[Federal Register Volume 86, Number 90 (Wednesday, May 12, 2021)]
[Proposed Rules]
[Pages 25961-25974]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-09978]


 ========================================================================
 Proposed Rules
                                                 Federal Register
 ________________________________________________________________________
 
 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
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 

  Federal Register / Vol. 86, No. 90 / Wednesday, May 12, 2021 / 
Proposed Rules  

[[Page 25961]]



DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

7 CFR Part 205

[Document Number AMS-NOP-11-0009; NOP-21-04PR]
RIN 0581-AD89


National Organic Program; Origin of Livestock; Reopening of 
Comment Period

AGENCY: Agricultural Marketing Service, USDA.

ACTION: Proposed rule; reopening of comment period.

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SUMMARY: The U.S. Department of Agriculture (USDA) Agricultural 
Marketing Service (AMS) is reopening the comment period on our April 
28, 2015, proposed rule to amend the origin of livestock requirements 
for dairy animals under the USDA organic regulations. We are reopening 
the proposed rule's comment period for 60 days to give all interested 
parties an opportunity to comment on whether AMS should prohibit the 
movement of transitioned cows in organic dairy production as part of 
the final rule. Comments previously submitted need not be resubmitted, 
as they are already incorporated into the public record and will be 
fully considered in any future final rule.

DATES: For the proposed rule published on April 28, 2015 (80 FR 23455), 
send comments on or before July 12, 2021.

ADDRESSES: You may send comments on the proposed rule to the Federal 
eRulemaking Portal at https://www.regulations.gov/. You can access the 
proposed rule and instructions for submitting public comments by 
searching for document number, AMS-NOP-11-0009. Comments may also be 
sent to Jennifer Tucker, Deputy Administrator, National Organic 
Program, USDA-AMS-NOP, 1400 Independence Ave. SW, Room 2642-S, Ag Stop 
0268, Washington, DC 20250-0268.
    Instructions: All comments received must include the docket number 
AMS-NOP-11-0009; NOP-21-04PR, and/or Regulatory Information Number 
(RIN) 0581-AD89 for this rulemaking. You should clearly indicate the 
topic and section number of this proposed rule to which your comment 
refers, state your position(s), offer any recommended language 
change(s), and include relevant information and data to support your 
position(s) (e.g., scientific, environmental, manufacturing, industry, 
or industry impact information, etc.). All comments and relevant 
background documents posted to https://www.regulations.gov will include 
any personal information provided.

FOR FURTHER INFORMATION CONTACT: Jennifer Tucker, Deputy Administrator, 
National Organic Program, USDA-AMS-NOP, 1400 Independence Ave. SW, Room 
2642-S, Stop 0268, Washington, DC 20250-0268. (202) 260-8077

SUPPLEMENTARY INFORMATION: On April 28, 2015, AMS (``we'') published in 
the Federal Register (80 FR 23455) a proposed rule to clarify 
requirements for organic dairy farms under the USDA organic 
regulations. The proposed rule would add requirements about 
transitioning dairy animals to organic production. Please refer to the 
proposed rule for information about AMS' proposed changes, rationale, 
and analysis.
    AMS received over 1,500 public comments on the proposed rule. On 
October 1, 2019, we reopened the comment period and received 
approximately 750 comments. These comments may be viewed at https://www.regulations.gov under docket number AMS-NOP-11-0009. We are again 
reopening the comment period to solicit views on two additional issues 
on the movement of the transitioned animals and on the updated economic 
analysis of the proposed rule.

I. Movement of Transitioned Animals and Regulatory Framework

    Origin of livestock in organic regulations refers to the 
requirements for continuous organic management of animals that produce 
organic meat or dairy products. In the 2015 proposed rule, AMS sought 
comment on a proposal to amend those requirements for dairy animals. 
The purpose of the proposed rule is to ensure that the origin of 
livestock provisions for organic dairy animals are consistently applied 
by all certifying agents. The proposed rule would require that organic 
milk and milk products must be from animals that have been under 
continuous organic management from the last third of gestation onward, 
with a limited exception for newly certified organic dairy producers. 
Those producers have the opportunity to transition non-organic 
livestock that has been under continuous organic management for twelve 
months into organic production. Once transitioned, the proposed rule 
would not distinguish between transitioned livestock and those that 
were under continuous organic management from the last third of 
gestation onward. AMS received numerous comments that advocated for 
different approaches that were not part of the proposed rule. AMS is 
issuing this notice to request public input on those different 
approaches and to provide an updated economic analysis.
    First, in the 2015 proposed rule, we declined to limit the movement 
of transitioned cows because we ``believe that some movement or inter-
farm sales of transitioned animals is reasonable and expected.'' 80 FR 
23463. Several commenters disagreed with this approach, and recommended 
that we limit the movement of transitioned animals to prevent organic 
producers or operations from continually transitioning animals and/or 
continually sourcing off-farm transitioned animals. Based on these 
comments, we are reopening the comment period to solicit views on 
whether the final rule should prohibit organic dairy operations from 
acquiring transitioned animals to expand or replace animals to produce 
organic milk.
    Second, we are also seeking comment on whether the final rule 
should use the term ``operation'' to describe the regulated entity. 
While the proposed rule used ``producer,'' several commenters noted 
that the term ``producer'' can be interpreted in different ways, and 
inconsistent interpretations may lead to inconsistent application of 
the organic regulations. Some certifier commenters stated that it would 
be simpler to verify an operation's eligibility (as opposed to a 
producer's eligibility) to transition animals. Additionally, the use of

[[Page 25962]]

``operations'' would align the proposal with the rest of the USDA 
organic regulations and the existing framework for certification and 
oversight.
    If these provisions are implemented, existing certified dairy 
operations that purchase animals, individually or as an entire herd, 
would not be allowed to purchase any transitioned animals for organic 
milk production beginning on the compliance date. They would be able to 
purchase and sell only livestock that had been under continuous organic 
management from the last third of gestation. New operations would have 
only one opportunity to transition in non-organic animals into the 
operations. Those transitioned animals could then be sold to other 
operations, but only as non-organic. Once sold, those animals would not 
be eligible to produce organic milk.
    In addition to comments on the provisions above, AMS is interested 
in comments on the following topics and options:
    1. Implementation timeframe. AMS had proposed that all requirements 
be implemented upon the effective date of a final rule, with an 
exception for any transition that was already approved by a certifying 
agent. AMS requests comments about whether an implementation timeframe 
is necessary for organic dairies to comply. If one is needed, AMS 
requests comments on how long this implementation period should be and 
why.
    2. Accuracy of the estimates in the Regulatory Impact Analysis 
(RIA)/Regulatory Flexibility Analysis. The cost estimates presented in 
this notice are based on USDA and industry data. AMS requests feedback 
on the assumptions related to costs and benefits, with supporting 
information (data and sources) where available.
    3. Exceptions to the one-time allowance requirement. AMS has not 
proposed exceptions to the one-time transition requirement, but the 
current regulations permit temporary variances in some scenarios (Sec.  
205.290) and allow for re-transition following Federal or State 
emergency treatments (Sec.  205.672). AMS seeks comments on whether the 
rule should include any additional exceptions to the one-time 
transition requirement for scenarios where the current regulations 
would not apply, and if so, what scenario(s) would warrant an 
exception.

II. Regulatory Impact Analysis/Regulatory Flexibility Analysis

    Because the Regulatory Impact Analysis and the Regulatory 
Flexibility Analysis for the proposed rule were completed in 2015, we 
decided to update those analyses with more current information. We have 
updated the analyses to reflect more current information about the 
dairy market, including the number of certified organic operations and 
the number of organic dairy animals. This updated information revises 
the estimated costs of the proposed rule ($488,000-$1,462,500) compared 
to the estimated costs ($288,000-$935,000) in our analysis published in 
2015. The analysis below also includes updated information on the 
distribution of dairy farms, dairy farm practices, and the market for 
dairy products. We also discuss public comments on those prior 
regulatory analyses.

Need for the Rule

    AMS determined that the USDA organic regulations for sourcing dairy 
animals and managing breeder stock require additional specificity to 
ensure organic dairy operations meet a consistent standard. 
Interpretations of these regulations have differed between certifying 
agents, and the different interpretations have led to widely divergent 
practices by organic dairy operations for sourcing replacement dairy 
animals. AMS proposes revising the regulations to ensure the USDA 
organic regulations are administered and enforced in a clear, uniform, 
and equitable manner, and to address inconsistencies determined in the 
2013 USDA Office of Inspector General (OIG) Audit.\1\ Furthermore, AMS 
expects that increased clarity will support trust in the USDA organic 
seal by assuring consumers that organic dairy products meet a 
consistent standard, a stated purpose of the Organic Foods Production 
Act (OFPA) of 1990 (7 U.S.C. 6501).
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    \1\ The July 2013 OIG audit report on organic milk operations 
may be accessed at the following website: http://www.usda.gov/oig/webdocs/01601-0002-32.pdf.
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    In a 2006 final rule related to this issue (June 7, 2006; 71 FR 
32803), AMS recognized that the regulations allowed different methods 
for replacing organic dairy animals depending on how the producer 
transitioned to organic production. AMS further stated that, given the 
almost 13,000 comments on the 2006 proposed rule (71 FR 32804), the 
issue was a significant concern of the organic community, including 
organic dairy producers, certifying agents, trade organizations, and 
consumers.
    The July 2013 OIG audit also identified a need for this rulemaking, 
and AMS concurred with this finding. The OIG audit of organic milk 
operations found that the interpretation and implementation of the 
origin of livestock requirements differed across producers and 
certifying agents. As a result, organic milk producers may have faced 
materially different organic production requirements based on their 
particular certifier's interpretation of the National Organic Program's 
(NOP) origin of livestock requirements. AMS agrees with OIG's 
recommendation that the regulations should be revised to clarify the 
origin of livestock requirements and ensure consistent application of 
the requirements by certifying agents.
    As described at the beginning of this SUPPLEMENTARY INFORMATION 
section, AMS published in 2015 a proposed rule to revise the origin of 
livestock regulations. The public comments received on the proposed 
rule in 2015 and during the reopened comment period in 2019 indicate 
there remains a need for rulemaking in this area.
    Of the comments received by AMS on the 2015 proposed rule, a large 
number were submitted by producers and consumers of organic dairy 
products and groups representing producers and consumers. These 
commenters generally expressed a desire for AMS to establish and 
enforce clearer rules for organic dairy production. They expressed that 
organic dairies should raise animals organically from birth and not be 
allowed to cycle animals in and out of organic production (i.e., by 
continually transitioning animals).
    NOP's experience is that because organic products cannot be readily 
distinguished from nonorganic products based on sight inspection, 
buyers rely on process verification methods to ensure that organic 
claims are true. Within the economics literature, organic food products 
are ``credence goods,'' or goods with characteristics that are valuable 
but are difficult to verify, both before and after 
purchase.2 3 4 Foods certified under USDA's NOP, including 
milk, have a common standard that specifies production practices, such 
as dairy herd pasture requirements, permitted feeds, and permitted use 
of antibiotics and hormones, that cannot

[[Page 25963]]

be independently verified by consumers.
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    \2\ Caswell, Julie A. and Eliza M. Mojduszka. 1996. ``Using 
Informational Labeling to Influence the Market for Quality in Food 
Products.'' American Journal of Agricultural Economics. Vol. 78, No. 
5: 1248-1253.
    \3\ Zorn, Alexander, Christian Lippert, and Stephan Dabbert. 
2009. ``Economic Concepts of Organic Certification.'' Deliverable 5 
of the EU FP7 CERTCOST Project: Economic Analysis of Certification 
Systems in Organic Food and Farming.
    \4\ Michael Darby and Edi Karni, ``Free Competition and the 
Optimal Amount of Fraud'' Journal of Law and Economics 16(1973)1:67-
88.
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    When producing goods with credence characteristics, producers face 
a moral hazard problem stemming from their incentive to forego taking 
costly actions or investments associated with the label claim if 
handlers or consumers have no way of verifying the production process 
(i.e., asymmetric information). In providing guidance to Federal 
agencies undertaking rulemaking, OMB Circular A-4 cites asymmetric 
information as a source of market failure and as a potential 
justification for regulation. Lassoued and Hobbs (2015) further 
emphasize the role of trust in the institutions and brands that verify 
credence good attributes as being essential for developing the consumer 
confidence that drives brand loyalty.\5\
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    \5\ Lassoued, R. and J.E. Hobbs (2015) ``Consumer Confidence in 
Credence Attributes: The Role of Brand Trust'' Food Policy 52:99-
107.
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    AMS developed the 2015 proposed rule in the context of maintaining 
trust in the NOP label, as it pertains specifically to organic dairy 
farms and to organic farms and organic handlers/processors generally. 
AMS anticipates that rulemaking on this topic will support both 
producer and consumer confidence in the organic label by reducing major 
inconsistencies in production practices across organic dairies.

Baseline

    A final rule would specify the conditions under which operations 
can transition non-organic animals to organic for the purpose of milk 
production. Current dairy production and husbandry practices provide 
important context for the baseline and cost analysis. For a general 
description of replacement animal production, see ``Overview of Organic 
Dairy Production'' in the 2015 proposed rule (80 FR 23468).
    The baseline presented below focuses on production practices of 
bovine dairy farms maintaining cows and heifers and does not include 
quantitative estimates for non-bovine dairy farms that maintain sheep 
and goats. AMS does not expect the rule would have a substantial 
economic impact on those specific sub-sectors for the following 
reasons: Goat does and sheep ewes are able to produce milk earlier than 
cows, so the potential cost-savings for non-bovine dairy farms to 
continually source transitioned animals (vs. animals under organic 
management from the last third of gestation) is small compared to that 
for bovine dairy farms. For this reason, the practice of continually 
adding transitioned animals to organic non-bovine herds is likely less 
prevalent than with organic bovine herds. These operations also make up 
a relatively small portion of the organic dairy industry. The Organic 
Integrity Database \6\ of certified organic operations includes 56 
dairy goat operations and 5 dairy sheep operations.
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    \6\ Certifying agents are required to send information on 
certified operations to AMS annually. Current and historical data 
may be accessed through the Organic Integrity Database at the 
following link: https://organic.ams.usda.gov/Integrity/. Accessed 
11/21/2019.
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    AMS used multiple data sources to describe the baseline and build 
quantitative estimates. The first source is the Agricultural Resource 
Management Survey (ARMS), which is maintained by USDA's Economic 
Research Service (ERS) and includes questions about dairy farm cattle 
purchases, restocking rates, and organic status.\7\ In 2016, ERS 
conducted a supplemental ARMS that focused on organic dairy operations. 
AMS worked with ERS to analyze recent ARMS data and develop an 
estimation of organic dairy production practices and costs for this 
rule.
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    \7\ The ERS ARMS survey information may be found at the 
following link:
    http://www.ers.usda.gov/data-products/arms-farm-financial-and-crop-production-practices.aspx.
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    Other sources of data are the National Agricultural Statistics 
Service's (NASS) 2016 Certified Organic Production Survey and 2017 
Census of Agriculture,\8\ which include State-level data on production, 
herd sizes, output, and sales for organic and non-organic crops and 
livestock. Additionally, we used the Organic Trade Association's (OTA) 
2019 Organic Industry Survey, conducted by the Nutrition Business 
Journal, to summarize market information and trends within the organic 
industry.\9\ Also, AMS requested an organic dairy farm special 
tabulation from the National Animal Health Monitoring System (NAHMS) 
Dairy 2014 report collected by USDA's Animal and Plant Health 
Inspection Service.\10\
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    \8\ The USDA NASS surveys may be found at the following link: 
https://www.nass.usda.gov/Surveys/Guide_to_NASS_Surveys/Organic_Production/.
    \9\ OTA/Nutrition Business Journal, 2019 Organic Industry 
Survey. Nutrition Business Journal conducted a survey between 
January 1 and April 25, 2019, to obtain information for their 
estimates. Over 200 organic firms responded to the survey. Available 
online at https://ota.com/resources.
    \10\ The 2014 Dairy NAAHMS report may be found at the following 
link: http://go.usa.gov/xKfEh.
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    A final source of data is the NOP list of all certified operations 
included in the Organic Integrity Database. In January of each calendar 
year, every USDA-accredited certifying agent is required to submit an 
annual list of the operations it certifies to NOP (7 CFR 
205.501(a)(15)(ii)). NOP consolidates this information into a public, 
searchable online database.\11\ AMS used information from this database 
to cross-check NASS data on the number of organic dairy operations.
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    \11\ Certifying agents are required to send information on 
certified operations yearly. Current and historical data may be 
accessed through the Organic Integrity Database at the following 
link: https://organic.ams.usda.gov/Integrity/.
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The Organic Dairy Market--Sales and Number of Operations
    According to the OTA Industry Survey, U.S. organic food, fiber, and 
agricultural product sales were over $55.0 billion in 2019, up 5 
percent from 2019.\12\ Organic dairy and eggs is the third largest 
sector in organic retail food sales (13 percent), after fruits and 
vegetables (36 percent) and beverages (14 percent). Sales of organic 
dairy products, including milk, cream, yogurt, cheese, butter, cottage 
cheese, sour cream, and ice cream, reached almost $5.8 billion in 2019. 
Table 1 shows the organic dairy market characteristics by subcategory. 
In 2019, organic dairy saw total sales growth of 2 percent, with the 
fluid milk growing 3 percent, yogurt growing 1 percent and cheese 
falling 1 percent.
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    \12\ Organic Trade Association (OTA)/Nutrition Business Journal, 
2020 Organic Industry Survey (pp. 4, 80).

                           Table 1--Organic Dairy Market--Retail Sales by Subcategory
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                                                                    Percent of                        Organic
           Subcategory            2019 Sales  ($    2019 Growth    organic dairy    Avg. markup   markup \c\  ($
                                        M)                           sales \a\       \b\  (%)           M)
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Milk/Cream......................          $3,394             2.9            58.8              51          $1,146
Yogurt \d\......................           1,260             0.5            21.8              10             115
Cheese \e\......................             572            -1.4             9.9              75             245
Butter/Cottage Cheese/Sour Cream             425             0.3             7.4              76             184
 \d\............................

[[Page 25964]]

 
Ice Cream.......................             118             1.3             2.0             100             118
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    Total.......................           5,769             1.7           100.0              47           1,808
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\a\ The Organic Trade Association's 2019 Organic Industry Survey (p. 80) included eggs as a subcategory for its
  summary on organic dairy sales, but we have excluded the data on eggs from this table.
\b\ USDA's AMS weekly reported prices in the 2020 weekly dairy retail report based on the first weekly report in
  January, April, July, and October. These reports are available at: https://www.ams.usda.gov/market-news/dairy.
  Average prices of product categories are averages across the four periods weighted by store counts. Markups
  are calculated as the: ((Organic Price-Conventional Price)/Conventional Price).
\c\ The dollar value of the organic markup for each category is: (Organic Sales x Markup)/(1+Markup).
\d\ The yogurt and butter, sour cream and cottage cheese markups are respectively the average of the markups of
  four yogurt products and butter, sour cream and cottage cheese products, weighted by counts of stores
  advertising organic products. Cheese markups are for natural varieties in 8 oz. blocks.

    Table 1 also includes markups in the prices of dairy products 
marketed as organic versus conventional (or ``nonorganic'') products. 
For dairy products, the average organic markup was 47 percent and 
totaled $1.8 billion in value.\13\ In market equilibrium, this markup 
reflects both the higher costs of organic production and the value 
consumers place on organically labeled products and their various 
underlying attributes. While AMS does not have estimates of the 
specific values of each attribute, the agency assumes that adjustments 
to the organic production standards that would reduce production costs 
must be simultaneously weighed against those adjustments' potential to 
affect markups.
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    \13\ National Retail Report--Conventional vs Organic--https://usda.library.cornell.edu/concern/publications/000000043?locale=en.
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    The 2016 NASS Organic Production Survey estimated that U.S. had 
approximately 2,559 certified and exempt organic dairy farms that 
milked a peak of 279,021 cows in 2016.\14\ These organic dairy farms 
had milk sales of nearly $1.4 billion in 2016. Despite the more recent 
sales declines, total organic milk production in the United States 
increased to 4.0 billion pounds in 2016, representing an 18.5 percent 
increase in production from 2015 and 44.5 percent increase since 2011. 
In that same time frame, the number of certified organic farms grew 1 
percent over 2015 (2,531 farms in 2015) and grew 41 percent compared to 
2011 (1,812 farms in 2011).
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    \14\ USDA NASS. 2017. Census of Agriculture--2016 Certified 
Organic Survey. Available online at: https://www.nass.usda.gov/Surveys/Guide_to_NASS_Surveys/Organic_Production/.
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    In comparison, the Organic Integrity Database \15\ identified 
approximately 3,516 organic livestock operations certified for 
production in January of 2020 that included ``dairy, milk, cow, 
cattle'' in their description of operations.\16\ Of these operations, 
49 operations were identified as operations milking ``goats'' or 
``sheep'' (and not bovine animals). An additional 286 were breeders, 
replacement heifer operations, or cull cattle handlers, all of which 
did not indicate that they produced milk. In all, the 3,181 farms in 
this database are likely to produce organic milk and be affected by the 
rule through their organic replacement heifer purchases.
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    \15\ The Organic Integrity Database is available online at: 
https://organic.ams.usda.gov/Integrity/.
    \16\ Data was filtered for operations certified for livestock 
scope with certified livestock or handling products that include 
terms ``milk'' or ``dairy.''
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    AMS decided to use the 2016 NASS data for our analysis for the 
following reasons. Primarily, the Organic Integrity Database does not 
track the number of organic dairy cattle maintained by certified 
operations. Absent information indicating a higher population of dairy 
cattle (compared to NASS data), an upward adjustment of farm numbers 
alone, without an adjustment of animal numbers, has little effect on 
our analysis. Secondly, the NASS survey of organic production records 
the number of organic dairy cows even if it does not necessarily 
classify the farm owning them as a dairy farm. This could undercount 
the number of operations, but not the number of organic dairy animals. 
Lastly, the Organic Integrity Database may overcount the number of 
operations that are actively engaged in dairy farming because mixed use 
farms may obtain additional certifications if they intend to handle 
organic dairy cattle but are not actively engaged in it.\17\
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    \17\ For instance, these operations may become certified for 
dairy so that they can manage organic dairy animals under favorable 
market conditions.
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Organic Dairy Farms--Characteristics and Distribution
    Organic dairy farms are, on average, smaller than conventional 
dairy farms. NASS' Certified Organic Surveys Agriculture show that the 
number of milk cows owned by organic dairy farms averaged 116 head in 
2011, 106 head in 2015, and 109 head in 2016. In contrast, NASS' Census 
of Agriculture showed the number of milk cows for conventional dairy 
farms averaged 144 head in 2012 and 175 head in 2017.
    Organic dairy farms also have lower yields, on average, than 
conventional dairy farms. The 2016 Survey of Organic Agriculture showed 
that each organic cow produces about 14,461 pounds of milk annually, or 
48 pounds per day over a 300-day lactation period. NASS production data 
for 2018 shows that across all operations (conventional and organic) 
average production is 23,149 pounds of milk per animal annually, or 77 
pounds per day over the same 300-day period. Despite higher production 
costs and lower yields, organic dairy farms can be economically viable 
through the price markups they receive over conventional milk and milk 
products. Table 1 shows that the average markup for organic milk 
products averaged 47 percent at the retail level.
    Based on the 2016 NASS Survey of Organic Production Data, Table 2 
shows that the highest concentration of organic dairy farms is in the 
Northeast and Upper Midwest regions,\18\ but that large organic dairy 
farms in California and Texas represent a large share of output. The 
five States with the largest number of certified organic dairy farms 
(Wisconsin, Pennsylvania, New York, Ohio, and Indiana) accounted for 
65.7 percent of the total farms. However, those States represented less 
than 30 percent of national organic milk production.
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    \18\ USDA's Certified Organic Production Survey available online 
at: https://www.nass.usda.gov/Surveys/Guide_to_NASS_Surveys/Organic_Production/.
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    By contrast, the West and South Central regions accounted for the 
highest milk production per farm. The two highest organic milk 
producing States (California and Texas)

[[Page 25965]]

represented only 4.3 percent of total certified organic dairy farms, 
while producing 31.6 percent of the total organic milk nationally. The 
survey also showed significant regional differences in the number of 
milk cows on dairy farms. The Northeast and North Central regions 
average 58 head per farm; the Southeast 112 head; the West 405 head, 
and the South Central 1,667 head per farm. ARMS and NAHMS data showed 
similar patterns of size difference across regions.

                       Table 2--Top States With Organic Dairy Farms Compared to Production
                                                     [2016]
----------------------------------------------------------------------------------------------------------------
                                                     Number of      Percent of         Milk         Percent of
                                                  organic  dairy   U.S. organic     production       U.S. milk
                                                       farms        dairy farms      (pounds)       production
----------------------------------------------------------------------------------------------------------------
United States...................................           2,559             100   4,034,989,854             100
California......................................             104             4.1     795,750,804            19.7
Texas...........................................               6             0.2     481,392,352            11.9
Wisconsin.......................................             453            17.9     370,627,696             9.2
Oregon..........................................              46             1.8     342,534,830             8.5
New York........................................             471            18.6     327,387,420             8.1
Pennsylvania....................................             300            11.9     196,641,598             4.9
Vermont.........................................             172             6.8     171,463,088             4.2
Washington......................................              41             1.6     128,685,429             3.2
Minnesota.......................................             108             4.3     127,828,496             3.2
Ohio............................................             212             8.4     119,264,078             3.0
Idaho...........................................              20             0.8     118,291,465             2.9
Indiana.........................................             225             8.9     113,879,386             2.8
Michigan........................................              70             2.8      65,950,978             1.6
Iowa............................................              74             2.9      46,847,454             1.2
Maine...........................................              63             2.5      44,456,548             1.1
----------------------------------------------------------------------------------------------------------------

The Organic Dairy Market--Replacement Animals
Cull and Mortality Rates
    Operations source replacement animals from on- and off-farm sources 
to replace animals that are sold, die, or are intentionally removed 
(``culled''). The APHIS NAHMS surveys \19\ in 2007 and 2014 provide 
data on how many animals are culled (removed) from U.S. dairies 
annually and the reasons for their removal. Most dairy cows were 
removed for udder problems or reproductive problems, followed by 
lameness and poor production.\20\ In the 2007 APHIS NAHMS survey of 
dairies, the national rate of permanently removing a dairy animal from 
a farm (excluding cows that died) was 23.6 percent \21\ while the 2014 
survey found a rate of 28.4 percent.\22\ The 2014 NAHMS survey found 
that 21 percent of adult organic cows were removed from the organic 
herd. These figures include animals that are sold as replacement 
females to other dairies. The 2014 survey found a lower percentage of 
cows were permanently removed on small and medium operations (26.0 and 
26.3 percent, respectively) than on large operations (29.7 percent).
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    \19\ USDA APHIS. NAHMS Dairy, 2007, Part I: Reference of Dairy 
Cattle Health and Management Practices in the United States, 2007. 
This survey included both nonorganic and organic dairy animals. 
Available online at: http://go.usa.gov/xKfEh.
    \20\ USDA APHIS. NAHMS Dairy 2007, 84.
    \21\ USDA APHIS. NAHMS Dairy 2007, 87.
    \22\ USDA APHIS. NAHMS Dairy 2014, Report I: Dairy Cattle 
Management Practices in the United States, 2014. Available online 
at: http://go.usa.gov/xKfEh, 218.
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    The same surveys provide information about the deaths of animals on 
dairies. Overall, annual mortality rates were 7.8 percent for un-weaned 
heifers, 1.8 percent for weaned heifers, and 5.7 percent for cows (2007 
survey). In 2014, NAHMS identified that about 5 percent of adult 
organic dairy cows die on the farm (compared to 21 percent of adult 
organic cows that were removed for other reasons). These numbers were 
roughly consistent with the 2007 report.
    Between culling and mortality, a dairy farm would need to raise or 
purchase females that represent about 30 percent (23.6 percent culled 
plus 5.7 percent deaths) of the farm's herd size to maintain its size. 
As a lactating dairy herd (cattle) typically calves about 50 percent 
female offspring each year, the overall dairy herd should have enough 
replacement females to replace culled animals and animals that die. 
This conclusion considers downward adjustments for mortality (using 
2007 NAHMS rates noted above of 7.8 percent and 1.8 percent) and 
additional reduction for culling.\23\ The additional (excess) 
replacement female animals should allow organic dairy operations to 
expand the number of animals in their herds should they wish to expand. 
This scenario has not considered that producers may choose to breed 
with sexed semen which will increase the number of female offspring 
available to the dairy farm.
---------------------------------------------------------------------------

    \23\ As an example, a 100-cow lactating dairy herd would produce 
about 50 heifers annually (i.e., 50 percent of births). Considering 
this heifer group as a single group, a 7.8 percent mortality rate 
would reduce the herd to about 46.1 animals by the end of year one 
(assuming a 7.8 percent mortality rate over the entire year). 
Additionally, we assume a 10 percent cull rate could further reduce 
this to 41.5 animals at the end of year one. By the end of the 
second year, this number could be reduced another 1.8 percent 
(mortality rate for weaned heifers) to 40.7 animals. Assuming a 
further 10 percent reduction due to culls, the original 50-animal 
group may be reduced to 36.6 animals by the end of year two.
---------------------------------------------------------------------------

Sourcing Organic Replacement Animals
    Most organic dairy farms replace culls and deaths with replacement 
heifers that are born and raised on the farm. The 2014 NAHMS data 
reports that 96.5 percent of organic replacement heifers are born and 
raised on the organic operation. An additional 2.6 percent of the 
replacement heifers are born on the operation and are subsequently 
raised off the operation before returning to the operation. The 
remaining 0.9 percent of replacement females are born off the operation 
and are presumably purchased from other operations.
    The 2016 ARMS data also provides information about how dairies 
source replacement animals. Overall, ARMS data indicates that in 2016, 
the average organic dairy farm milked 102.7 cows and added 43.0 
replacement animals of all types. Of those replacements, 93.8 percent 
(40.35 head) were born on the farm (and owned continuously by it)

[[Page 25966]]

and 85.1 percent (36.62 head) were both born and raised on the farm. 
Based on 2,559 total dairy farms with a mid-point herd size of 267,523 
reported in the Census of Agriculture, ARMS data indicates that 110,037 
total heifers and milk cows (41.1 percent of the herd) were added to 
operations in 2016.\24\ Purchased animals from off-farm sources 
included 4,325 milk cows (3.9 percent), 1,953 large heifers weighing 
more than 500 pounds (0.73 percent), and 559 small heifers weighing 
less than 500 pounds (0.2 percent).
---------------------------------------------------------------------------

    \24\ The 2017 ARMS survey indicates that the average organic 
herd size is 102.7 head while the 2016 Census of Organic Production 
indicates it is 104.5 (= 267,523 head/2,559 farms).
---------------------------------------------------------------------------

    Of the organic farms responding to the 2016 ARMS, 8.7 percent 
reported purchasing dairy cows and 10.9 percent reported buying 
replacement heifers. Farms that purchased milk cows purchased an 
average of 19 cows per farm and those that purchased heifers bought an 
average of 7 head. Most organic dairies also reported selling cull cows 
(animals that are no longer productive for milk production and are sold 
for beef), milk cows, and replacement heifers. Organic dairy farms sold 
an average of 1.6 milk cows and 1.3 replacement heifers with sales of 
replacement heifers exceeding purchases. Alternatively, the 2014 NAHMS 
data similarly show that the average organic dairy farm added 39 
replacements that were born on the operation and added to the milking 
herd and purchased 7 replacements that were added to the milking herd.
    Exact data on how many replacement heifers bought were transitioned 
heifers and how many were managed organically from the last third of 
gestation are not available. For this reason, this RIA calculates costs 
for two conjectured values for the share of purchased replacements that 
are transitioned heifers. Furthermore, AMS does not have aggregated 
data on what approach producers currently use when purchasing 
replacement heifers. Therefore, we do not have data on how many 
producers are bringing heifers into organic production as nonorganic 
animals and transitioning them into organic (or purchasing animals 
transitioned on other organic operations) versus sourcing and managing 
animals as organic from the last third of gestation. Excluding small 
heifers, the percentage of replacement heifers that are transitioned to 
organic production is, at most, 1.7 percent.\25\ AMS also notes that 
the OIG report provided survey data indicating the proportion of 
sampled producers that may be practicing continuous transitioning. OIG 
found that out of a sample of six of the top ten certifying agents that 
certify the most organic dairy operations in the U.S., three allowed 
continuous transitioning.
---------------------------------------------------------------------------

    \25\ This percentage represents 0.75 purchased (large) heifers 
divided by 43.0 replacements (2016 AMRS data).
---------------------------------------------------------------------------

Regulatory Impact Analysis

Comments Received on Costs and Benefits
    AMS specifically sought input from the public about the estimated 
costs and benefits presented in the 2015 proposed rule. We received 29 
comments in 2015 and 82 comments in 2019 that addressed our estimated 
costs and benefits. We summarize and respond to these comments below.
Availability of Replacement Animals
    In 2015, some comments noted that organic heifer supplies were 
tight and that the heifers for sale were not of consistently high 
quality. This led commenters to believe the proposed rule could curtail 
growth of existing or new operations, restrict milk supply, and raise 
consumer prices. Some comments urged AMS to seek a consistent standard 
for all operations while considering that operations may need to grow 
to meet consumer demand.
    A comment in 2015 calculated that a dairy could be expected to 
raise only enough of its own heifers to grow at an annual rate of 5 
percent, after accounting for morbidity and culling. This commenter 
questioned AMS' conclusion there would be an ``ample supply'' of 
organic heifers under the rule. The commenter estimated that the 
industry would take time to catch up with the demand for organic (from 
last third of gestation) heifers.
    Other comments in 2015 argued that there was an adequate supply of 
organic (last third of gestation) heifers available or that operations 
would raise and sell them if the price was higher and reflected the 
cost of raising them. In 2019, commenters claimed there is a surplus of 
organic (last third of gestation) heifers available to meet market 
needs and that there is an ample supply of animals even if morbidity/
mortality rates are high or heifer selection is aggressive. No comments 
in 2019 claimed that organic heifer supplies were constrained.
    AMS response: Based on our analysis of the comments received, AMS 
continues to believe that sufficient numbers of organic heifers 
(organically managed from last third of gestation) would be available 
after rule implementation to maintain and/or grow existing organic 
dairies. To mitigate potential and unforeseen impacts, AMS proposes 
establishing a compliance date for this rule to allow animals in the 
middle of an approved transition to complete the transition and produce 
organic milk. AMS received many comments that supported this approach 
during the 2019 comment period.
Price of Replacement Animals
    A commenter in 2019 disagreed with AMS' estimate of a $1,300 cost 
difference between transitioned animals and last-third-of-gestation 
organic animals. The commenter believed AMS' estimate was too high. The 
commenter further explained that its ``discussions with dairy auction 
sales barns that previously sold organic cattle do not align with that 
value'' and the most common response it received from extension agents 
in the Northeast was that ``demand and verified sales have all but 
dried up for organic springing heifers.''
    AMS received many comments in 2019 related to the cost difference 
for raising heifers organically vs. nonorganically during the first 12 
months of life. One commenter found a $469 average cost difference 
(organic being more costly) per animal. Most comments noted a cost 
difference from $600 to $1,000 per calf, and some comments noted a 
difference as high as $1,300 per calf. Commenters tended to use the 
difference in production costs to describe the financial disadvantage 
and the harm to operations that source only last-third-of-gestation 
organic animals in comparison to operations that continually transition 
heifers to organic production.
    Commenters in 2015 and 2019 generally agreed that implementation of 
the proposed rule would result in greater demand for organic heifers 
and would likely increase the price of organic replacement animals. 
Many commenters viewed this scenario favorably, as it would benefit 
organic producers who sell last-third-of-gestation organic animals (as 
opposed to heifer-raising operations selling transitioned animals).
    AMS response: AMS continues to present the costs of the rule as a 
range based on different potential scenarios (see Table 4). We agree 
with comments that the price of organic heifers may increase, and we 
have estimated costs under two scenarios where the price of heifers 
increases by $500 and where the price does not increase. We estimate 
that the price of an organic (last third of gestation) heifer is $2,000 
and up to $2,500 if increased demand drives

[[Page 25967]]

prices upward. This represents at least a $1,000 premium for organic 
(last third of gestation) animals over transitioned animals. The 
estimated difference seems to agree with comments that production costs 
for these animals are $600 to $1,300 higher. We recognize that this 
price estimate may be high and thus the result might be considered an 
upper bound of the estimated costs.
Effect on Consumer Milk Price
    A commenter in 2015 estimated the rule would increase the cost of 
producing organic milk by 3.7 to 6.0 cents per half gallon (0.87 
percent to 1.42 percent, respectively) and that the increase would be 
passed to consumers and negatively affect consumer demand. However, AMS 
also received comments in 2015 from organic milk consumers that 
supported the proposed rule even recognizing the price of milk could 
increase. Another comment in 2015 noted that if supply of organic milk 
were to become very restricted under the new requirements, retail 
prices could increase to a point where consumer demand would flatten or 
even decrease.
    In 2019, stakeholders were more concerned with how consumer milk 
prices negatively affect organic dairy producers than how they affect 
consumers. Comments frequently discussed the idea that there is an 
oversupply of organic milk currently ``flooding the market'' that are 
driving consumer prices down.
    AMS response: Table 1 figures indicate that the retail markup of 
organic milk products over conventional milk products is 47 percent. 
The AMS organic dairy report for February 8th to 12th, 2021, indicated 
that the 2020 average (farm-level) organic milk pay price was $31.55 
per hundredweight while the USDA World Agricultural Demand and Supply 
Estimates for April 2021 indicate that the 2020 (farm-level) all milk 
price was $18.32 per hundredweight. Together these values indicate that 
the farm-level organic markup is 72 percent. The ERS farm share of the 
retail price for the milk and dairy basket in 2018 was 28 percent. 
Collectively, this implies that the farm share of the retail price for 
organic milk is 32 percent.
    Table 4 shows that the total costs of this proposal to the organic 
milk producers net of transfers would be $1,462,500 under our 50 
percent transitioning scenario and $731,000 under our 25 percent 
transitioning scenario discussed further below. The Census of Organic 
Agriculture indicates that farm-level organic milk revenue was $57.8 
million in 2016.\26\ Based on these figures, AMS estimates that a final 
rule would increase producer costs by 1.3 to 2.5 percent and retail 
costs by 0.4 to 0.8 percent. Price effects will depend on the specific 
products being considered. AMS first-of-the-quarter price reports 
indicate that a half gallon of organic milk has an average retail price 
of $3.98. Based on our calculations, a final rule might raise this 
price by 2 to 3 cents. AMS does not believe that price effects of this 
magnitude are likely to limit industry growth or noticeably affect 
demand.
---------------------------------------------------------------------------

    \26\ Given the recency of the data and the relatively low 
inflation rate throughout, we do not adjust for inflation in our 
estimates. We note that ARMS data and the Census of Agriculture Data 
both reflect 2016 data indicating no need to adjust for inflation in 
calculating markups.
---------------------------------------------------------------------------

Number of Transitioning Animals
    One commenter in 2015 estimated there were 60,000 conventional 
animals transitioning to organic production on new dairy farms and 
established dairy farms. The commenter predicted this could lead to an 
oversupply of milk and decrease in milk price (income for the dairy 
farm). Another commenter in 2019 believed that ``tens of thousands'' of 
animals had transitioned since 2015.
    AMS response: AMS recognizes that we do not have precise data on 
how many animals are transitioned on an annual basis by certified 
organic operations. Our experience indicates that most organic dairy 
farms do not continually transition animals. However, because of the 
lack of precise numbers available, we estimate that transitioned 
animals comprise 25 percent (low end) to 50 percent (high end) of all 
purchased replacement animals. AMS did not receive concrete data from 
comments to support alternative figures.
Changes in Dairy Market Since 2015
    In 2019, many comments noted that the organic dairy industry had 
changed considerably since AMS published the proposed rule in 2015. 
Primarily, commenters noted a decline in consumer demand for organic 
milk and increased availability of organic milk and organic dairy cows. 
Some comments noted that fewer operations are transitioning to organic 
production due to limited opportunities to secure a contract with a 
milk handler or because the price premium for organic production is no 
longer an incentive to transition. Some 2019 comments noted that the 
cost of the rule would be less than AMS estimated in 2015 due to 
increased availability of organic (from last third of gestation) 
replacement animals and a corresponding drop in prices for these 
animals.
    AMS response: AMS recognizes that the organic dairy market in 2015 
differed from the current organic dairy market. Our calculation of 
costs for this proposal is higher than those calculated in 2015 because 
the cost calculation is based, in part, on the number of organic dairy 
operations and total organic herd size. These numbers have both 
increased since 2015, so the estimated cost is higher.
Costs and Benefits (General)
    A commenter in 2019 disagreed with AMS' cost analysis in the 
proposed rule. It stated that the cost analysis ``fails to capture the 
cost inequities of not implementing the proposed rule,'' and 
specifically points to its ``failure to distinguish production costs 
between organic and transitioned heifers.'' Without this information, 
the commenter argues ``neither the agency nor stakeholders can 
understand the true cost, and true harm, of implementing or not 
implementing the proposed rule.'' Furthermore, the commenter calculated 
the harm to operations that source only last-third-of-gestation organic 
animals using the difference in production costs for transitioned 
animals and last-third-of-gestation organic animals. The commenter 
estimated that 25 percent or 50 percent of all culled organic dairy 
animals are replaced with transitioned animals and calculated 
competitive harm of $9.29 million to $18.58 million annually ($469 
multiplied by 25 percent to 50 percent of all culled animals using a 
cull rate of 28.4 percent).
    AMS response: The commenter estimates that the competitive harm 
from the current enforcement practice of allowing transitioned animals 
is $9.29 million (under the 25 percent scenario) and $18.58 million 
(under the 50 percent scenario). These estimates are based on the 
commenter's finding that a conventional heifer costs $462 less to raise 
and that organic farms require 79,242 replacement heifers annually 
based on a 28.4 percent cull rate on the 279,021 (head) total U.S. 
organic herd.
    AMS agrees with the commenter's general concern that organic dairy 
farms need to replace a substantial share of cows each year and that 
the uneven application of rules regarding transition of heifers creates 
artificial cost disparities. AMS uses the price difference for 
purchased replacement heifers (transitioned vs. organic from last third 
of gestation) as its estimate of the per animal increase in costs for 
dairy farms that have used transitioned animals. AMS recognizes that 
this does

[[Page 25968]]

not account for increased costs to operations that might maintain 
ownership of offspring that are born on-farm, subsequently removed from 
organic production, and then transitioned back into organic production. 
We understand that most certifiers do not interpret the current 
regulations to allow this practice. For this reason, AMS believes that 
applying the cost differential to replacement heifers that are both 
purchased and unpurchased (i.e., owned) would likely overstate the cost 
of the rule. However, AMS seeks data from industry regarding the extent 
to which unpurchased heifers are transitioned to inform our cost 
calculations.
    As described in our consideration of regulatory alternatives, AMS 
expects that purchases of replacement heifers that are transitioned 
animals would increase if AMS allowed this practice (Alternative A). 
Additionally, dairy operations utilizing heifer-raising operations 
while retaining ownership may switch to operations that use 
conventional practices and then transition the animals. Table 3 shows 
that only 11 percent of operations purchase replacement heifers. The 
uneven application of the current rule suggests that a smaller share of 
producers is benefiting from the cost advantage of transitioned 
heifers, at a level higher than that suggested by the average number of 
head purchased.
Costs of Proposed Rule
    The proposed rule would likely increase production costs on organic 
livestock and dairy operations that currently continually transition 
nonorganic animals and/or operations that source transitioned dairy 
animals as replacements. Additionally, any dairy that purchases organic 
heifers may pay higher prices for organic animals due to increased 
demand, but organic operations selling replacement heifers would 
benefit from any higher prices.
    We assume that farms that exclusively raise their own organic 
replacement heifers and manage those animals organically from birth 
would not incur additional costs under the proposed rule. Similarly, 
dairy farms that send organic heifer calves to other certified organic 
operations to have the animals continuously managed as organic (for 
some period of time before returning to the farm) would not incur 
additional costs. Finally, nonorganic dairy operations converting to 
organic production for the first time would not incur new costs during 
the 12-month transition period; they may transition animals on a one-
time basis under the proposed rule.

Estimated Costs for Dairies

    The proposed rule creates two costs for organic dairy farms. First, 
dairy farms that regularly transition heifers or regularly purchase 
transitioned replacement heifers after their initial transition to 
organic would be required either to purchase higher-cost organic (from 
last third of gestation) replacement heifers or to raise their own 
replacement by raising organic calves to maturity. This analysis 
assumes that transitioned animals are currently sold at a discount 
compared to organic (from the last third of gestation) replacement 
animals.
    Second, by raising the demand for organic replacement heifers, the 
proposed rule may raise the price of organic replacement heifers if 
operations currently selling organic (transitioned) replacement heifers 
cannot comply with the proposed requirements and operations that sell 
organic (last third of gestation) replacement heifers cannot easily 
increase offerings. While this price increase is likely to be small, it 
would raise costs to any organic dairy farm that is a net buyer of 
organic replacement heifers, regardless of whether it continually 
transitions animals or purchases transitioned replacement heifers. This 
same price effect, however, would create an offsetting benefit to any 
dairy farm that is a net seller of organic replacement heifers.
    AMS estimates the costs of the proposed rule below by estimating 
the total number of replacement animals purchased by U.S. organic dairy 
cattle operations annually. We then estimate the percentage of all 
purchased animals that does not meet the requirements of the proposed 
rule (i.e., the percentage of animals bought by organic operations that 
are not organic from the last third of gestation). Due to the 
unavailability of precise data, we estimated a range of possibilities 
(25 percent to 50 percent of all purchased animals). To calculate 
costs, we then multiply the number of animals by the price difference 
between organic (from the last third of gestation) and nonorganic 
heifers (we use nonorganic heifer prices as a substitute for 
transitioned animals in the absence of that data). Finally, we 
considered a possible increase for the price of organic animals to 
calculate the maximum expected costs. Below we discuss the data and 
calculations in detail.
    The ARMS survey includes farm-level data on purchases and sales of 
heifers weighing more than 500 pounds, a category that explicitly 
includes sales of springers.\27\ While the ARMS survey does not 
identify whether purchased heifers have been organic from birth or have 
transitioned to organic status, it does identify whether the farms 
themselves are certified or transitioning to organic status. Since all 
cattle sold by organic dairies are themselves organic and all cattle 
sold by non-organic dairies are conventional, this analysis assumes 
that the difference in the large heifer sales prices for organic or 
transitioning farms and other farms reflects the difference in costs 
for those animals. This analysis estimates costs under the alternative 
assumptions that either 25 or 50 percent of all purchased heifers are 
transitioned heifers.
---------------------------------------------------------------------------

    \27\ A springer is a heifer (i.e., a female cow that has not 
previously calved) that is 7 to 9 months pregnant and will begin 
producing milk within 0 to 2 months.
---------------------------------------------------------------------------

    We used 2016 ARMS data to estimate the number of replacement 
animals purchased by organic operations. Table 3 provides the average 
numbers and prices of large heifers bought and sold by organic or 
transitioning farms, divided into four different size categories, along 
with figures for all organic or transitioning farms and all other non-
organic farms. Compared with their non-organic counterparts, organic 
and transitioning dairy farms are smaller in herd size, less likely to 
purchase large heifers as replacements, and more likely to sell large 
heifers. On average, organic dairies purchase replacement large heifers 
at a rate of 0.73 percent of their total herd size (or 0.75 head) and 
sold large replacement heifers at a rate of 1.2 percent of their total 
herd size (or 1.27 head).
    However, only 10.9 percent of dairy farms purchased large heifers 
so that the average farm purchasing heifers bought 6.9 head. Based on 
an average mid-point herd size of 267,523 milk cows,\28\ all organic 
dairies purchase 1,953 large heifers annually. Rounding the large 
heifer purchase figure to 1,950, these

[[Page 25969]]

figures imply that 488 purchased heifers are transitioned (rather than 
managed organically from the last third of gestation) under our 25 
percent assumption, and 975 are transitioned heifers under our 50 
percent assumption.
---------------------------------------------------------------------------

    \28\ The mid-point herd size is the average of the Jan 1 and Dec 
31 herd size for 2016. NASS Organic Production Survey. It is 
slightly less than peak heard size of 279,021.

      Table 3--Heifer Purchase and Sales Price and Related Statistics by Dairy Farm Size and Organic Status
                                                     [ARMS]
----------------------------------------------------------------------------------------------------------------
                                       1-49            49-99          100-199          200+             All
----------------------------------------------------------------------------------------------------------------
                                     Organic and Organic Transitioning Farms
----------------------------------------------------------------------------------------------------------------
Number of Farms in ARMS Survey..             144             114              42              32  ..............
Largest Number of Cows Milked...              33              68             132             499             103
L. Heifers Sold (Head)..........            0.31            0.84            0.60            8.02            1.27
Sold L Heifers ($/Head).........          $1,350          $1,993          $2,111          $1,918          $1,887
% of Farms Purchasing L. Heifers              8%             16%             10%              7%             11%
Purch. L. Heifers as a % of Herd            1.5%            1.0%            1.3%            0.2%            0.7%
----------------------------------------------------------------------------------------------------------------
                                                   Other Farms
----------------------------------------------------------------------------------------------------------------
L. Heifers Sold (Head)..........            1.14            1.37            1.73            9.68             5.5
Sold L Heifers ($/Head).........            $600          $1,161          $1,304            $989          $1,012
% of Farms Purchasing L. Heifers            3.3%            7.2%            4.8%           12.1%            3.3%
Purch. L. Heifers as a % of Herd            0.2%            1.0%            0.8%            3.2%            2.9%
----------------------------------------------------------------------------------------------------------------

    We also used the 2016 ARMS data to estimate the price difference 
between organic replacement animals and nonorganic replacement animals. 
Table 3 shows the price at which organic and transitioning dairies sold 
large replacement heifers. Because the price of transitioned heifers 
compared to last-third-of-gestation organic heifers is not available, 
our analysis uses the cost of non-organic large heifers as a 
substitute. This is likely to exaggerate the cost differential. The 
large heifer selling price of $1,887 at organic and transitioning dairy 
farms was $865 more than the selling price of $1,012 at non-organic 
farms. Across individual farm size categories, however, this difference 
in prices between organic and non-organic selling prices varied across 
size categories, ranging from $750 (farms with 0-49 cows) to $937 (200+ 
cows). Based on the data, our analysis assumes that before the 
imposition of any of the proposed changes, a transitioned heifer costs 
$1,000 and an organic heifer costs $2,000 so that the difference in 
price between the two animal types is slightly higher than the largest 
difference observed in the data.
    Related data and public comments support these assumptions on price 
relationships. The approximately $1,000 price of non-organic bred 
heifers (our substitute for the price of a transitioned animal) is 
supported by livestock auction market prices at five sites \29\ 
collected by AMS in November of 2019. These data show that bred heifers 
in the third trimester (i.e., springers) of supreme and approved 
quality sold for $1,045.
---------------------------------------------------------------------------

    \29\ This includes data collected in the AMS Livestock and 
Replacement Cattle Reports reported at https://www.ams.usda.gov/market-news/feeder-and-replacement-cattle-auctions for the following 
five auctions: Mid-Georgia Livestock, Jackson, GA; Empire Livestock, 
Cherry Creek, NY; Mammoth Cave Dairy Auction, Smiths Grove, KY; New 
Holland Sales Stables, New Holland, PA; and Toppenish Monthly Dairy 
Replacement Sale, Toppenish, WA.
---------------------------------------------------------------------------

    Additionally, the assumptions are supported by public comments that 
indicate it costs between $600 and $1,300 more to raise an organic calf 
than a nonorganic calf.
    The increased demand for 975 additional organic (from last third of 
gestation) replacement heifers under the 50 percent transitioning 
assumption (or 488 additional organic replacement heifers under the 25 
percent transitioning assumption) is not expected to lead to a large 
increase in their price because many of the key inputs to producing 
those organic replacement heifers can be readily expanded. These inputs 
include organic heifer calves, additional organic feed, and additional 
organic pasture land. Because heifer calves are often sold for meat 
rather than milk production, the number of these animals that might be 
re-directed into milk production is far less than their total 
availability, a situation providing a strong check on price increases 
for that input. Moreover, the additional organic pasture and additional 
feed required for 975 additional organic replacements are relatively 
small compared to the existing requirements for the 103,000 heifers 
currently retained by organic farms for their own replacements.
    However, this analysis assumes that the increased demand for 
organic replacement heifers pushes up their price by $500, or 25 
percent,\30\ to $2,500. In this case, the total cost of purchasing 
replacement heifers by organic dairy farms would be $4.875 million per 
year (1,950 replacements animals purchased from off farm at $2,500 per 
head). This would be the new total cost of purchasing organic heifers 
rather than the additional cost of purchasing organic heifers, which is 
considerably less.\31\
---------------------------------------------------------------------------

    \30\ A 25 percent price increase resulting from a 50 percent 
increase in quantity supplied is consistent with an elasticity of 
supply of 2.
    \31\ These costs reflect only those for dairy cattle. Costs for 
purchasing dairy sheep and goats are not included in this analysis.
---------------------------------------------------------------------------

    Table 4 shows the estimated costs to and intra-industry transfers 
between organic dairy farms purchasing organic heifers under 
alternative assumptions on price response and replacement heifer 
purchases that would follow the proposed rule. Industry transfers are 
costs to a set of dairy farms that are exactly offset by benefits to 
another dairy farm. In the case of the proposed rule that would affect 
organic dairy farms, such transfers would occur because farms that are 
currently net sellers of organic heifers see sales revenue increase 
from price increases for organic heifers should the rule be enacted, 
even as net buyers of organic cattle see their costs increase. If the 
price of organic heifers does not increase, then no transfer would 
occur.
    AMS expects that organic dairy farms will purchase 1,950 
replacement heifers per year based on our analysis of ARMS data. If the 
price of organic dairy heifers were to be unchanged following the rule, 
our analysis finds that total costs would increase by $975,000 per year

[[Page 25970]]

under the assumption that 50 percent of purchased replacement animals 
had been transitioned animals, or costs increase by $488,000 under the 
assumption that 25 percent of purchased replacement animals had been 
transitioned animals. In these cases, there are no transfers. If the 
price of organic dairy heifers rises to $2,500 and 25 percent of 
purchased replacements are transitioned, our analysis finds that total 
costs are $732,000 (reflecting 488 new organic replacement heifers 
purchased for $1,500 over the conventional price) and transfers are 
$731,000 (reflecting 1,462 previously purchased organic heifers 
purchased at price $500 higher).
    If the price of organic dairy heifers rises 50 percent, and 50 
percent of purchased replacements are transitioned, our analysis finds 
that total costs would be $1,462,500 (reflecting 975 new organic 
replacement heifers purchased for $1,500 over the conventional price) 
and transfers would be $487,500 (reflecting 975 previously purchased 
organic heifers purchased at price $500 higher). This information is 
presented in Table 4 below.

   Table 4--Estimated Costs Under Alternative Assumptions for Price Response and the Quantity of Transitioned
                           Animals Purchased by Certified Organic Operations Annually
----------------------------------------------------------------------------------------------------------------
                           Assumptions regarding . . .                               Estimated
---------------------------------------------------------------------------------   additional       Estimated
                                                                                   costs net of      transfers
             . . . Price response                  . . . Transitioning heifers       transfers
----------------------------------------------------------------------------------------------------------------
The price of organic heifers remains at $2,000  25 percent of heifers are               $488,000              $0
                                                 transitioning.
The price of organic heifers remains at $2,000  50 percent of heifers are                975,000               0
                                                 transitioning.
The price of organic heifers rises from $2,000  25 percent of heifers are                732,000         731,000
 to $2,500.                                      transitioning.
The price of organic heifers rises from $2,000  50 percent of heifers are              1,462,500         487,500
 to $2,500.                                      transitioning.
----------------------------------------------------------------------------------------------------------------

    If some of the sellers of the 975 additional organic heifers 
required under the 50 percent assumption (or the 488 additional organic 
heifers required under the 25 percent assumption) have costs to 
supplying these animals that are less than $2,500, then industry 
transfers would exceed the values stated in Table 4. Increased sales 
are expected to benefit operations that have more flexibility in 
capacity (e.g., available pasture) to accommodate raising organic 
replacement heifers for the organic market. Importantly, sales response 
across individual farms will likely be uneven and depend on site-
specific factors such as the farm's ability to access new buyers and 
increase organic pasture.
    Differences in purchase patterns of milk cows and replacement 
heifers also vary by size in a way that affects the distribution of 
costs associated with the proposed rule. Ten percent of operations with 
fewer than 50 cows reported purchasing milk cows, and the average 
number purchased was 6 head. Five percent of operations with between 50 
and 99 cows reported purchasing milk cows, and the average number 
purchased was 14 head. Three percent of operations with between 100 and 
199 cows reported purchasing milk cows, and the average number 
purchased was 10 head. No operations with 200 or more cows reported 
purchasing milk cows.
    The pattern is different for purchasing heifers. Eight percent of 
operations with fewer than 50 cows reported purchasing heifers, and the 
average number purchased was 7 head. Sixteen (16) percent of operations 
with between 50 and 99 cows reported purchasing heifers, and the 
average number purchased was 4 head. Ten (10) percent of operations 
with between 100 and 199 cows reported purchasing heifers, and the 
average number purchased was 17 head. Seven (7) percent of operations 
with 200 or more cows reported purchasing heifers, and the average 
number purchased was 12 head. Based on a cost differences of $1,500 per 
head between transitioned replacement heifers and organic replacement 
heifers, and assuming that half of replacement heifers currently 
purchased are transitioned, the average dairy with fewer than 50 cows 
would pay an additional $382-$510; dairies with between 50 and 99 cows 
would pay an additional $499-$666; dairies with between 100 and 199 
cows would pay an additional $1,316-$1,755; and dairies with 200 or 
more cows would pay an additional $628-$837. The costs by size of 
operation are summarized in Table 5.

                       Table 5--Costs by Size of Operation for Purchasing Organic Heifers
----------------------------------------------------------------------------------------------------------------
                                                               Size of operation
                             -----------------------------------------------------------------------------------
                               Fewer than 50 cows       50-99 Cows          100-199 Cows       200 Or more cows
----------------------------------------------------------------------------------------------------------------
Share of Operations.........                  43%                  34%                  13%                  10%
Percent of operations that                     8%                  16%                  10%                   7%
 purchased replacement
 heifers....................
Average number of                            6.68                 4.06                17.22                12.33
 replacement heifers
 purchased..................
Number of Farms.............                1,114                  879                  324                  247
Average Cost Per Farm.......            $382-$510            $499-$666        $1,316-$1,755            $628-$837
Total cost for purchase of      $425,849-$567,798    $438,939-$585,252    $426,377-$568,502    $155,007-$206,676
 replacement heifers across
 size class.................
Cost per operation for              $5,009-$6,678        $3,048-$4,063      $12,919-$17,225       $9,247-$12,330
 operations purchasing
 replacements...............
----------------------------------------------------------------------------------------------------------------

    The costs in Table 5 do not reflect the offsetting effect of 
transfers. For this reason, the sum of the total costs of replacing 
heifers across all size categories ($2.41 million and $2.89 million) 
roughly equals the sum costs (net of transfer) and transfers in Table 4 
($2.44 million and $2.92 million) with minor discrepancies reflecting 
rounding differences.

Effects on Heifer-Raising Operations

    Organic dairy operations that continually source transitioned 
heifers would need to change their practices to meet the requirements 
of the proposed

[[Page 25971]]

rule. In some cases, organic dairy operations source their transitioned 
heifers from off-site heifer-raising operations. Here, we discuss the 
potential effects of the proposed rule on these operations.
    A 2011 USDA NAHMS study on heifer-raising operations \32\ found 
that most heifers sent to heifer-raising operations (80 percent) are 
returned to their dairy of origin. The study also found that most 
heifer-raising operations receive weaned calves (rather than wet 
calves) and send them back as pregnant heifers. In the 2015 proposed 
rule, AMS specifically requested comments and data on the likely 
impacts on heifer-raising operations. We did not receive any data on 
the number of heifer-raising operations that continually transition 
animals for sale to organic dairies or on the number of animals raised 
by such operations annually. Aside from fragmentary evidence in the AMS 
Organic Integrity Database, AMS does not currently have specific data 
on the locations, numbers, or sizes of organic heifer-raising 
operations.\33\
---------------------------------------------------------------------------

    \32\ USDA, Animal Plant Health Inspection Service. Dairy Heifer 
Raiser, 2011 (October 2012). Available online at: https://www.aphis.usda.gov/aphis/ourfocus/animalhealth/monitoring-and-surveillance/nahms/nahms_dairy_studies.
    \33\ The Organic Integrity Database includes descriptions of the 
products for which organic farms are certified as recorded by the 
certifying agent. It lists 220 operations that recorded dairy cattle 
but not milk production (i.e., a possible indicator for a heifer-
raising operation). These operations were often identified as being 
involved with ``dairy cows,'' ``breeding operations,'' and 
``replacements.'' Unfortunately, the database does not provide 
sufficient information to use in our analysis of heifer-raising 
operations.
---------------------------------------------------------------------------

    In the absence of specific information, we considered that organic 
dairy operations could be using organic heifer-raising operations to 
transition animals on a continual basis by taking in nonorganic weaned 
calves (e.g., 12-month old heifers) and providing organic management 
for 12 months before returning the pregnant organic heifers to an 
organic dairy.
    Under the proposed rule, heifer-raising operations would not be 
required to change their animal production practices. These operations 
are certified organic and currently manage animals in compliance with 
the USDA organic regulations as a requirement of their organic 
certification. However, the proposed rule would not allow any 
operations, once certified, to continually source nonorganic animals. 
Therefore, these operations would be able to accept only weaned calves 
that had been managed organically from the last third of gestation.
    Within our analysis, we have assumed that competitive markets for 
both transitioning and replacement heifers have resulted in prices for 
these animals that are sufficiently high enough to allow sellers to 
recover the cost of raising these animals along with a ``normal'' rate 
of return on capital investment. The analysis assumes that the 50 
percent conjectured increase in price of organic replacement heifers is 
sufficient to simultaneously ensure that markets clear (i.e. quantity 
supplied equals quantity demanded) at the higher number of transacted 
animals and offset the increased costs to supplying more animals.
    As with other aspects of our analysis regarding supply response, 
AMS assumes that the ability of individual sellers of replacement 
heifers to adjust management practices to market conditions will vary 
with the site-specific characteristics of operations, such as their 
ability to find new buyers and access to additional organic pasture. 
Whether heifer-raising operations will increase or decrease sales of 
organic heifers following the implementation of the rule cannot be 
determined with the available data.

Effects on Consumers

    Most dairies report that they source at least some of their 
replacement cows from their own calves, and only 11 percent of all 
dairies purchase replacement heifers, with less than 1 percent of all 
replacements being purchased from off the farm. The majority of 
producers that do not purchase replacement heifers would not see an 
increase in costs. To replace purchased transitioned heifers, dairies 
would have to either raise their own replacements or buy them from an 
operation that sells organic (from last third of gestation) replacement 
heifers. Since the current supply of replacement heifers can be 
increased without large price increases, as detailed above, it is 
unlikely that the proposed rule would significantly increase milk 
production or milk costs to the consumer. Some commenters to the 2015 
proposed rule suggested that the limits on transitions would increase 
the price of organic milk for consumers. They noted that with the 
proposed limits on transitions, organic growth for existing organic 
dairy farms would be biologically capped at 5 percent. Any additional 
growth would need to come from new organic dairy farms or nonorganic 
dairy farms transitioning to organic milk production. These commenters 
stated that the price of organic milk for consumers could rise if 
demand approached the hard limit for dairy cattle growth.
    For additional discussion, see our response to comments on ``Effect 
on consumer milk price'' above.
Benefits of the Proposed Rule
    The proposed rule would provide producers and consumers of organic 
foods with multiple types of benefits. First, the rule would give 
specificity and clarity to the enforcement of regulations relating to 
the origin of dairy livestock and the management of breeder stock, 
Second, the rule would create uniformity in the application of the USDA 
organic regulations by generally requiring organic management for an 
animal's entire life. Together, these may enhance the value of organic 
premiums that consumers are willing to pay for milk certified under the 
USDA organic regulations by reducing uncertainty.
    The 2016 NASS Certified Organic Production Survey show that U.S. 
farms and ranches produced and sold $7.6 billion in certified organic 
commodities, up 23 percent from 2015. At the retail level, the OTA 2019 
U.S. Industry Survey found that retail sales of organic production 
totaled $52.5 billion, 6 percent above the previous year. Organic dairy 
cattle producers who sell organic dairy females may receive a benefit 
as part of an intra-industry transfer. AMS estimates that on the high 
side, the price of an organic springer may increase by $500 over 
current prices due to increased demand. If this price increase were to 
occur, dairy producers who are net sellers of replacement springers 
would benefit through the intra-industry transfer.
    AMS does not expect the proposed rule to increase demand for 
organic milk. However, AMS does expect the proposed rule to help 
support consumer confidence by preventing organic dairies from 
continuing to transition non-organic animals into organic milk 
production. The sustained demand should be valuable for organic milk 
producers and strengthen the value of the organic brand in the mind of 
consumers; these outcomes are not benefits in themselves, as that term 
is defined for purposes of Executive Order 12866 and OMB Circular A-4, 
but to the extent that they disincentivize the (costly) establishment 
of credentials that are alternative to USDA organic certification, the 
associated cost savings qualify as rule-induced benefits.
Alternatives Considered
    As required by Executive Order 12866, AMS considered alternative 
regulatory approaches in our development and analysis of the

[[Page 25972]]

proposal. AMS considered alternatives that would be both less stringent 
(less costly) and more stringent (more costly). The alternatives 
considered are shown in Table 6 and discussed below.

                                        Table 6--Alternatives Considered
----------------------------------------------------------------------------------------------------------------
                        Alternative                                              Description
----------------------------------------------------------------------------------------------------------------
(A) Allow Continual Transition............................  Allow any operation to transition nonorganic dairy
                                                             animals into organic production over a 12-month
                                                             period on a continual basis.
(B) Prohibit All Transitions..............................  Remove all exceptions for transition of nonorganic
                                                             animals.
----------------------------------------------------------------------------------------------------------------

Alternative A--Allow Continual Transition

    AMS considered amending the regulations to specify that any 
operation could transition dairy animals into organic production over a 
12-month period on a continual basis. Under OFPA, a dairy animal from 
which milk or milk products will be sold or labeled as organically 
produced must be raised in accordance with OFPA for not less than the 
12-month period immediately prior to the sale of such milk and milk 
products (7 U.S.C. 6509(e)(2)(A)).
    AMS could presumably allow transition of any dairy animal into 
organic production, without further limitation, if the animal were 
managed organically for the 12-month period prior to the sale of milk 
as organic. In effect, this would mean that an operation could 
continually transition nonorganic dairy animals into organic production 
on an ongoing basis, as opposed to allowing an operation to transition 
animals into organic production once. In this scenario, organic dairy 
farms using heifer-raising operations following organic practices would 
now use heifer-raising operations that treat the young animals with 
antibiotics and other medications prohibited in organic livestock 
production and/or provide nonorganic feed until one year before they 
were expected to produce milk. Also, in the scenario, all purchased 
replacements would be transitioned heifers. Relatedly, operations 
wanting to assure consumers that they had raised organic heifers under 
organic conditions through their entire lives would have to do so under 
a separate certification program.
    ARMS Data indicated that the average organic dairy operation kept 
40.4 heifers (or 39.3 percent of its herd) for breeding and 36.6 
heifers (or 35.7 percent of its herd) were kept for breeding and raised 
on the operation. The difference of these values, 3.6 percent, 
represents the likely proportion of organic heifers raised on outside 
heifer-raising operations (as a share of the total herd). If all those 
animals become transitioned heifers, then an additional 9,711 animals 
(i.e., 267,523 head * 3.6 percent) would be transitioned. AMS assumes 
that the price difference between organic (last third of gestation) and 
transitioned heifers accurately reflects the cost difference of $1,000 
in raising heifers for milking under those two comparative production 
systems. In this case, the benefit of allowing for continuous 
transitioning of heifers is $9,711,000.
    While the cost difference might suggest that organic farms would 
acquire an even larger share of heifer replacements through purchases 
rather than internally through breeding, AMS feels this is unlikely 
owing to the asymmetric information problems associated with cattle 
sales. Asymmetric information problems arise because heifer sellers 
have more information than heifer buyers about the health, breeding, 
and temperament of their animals. This has the effect of reducing total 
transactions in the market (Akerlof, 1970).34 35
---------------------------------------------------------------------------

    \34\ George, Akerlof. (1970) The Market for Lemons: Quality 
Uncertainty and the Market Mechanism. In: The Quarterly Journal of 
Economics.
    \35\ Such information asymmetries create a ``lemons problem'' 
where buyers assume that only the lowest quality heifers would be 
sold by dairy farms while the best are retained for internal on farm 
use. Dairies, in turn, sell only their lower quality heifers because 
the sales price is too low to justify bringing higher quality 
animals to market.
---------------------------------------------------------------------------

    The potential cost associated with the adoption of the continuous 
transition for all organic dairies could be illustrated by a 
deleterious effect on markups to products marketed under the organic 
label; although a markup reduction is not a cost, from the society-wide 
perspective taken for purposes of Executive Order 12866 and OMB 
Circular A-4, it may be a sign of an increased incentivize for the 
(costly) establishment of credentials that are alternative to USDA 
organic certification. Table 1 shows that milk products marketed under 
the organic label earned an average markup of 47 percent over 
conventional products that total $1.8 billion in total value. A one 
percent fall in total markups would be associated with a $18 million 
reduction in organic premiums at the retail level.
    Continual transition could achieve the regulatory objective of 
establishing a consistent and uniform standard for all operations. The 
National Organic Standards Board's recommendations and stakeholder 
comments support AMS' decision to not select this alternative, as 
comments indicate that at least some consumers expect organic milk be 
produced without the use of antibiotics (and other substances 
prohibited under the USDA organic regulations) and expect organic 
management of all animals on organic operations.

Alternative B--Prohibit All Transitions

    A second alternative AMS considered was to remove any allowance for 
dairy operations to transition animals to organic production, including 
new and nonorganic dairies seeking to convert to organic production. 
Under this option, all dairy animals would need to be managed 
organically from the last third of gestation for milk and dairy 
products to be sold, labeled, or represented as organic.
    The costs of this alternative are threefold. First, producers would 
bear the increased annual costs of $1,462,500 described in Table 4 and 
under the one-time transition scenario where 50 percent of heifers are 
transitioning. Because conventional organic dairy farms transitioning 
to organic would also need to purchase heifers and milking cows 
approximately equal to the size of their current operations, AMS 
believes that the price increase for organic heifers may significantly 
exceed a 50 percent price increase.
    Second, this alternative would limit the ability of the industry to 
expand to meet growing demand and thereby create price instability 
within the market. In periods of stable demand, firm entry into the 
organic market is modest, reflecting factors such as population and 
income growth. In these stable periods under current rules, the cost of 
producing organic milk for established producers reflects both the 
higher cost of production in terms of feed costs, land requirements, 
and animal husbandry practices, and the higher cost of replacement 
heifers. In periods of industry growth (i.e., high

[[Page 25973]]

demand), entrants to this industry bear those costs as well, but also 
face the significant additional costs of converting land for organic 
feed and pasture over a 3-year period. Under this alternative, in 
periods of industry growth (i.e., high demand) new entrants to the 
industry would face the additional cost of acquiring organic heifers 
and milking cows under periods of tight supply and this alternative 
could lengthen the time required for new entrants to begin production. 
While a subset of organic dairies would see higher returns on sales of 
heifers, incumbent farms seeking to grow would see higher costs of 
expanding herds through heifer purchases and the additional time 
required to certify additional land under the organic program. While 
some incumbent producers may benefit under this alternative in the 
short-term, the added costs to entry and expansion would likely foster 
price volatility for organic heifers and wholesale organic milk, as the 
supply has a limited ability to expand in response to demand 
fluctuations.
    Organic heifers are an input to wholesale organic milk production, 
and wholesale milk is an input to retail organic milk products such as 
organic cheese, yogurt, butter, and retail-level milk. Bringing organic 
milk products to market requires complementary investments in retail 
marketing outlets and brand development. Bernanke (1983), Cabellero and 
Pindyck (1996), and Carruth et al. (2000) find that increasing input 
price volatility reduces investment since the value of the option to 
delay the investment rises with increased uncertainty about the 
investment's return.36 37 38 Such volatility could limit 
long-term growth in organic milk demand if downstream milk processors 
(for cheese and other milk products) and retailers require an organic 
milk supply with stable prices to allow for planning of other 
investments such as equipment, brand promotion, and retail promotion, 
which in some cases constitutes building retail stores focused solely 
on the sale of organic products.
---------------------------------------------------------------------------

    \36\ Bernanke, Ben S. (1983) ``Irreversibility, Uncertainty and 
Cyclical Investment'', Quarterly Journal of Economics (98) 85-106.
    \37\ Caballero, Ricardo J. and Pindyck, Robert S. ``Uncertainty, 
Investment, and Industry Evolution'' International Economic Review 
(1996)37:641-663.
    \38\ Carruth, A., Dickerson, A., and Henley, A. (2000) ``What do 
We Know About Investment Under Uncertainty?'' Journal of Economic 
Surveys (14)2: 119-154.
---------------------------------------------------------------------------

    This alternative would simplify enforcement of the requirements by 
applying a single standard, without exceptions, to all organic dairy 
operations. It would also align the requirements for dairy animals with 
the requirements for organic slaughter stock. AMS does not believe this 
option is necessary for several reasons.
    First, AMS believes that certifiers will be able to enforce a rule 
that allows for a limited and well-defined transition. Second, AMS 
believes that allowing one-time transitions for organic dairy 
operations maintains market stability while simultaneously preserving 
the value of the organic label. Third, AMS notes that other aspects of 
the USDA organic regulations slow entry into this market and believes 
that eliminating its historic allowance of dairy animal transitions 
would unfairly burden downstream organic processors and retailers who 
have invested in the industry based on the expectation of the 
continuation of regulations that ensure a stable and responsive market 
supply. Most comments objected to the presence of different 
requirements across the industry, depending on how a certifying agent 
interprets the regulations. Most commenters supported a one-time 
allowance.
Conclusions
    AMS is proposing a regulatory option that retains the opportunity 
for new operations to transition into organic dairy production once. We 
are reopening the comment period to solicit views on whether the final 
rule should prohibit certified organic dairy operations from acquiring 
transitioned animals to expand or replace animals to produce organic 
milk. We are also seeking comment on whether AMS should use the term 
``operation'' to describe the regulated entity, rather than 
``producer.''
    A clear and consistent standard for transition of dairy animals 
into organic production is needed and anticipated by dairy producers, 
consumers, trade associations, certifying agents, and USDA's OIG. AMS 
seeks to provide a foundation for compliance and enforcement in support 
of fair competition among dairy operations through a well-defined and 
consistently implemented standard.

Regulatory Flexibility Analysis

    The Regulatory Flexibility Act (RFA) (5 U.S.C. 601-612) requires 
agencies to consider the economic impact of each rule on small entities 
and evaluate alternatives that would accomplish the objectives of the 
rule without unduly burdening small entities or erecting barriers that 
would restrict their ability to compete in the market. The purpose is 
to fit regulatory actions to the scale of businesses subject to the 
action. Pursuant to the requirements set forth in RFA, AMS performed an 
economic impact analysis on small entities. Small entities include 
producers and agricultural service firms, such as handlers and 
accredited certifying agents. AMS has determined that the proposed 
action would impact small entities but that it would not have a 
significant economic impact on them.
    RFA permits agencies to prepare the regulatory flexibility analysis 
in conjunction with other analyses required by law, such as RIA. AMS 
notes that several requirements of the regulatory flexibility analysis 
overlap with those of RIA. For example, RFA requires a description of 
the reasons why the action by the agency is being considered and an 
analysis of the proposed rule's costs to small entities. RIA likewise 
describes the need for the proposed rule, the alternatives considered, 
and the potential costs and benefits of the proposed rule. In order to 
avoid duplication, we combine some analyses as allowed in Sec.  605(b) 
of RFA. As explained below, AMS expects that the entities that could be 
impacted by the proposed rule would qualify as small businesses. In 
RIA, the discussion of alternatives and the potential costs and 
benefits pertains to impacts upon all entities, including small 
entities. Therefore, the scope of those discussions in RIA is 
applicable to regulatory flexibility analysis under RFA. RIA should be 
referred to for more detail.
Potentially Affected Small Entities
    AMS has considered the economic impact of the proposed action on 
small entities. Small entities include producers transitioning into 
organic dairy production, existing organic dairy producers, producers 
that raise replacement animals for organic dairies, and certifying 
agents. AMS believes that the cost of implementing the proposed rule 
will fall primarily on organic dairies that currently purchase 
transitioned heifers, although any organic dairies that purchase 
organic heifers would be expected to pay higher prices in the short-
term due to increased competition for these animals. Farms that sell 
their excess organic replacement heifers may see an increase in demand 
for their heifers, and farms that raise their own organic replacement 
heifers would not likely be affected by the proposal. AMS believes 
heifer development operations also could be impacted by this action. 
However, limited information on the number and size of heifer 
development operations prevents our estimation of the number

[[Page 25974]]

of such entities and any increased costs for those entities.
    The Small Business Administration (SBA) defines small agricultural 
service firms, which include certifying agents, as those having annual 
receipts of less than $8,000,000 (13 CFR 121.201). There are currently 
78 USDA-accredited certifying agents; based on a query of NOP certified 
organic operations database, there are approximately 47 certifying 
agents who are currently involved in the certification of organic 
dairies. Of those 47 certifiers, 14 are State governments, 2 are county 
governments, and 1 is a large State university. AMS believes that none 
of these 17 public entities would meet SBA criterion for small 
agricultural service firms, but that the 29 other private certifying 
agents would. While certifying agents are small entities that would be 
affected by the proposed rule, we do not expect that these certifying 
agents would incur significant costs as a result of this action. 
Certifying agents already must comply with the current regulations, 
e.g., maintaining certification records for organic dairy operations.
    For the regulatory flexibility analysis, AMS focused on estimating 
how different size organic dairy operations (small versus large) would 
be impacted as a result of purchasing all organic dairy replacement 
animals. As defined by SBA (13 CFR 121.201), small agricultural 
producers are those having annual receipts of less than $1,000,000. AMS 
used this SBA criterion to identify large organic dairy operations, 
those with cash receipts of more than $1,000,000, and small operations, 
those with cash receipts of $1,000,000 or less.
    Data on the exact shares of organic dairy farms that have sales 
above and below $1,000,000 are not available. However, ARMS data 
indicates that the average sales revenue of dairy farms from sales of 
organic milk and animals is $2,855 per milked cow, a figure that 
indicates that revenues exceed $1,000,000 for farms with more than 350 
head.
    Within the 2016 ARMS data, 90 percent of dairy farms (300 of the 
332) had fewer than 200 milking animals. Lacking more detailed 
information, we assume that 92 percent of all organic dairy farms (or 
2,354 of 2,559) qualify as small businesses under the SBA standard. We 
also assume that these farms purchase replacement heifers in the same 
pattern as the average farm with 200 or fewer head. In this case, small 
organic dairy farms purchase 0.7 replacement heifers on average, with 
the 11.3 percent of small farms that purchase replacement heifers 
buying 6.6 head on average. In contrast, large organic dairy farms 
purchase 0.8 replacement heifers on average, with the 6.8 percent of 
large farms that purchase replacement heifers buying 12.3 head on 
average.
    For this cost analysis, we assumed that the difference in cost 
between transitioned replacement heifers and organic (from last third 
of gestation) replacement heifers is currently $1,000 per head, that 
half of organic replacement heifers currently purchased are 
transitioned, and that the increased demand for organic replacement 
heifers raises their price by $500. Based on our analysis, AMS 
estimates that, under the proposed rule, small operations would 
collectively spend an additional $1,312,317 to $1,749,756 for heifers. 
Large operations would collectively pay an additional $128,649 to 
$171,532 for heifers. Of the operations that purchase heifers, the 
average additional cost per operation in the 50 percent price increase 
scenario would be $4,926 to $6,569 for small operations and $9,247 to 
$12,330 for large operations.\39\ AMS notes that this analysis assumed 
that there is no difference in the cost per head paid by large and 
small operations for purchases of replacement heifers and that these 
costs estimates do not include transfers.\40\ Table 7 summarizes the 
cost analysis using SBA criterion for small businesses (i.e., producers 
with less than $1,000,000 in cash receipts).
---------------------------------------------------------------------------

    \39\ Small operations making purchases buy 6.57 heifers and will 
pay $1,000 more for half those animals and $2,000 on the others. 
Large operations making purchases buy 12.33 heifers and will also 
pay $1,000 more for half those animals and $2,000 on the others.
    \40\ As with the Table 5 costs breakout by operation size, total 
costs in Table 7 ($1.440 million and $1.921 million under the 25 and 
50 percent transitioning scenarios) roughly equal the Table 4 
estimates of costs net of transfers ($1.463 million and $1.950 
million). Discrepancies are attributed to rounding errors.

               Table 7--Cost of Organic Replacement Heifers by SBA Criterion for Small Businesses
----------------------------------------------------------------------------------------------------------------
                                                                  Small operations       Large operations  (> =
                                                                    (<$1,000,000)              $1,000,000)
----------------------------------------------------------------------------------------------------------------
Total cost (all operations).................................     $1,312,317-$1,749,756         $128,649-$171,532
Per operation purchasing replacement heifers (25% to 50%                 $4,926-$6,569            $9,247-$12,330
 transitioned replacements).................................
----------------------------------------------------------------------------------------------------------------

    To understand the potential costs in context, we used the higher 
average cost estimate per operation from Table 7 for the purchase of 
organic replacement heifers (i.e., $6,569 for small; $12,330 for large) 
and compared it to the average gross cash farm income for farms with 
200 head or fewer and for farms with more than 200 head using a revenue 
estimate from ARMS data that farms earn $2,855 per head. Of farms with 
200 head or fewer and $158,003 in sales on average, the 11.3 percent of 
farms purchasing replacement heifers will have their costs increase 4.2 
percent on average. Of large farms with more than 200 head and 
$1,683,366 in revenue, the 12.33 percent purchasing replacement heifers 
will see costs increase by 0.7 percent.
    It is important to note that these cost figures do not include the 
potential offsetting effect of transfers, or increased revenue from 
replacement heifer sales as organic replacement heifer prices increase. 
This revenue is recorded as a transfer in the benefit-cost analysis.
    If implemented, the proposed rule would, as discussed in the 
benefits portion of RIA, ensure that consumer expectations are met and 
support the market for these organic products. AMS believes that the 
long-term economic impact on producers of not implementing the proposal 
would be greater than the economic impact of a rule due to the need for 
greater consistency in applying the origin of livestock standard across 
the organic dairy sector.
    AMS has not identified any relevant Federal rules that are 
currently in effect that duplicate, overlap, or conflict with the 
proposed rule. The proposed action would provide additional clarity on 
the origin of livestock requirements that are specific and limited to 
the USDA organic regulations.

Erin Morris,
Associate Administrator, Agricultural Marketing Service.
[FR Doc. 2021-09978 Filed 5-11-21; 8:45 am]
BILLING CODE P