which walnuts are cultivated have shifted. The newer varieties 
mature later than the varieties grown at the time of the program's 
inception. At the same time, cultivation has slowly moved into areas 
that previously were not suited for walnut production. With differences 
in climate, soil, and water, witnesses explained that these new 
production areas have slightly later growing cycles. The proposed 
change in the marketing year would better reflect current crop cycles.
    Proposed conforming changes would ensure that Board member terms of 
office and marketing estimates calculated by the Board would conform to 
the modified marketing year. This amendment is not expected to result 
in any increases in costs to growers or handlers.

Definition of Pack

    Proposal 2 would amend the order by specifying that the act of 
packing walnuts is considered a handling function. In addition, the 
term ``pack'' would be amended to include shelling, and would be 
modified so that packing is applicable to both inshell and shelled 
walnuts.
    According to the hearing record, the order currently defines ``to 
handle'' as to ``sell, consign, transport, or ship, or in any other 
way, to put walnuts into the current of commerce''. The definition does 
not include the specific act of packing. ``To pack'', as currently 
defined in the order means, ``to bleach, clean, grade or otherwise 
prepare inshell walnuts for market''. Pack is not currently applicable 
to shelled walnuts. Witnesses stated that the proposed amendments to 
the definitions of ``handle'' and ``pack'' would more accurately 
reflect current industry operations.
    This amendment is not expected to result in any increases in costs 
to growers. If implemented, this proposal may result in some packing 
entities previously not considered to be handlers under the order to be 
redefined as handlers. According to witnesses, there are roughly five 
packer entities that would qualify as handlers under the new 
definition. While some increases in administration costs on the part of 
handlers could arise as a result of reporting requirements, record 
evidence indicates that the benefit of more accurate industry 
information would merit that expense.

Restructuring of the Board

    Proposal 3(a) seeks to amend all parts of the order that refer to 
cooperative seats on the Board, to redistribute member seats among 
districts, and to provide designated seats for a major handler, if such 
handler existed. A major handler would have to handle 35 percent or 
more of the crop.
    According to the hearing record, the recent transition of the 
industry's largest cooperative from a cooperative entity to a publicly 
held company was the impetus for this proposal. Witnesses expressed the 
need to modify the Board structure to provide for representation that 
accurately reflects the current industry. Witnesses advocated that the 
Board structure should maintain the current number of Board members and 
alternates, and that the allocation of member seats between grower and 
handler positions should remain the same (meaning 4 handler member 
seats, five grower member seats and one public member).
    Witnesses also recommended modifying the allocation of Board 
representation according to two possible scenarios. The two scenarios 
include: (1) Membership allocation that acknowledges the existence of a 
handler handling 35 percent or more of production and, (2) membership 
allocation in the absence of such handler. According to record 
evidence, these proposed amendments would not result in any increases 
in costs.

Nominations

    Proposal 3(b) would amend the Board member nomination process to 
reflect proposed changes in the Board structure, as outlined in 3(a). 
Current nomination procedures allow for all cooperative seat nominees 
to be selected by the cooperative and forwarded to the Secretary for 
approval and appointment. The cooperative nominee selection process is 
independent of the Board. All non-cooperative seat nominees are 
selected through a ballot nomination process overseen by the Board 
staff, and forwarded to the Secretary for approval and appointment.
    According to the hearing record, the revised nomination procedures 
would allow a handler who handles 35 percent or more of the crop to 
nominate persons to fill its designated seats (as described in 3(a)) 
and to forward them to the Secretary for approval and appointment. 
Nomination of persons to fill all other seats would be conducted by the 
Board staff.
    In the event a handler handling 35 percent or more of the crop does 
not exist, all Board nominees would be selected through a ballot 
nomination process conducted by the Board staff.
    While some increases in administration costs could arise as a 
result of an increased number of ballots to be mailed by the Board if a 
major handler does not exist, record evidence indicates that the 
expense would be minor and would not directly burden growers or 
handlers.

Qualify by Acceptance

    Proposal 4 would require Board nominees to submit a written 
qualification and acceptance statement prior to selection by USDA. 
Currently, the acceptance procedure for persons

[[Page 14385]]

nominated and selected to serve on the Board involves a two-step 
process. If this amendment were implemented, the two steps could be 
combined into one, thus resulting in less paperwork, a shorter 
acceptance procedure and improved efficiency in the acceptance process. 
This amendment is not expected to result in any increases in costs to 
growers or handlers.

California Walnut Board

    Proposal 5 would change the name of the Walnut Marketing Board to 
the California Walnut Board. Witnesses stated that the proposed name of 
``California Walnut Board'' would more accurately represent the Board's 
responsibilities. This amendment is not expected to result in any 
significant increases in costs to growers or handlers.

Authority To Reestablish Districts and Board Structure

    Proposal 6 would add authority to reestablish districts, to 
reapportion members among districts, and to revise groups eligible for 
representation on the Board. The intent of this proposal is to provide 
the Board with a tool to more efficiently respond to the changing 
character of the California walnut industry. In recommending any such 
changes, the following would be considered: (1) Shifts in acreage 
within districts and within the production area during recent years; 
(2) the importance of new production in its relation to existing 
districts; (3) the equitable relationship between Board apportionment 
and districts; (4) changes in industry structure and/or the percentage 
of crop represented by various industry entities resulting in the 
existence of two or more handlers handling 35 percent or more of the 
crop; and (5) other relevant factors. This amendment is not expected to 
result in any increases in costs to growers or handlers.

Voting Procedures

    Proposal 7 would amend Board quorum and voting requirements to add 
percentage requirements, add authority for the Board to vote by ``any 
other means of communication'' (including facsimile) and add authority 
for Board meetings to be held by telephone or by ``any other means of 
communication''.
    Witnesses stated that references to the meeting quorum requirements 
should be amended to include a percentage equivalent of the current 
six-out-of-10-member minimum, or sixty percent. In addition, witnesses 
supported modifying the order language regarding voting requirements to 
state that a sixty-percent super-majority vote of the members present 
at a meeting should be required of all Board decisions, except where 
otherwise specifically provided. The order currently states that a 
majority vote is needed, with no percentage equivalent specified.
    According to the record, the order currently requires that all 
Board meetings be held at a physical location. Witnesses stated that 
the order should be amended to allow for some meetings to be held using 
``other means of communication'', such as telephone or 
videoconferencing. Witnesses stated that use of new communication 
technology would result in timesavings while still allowing the Board 
to conduct its business. Witnesses stated that it is the intent of the 
Board that voting procedures for all types of non-traditional meetings 
can be recommended and adopted as appropriate for each type of 
technology used.
    Amendments proposed under this material issue are not expected to 
result in any significant changes in costs to growers or handlers.

Carryover of Excess Assessment Funds

    Proposal 8 would amend the order to add authority to carry over 
excess assessment funds. According to the hearing record, the order 
currently states that any assessment funds held in excess of the 
marketing year's expenses must be refunded to handlers. Refunds are 
returned to handlers in accordance with the amount of that handler's 
pro rata share of the actual expenses of the Board.
    This proposed amendment would allow the Board, with the approval of 
the Secretary, to establish an operating monetary reserve. This would 
allow the Board to carry over to subsequent production years any excess 
funds in a reserve, provided that funds already in the reserve do not 
exceed approximately two years' expenses. If reserve funds do exceed 
that amount, the assessment rate could be reduced so as to cause 
reserves to diminish to a level below the two-year threshold.
    According to the record, reserve funds could be used to defray 
expenses during any production year before assessment income is 
sufficient to cover such expenses, or to cover deficits incurred during 
any fiscal period when assessment income is less than expenses. 
Additionally, reserve funds could be used to defray expenses incurred 
during any period when any or all of the provisions of the order are 
suspended, or to meet any other such costs recommended by the Board and 
approved by the Secretary. This proposal is not expected to result in 
any significant increases in costs to growers or handlers.

Contributions

    Proposal 9 would amend the order by adding authority to accept 
contributions. If implemented, this proposed amendment would grant 
authority to the Board to accept voluntary contributions. Contributions 
could only be used to pay for research and development activities, and 
would be free from any encumbrances by the donor. According to the 
hearing record, the Board would retain oversight of the application of 
such contributions.
    Witnesses supported this proposal by stating that it would provide 
the Board and the industry with valuable resources to enhance research 
and development activities. It is not expected that this proposal would 
result in any additional costs to growers or handlers.

Reimbursement of Expenses

    Proposal 10 would amend the order to clarify that members and 
alternate members may be reimbursed for expenses incurred while 
performing their duties and that reimbursement includes per diem. 
According to the hearing record, this proposed amendment would not have 
any impact on the current expense reimbursement activities of the 
Board. Rather, it would clarify and update order language to more 
clearly state that while Board members and alternates serve without 
compensation, expenses incurred while performing the duties of a Board 
member that have been authorized by the Board will be incurred. It is 
not expected that this proposal would result in any additional costs to 
growers or handlers.

Quality Regulations

    Proposal 12a would broaden the scope of the quality control 
provisions by adding authority to recommend different regulations for 
different market destinations. Witnesses emphasized the usefulness in 
terms of market development of being able to establish different 
regulations for individual markets and/or regions. Witnesses stated 
that allowing the Board to make such recommendations would help the 
walnut industry adapt to changing international market conditions.

Updating Order Terminology

    Proposal 14 would amend the order by replacing the terms 
``carryover'' with ``inventory,'' and ``mammoth'' with ``jumbo,'' to 
reflect current day industry procedures. This proposal would also

[[Page 14386]]

result in conforming changes being made to the ``Marketing estimates 
and recommendations'' and ``Reports of handler carryover'' sections of 
the order.
    Handler carryover, defines the amount of California walnuts (both 
merchantable as well as the estimated quantity of merchantable walnuts 
to be produced from shelling stock and unsorted material), wherever 
located, held by California walnut handlers at any given time.
    Witnesses explained that the current term ``carryover'' is 
misleading in that the term implies the amount of inventory held by 
handlers from one marketing year to the next. Witnesses stated that the 
term ``inventory'' would more accurately convey the intent of this 
definition, and would also reflect current day calculations of walnut 
availability.
    Section 984.67, Exemptions, of the order provides for situations 
under which California walnuts may be exempted from complying with 
order regulations. One exemption is applicable to lots of merchantable 
inshell walnuts that are mammoth size or larger, as defined by the 
United States Standards for Walnuts in the Shell.
    Witnesses stated that given the new varieties currently being 
produced in the industry, the term ``mammoth'' no longer applies. 
According to record evidence, the current production's equivalent to 
``mammoth'' size is ``jumbo'' size, as defined by the United States 
Standards for Walnuts in the Shell. Thus, witnesses stated that the 
order language should be updated to reflect the industry's current 
terminology and size of walnuts being produced. This proposal is not 
expected to result in any increases in costs to growers or handlers.

Interhandler Transfers

    Proposal 15(a) would amend the order to clarify the term 
``transfer'' and to add authority for the Board to recommend methods 
and procedures, including necessary reports, for administrative 
oversight of such transfers.
    Witnesses stated that it would be beneficial to simplify current 
order language so that all interhandler transfers were considered a 
``sale of inshell and shelled walnuts within the area of production by 
one handler to another.'' Witnesses explained that the proposed 
language restated the current application of this provision in walnut 
transactions in simpler terms. This proposal is not expected to result 
in any increases in costs to growers or handlers.

Reporting Requirements

    Proposal 15(b) would amend the order to clarify that the Board may 
require reports from handlers and packers to include interhandler 
transfers or any other activity that involves placing California 
walnuts into the stream of commerce.
    According to the hearing record, current authority provided in this 
section only applies to the reporting of handler walnut receipts from 
growers. Witnesses stated that this authority should be broadened to 
include interhandler transfers, or receipts from any other entity as 
recommended by the Board and approved by the Secretary. This proposal 
is not expected to result in any increases in costs to growers or 
handlers.

Trade Demand

    Proposal 16 would update and simplify the language in Sec.  984.22, 
Trade demand, to state ``United States and its territories,'' rather 
than name ``Puerto Rico'' and ``The Canal Zone''. Witnesses explained 
that the reference to ``Puerto Rico'' and ``The Canal Zone'' in the 
order is outdated and should be updated to reference ``United States 
and its territories''.
    According to record evidence, this amendment would not impact trade 
demand calculations under the order since the purpose of the reference 
is to accurately identify the amount of shelled or inshell walnuts 
demanded by the Untied States, including its territories. Thus, while 
the terminology identifying the geographic regions included in the 
calculation would change, the intent of the original language would 
remain unchanged. This proposal is not expected to result in any 
increases in costs to growers or handlers.

Relationship With California Walnut Commission

    Proposal 17 would amend the order by adding language that would 
acknowledge that the Board may deliberate, consult, cooperate and 
exchange information with the California Walnut Commission (CWC). Any 
information sharing would be kept confidential.
    Record evidence indicates the CWC and the Federal marketing order 
program are currently administered out of the same office location and 
employ the same staff. Thus, this proposal, if implemented, would 
formalize the relationship that currently exists between the two 
entities. Witnesses stated that collaboration between the two programs 
leads to reduced administrative costs, as much of the information 
collected by each entity can be shared. This amendment is not expected 
to result in any increases in costs to growers or handlers.
    In addition, USDA proposed adding two provisions that would help 
assure that the operation of the program conforms to current Department 
policy.
    Proposal 18 would establish tenure requirements for Board members. 
Currently, the term of office of each member and alternate member of 
the Board is 2 years. There are no provisions related to term limits in 
the marketing order.
    The record evidence suggests that term limits for Board members 
could increase industry participation on the Board, provide for more 
diverse membership, provide the Board with new perspectives and ideas, 
and increase the number of individuals in the industry with Board 
experience. This amendment is not expected to result in any increases 
in costs to growers or handlers.
    Proposal 19 would require that continuance referenda be conducted 
on a periodic basis to ascertain industry support for the order and add 
more flexibility in the termination provisions.
    Currently, there is no requirement in the order that continuance 
referenda be conducted on a periodic basis. The USDA believes that 
growers should have an opportunity to periodically vote on whether a 
marketing order should continue. Continuance referenda provide an 
industry with a means to measure grower support for the program. 
Experience has shown that programs need significant industry support to 
operate effectively. This amendment is not expected to result in any 
increases in costs to growers or handlers.
    The proposals put forth at the hearing would streamline program 
organization, but are not expected to result in a significant change in 
industry production, handling or distribution activities. In discussing 
the impacts of the proposed amendments on growers and handlers, record 
evidence indicates that the changes are expected to be positive because 
the administration of the programs would be more efficient, and 
therefore more effective, in executing Board duties and 
responsibilities. There would be no significant cost impact on either 
small or large growers or handlers.
    Interested persons were invited to present evidence at the hearing 
on the probable regulatory and informational impact of the proposed 
amendments to the order on small entities. The record evidence is that 
most of the

[[Page 14387]]

amendments are designed to increase efficiency in the functioning of 
the orders.
    Current information collection requirements for Part 984 are 
approved by OMB under OMB number 0581-0178, Vegetable and Specialty 
Crops. Any changes in those requirements as a result of this proceeding 
would be submitted to OMB for approval. Witnesses stated that existing 
forms could be adequately modified to serve the needs of the Board. 
While conforming changes to the forms would need to be made (such as 
changing the name of the Board), the functionality of the forms would 
remain the same.
    As with other similar marketing order programs, reports and forms 
are periodically reviewed to reduce information requirements and 
duplication by industry and public sector agencies.
    USDA 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 marketing 
order 984 to the benefit of the California walnut industry.
    Board meetings regarding these proposals as well as the hearing 
dates were widely publicized throughout the California walnut industry. 
All interested persons were invited to attend the meetings and the 
hearing and participate in 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 and nominations can be conducted prior 
to the beginning of the next crop year. All written exceptions timely 
received will be considered and a grower referendum will be conducted 
before these proposals are implemented.
    AMS is committed to complying with the E-Government Elimination 
Act, to promote the use of the Internet and other information 
technologies to provide increased opportunities for citizen access to 
Government information and services, and for other purposes.
    Further, the public hearing held on May 17 and 18, 2006, in 
Modesto, California, was widely publicized throughout the California 
walnut industry and all interested persons were invited to attend and 
all entities, both large and small, were able to express their views on 
this issue.
    Finally, interested persons are invited to submit information on 
the regulatory and informational impacts of this action on small 
businesses.
    A small business guide on complying with fruit, vegetable, and 
specialty crop marketing agreements and orders may be viewed at: http://www.ams.usda.gov/fv/moab.html. Any questions about the compliance 
guide should be sent to Jay Guerber at the previously mentioned address 
in the FOR FURTHER INFORMATION CONTACT section.

Civil Justice Reform

    The amendments to Marketing Order No. 984 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 this 
proposal.
    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 USDA 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, USDA 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 USDA's ruling on the petition, 
provided an action is filed not later than 20 days after the date of 
the entry of the ruling.

Rulings on Briefs of Interested Persons

    Briefs, proposed findings and conclusions, and the evidence in the 
record were considered in making the findings and conclusions set forth 
in this recommended decision. To the extent that the suggested findings 
and conclusions filed by interested persons are inconsistent with the 
findings and conclusions of this recommended decision, the requests to 
make such findings or to reach such conclusions are denied.

General Findings

    The findings hereinafter set forth are supplementary to the 
findings and determinations which were previously made in connection 
with the issuance of the marketing agreement and order; and all said 
previous findings and determinations are hereby ratified and affirmed, 
except insofar as such findings and determinations may be in conflict 
with the findings and determinations set forth herein.
    (1) The marketing agreement and order, as 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 walnuts grown 
in the production area (the State of California) in the same manner as, 
and are applicable only to, persons in the respective classes of 
commercial and industrial activity specified in the marketing 
agreements and orders 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 areas 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 areas 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 walnuts grown in the production area; and
    (5) All handling of walnuts grown in the production areas as 
defined in the marketing agreement and order, is in the current of 
interstate or foreign commerce or directly burdens, obstructs, or 
affects such commerce.

List of Subjects in 7 CFR Part 984

    Marketing agreements, Nuts, Reporting and recordkeeping 
requirements, and Walnuts.

PART 984--WALNUTS GROWN IN CALIFORNIA

    1. The authority citation for 7 CFR part 984 continues to read as 
follows:

    Authority: 7 U.S.C. 601-674.

    2. Revise Sec.  984.6 to read as follows:


Sec.  984.6  Board.

    Board means the California Walnut Board established pursuant to 
Sec.  934.35.
    3. Revise Sec.  984.7 to read as follows:

[[Page 14388]]

Sec.  984.7  Marketing year.

    Marketing year means the twelve months from September 1 to the 
following August 31, both inclusive, or any other such period deemed 
appropriate and recommended by the Board for approval by the Secretary.
    4. Revise Sec.  984.13 to read as follows:


Sec.  984.13  To handle.

    To handle means to pack, sell, consign, transport, or ship (except 
as a common or contract carrier of walnuts owned by another person), or 
in any other way to put walnuts, inshell or shelled, into the current 
of commerce either within the area of production or from such area to 
any point outside thereof, or for a manufacturer or retailer within the 
area of production to purchase directly from a grower: The term ``to 
handle'' shall not include sales and deliveries within the area of 
production by growers to handlers, or between handlers.
    5. Revise Sec.  984.14 to read as follows:


Sec.  984.14  Handler.

    Handler means any person who handles inshell or shelled walnuts.
    6. Revise Sec.  984.15 to read as follows:


Sec.  984.15  Pack.

    Pack means to bleach, clean, grade, shell or otherwise prepare 
walnuts for market as inshell or shelled walnuts.
    7. Revise Sec.  984.21 to read as follows:


Sec.  984.21  Handler inventory.

    Handler inventory as of any date means all walnuts, inshell or 
shelled (except those held in satisfaction of a reserve obligation), 
wherever located, then held by a handler or for his or her account.
    8. Revise Sec.  984.22 to read as follows:


Sec.  984.22  Trade demand.

    (a) Inshell. The quantity of merchantable inshell walnuts that the 
trade will acquire from all handlers during a marketing year for 
distribution in the United States and its territories.
    (b) Shelled. The quantity of merchantable shelled walnuts that the 
trade will acquire from all handlers during a marketing year for 
distribution in the United States and its territories.
    9. Revise Sec.  984.35 to read as follows:


Sec.  984.35  California Walnut Board.

    (a) A California Walnut Board is hereby established consisting of 
10 members selected by the Secretary, each of whom shall have an 
alternate nominated and selected in the same way and with the same 
qualifications as the member. The members and their alternates shall be 
selected by the Secretary from nominees submitted by each of the 
following groups or from other eligible persons belonging to such 
groups:
    (1) Two handler members from District 1;
    (2) Two handler members from District 2;
    (3) Two grower members from District 1;
    (4) Two grower members from District 2;
    (5) One grower member nominated at-large from the production area; 
and,
    (6) One member and alternate who shall be selected after the 
selection of the nine handler and grower members and after the 
opportunity for such members to nominate the tenth member and 
alternate. The tenth member and his or her alternate shall be neither a 
walnut grower nor a handler.
    (b) In the event that one handler handles 35% or more of the crop 
the membership of the Board shall be as follows:
    (1) Two handler members to represent the handler that handles 35% 
or more of the crop;
    (2) Two members to represent growers who market their walnuts 
through the handler that handles 35% or more of the crop;
    (3) Two handler members to represent handlers that do not handle 
35% or more of the crop;
    (4) One member to represent growers from District 1 who market 
their walnuts through handlers that do not handle 35% or more of the 
crop;
    (5) One member to represent growers from District 2 who market 
their walnuts through handlers that do not handle 35% or more of the 
crop;
    (6) One member to represent growers who market their walnuts 
through handlers that do not handle 35% or more of the crop shall be 
nominated at large from the production area; and,
    (7) One member and alternate who shall be selected after the 
selection of the nine handler and grower members and after the 
opportunity for such members to nominate the tenth member and 
alternate. The tenth member and his or her alternate shall be neither a 
walnut grower nor a handler.
    (c) Grower Districts:
    (1) District 1. District 1 encompasses the counties in the State of 
California that lie north of a line drawn on the south boundaries of 
San Mateo, Alameda, San Joaquin, Calaveras, and Alpine Counties.
    (2) District 2. District 2 shall consist of all other walnut 
producing counties in the State of California south of the boundary 
line set forth in paragraph (c)(1) of this section.
    (d) The Secretary, upon recommendation of the Board, may 
reestablish districts, may reapportion members among districts, and may 
revise the groups eligible for representation on the Board as specified 
in paragraphs (a) and (b) of this section: Provided, That any such 
recommendation shall require at least six concurring votes of the 
voting members of the Board. In recommending any such changes, the 
following shall be considered:
    (1) Shifts in acreage within districts and within the production 
area during recent years;
    (2) The importance of new production in its relation to existing 
districts;
    (3) The equitable relationship between Board apportionment and 
districts;
    (4) Changes in industry structure and/or the percentage of crop 
represented by various industry entities resulting in the existence of 
two or more major handlers;
    (5) Other relevant factors.
    10. Revise Sec.  984.36 to read as follows:


Sec.  984.36  Term of office.

    The term of office of Board members, and their alternates shall be 
for a period of two years ending on August 31 of odd-numbered years, 
but they shall serve until their respective successors are selected and 
have qualified. Board members may serve up to three consecutive, two-
year terms of office. In no event shall any member serve more than six 
consecutive years on the Board. For purposes of determining when a 
Board member has served three consecutive terms, the accrual of terms 
shall begin following any period of at least twelve consecutive months 
out of office. The limitation on tenure shall not apply to alternates.
    11. Revise Sec.  984.37 to read as follows:


Sec.  984.37  Nominations.

    (a) Nominations for all grower members shall be submitted by ballot 
pursuant to an announcement by press releases of the Board to the news 
media in the walnut producing areas. Such releases shall provide 
pertinent voting information, including the names of candidates and the 
location where ballots may be obtained. Ballots shall be accompanied by 
full instructions as to their markings and mailing and shall include 
the names of incumbents who are willing to continue serving on the 
Board and such other candidates as may be proposed pursuant to methods 
established by the Board with the approval of the Secretary. Each 
grower, regardless of the number and location of his or her walnut 
orchard(s), shall be entitled to cast only one ballot in the nomination 
and each vote shall be given

[[Page 14389]]

equal weight. If the grower has orchards in both grower districts, he 
or she shall advise the Board of the district in which he/she desires 
to vote. The person receiving the highest number of votes for each 
grower position shall be the nominee.
    (b) Nominations for handler members shall be submitted on ballots 
mailed by the Board to all handlers in their respective Districts. All 
handlers' votes shall be weighted by the kernelweight of walnuts 
certified as merchantable by each handler during the preceding 
marketing year. Each handler in the production area may vote for 
handler member nominees and their alternates. However, no handler with 
less than 35% of the crop shall have more than one member and one 
alternate member. The person receiving the highest number of votes for 
each handler member position shall be the nominee for that position.
    (c) A calculation to determine whether or not a handler who handles 
35 percent or more of the crop shall be made prior to nominations. For 
the first nominations held upon implementation of this language, the 35 
percent threshold shall be calculated using an average of crop handled 
for the year in which nominations are made and one year's handling 
prior. For all future nominations, the 35 percent handling calculation 
shall be based in the average of the two years prior to the year in 
which nominations are made. In the event that one handler handles 35% 
or more of the crop the membership of the Board, nominations shall be 
as follows:
    (1) Nominations of growers who market their walnuts to the handler 
that handles 35% or more of the crop shall be conducted by that handler 
and the names of the nominees shall be forwarded to the Board for 
approval and appointment by the Secretary.
    (2) Nominations for the two handler members representing the major 
handler shall be conducted by the major handler and the names of the 
nominees shall be forwarded to the Board for approval and appointment 
by the Secretary.
    (3) Nominations on behalf of all other grower members (Groups (b) 
(4), (5) and (6) of Sec.  984.35) shall be submitted after ballot by 
such growers pursuant to an announcement by press releases of the Board 
to the news media in the walnut producing areas. Such releases shall 
provide pertinent voting information, including the names of candidates 
and the location where ballots may be obtained. Ballots shall be 
accompanied by full instructions as to their markings and mailing and 
shall include the names of incumbents who are willing to continue 
serving on the Board and such other candidates as may be proposed 
pursuant to methods established by the Board with the approval of the 
Secretary. Each grower in Groups (Groups (b) (4), (5) and (6) of Sec.  
984.35), regardless of the number and location of his or her walnut 
orchard(s), shall be entitled to cast only one ballot in the nomination 
and each vote shall be given equal weight. If the grower has orchard(s) 
in both grower districts he or she shall advise the Board of the 
district in which he or she desires to vote. The person receiving the 
highest number of votes for grower position shall be the nominee.
    (4) Nominations for handler members representing handlers that do 
not handle 35% or more of the crop shall be submitted on ballots mailed 
by the Board to those handlers. The votes of these handlers shall be 
weighted by the kernelweight of walnuts certified as merchantable by 
each handler during the preceding marketing year. Each handler in the 
production area may vote for handler member nominees and their 
alternates of this subsection. However, no handler shall have more than 
one person on the Board either as member or alternate member. The 
person receiving the highest number of votes for a handler member 
position of this subsection shall be the nominee for that position.
    (d) Each grower is entitled to participate in only one nomination 
process, regardless of the number of handler entities to whom he or she 
delivers walnuts. If a grower delivers walnuts to more than one handler 
entity, the grower must choose which nomination process he or she 
participates in.
    (e) The nine members shall nominate one person as member and one 
person as alternate for the tenth member position. The tenth member and 
alternate shall be nominated by not less than 6 votes cast by the nine 
members of the Board.
    (f) Nominations in the foregoing manner received by the Board shall 
be reported to the Secretary on or before June 15 of each odd-numbered 
year, together with a certified summary of the results of the 
nominations. If the Board fails to report nominations to the Secretary 
in the manner herein specified by June 15 of each odd-numbered year, 
the Secretary may select the members without nomination. If nominations 
for the tenth member are not submitted by September 1 of any such year, 
the Secretary may select such member without nomination.
    (g) The Board may recommend, subject to the approval of the 
Secretary, a change to these nomination procedures should the Board 
determine that a revision is necessary.
    12. Revise Sec.  984.38 to read as follows:


Sec.  984.38  Eligibility.

    No person shall be selected or continue to serve as a member or 
alternate to represent one of the groups specified in Sec.  
984.35(a)(1) through (6) or Sec.  984.38(b)(1) through (6), unless he 
or she is engaged in the business he or she is to represent, or 
represents, either in his or her own behalf or as an officer or 
employee if the business unit engaged in such business. Also, each 
member or alternate member representing growers in District 1 or 
District 2 shall be a grower, or officer or employee of the group he or 
she is to represent.
    13. Revise Sec.  984.39 to read as follows:


Sec.  984.39  Qualify by acceptance.

    Any person nominated to serve as a member or alternate member of 
the Board shall, prior to selection by USDA, qualify by filing a 
written qualification and acceptance statement indicating such person's 
willingness to serve in the position for which nominated.


Sec.  984.40  [Amended]

    14. Amend Sec.  984.40 by removing the word ``his'' and adding the 
phrase ``his or her'' in its place in 2 places in paragraph (a) and 3 
places in paragraph (b), and by removing the last sentence in paragraph 
(b).
    15. Revise Sec.  984.42 to read as follows:


Sec.  984.42  Expenses.

    The members and their alternates of the Board shall serve without 
compensation, but shall be allowed their necessary expenses incurred by 
them in the performance of their duties under this part.
    16. Amend Sec.  984.45 by revising paragraphs (b) and (c) and 
adding paragraph (d) to read as follows:


Sec.  984.45  Procedure.

    (a) * * *
    (b) All decisions of the Board, except where otherwise specifically 
provided (see Sec.  984.35(d)), shall be by a sixty-percent (60%) 
super-majority vote of the members present. A quorum of six members, or 
the equivalent of sixty percent (60%) of the Board, shall be required 
for the conduct of Board business.
    (c) The Board may vote by mail or telegram, or by any other means 
of communication, upon due notice to all members. The Board, with the 
approval of the Secretary, shall prescribe the minimum number of votes 
that must be cast when voting is by any of these methods, and any other 
procedures

[[Page 14390]]

necessary to carry out the objectives of this paragraph.
    (d) The Board may provide for meetings by telephone, or other means 
of communication and any vote cast at such a meeting shall be confirmed 
promptly in writing: Provided, That if any assembled meeting is held, 
all votes shall be cast in person.
    17. Revise Sec.  984.46 to read as follows:


Sec.  984.46  Research and development.

    The Board, with the approval of the Secretary, may establish or 
provide for the establishment of production research, marketing 
research and development projects, and marketing promotion, including 
paid advertising, designed to assist, improve, or promote the 
marketing, distribution, and consumption or efficient production of 
walnuts. The expenses of such projects shall be paid from funds 
collected pursuant to Sec.  984.69 and Sec.  984.70.
    18. Amend Sec.  984.48 by revising paragraphs (a) introductory 
text, (a)(2), (4), and (5) to read as follows:


Sec.  984.48  Marketing estimates and recommendations.

    (a) Each marketing year the Board shall hold a meeting, prior to 
October 20, for the purpose of recommending to the Secretary a 
marketing policy for such year. Each year such recommendation shall be 
adopted by the affirmative vote of at least 60% of the Board and shall 
include the following, and where applicable, on a kernelweight basis:
    (1) * * *
    (2) Its estimate of the handler inventory on September 1 of inshell 
and shelled walnuts;
    (3) * * *
    (4) Its estimate of the trade demand for such marketing year for 
shelled and inshell walnuts, taking into consideration trade inventory, 
imports, prices, competing nut supplies, and other factors;
    (5) Its recommendation for desirable handler inventory of inshell 
and shelled walnuts on August 31 of each marketing year;
* * * * *
    19. Amend Sec.  984.50 by revising the heading and paragraph (d) to 
read as follows:


Sec.  984.50  Grade, quality and size regulations.

* * * * *
    (d) Additional grade, size or other quality regulation. The Board 
may recommend to the Secretary additional grade, size or other quality 
regulations, and may also recommend different regulations for different 
market destinations. If the Secretary finds on the basis of such 
recommendation or other information that such additional regulations 
would tend to effectuate the declared policy of the Act, he or she 
shall establish such regulations.
* * * * *
    20. Amend Sec.  984.51 by revising paragraph (a) to read as 
follows:


Sec.  984.51  Inspection and certification of inshell and shelled 
walnuts.

    (a) Before or upon handling of any walnuts for use as free or 
reserve walnuts, each handler at his or her own expense shall cause 
such walnuts to be inspected to determine whether they meet the then 
applicable grade and size regulations. Such inspection shall be 
performed by the inspection service or services designated by the Board 
with the approval of the Secretary; Provided, That if more than one 
inspection service is designated, the functions performed by each 
service shall be separate, and shall not duplicate each other. Handlers 
shall obtain a certificate for each inspection and cause a copy of each 
certificate issued by the inspection service to be furnished to the 
Board. Each certificate shall show the identity of the handler, 
quantity of walnuts, the date of inspection, and for inshell walnuts 
the grade and size of such walnuts as set forth in the United States 
Standards for Walnuts (Juglans regia) in the Shell. Certificates 
covering reserve shelled walnuts for export shall also show the grade, 
size, and color of such walnuts as set forth in the United States 
Standards for Shelled Walnuts (Juglans regia). The Board, with the 
approval of the Secretary, may prescribe procedures for the 
administration of this provision.
* * * * *
    21. Amend Sec.  984.52 by revising paragraph (a) and adding a new 
paragraph (c) to read as follows:


Sec.  984.52  Processing of shelled walnuts.

    (a) No handler shall slice, chop, grind, or in any manner change 
the form of shelled walnuts unless such walnuts have been certified as 
merchantable or unless such walnuts meet quality regulations 
established under Sec.  984.50(d) if such regulations are in effect.
* * * * *
    (c) The Board shall establish such procedures as are necessary to 
insure that all such walnuts are inspected prior to being placed into 
the current of commerce.
    22. Revise Sec.  984.59 to read as follows:


Sec.  984.59  Interhandler transfers.

    For the purposes of this part, transfer means the sale of inshell 
and shelled walnuts within the area of production by one handler to 
another. The Board, with the approval of the Secretary, may establish 
methods and procedures, including necessary reports, for such 
transfers.


Sec.  984.67  [Amended]

    23. Amend Sec.  984.67 by removing the word ``mammoth'' and adding 
the word ``jumbo'' in its place in paragraph (a).
    24. Amend Sec.  984.69 by revising paragraph (c) to read as 
follows:


Sec.  984.69  Assessments.

* * * * *
    (c) Accounting. If at the end of a marketing year the assessments 
collected are in excess of expenses incurred, such excess shall be 
accounted for in accordance with one of the following:
    (1) If such excess is not retained in a reserve, as provided in 
paragraph (c)(2) or (c)(3) of this section, it shall be refunded to 
handlers from whom collected and each handler's share of such excess 
funds shall be the amount of assessments he or she has paid in excess 
of his or her pro rata share of the actual expenses of the Board.
    (2) Excess funds may be used temporarily by the Board to defray 
expenses of the subsequent marketing year: Provided, That each 
handler's share of such excess shall be made available to him or her by 
the Board within five months after the end of the year.
    (3) The Board may carry over such excess into subsequent marketing 
years as a reserve: Provided, That funds already in reserve do not 
exceed approximately two years' budgeted expenses. In the event that 
funds exceed two marketing years' budgeted expenses, future assessments 
will be reduced to bring the reserves to an amount that is less than or 
equal to two marketing years' budgeted expenses. Such reserve funds may 
be used:
    (i) To defray expenses, during any marketing year, prior to the 
time assessment income is sufficient to cover such expenses;
    (ii) To cover deficits incurred during any year when assessment 
income is less than expenses;
    (iii) To defray expenses incurred during any period when any or all 
provisions of this part are suspended;
    (iv) To meet any other such costs recommended by the Board and 
approved by the Secretary.
* * * * *
    25. Add a new Sec.  984.70 to read as follows:

[[Page 14391]]

Sec.  984.70  Contributions.

    The Board may accept voluntary contributions but these shall only 
be used to pay expenses incurred pursuant to Sec.  984.46, Research and 
development. Furthermore, such contributions shall be free from any 
encumbrances by the donor and the Board shall retain complete control 
of their use.
    26. Revise Sec.  984.71 to read as follows:


Sec.  984.71  Reports of handler inventory.

    Each handler shall submit to the Board in such form and on such 
dates as the Board may prescribe, reports showing his or her inventory 
of inshell and shelled walnuts.
    27. Revise Sec.  984.73 to read as follows:


Sec.  984.73  Reports of walnut receipts.

    Each handler shall file such reports of his or her walnut receipts 
from growers, handlers, or others in such form and at such times as may 
be requested by the Board with the approval of the Secretary.
    28. Amend Sec.  984.89 by redesignating paragraph (b)(4) as (b)(5) 
and adding a new paragraph (b)(4) to read as follows:


Sec.  984.89  Effective time and termination.

* * * * *
    (b) * * *
    (4) Within six years of the effective date of this amendment the 
Secretary shall conduct a referendum to ascertain whether continuance 
of this part is favored by producers. Subsequent referenda to ascertain 
continuance shall be conducted every six years thereafter. The 
Secretary may terminate the provisions of this part at the end of any 
fiscal period in which the Secretary has found that continuance of this 
part is not favored by a two-thirds (\2/3\) majority of voting 
producers, or a two-thirds (\2/3\) majority of volume represented 
thereby, who, during a representative period determined by the 
Secretary, have been engaged in the production for market of walnuts in 
the production area. Such termination shall be announced on or before 
the end of the production year.
* * * * *
    29. Add a new Sec.  984.91 to read as follows:


Sec.  984.91  Relationship with the California Walnut Commission.

    In conducting Board activities and other objectives under this 
part, the Board may deliberate, consult, cooperate and exchange 
information with the California Walnut Commission, whose activities 
compliment those of the Board. Any sharing of information gathered 
under this subpart shall be kept confidential in accordance with 
provisions under section 10(i) of the Act.

    Dated: March 19, 2007.
Lloyd C. Day,
Administrator, Agricultural Marketing Service.
 [FR Doc. E7-5312 Filed 3-26-07; 8:45 am]
BILLING CODE 3410-02-P