Walnuts Grown in California; Recommended Decision and Opportunity To File Written Exceptions

Published date05 August 2020
Citation85 FR 47305
Record Number2020-15135
SectionProposed rules
CourtAgricultural Marketing Service
Federal Register, Volume 85 Issue 151 (Wednesday, August 5, 2020)
[Federal Register Volume 85, Number 151 (Wednesday, August 5, 2020)]
                [Proposed Rules]
                [Pages 47305-47317]
                From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
                [FR Doc No: 2020-15135]
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                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.
                ========================================================================
                Federal Register / Vol. 85, No. 151 / Wednesday, August 5, 2020 /
                Proposed Rules
                [[Page 47305]]
                DEPARTMENT OF AGRICULTURE
                Agricultural Marketing Service
                7 CFR Part 984
                [Docket No. AO-SC-20-J-0011; AMS-SC-19-0082; SC19-984-1]
                Walnuts Grown in California; Recommended Decision and Opportunity
                To File Written Exceptions
                AGENCY: Agricultural Marketing Service, USDA.
                ACTION: Proposed rule and opportunity to file exceptions.
                -----------------------------------------------------------------------
                SUMMARY: This recommended decision proposes amendments to Marketing
                Order No. 984 (Order), which regulates the handling of walnuts grown in
                California. The proposed amendments are based on the record of a public
                hearing held via videoconference technology on April 20 and 21, 2020.
                The California Walnut Board (Board), which locally administers the
                Order, recommended proposed amendments that would add authority for the
                Board to provide credit for certain market promotion expenses paid by
                handlers against their annual assessments due under the Order and
                establish requirements to effectuate the new authority. In addition,
                the Agricultural Marketing Service (AMS) proposed to make any such
                changes as may be necessary to conform to any amendment that may result
                from the public hearing.
                DATES: Written exceptions must be filed by September 4, 2020.
                ADDRESSES: Written exceptions should be filed with the Hearing Clerk,
                U.S. Department of Agriculture, Room 1031-S, Washington, DC 20250-9200;
                Fax: (202) 720-9776 or via the internet at https://www.regulations.gov.
                All comments should reference the docket number and the date and page
                number of this issue of the Federal Register. Comments will be made
                available for public inspection in the Office of the Hearing Clerk
                during regular business hours or can be viewed at https://www.regulations.gov.
                FOR FURTHER INFORMATION CONTACT: Melissa Schmaedick, Marketing Order
                and Agreement Division, Specialty Crops Program, AMS, USDA, Post Office
                Box 952, Moab, UT 84532; Telephone: (202) 557-4783, Fax: (435) 259-
                1502, or Andrew Hatch, Marketing Order and Agreement Division,
                Specialty Crops Program, AMS, USDA, 1400 Independence Avenue SW, Stop
                0237, Washington, DC 20250-0237; Telephone: (202) 720-2491, Fax: (202)
                720-8938, or Email: [email protected] or
                [email protected].
                 Small businesses may request information on this proceeding by
                contacting Richard Lower, Marketing Order and Agreement Division,
                Specialty Crops Program, AMS, USDA, 1400 Independence Avenue SW, Stop
                0237, Washington, DC 20250-0237; Telephone: (202) 720-2491, Fax: (202)
                720-8938, or Email: [email protected].
                SUPPLEMENTARY INFORMATION: Prior documents in this proceeding: Notice
                of Hearing issued on February 2, 2020, and published in the February
                11, 2020, issue of the Federal Register (85 FR 7669) and a Correction
                to the Notice of Hearing issued on April 9, 2020, and published in the
                April 10, 2020, issue of the Federal Register (85 FR 20202).
                 This action is governed by the provisions of sections 556 and 557
                of title 5 of the United States Code and, therefore, is excluded from
                the requirements of Executive Orders 12866, 13563, and 13175.
                Additionally, because this rule does not meet the definition of a
                significant regulatory action it does not trigger the requirements
                contained in Executive Order 13771. See the Office of Management and
                Budget's (OMB) Memorandum titled ``Interim Guidance Implementing
                Section 2 of the Executive Order of January 30, 2017, titled `Reducing
                Regulation and Controlling Regulatory Costs' '' (February 2, 2017).
                 Notice of this rulemaking action was provided to tribal governments
                through the Department of Agriculture's (USDA) Office of Tribal
                Relations.
                Preliminary Statement
                 Notice is hereby given of the filing with the Hearing Clerk of this
                recommended decision with respect to the proposed amendments to
                Marketing Order 984 regulating the handling of walnuts grown in
                California and the opportunity to file written exceptions thereto.
                Copies of this decision can be obtained from Melissa Schmaedick, whose
                address is listed above.
                 This recommended decision is issued pursuant to the provisions of
                the Agricultural Marketing Agreement Act of 1937, as amended (7 U.S.C.
                601-674), hereinafter referred to as the ``Act,'' and the applicable
                rules of practice and procedure governing the formulation and amendment
                of marketing agreements and orders (7 CFR part 900).
                 The proposed amendments are based on the record of a public hearing
                held via videoconference technology on April 20 and 21, 2020. Notice of
                this hearing was published in the Federal Register on February 11, 2020
                (85 FR 7669) followed by a Correction to the Notice of Hearing issued
                on April 9, 2020, and published in the April 10, 2020, issue of the
                Federal Register (85 FR 20202). The notice of hearing contained one
                proposal submitted by the Board and one submitted by USDA.
                 The proposed amendments were recommended by the Board on September
                13, 2019 and were submitted to USDA on September 16, 2019. After
                reviewing the proposals and other information submitted by the Board,
                USDA made a determination to schedule this matter for hearing. The
                Board's proposed amendments to the Order would add authority for the
                Board to provide credit for certain market promotion expenses paid by
                handlers against their annual assessments due under the Order and would
                establish requirements to effectuate the new authority.
                 USDA proposed to make any such changes as may be necessary to the
                Order to conform to any amendment that may be adopted, or to correct
                minor inconsistencies and typographical errors.
                 Twelve witnesses testified at the hearing. Eleven witnesses
                represented walnut producers and handlers in the production area, as
                well as the Board, and one witness was from USDA. Ten industry
                witnesses supported the proposed amendments, while the eleventh had
                reservations about the program and its underlying assumptions. The USDA
                witness remained neutral. Four dissenting
                [[Page 47306]]
                opinions and one comment were received by AMS after the notice of
                hearing was published in the Federal Register and are therefore
                considered ex parte communications. In accordance with section 900.16
                of the Rules of Practice governing this proceeding (7 CFR 900.16), the
                ex parte communications were entered into the record but do not
                constitute testimony and were not considered in the drafting of this
                recommended decision.
                 The authority to provide credit for certain market promotion
                expenses paid by handlers against their annual assessment obligations,
                also referred to as ``credit-back authority,'' does not currently exist
                under the Order. The Board's proposed amendments would authorize
                credit-back authority and establish requirements to administer a
                credit-back program.
                 If implemented, the proposed amendments would allow the Board to
                set aside funds every year during its budget discussions to fund such a
                program. Under the program, certain market promotion expenses paid
                directly by handlers within a marketing year could be ``credited-back''
                to the handler against their assessment obligation paid to the Board.
                The credit-back amount available to each handler would be determined by
                that handler's percentage of the industry's total volume of walnuts
                handled during the prior marketing year multiplied by the current
                marketing year's credit-back program budget.
                 Witnesses at the hearing explained that the proposed amendments are
                necessary to encourage handlers to undertake market promotion
                activities, in addition to the Board's generic marketing efforts, to
                increase market demand for the industry's increasing supply of walnuts.
                Witnesses further explained that future increases in supply without
                additional increases in demand could result in weaker market returns.
                Therefore, proponents support the need to increase demand for walnuts
                to stabilize future market returns.
                 As an indicator of untapped growth potential, witnesses referred to
                a domestic walnut consumption analysis that revealed only 40 percent of
                U.S. households consume walnuts. Witnesses argued that the proposed
                credit-back authority could stimulate domestic demand through handler-
                led promotion and product innovation, and that doing so could stabilize
                future market prices.
                 One witness agreed that an increase in demand for walnuts was
                necessary to stabilize future market prices but expressed concerns with
                the proposed amendments.
                 The witness argued that handlers do not pay assessments under the
                Order in practice because they deduct the assessments from their
                payments to walnut producers; therefore, the producers actually pay the
                assessments.
                 At the conclusion of the hearing, the Administrative Law Judge
                established a deadline of May 6, 2020, for the submission of
                corrections to the transcript, and May 22, 2020, as a deadline for
                interested persons to file proposed findings and conclusions or written
                arguments and briefs based on the evidence received at the hearing. One
                brief in favor of the proposed amendments was received from the Board.
                * * * * *
                Material Issues
                 The material issues presented on the record of hearing are as
                follows:
                 1. Whether to amend Sec. 984.46 to add authority to provide credit
                for certain market promotion expenses paid by handlers against their
                annual assessments due under the Order.
                 2. Whether to add a new Sec. 984.546 to establish requirements
                effectuating Material Issue 1. Corresponding changes would also
                establish a new Subpart D with the heading ``Research and Development
                Requirements,'' under which Sec. 984.546 would be listed and reserving
                Sec. 984.547.
                 3. Whether any conforming changes need to be made as a result of
                the above proposed amendments. Conforming changes may also include
                correction of non-substantive, typographical errors.
                * * * * *
                Findings and Conclusions
                 The following findings and conclusions on the material issues are
                based on evidence presented at the hearing and the record thereof.
                Material Issue Number 1--Credit-Back Authority
                 Section 984.46, ``Research and Development,'' should be amended to
                add credit-back authority. This authority would authorize the Board to
                credit the pro rata assessment obligations of a handler with such
                portion of his or her direct expenditure for marketing promotion,
                including paid advertising, under an annual credit-back program. The
                credit-back amount available to each handler would be determined by
                that handler's percentage of the industry's total volume of walnuts
                handled during the prior marketing year multiplied by the current
                marketing year's credit-back program budget. The credit-back budget
                would be set annually and would be subject to approval of the
                Secretary.
                 Credit-back would be limited such that no handler would receive
                credit-back for any creditable expenditures exceeding the total amount
                of calculated credit-back available to them for the applicable
                marketing year program. Further, no handler would receive credit-back
                in an amount that exceeds that handler's assessments paid in the
                applicable marketing year at the time the credit-back application is
                made.
                 The proposed amendment also stipulates that marketing promotion
                expenses would be credited at a rate recommended by the Board and
                approved by the Secretary. That rate would reflect how much per dollar
                of marketing promotion expenses paid by each handler would be
                reimbursable under the proposed credit-back program during the
                applicable marketing year. In addition, the proposed amendment provides
                that a handler need not necessarily apply for reimbursement of their
                total calculated credit-back available to them; credit-back could be
                applied to all or any portion of a handler's direct expenditures.
                 The proposed amendment further provides that credit could be paid
                directly to the handler as a reimbursement of assessments paid, and
                that different credit rates for different products or different
                marketing promotion activities could be established. Differing rates
                would require a recommendation by the Board, according to priorities
                determined by the Board and its marketing plan, and approval by the
                Secretary. The amendment would also allow the Board to adjust the
                credit-back program to provide for alternative methods of issuing
                credit if future advances in the industry warranted. All future
                proposed amendments would require approval by the Secretary.
                 Regarding the kind of expenditures eligible for reimbursement under
                the proposed authority, also referred to as ``creditable
                expenditures,'' the proposed amendment stipulates that such
                expenditures could include, but would not be limited to: Money spent
                for advertising space or time in newspapers, magazines, radio,
                television, transit, and outdoor media, including the actual standard
                agency commission costs not to exceed 15 percent. According to the
                record, the proposed amendment specifies that creditable expenditures
                would be required to promote the sale of walnuts, walnut products or
                their uses, but not the production or farming of walnuts.
                 Currently, Sec. 984.46 allows for production research, marketing
                research
                [[Page 47307]]
                and development projects, and marketing promotion, including paid
                advertising, designed to assist, improve, or promote the marketing,
                distribution, and consumption or efficient production of California
                walnuts. These activities are carried out directly by the Board, are
                generic in their promotion of all California walnuts, and are paid for
                by assessments as part of the Board's operating budget.
                 Witnesses explained that the current authority limits the Board to
                generic marketing and promotion activities for inshell and shelled
                walnuts. While the authority does allow the Board to conduct marketing
                research and development projects, the Board does not manufacture or
                otherwise sell walnuts. Therefore, it is incumbent upon handlers to
                further develop new product formulations and deliver products to the
                market. Because product innovation and marketing can be costly, the
                Board recommended credit-back authority that would incentivize handlers
                to support such initiatives.
                 If implemented, the proposal would encourage handlers to build upon
                the Board's generic marketing activities, providing additional
                visibility, awareness and sales for walnuts. Witnesses explained that
                the need for increased marketing, promotion and product innovation
                stems from the industry's growing production, increased competition in
                the export market and the need to stabilize fluctuating grower returns.
                 According to the hearing record, production has nearly doubled in
                the past decade from 328,000 tons in the 2007/2008 crop year to 690,000
                tons estimated for the 2018/2019 crop year. Evidence suggests that the
                increase in production is a combination of both new plantings and
                higher yields per acre.
                 High market prices in 2013 and 2014 spurred grower investment in
                new plantings, resulting in a significant jump in total industry
                planted acreage over the 2013 to 2017 time period. As trees mature and
                transition from non-bearing to bearing acreage, a process that takes
                roughly five years, total industry production increases. The 2018-2019
                crop year industry total of bearing acres is estimated at 350,000, up
                from 230,000 in the 2008-2009 crop year. Witnesses estimate that 15,000
                more acres will come into production by the end of the 2019-2020 crop
                year for a new total of 365,000 bearing acres. Moreover, an additional
                65,000 acres are due to come into production over the next five years.
                With each acre yielding roughly two tons, the Board is forecasting a
                17-percent increase in production from 750,000 tons in 2020 to 875,000
                tons in 2025.
                 Record evidence also indicated that production in Chile, China and
                Europe, all competitors of California walnuts in the international
                market, is another factor in assessing future market stabilization.
                While California walnuts accounted for 57 percent of world trade in
                2017-2018, its production only accounted for 31 percent of the world
                total. Witnesses reported that while the domestic market is the largest
                consumer of California walnut production, exports currently account for
                roughly 66 percent of all industry trade. The industry's largest export
                markets are Germany, Turkey, the United Arab Emirates and Japan. As
                world production increases, witnesses expressed concern over
                maintaining market share and the potential downward impact on prices of
                increasing global supply.
                 Witnesses also expressed concern over the California walnut
                industry's reliance on the export market, stating that fluctuating
                global supply and demand has contributed to domestic price volatility.
                Citing fluctuations in grower returns over the previous eleven years, a
                witness correlated record low returns of $1,280 per ton and record high
                returns of $3,710 per ton with events impacting trade relationships and
                global demand.
                 Witnesses argued that less reliance on export markets and
                increasing domestic demand for California walnuts would lead to more
                stable grower returns. According to a recent study commissioned by the
                Board, only 40 percent of U.S. households purchase walnuts on a regular
                basis and domestic consumption has remained at roughly one-half pound
                of walnuts per person annually for the past twenty years. Based on this
                evidence, witnesses argued that increasing domestic demand would be a
                strategically sound approach to offsetting anticipated downward
                pressure of projected increases in domestic supply on domestic prices.
                 According to the record, strategic planning efforts for future
                market stabilization began in early 2019 with the formation of the
                Board's Marketing Order Revision Committee (MORC) and a review of
                section 7 U.S.C. 608c(6)(I) of the Act, which provides credit-back
                authority for walnuts. Further, a study of similar programs under the
                Federal marketing orders for almonds and dried prunes produced in
                California piqued the MORC's interest in developing a credit-back
                program for walnuts.
                 According to the record, MORC members concluded that adding credit-
                back authority for promotional activities would encourage handlers to
                build upon the work the Board does to grow domestic consumption. The
                credit-back program would allow for the handlers to promote their
                brands through various activities, including but not limited to, money
                spent for advertising space or time in newspapers, magazines, radio,
                television, transit, and outdoor media. Witnesses explained that while
                promotional activities of the Board and handlers would be similar,
                handlers' ability to market their branded products would spur both
                marketing innovation and consumer demand in a way that the Board is not
                able to accomplish on its own. A full list of qualified activities is
                listed in proposed Sec. 984.546 of the proposed amendatory language of
                this recommended decision.
                 The proposed amendment further specifies that all promotional
                activities and related creditable expenditures eligible for credit-back
                would be required to promote the sale of walnuts, walnut products or
                their uses, but not the production or farming of walnuts. According to
                the record, activities supporting the production or farming of walnuts
                would not be eligible because such activities would not contribute to
                increasing demand for walnuts, which is the intended purpose of the
                proposed credit-back program.
                 Witnesses stated that the anticipated cost impact on the industry,
                and on individual stakeholders, as a result of this proposal would be
                minimal given that the credit-back program would be funded by
                allocating a portion of the Board's existing annual promotion and
                marketing fund to that purpose. Therefore, witnesses argued that
                overall assessments would not increase as a result of this proposal.
                Witnesses clarified that, if the Board were to consider changing the
                annual assessment rate, such recommendation would be based on an
                overall budget analysis related to the Order's operating expenses.
                 One witness raised concerns over the potential lack of transparency
                between handlers and growers, arguing that handlers would be able to
                deduct marketing expenses from payments to growers and then receive
                credit for those expenses without disclosing or passing on any benefit
                to the growers. Proponents of the proposed amendment countered this
                statement by explaining that increased demand for California walnuts,
                regardless of the brand under which they are sold, would benefit all
                stakeholders within the industry. Educating consumers to incorporate
                walnuts into their diets would lead to long-term increases in demand,
                which would in turn provide a stable market for growing domestic
                production.
                [[Page 47308]]
                Without increased marketing, product innovation and market penetration,
                proponents argued that the anticipated supply would lead to market
                prices below the cost of production.
                 The witness also argued that producers ultimately bear the
                assessment burden. USDA clarifies that California walnut handlers are
                required under both the Act and the regulation of the Order to pay
                assessments. Assessments are collected on a pro rata basis, with each
                handler's assessment due under the Order being equal to the volume of
                California walnuts handled multiplied by the assessment rate in effect
                at that time.
                 Regarding the assessment burden, witnesses further explained that
                each handler's access to credit-back reimbursements would be limited to
                the pro rata assessment obligations of that handler. This means that
                the credit-back amount available to each handler would be determined by
                that handler's percent of the industry's total volume of walnuts
                handled during the prior marketing year multiplied by the current
                marketing year's credit-back program budget. For this reason, witnesses
                argued that the proposed credit-back program would equitably provide
                all California walnut handlers with access to marketing and promotion
                support commensurate to the size of their operation.
                 According to the record, the amount each handler could receive as
                reimbursement per creditable expenditure would be the value of the
                expenditure multiplied by the reimbursement rate. Total reimbursements
                for any given marketing year could not exceed a handler's total
                available credit-back calculated for that year; reimbursement per
                creditable expenditure at any given time would be limited to the amount
                a handler had paid in pro rata assessments at the time of the
                reimbursement request. The credit-back program budget and the
                reimbursement rate for creditable expenditures would be recommended
                annually by the Board and would be subject to approval of the
                Secretary.
                 If implemented, this authority would also allow the Board to
                recommend different credit rates for different products or different
                marketing promotion activities. Witnesses explained that having the
                flexibility to recommend different rates may be helpful in encouraging
                different types of handler activities to supplement the Board's
                marketing plan and priorities in the future.
                 Witnesses explained that different rates for different activities
                would not be used immediately, and that initially one rate would be
                applied to a broad scope of activities. This approach would allow the
                industry and Board staff to become familiar with the credit-back
                concept. If successful, the Board would have the option of recommending
                differing rates for approval by the Secretary. Witnesses also noted
                that the proposed authority would not require that the Board offer a
                credit-back program annually and that the decision whether to forego
                the program in any given year would also be made during the annual
                Board budget process.
                 The proposed amendment would also allow the Board to recommend
                alternative methods to reimbursement for issuing credit in the future
                if warranted. Witnesses explained that, if implemented, credit-back
                would initially be issued as a reimbursement upon approval of handler-
                submitted documentation of creditable expenditures by Board staff.
                Reimbursement in the form of a check issued to the handler would
                provide a clear, traceable transaction, thereby facilitating
                recordkeeping and compliance during the program's implementation. The
                proposed rules regarding reimbursement are specifically addressed in
                Material Issue 2. Any changes to the reimbursement method for credit-
                back would require a recommendation by the Board and approval by the
                Secretary.
                 According to the record, the proposed amendment would benefit the
                entire industry. Given that the proposed credit-back would only offset
                a portion of handler activity costs, witnesses explained that the
                handler-paid portion would result in an overall industry increase in
                total marketing and promotion investment. If successful, the increased
                efforts would result in a growth of domestic consumer demand for
                walnuts and walnut products and could correlate into greater returns to
                both growers and handlers.
                 Regarding industry stakeholder awareness of the proposed
                amendments, representatives of the Board stated that the idea of a
                credit-back program was publicly discussed at a Board meeting in May
                2019, before being presented and unanimously recommended by the Board
                as an amendment to the Order on September 13, 2019. Leading up to the
                Board's recommendation, the MORC held several meetings where members
                discussed and debated the merits of the proposed language, possible
                alternatives, potential benefits, potential costs to staff, and
                possible compliance issues.
                 USDA is recommending one clarifying change to the proposed language
                in Sec. 984.46 paragraph (a), which would add credit-back authority.
                USDA has determined that the language presented in the Notice of
                Hearing lacked a reference to the proposed, new paragraph (b) and only
                included a reference to proposed, new paragraph (c). This correction
                was discussed at the hearing and a witness clarified that proposed, new
                paragraphs (b) and (c) were both necessary references in the proposed
                revision to Sec. 984.46 paragraph (a), and that the omission of the
                reference to paragraph (b) was an oversight. USDA has revised the
                proposed language so that both proposed new paragraphs are referenced.
                This new language is included in the proposed regulatory text of this
                recommended decision.
                 For the reasons stated above, it is recommended that Sec. 984.46
                be amended to add credit-back authority under the Order.
                Material Issue Number 2--Credit-Back Program Requirements
                 A new Sec. 984.546 should be added to establish requirements
                effectuating Material Issue 1. Corresponding changes should also
                establish a new Subpart D with the heading ``Research and Development
                Requirements,'' under which Sec. 984.546 would be listed. In addition,
                Sec. 984.547 should be reserved.
                 If the authority recommended under Material Issue I were
                implemented, requirements would be needed to effectuate it. Witnesses
                at the hearing expressed the need to implement the proposed credit-back
                program as quickly as possible and requested that USDA conclude the
                amendment process in tandem with the beginning of the 2020-2021
                marketing year, which begins September 1, 2020. By including proposed
                requirements alongside the proposal to add credit-back authority,
                witnesses aimed to expedite the full implementation of the program.
                 According to the record, the Board is recommending a credit-back
                rate of $0.70 cents for each handler dollar spent on qualified
                activities eligible for credit-back reimbursement up to each handler's
                pro-rata share of assessments paid into the allocated credit-back fund.
                During its annual budget process, the Board would designate a credit-
                back fund based on forecasted production and anticipated assessment
                revenue. The per handler pro-rata share of the credit-back fund would
                be calculated by multiplying the budgeted credit-back fund by each
                handler's percentage of walnuts handled of the previous marketing
                year's total walnuts. The Board would then communicate to handlers the
                availability of the credit-back fund and their pro-rata portion of that
                fund.
                [[Page 47309]]
                 The following is a sample calculation of a handler's pro-rata
                portion of a hypothetical credit-back fund based on an assumed total
                industry production of 625 million hundred weight assessed at $0.04 per
                hundred weight, and where the credit-back fund is ten percent of the
                total Board budget for that year and the handler's share of the total
                industry's walnut production handled.
                 To calculate the total assessments collected for that year,
                multiply the total production by the assessment rate for a result of
                $25 million (625 million x $0.04 = $25 million). To calculate the
                credit-back budget, multiply the total Board budget by 10 percent for a
                result of $2.5 million. To calculate the pro rata share of the credit-
                back fund allocated to that handler, multiply the total credit-back
                fund by the handler's pro rata share for a result of $250,000.
                 If the reimbursement level is set at 70 percent, one can calculate
                the creditable expenditures the handler would have to spend on
                qualified activities promoting products containing 100 percent walnuts
                in order to receive their full amount of pro rata share by dividing the
                pro rata share by the reimbursement rate. Two hundred and fifty
                thousand dollars divided by 70 percent results in a total necessary
                expenditure of $357,143. At this rate, the handler would spend $357,143
                on qualified activities, of which $250,000 would be reimbursed, and
                $107,143 would be paid for by the handler's own investment
                ($250,000/.70 = $357,143).
                 Table 1--Example of Board Credit-Back Program Budget and Handler Pro Rata Share
                ----------------------------------------------------------------------------------------------------------------
                 Calculation Value
                ----------------------------------------------------------------------------------------------------------------
                Credit-Back Program Budget:
                 A. Total production (cwt).......................... ....................................... 625,000,000
                 B. Assessment rate ($ per cwt)..................... ....................................... $0.04
                 C. Board Annual Budget............................. C = A * B.............................. $25,000,000
                 D. Share of Board budget allocated to Credit-Back ....................................... 10%
                 program.
                 E. Credit-back program annual budget............... E = C * D.............................. $2,500,000
                Handler Pro Rata Share:
                 F. Handler share of acquisition.................... ....................................... 10%
                 G. Maximum reimbursement to a handler with 10% of G = E * F.............................. $250,000
                 annual walnut acquisitions.
                 H. Credit-Back percentage rate..................... ....................................... 70%
                 I. Total creditable expenditures on qualified I = G/H................................ $357,143
                 promotional activities of walnut-only products for
                 handler to get full reimbursement (100% walnuts).
                ----------------------------------------------------------------------------------------------------------------
                 According to the record, the MORC discussed varying levels of
                reimbursement from 50 cents to 65 cents, and ultimately recommended 70
                cents as a level of reimbursement. The 70-cent level was determined to
                attract handlers to participate and encourage use of the proposed
                program with the goal of spurring increased investment in walnut
                promotion and marketing.
                 Paragraph (a) of proposed Sec. 984.546 addresses requirements
                regarding timeliness of the reimbursement claim and the credit-back
                rate. Witnesses explained that handlers would be able to apply for
                credit-back on the expenses of qualified activities completed within
                the marketing year. Handlers would provide proof of payment and
                documentation of qualified activities to the Board for review. Once the
                Board has approved the claim, the handler would receive a reimbursement
                for 70 percent of the creditable expenditures of the qualified activity
                up to the handler's pro-rata share of the credit-back fund. If a
                credit-back claim for expenses is made prior to the end of the
                marketing year, the handler must also have paid sufficient assessments
                into the credit-back fund to cover their reimbursement.
                 According to the record, a credit-back reimbursement for a
                creditable expenditure of $10,000 promoting a product containing 100
                percent walnut content, such as walnut butter, would be calculated by
                multiplying the cost of the activity by the percentage of walnut
                content and the reimbursement rate. This calculation results in a
                credit-back reimbursement of $7,000 to the handler and is captured in
                the following table, Scenario One.
                 Scenario One
                 [100% Walnut product]
                ----------------------------------------------------------------------------------------------------------------
                 Calculation Value
                ----------------------------------------------------------------------------------------------------------------
                J. Walnut product contains 100% walnuts................ ....................................... 100%
                K. Total cost of qualified activity.................... ....................................... $10,000
                L. Credit-back reimbursement rate...................... ....................................... 70%
                M. Amount reimbursed (credit-back) to handler for M = K * J * L.......................... $7,000
                 walnut 100% product.
                ----------------------------------------------------------------------------------------------------------------
                 The proposed language also states that claims for credit-back on
                expenses must be made within 15 days after the end of the marketing
                year. Witnesses explained that 15 days would be reasonable given that
                most handlers have annual marketing plans that would allow them to
                accurately accrue and submit documentation on a timely basis. Further,
                witnesses explained that most handlers would be likely to submit
                credit-back claims directly after the conclusion of qualified
                activities. Therefore, handlers would most likely already have
                submitted claims prior to the end of the marketing year.
                 Paragraphs (b) and (c) of proposed Sec. 984.546 address
                requirements regarding the importance of assessment payments and
                handler eligibility for reimbursement under the proposed credit-back
                program.
                 Proposed Sec. 984.546(b), ``Assessment payments,'' states that
                handlers are responsible for assessment payments under Sec. 984.69 of
                the Order and that a handler must be current on all assessment payments
                prior to receiving credit-back for creditable expenditures. Witnesses
                explained that because the credit-back program would be funded by
                assessments, a handler must be current with his or her assessment
                [[Page 47310]]
                obligation prior to receiving a reimbursement.
                 To that end, proposed Sec. 984.546(c), ``Handler eligibility for
                reimbursement,'' states that credit-back for qualified activities would
                only be issued to the handler who performed such activities. Witnesses
                explained that this requirement would prevent third parties or
                affiliates who might be partnered with a handler for a specific
                promotional activity from being eligible to claim or receive credit-
                back reimbursement.
                 If implemented, the credit-back program would run on an annual
                basis. As previously explained, the Board would recommend funding for
                the program as part of its annual marketing year budget process. The
                Board's activities, including the administration of the Order, are paid
                for by assessments paid by handlers during the applicable marketing
                year. For this reason, proposed Sec. 984.546(d), ``Applicability to
                marketing year,'' states that credit-back would only be granted for
                creditable expenditures for qualified activities that are conducted and
                completed during the marketing year for which credit-back is requested.
                Witnesses explained that if a handler's activities extended beyond one
                marketing year, that handler could request reimbursement only for those
                creditable expenditures applicable to the marketing year in which they
                were completed.
                 Proposed Sec. 984.546(e), ``Qualified activities,'' details
                requirements applicable to creditable expenditures resulting from
                qualified activities in paragraphs (e)(1) through (4). According to the
                record, the credit given for creditable expenditures resulting from
                qualified activities would be commensurate with accepted professional
                practices and rates for the type of activity conducted. Witnesses
                explained that this requirement would be necessary to ensure that
                reimbursements are not unfairly above or below standard market rates.
                In the case of claims for credit-back for activities not covered by
                specific and established criteria, the Board would review the expenses
                claimed against rates for similar activities to ensure consistency in
                reimbursement practices.
                 Regarding the kinds of activities that would be considered
                qualified for credit-back reimbursement, witnesses stated that the
                clear and evident purpose of each qualified activity should be to
                promote the sale, consumption or use of California walnuts, both
                inshell and shelled, and their products. Witnesses were careful to
                explain that qualified activities should focus on increasing demand.
                For this reason, no credit would be given for any activity that targets
                the farming or grower trade.
                 Similarly, credit-back would not be allowed for travel expenses, or
                for any promotional activities that result in price discounting. Travel
                expenses are considered normal business activities that do not directly
                promote the sale or consumption of California walnuts. Witnesses
                explained that price discounting, or offering a price below market
                levels for promotional purposes, would also be excluded from
                reimbursement eligibility because the practice does not directly
                promote the sale or consumption of California walnuts at market prices.
                 Regarding activities qualified for credit-back, proposed Sec. Sec.
                984.546(e)(5)(i) and (ii) put forward the following list: Paid media
                directed to end-users, trade or industrial users, and paid advertising
                space or time, including, but not limited to, newspapers, magazines,
                radio, television, online, transit, and outdoor media (including
                standard agency commission costs not to exceed 15 percent of gross
                expense); market promotion, marketing research (except pre-testing and
                test-marketing of paid advertising), and trade and consumer product
                public relations (not including advertising or public relations agency
                fees); in-store demonstrations, production of promotional materials,
                sales and marketing presentation kits, etc. (excluding couponing); and
                trade show booth rentals, services, and promotional materials.
                 According to the record, expenses for pre-testing and test-
                marketing of paid advertising, public relations agency fees and
                couponing would not be considered creditable expenditures as they also
                are considered a normal cost of business and do not directly meet the
                criteria of promoting sales or consumption.
                 Proposed Sec. 984.546(e)(5) addresses promotional activities
                involving joint activities, handler-owned distribution of products, and
                promotional activities conducted under a State or Federal trade
                program.
                 For qualified credit-back activity involving joint participation by
                a handler and a manufacturer or seller of a complementary product(s),
                or a handler selling multiple complementary products, including other
                nuts, witnesses stated that the amount allowed for credit-back would
                reflect that portion of the activity represented by walnuts. Witnesses
                explained that when walnuts are marketed with other non-walnut items
                (other nuts, dried fruits, etc.) eligible credit-back would be limited
                to the walnut percentage of that product. Creditable expenditures to
                support walnuts used as an ingredient in such a manufactured food
                product would receive credit-back based on the proportionate share of
                walnuts included in the product.
                 According to the record, an example of the above would be a snack
                bar with multiple ingredients, including 30 percent of each walnuts,
                almonds and cashews and an additional 10 percent of non-nut
                ingredients. If the total cost to the handler for this activity was
                $10,000, the handler could claim the percentage of the activity related
                to walnuts, or 30 percent, which would equal $3,000 ($10,000 x .3 =
                $3,000). At a reimbursement rate of 70 percent, the handler would
                receive $2,100 in credit-back ($3,000 x .7 = $2,100). This calculation
                is replicated in the table below, Scenario Two.
                 Scenario Two
                 [30% Walnut product]
                ----------------------------------------------------------------------------------------------------------------
                 Calculation Value
                ----------------------------------------------------------------------------------------------------------------
                N. Walnut product contains 30% walnuts................. ....................................... 30%
                O. Total cost of qualified activity.................... ....................................... $10,000
                P. Credit-back reimbursement rate...................... ....................................... 70%
                Q. Total creditable expenditure on partial walnut Q = O * N.............................. $3,000
                 products for handler to get partial reimbursement (for
                 30% walnuts).
                R. Amount reimbursed (credited-back) to handler for R = Q * P.............................. $2,100
                 partial walnut product.
                ----------------------------------------------------------------------------------------------------------------
                [[Page 47311]]
                 In addition, the handler's name or brand may be included on the
                product packaging, but the words ``California Walnuts'' must always be
                included on the product packaging. Witnesses stated that the inclusion
                of ``California Walnuts'' on packaging was important given that the
                intent of the credit-back program was to promote the consumption of all
                California walnuts, not just those under a singular brand. Witnesses
                further clarified that omission of this wording would disqualify an
                otherwise creditable expenditure from being reimbursable.
                 For products owned or distributed by the handler, witnesses stated
                that the walnut product being promoted must list the ownership or
                distributorship on the package and display the handler's name and the
                handler's brand. Similarly, the words ``California Walnuts'' must
                always be included on the primary face label.
                 Based on record evidence, USDA is recommending a clarifying change
                to the proposed regulatory text in Sec. 984.546(e)(5)(iii). Current
                wording of this proposed paragraph does not adequately state that in
                all promotional activities, regardless of whether a handler is
                operating independently or in conjunction with a manufacturer, or
                whether promoting a product that is solely walnut content or walnuts
                are a partial ingredient, the words ``California Walnuts'' must be
                included in the labeling in order for that activity to qualify as a
                creditable expenditure. USDA is recommending this change in conformance
                with witness testimony clarifying the intent of the proposed language.
                The revised language is included in the proposed regulatory text of
                this recommended decision.
                 Regarding handler promotional activities pursuant to a contract
                with the Foreign Agricultural Service (FAS), USDA, and/or the
                California Department of Food and Agriculture (CDFA), proposed Sec.
                984.546(e)(5)(iv) states that these activities would not be eligible
                for credit-back unless the Board is administering the foreign marketing
                program, and the handler certifies that he or she would not be
                reimbursed by either FAS or CDFA for the amount claimed for credit-
                back. Foreign market expenses paid by third parties as part of a
                handler's contract with FAS or CDFA would not be eligible for credit-
                back.
                 Witnesses explained that FAS and CDFA offer various promotional
                programs to which handlers can apply. If a handler were to receive
                support from one of those programs and apply for credit-back
                reimbursement as well, that handler would effectively be receiving two
                forms of support for the same activity. Witnesses reiterated that the
                intent of the credit-back program is to encourage handler-led promotion
                and marketing activities to increase demand for walnuts by offsetting a
                portion of those costs with a partial reimbursement of their assessment
                paid. Collecting double payments from two sources for the same activity
                defeats the purpose of extending promotional funds to increase the
                overall level of marketing activity within the industry.
                 Handlers would provide proof of payment and documentation of
                qualified activities to the Board for review. Once the Board has
                approved the claim, the handler would receive a reimbursement for 70
                percent of the expense of the qualified activity up to the handler's
                pro-rata share of the credit-back fund. If a credit-back claim for
                expenses is made prior to the end of the marketing year, the handler
                must also have paid sufficient assessments into the credit-back fund to
                cover their reimbursement. The Board's proposal also states that claims
                for credit-back on expenses must be made within 15 days after the end
                of the marketing year.
                 According to the record, proposed Sec. 984.546(e)(6), ``Credit-
                back Reimbursement claims,'' to obtain credit-back for creditable
                expenditures, a handler's claim would need to include a description of
                the activity and when and where it was conducted and an actual sample,
                picture or other physical evidence of the qualified activity. In
                addition, copies of all invoices from suppliers or agencies, and all
                canceled checks or other proof of payment issued by the handler in
                payment of these invoices, must also be submitted to the Board for
                review.
                 If the claim is validated, the Board would issue a check to the
                recipient handler within 30 days of its receipt. If a claim is not
                sufficiently documented or does not reflect qualified credit-back
                activities, the Board would deny it. An appeal process would afford a
                handler with a denied claim the opportunity to appeal the denial.
                 Witnesses stated that the proposed credit-back program requirements
                were designed with an appeals process as a mechanism to address any
                unforeseen issues that may arise. If implemented, Board staff, Board
                members and walnut handlers will require time to adjust to a new
                business process. Proposed Sec. 984.546(f), ``Appeals,'' outlines this
                process and states that the appeal process would begin with the
                Executive Committee's (Committee) review of the Board staff's decision.
                To trigger this review, the affected handler would need to submit a
                written request that includes permission to share the specific
                information relating to the claim in question with the Committee.
                Appeals could be personally presented by the affected handler or
                presented by Board staff. If the Board staff presents the appeal, the
                identity of the affected handler would be kept confidential.
                 The proposed paragraph further provides that if the affected
                handler disagrees with the decision of the Committee, the handler could
                request that the Board review the Committee's decision. If the handler
                disagrees with the decision of the Board, the handler, through the
                Board, could request that the Secretary review the Board's decision.
                 Finally, witnesses explained that the proposed regulations would
                provide for a mechanism to make future adjustments to the program's
                operation if needed. While the MORC and the Board attempted to capture
                all pertinent operational details, implementation, if approved, could
                bring to light necessary adjustments for more efficient and effective
                operation. If any such adjustments were necessary, the Board could make
                recommendations through the notice and comment process for ultimate
                approval by the Secretary.
                 In its recommendation, the Board stated that the proposed changes
                have the broadest possible support from the industry. The proposed
                amendments were presented and discussed at several meetings involving
                California walnut handlers and growers.
                 For the reasons stated above, it is recommended that a new Sec.
                984.546, including the clarifying change recommended by USDA to Sec.
                984.546(e)(5)(iii) discussed above, should be added to establish
                requirements effectuating Material Issue 1. Corresponding changes
                should also establish a new Subpart D with the heading ``Research and
                Development Requirements,'' under which Sec. 984.546 would be listed.
                In addition, Sec. 984.547 should be reserved.
                Small Business Considerations
                 Pursuant to the requirements set forth in the Regulatory
                Flexibility Act (RFA), AMS has considered the economic impact of this
                action on small entities. Accordingly, AMS has prepared this initial
                regulatory flexibility analysis.
                 The purpose of the RFA is to fit regulatory actions to the scale of
                businesses subject to such actions so that small businesses will not be
                unduly or disproportionately burdened. Marketing orders and amendments
                thereto are unique in that they are normally brought about through
                group action of essentially small entities for their own benefit.
                [[Page 47312]]
                 During the hearing held on April 20 and 21, 2020, interested
                parties were invited to present evidence on the probable regulatory
                impact on small businesses of the proposed amendment to the Order. The
                evidence presented at the hearing shows that the proposed amendment
                would not have a significant negative economic impact on a substantial
                number of small agricultural producers or handlers.
                 Eight grower and handler witnesses testified at the hearing. All
                eight witnesses were growers and five were also handlers. Four
                testified that they were small walnut growers according to the Small
                Business Administration (SBA) definition and four were large. Of the
                five who were handlers, one was small, and four were large.
                 All five who were both handlers and growers expressed support for
                the proposed amendment. Of the three remaining grower witnesses, two
                stated their support. One grower reported that he had concerns but did
                not specifically oppose the amendment. Therefore, in their role as
                growers, 7 out of 8 witnesses supported the amendment, and stated that
                they expected to see significant benefits from the additional promotion
                expenditure that would be authorized by the amendment and would not
                incur additional costs. The benefits and impacts of the proposed
                amendment are explained in the following three sections: (a) Walnut
                Industry Background and Overview, (b) Domestic Market Demand for
                Walnuts, and (c) Estimated Economic Impact of the Proposed Credit-Back
                Program.
                Walnut Industry Background and Overview
                 According to the hearing record there are approximately 4,400
                producers and 92 handlers in the production area. Record evidence
                includes reference to a study showing that the walnut industry
                contributes 85,000 jobs to the economy, directly and indirectly.
                 A small handler as defined by the SBA (13 CFR 121.201) is one that
                grosses less than $30,000,000 annually. A small grower is one that
                grosses less than $1,000,000 annually.
                 Record evidence showed that approximately 82 percent of
                California's walnut handlers (75 out of 92) shipped merchantable
                walnuts valued under $30 million during the 2018-2019 marketing year
                and would therefore be considered small handlers according to the SBA
                definition.
                 Data in the hearing record from the 2017 Agricultural Census,
                published by USDA's National Agricultural Statistics Service (NASS),
                showed that 86 percent of California farms growing walnuts had walnut
                sales of less than $1 million.
                 In an alternative computation using NASS data from the hearing
                record, the 3-year average crop value (2016-2017 to 2018-2019) was
                $1.24 billion. Average bearing acres over that same 3-year period were
                333,000. Dividing crop value by acres yields a revenue per acre
                estimate of $3,733. Using these numbers, it would take approximately
                268 acres ($1,000,000/$3,733) to yield $1 million in annual walnut
                sales. The 2017 Agricultural Census data show that 80 percent of walnut
                farms in 2017 were below 260 acres. Therefore, well over three-fourths
                of California walnut farms would be considered small businesses
                according to the SBA definition.
                 Walnuts bloom in March and April, and the harvest of the earliest
                varieties begins in the first part of September. As later varieties
                mature, the harvest continues into November. The crop comes in from the
                field at about 25 percent moisture and the hulling and drying process
                typically takes place within 24 hours. The nuts are hulled (removal of
                the green husks) and dried to about 7 percent moisture before delivery
                to a handler. Some growers have their own hulling and drying equipment
                and others pay for this service. Drying to seven percent moisture keeps
                the nuts stable in storage and minimizes deterioration.
                 Once received by the handler, shelling varieties are shelled and
                have a shelf life of approximately 12 months. Unshelled varieties are
                cleaned, sized, and put into storage. Both shelled and unshelled nuts
                are shipped and distributed to customers throughout the marketing year.
                Approximately 75 percent of the California walnut crop is sold as
                kernels (shelled). Witnesses testified that advances in processing and
                packaging technologies continue to improve product quality,
                consistency, and shelf-life.
                 Weather is one of two main factors driving crop size variability, a
                significant feature of the walnut market. In some years, climatic
                conditions may contribute to fungus or other issues that damage the
                crop and cause nuts to fall prior to harvest. With walnuts grown over a
                large geographic area, some regions will have better weather than
                others in any particular year. Crops were larger in 2015 and 2018 and
                smaller in 2017 and 2019.
                 The other key variability factor is ``alternate bearing'' (a
                natural tendency of several types of tree nuts, in which a large crop
                is often followed by a small crop). As trees mature, alternate bearing
                can become more pronounced, and for many years this had a big impact on
                crop size variability. With recent new plantings, the average age of
                producing trees in California has dropped. There is less of an
                alternate bearing tendency with younger trees. Crop sizes have become
                less variable as younger trees reach bearing age, which typically
                occurs in the fifth year. Older trees are replaced with varieties with
                improved quality characteristics to meet changing consumer demand.
                Newer varieties are generally more productive, contributing to higher
                yields per acre and greater production.
                 The hearing record shows that crop size variability, particularly
                the reduced availability of walnuts in short crop years, continues to
                contribute to loss of demand, as some buyers of kernels as ingredients
                in baked goods and other products shift to other tree nuts. These lost
                market opportunities are additional factors in the industry's interest
                in product diversification through a credit-back program.
                 Additional factors that affect current market conditions are the
                longer-term supply impacts of growers responding to market signals. If
                producers decide to plant more trees because of strong market prices,
                such as in the 2011-2014 time period, they receive those trees one or
                two years later, based on contracts that vary with the type of nursery
                stock. This time lag, and penalties associated with dropping a planting
                contract, contribute to continued planting even after market prices
                drop and growers might otherwise not want to plant. For these reasons,
                there is a delayed response in planting new trees, and a delayed
                response in reducing the level of planting when prices and revenue per
                acre decline, such as in 2015-2018. One witness estimated that the rate
                of tree planting in recent years is about three times greater than tree
                removal. Another key factor is that the time from tree planting to
                bearing nuts is typically five years.
                 Record evidence shows that walnut production exceeded 600,000
                inshell tons every season starting in 2015-2016. Witnesses testified
                that a key factor in their support of new demand expansion initiatives
                is their expectation that walnut production is likely to be at or above
                700,000 tons within one or two seasons and may exceed 800,000 tons a
                few years later.
                 The hearing record shows that farm management decisions made years
                ago will have a large impact on walnut supply for the coming years,
                contributing to grower and handler support for major initiatives to
                increase demand, including credit-back.
                 About two-thirds of the walnut crop is typically exported, and for
                many
                [[Page 47313]]
                years, increasing international demand facilitated expansion of the
                walnut market. China emerged as a major walnut buyer, but also began
                large scale planting of walnuts. Prices continued to improve for years,
                reaching $1.86 per pound, ($3,710 per ton) in 2013-2014. As China's new
                plantings started coming into production, world walnut prices began to
                decline. By 2017-2018, walnut prices rebounded as Turkey and other
                Middle eastern countries took up some of the slack in world market
                demand, according to the hearing record.
                 Hearing evidence provided various reasons for the decline in walnut
                crop value since the peak level of $1.9 billion in 2014-2015. One was
                reduced export market opportunities. With increased trade barriers from
                China and India, significant volumes were shifted into other export
                markets, driving prices downward. Walnut production was also growing in
                Chile and Europe. The 2018-2019 price fell to $0.65 per pound ($1,300
                per ton). With the reduced reliability of the international market, the
                industry is increasingly looking for ways to increase demand in the
                U.S. domestic market.
                 The hearing record shows that most of the grower and handler
                witnesses stated that a key reason for seeking credit-back authority
                was the need to increase demand after years of unfavorable marketing
                conditions. Witnesses stated that a key factor in their support of
                seeking new ways to increase market demand was several years of
                deteriorating profitability.
                 Hearing evidence included data that facilitated comparing farm
                revenue per acre to cost of production, a key measure of walnut farm
                profitability. Tables 2 and 3 illustrate the decline in profitability
                by comparing two four-year periods with very different financial
                outcomes, 2011 to 2014 and 2015 to 2018.
                 Table 2--California Walnuts: Cost of Production Data From University of California Extension
                ----------------------------------------------------------------------------------------------------------------
                 Sample yield
                 (from Table 5 of Sample costs per
                 Average yield: Average yield: UC study) that acre associated
                 Year tons per acre pounds per acre is closest to with yield shown
                 \1\ NASS yield in in column (c)
                 column (b) \2\ \2\
                 (a) (b) (c) (d)
                ----------------------------------------------------------------------------------------------------------------
                2011.................................... 1.74 3,480 ................ ................
                2012.................................... 1.84 3,680 3,400 $3,318
                2013.................................... 1.76 3,520 4,000 4,015
                2014.................................... 1.97 3,940 ................ ................
                 -----------------------------------------------------------------------
                 2011-2014 avg....................... 1.83 ................ ................ 3,667
                ----------------------------------------------------------------------------------------------------------------
                2015.................................... 2.02 4,040 4,500 4,509
                2016.................................... 2.19 4,380 ................ ................
                2017.................................... 1.88 3,760 4,500 5,574
                2018.................................... 1.93 3,860 4,500 5,283
                 -----------------------------------------------------------------------
                 2015-2018 avg....................... 2.01 ................ ................ 5,122
                ----------------------------------------------------------------------------------------------------------------
                \1\ Source: NASS, USDA.
                \2\ Source: ``Table 5. Ranging Analysis--Walnuts--Costs per Acre and Per Pound at Varying Yields to Produce
                 Walnuts.'' Table 5 appears in each of the following five UC Cooperative Extension studies: ``Walnuts Cost and
                 Returns Study, Sacramento Valley,'' UC Coop. Extension--2012, 2015, 2018. ``Walnuts Cost and Returns Study,
                 San Joaquin Valley North'', UC Coop. Extension--2013, 2017. Sample yields appear in column 2 of Table 5 in
                 each publication.
                 Table 2 displays cost of production numbers that represent both
                time periods. University of California Extension conducted two cost of
                production studies in the 2011-2014 time period, and three studies
                between 2015 and 2019. Each of the five studies had ranges of
                production cost figures associated with different yields. To be
                representative of a typical or average walnut producer, the costs
                selected to present in column (d) were associated with University of
                California study yields (column c) closest to the NASS average annual
                yields for that year (column b).
                 The average production cost per acre figures for 2011-2014 and
                2015-2018 were $3,667 and $5,122, respectively. Those figures were
                transferred to column (d) of Table 3, and the associated average yields
                (1.83 and 2.10 tons per acre) appear in column (b) of Table 3.
                 Table 3--California Walnuts: Producer Gross Return, Cost of Production, Net Return
                ----------------------------------------------------------------------------------------------------------------
                 Season average Producer net
                 producer Average yield: Producer gross Total cost of return per acre
                 Range of years price, $/ton tons per acre return per production per (gross return
                 \1\ \2\ acre acre \3\ minus cost)
                 (a) (b) (c) (d) (e)
                 .............. .............. (a) * (b) ............... (c)-(d)
                ----------------------------------------------------------------------------------------------------------------
                2011-2014..................... $3,245 1.83 $5,930 $3,667 $2,264
                2015-2018..................... 1,828 2.01 3,664 5,122 -1,458
                ----------------------------------------------------------------------------------------------------------------
                \1\ Source: NASS, USDA.
                \2\ Four-year averages computed in Table 1, based on annual NASS yield data.
                [[Page 47314]]
                
                \3\ Computed in Table 1, based on U. of California Extension cost of production studies. For 2011-2014, the cost
                 of production per acre is a two-year average (2012, 2013). For 2015-2018, the cost per acre is a 3-year
                 average (2015, 2017, 2018).
                 Table 3 uses the data from Table 2 to show how the walnut farm
                profitability declined between the two time periods. Producer gross
                returns per acre for each of the two four-year time periods (column
                (c)) were computed by multiplying average yield by average price.
                Subtracting cost of production in column (d) yields the producer net
                return in column (e).
                 The two producer net return numbers in column(e) of Table 3 are the
                key results of this cost and return analysis. Four years of walnut farm
                profitability, represented by producer net return per acre of $2,264
                for 2011-2014, were followed by four years of difficult market
                conditions (2015-2018), with a negative average net return figure (-
                $1,458). This analysis provides a numerical estimate that bears out the
                witness testimony that emphasized that a dramatic downward shift in
                their economic fortunes in recent years was a major factor in their
                support for a credit-back program that would leverage additional
                financial resources for handler-based promotional expenditures oriented
                toward increasing domestic demand for walnut products.
                Domestic Market Demand for Walnuts
                 With reduced export market opportunities, the industry focused in
                recent years on ways to expand the domestic market. Record evidence
                showed that domestic per capita consumption has been approximately one-
                half pound for many years.
                 The Board commissioned a large consumer survey (with 1,000
                respondents) showing that walnut products were reaching 40 percent of
                U.S. households, indicating significant expansion potential. The study
                pointed out significant differences among age groups, with 22 percent
                of those aged 18 to 24 being walnut consumers. Certain age groups are
                therefore the targets for demand expansion.
                 The majority of walnuts going into the domestic market are kernels
                (shelled). One key segment is retail sales, with the main product being
                bags of raw kernels. Another major segment is industrial--use as an
                ingredient by food manufacturers in making pastries and other products.
                Record evidence shows that walnut industry participants consider these
                two segments to be a narrow group of uses which needs to be expanded.
                 Witnesses reported that among the Board's strategic objectives, the
                top priority is retail sector growth, and the snack category in
                particular. However, current Board marketing programs are generic in
                nature and focus largely on the traditional forms of walnuts: Raw. Raw
                walnuts as a snack product are important components but expanding
                retail market development beyond the raw product is considered critical
                by industry participants, according to the hearing record. New
                consumption growth will mainly be achieved through new products and
                forms that appeal to a larger consumer audience, witnesses stated.
                 According to the hearing record, opportunities for significant
                walnut demand expansion include snack products such as roasted, salted,
                glazed, and trail mixes, and other new products such as beverages,
                spreads and meat alternatives. Witnesses stated that these demand
                expansion opportunities are best achieved through brand advertising and
                other handler-based promotional approaches, rather than the generic
                promotion currently authorized through the Order. Witnesses reported
                that this is a key reason why adding credit-back authority would be
                helpful for demand expansion--by providing incentives for handler-based
                product development and promotion.
                 A small handler stated that if credit-back authority is added to
                the marketing order, his firm was likely to partner with another
                company to create a snack product, providing evidence that credit-back
                authority would help small handlers as well as large ones.
                Estimated Economic Impact of the Proposed Credit-Back Program
                 The hearing record included evidence of the estimated impact of the
                credit-back program on walnut grower total revenue and net return.
                Table 4 presents an illustrative example of the impact of handlers
                taking advantage of the credit-back incentive by increasing their
                promotional spending. Based on the assumptions shown in the table,
                walnut growers would see increased total revenue of $21.1 million (row
                K) and increased net return of $16.8 million (row L). The table shows
                that there are four computational steps that lead up to the final
                computations in rows K and L.
                 The first step is to estimate a typical annual budget of the Board
                ($25 million in row C) by multiplying the current assessment rate paid
                to the board ($0.04) by a number representing an annual walnut
                production level representative of recent years (625 million
                hundredweight [cwt]).
                 Table 4--Calculating the Impact of the Walnut Credit-Back Program on Producer Total Revenue and Net Return
                ----------------------------------------------------------------------------------------------------------------
                 Calculation Value
                ----------------------------------------------------------------------------------------------------------------
                A. Total production (cwt).............................. ....................................... 625,000,000
                B. Assessment rate ($/cwt)............................. ....................................... $0.04
                C. Total Board budget.................................. C = A * B $25,000,000
                D. Share of budget allocated to Credit-Back program (%) ....................................... 10%
                E. Credit-Back program budget.......................... E = C * D $2,500,000
                F. Credit-Back rate (%)................................ ....................................... 70%
                G. Total advertising and promotion expenditures with G = E/F $3,571,429
                 Credit-Back program.
                H. Increase in advertising and promotion expenditure... H = G-E $1,071,429
                I. Increase in TOTAL revenue per dollar of advertising/ ....................................... $19.75
                 promotion \1\.
                J. Increase in NET return per dollar of advertising/ ....................................... $15.67
                 promotion \1\.
                K. Increase in TOTAL revenue........................... K = H * I $21,160,714
                L. Increase in NET return.............................. L = H * J $16,789,286
                ----------------------------------------------------------------------------------------------------------------
                \1\ Estimates of total revenue and net return per dollar spent on promotion are from a report prepared for the
                 Board by Dr. Harry M. Kaiser of Cornell University entitled ``Economic Evaluation of the California Walnut
                 Board's Advertising and Promotion Programs: An Analysis of the Direct and Indirect Impacts``, July 5, 2018.
                [[Page 47315]]
                 If the Board allocated 10 percent of a $25 million annual budget to
                the credit-back program, the funds available to allocate to pay
                handlers for eligible promotional spending would be $2.5 million (row
                E). According to the hearing record, this is a level of credit-back
                funding supported by growers and handlers.
                 Handlers would receive 70 percent of the amount they expended on
                creditable expenditures. If the Board expended its full annual credit-
                back budget of $2.5 million, the total promotional expenditure would
                rise to $3.57 million ($2.5/0.70) as shown in row G. The Credit-Back
                expenditure would create the incentive for handlers to spend the $2.5
                million plus an additional $1.07 million (row H).
                 The final step is the overall economic impact on the walnut market
                of the increased spending on advertising and promotion. A 2018 economic
                analysis of walnut promotion impacts by Dr. Harry Kaiser (cited in the
                footnote of Table 4) showed that each dollar of walnut advertising and
                promotional expenditure yielded $19.75 in total revenue and $15.67 in
                net return to walnut growers (rows I and J). Multiplying $1.07 million
                by those two promotional impact-per-dollar figures yields the estimated
                increase in total revenue per year and net return per year of $21.16
                million and $16.79 million, respectively, shown in rows K and L. Net
                return is what is returned to walnut growers after accounting for the
                cost of the promotion program.
                 Record evidence indicates that all industry members, growers and
                handlers, would benefit proportionally from an increase in demand
                brought about due to the credit-back program. The credit-back program
                would be funded by allocating to the credit-back program a portion of
                the total Board promotional budget, funded at the current assessment
                rate. With no increase in the Board's assessment rate, there would be
                no increased costs to growers or handlers.
                 All handlers, large and small, would benefit proportionally by
                participating in the credit-back program. Handlers will participate
                only if they decide that they will benefit, and would incur no costs if
                they choose not to participate. No handler can benefit
                disproportionately from the program, since a handler's maximum credit-
                back payment from the Board is based on that handler's share of total
                industry acquisitions from the prior year, according to the hearing
                record. As cited above, a small handler testified that their smaller
                size would not be a hindrance to using the credit-back program, because
                his walnut processing operation could develop a new product in
                partnership with another firm.
                 Consumers would benefit from product diversification of the walnut
                market. They could choose to buy any of the new products that become
                available, thereby adding new foods to their diet, at prices that fit
                within their food budget.
                 The record shows that the proposal to add authority to establish
                the credit-back program would, in itself, have no significant economic
                impact on producers or handlers of any size. If the proposed authority
                and the accompanying requirements were implemented, both benefits and
                costs could be anticipated. Costs of complying with the new program
                could include handler maintenance and delivery of receipts and
                documentation for reimbursement of creditable expenditures, but these
                would be minimal and are considered standard business practices. For
                the reasons described above, it is determined that the benefits of
                adding authority for a credit-back program would outweigh the potential
                costs of future implementation.
                 USDA has not identified any relevant Federal rules that duplicate,
                overlap or conflict with this proposed rule. These amendments are
                intended to improve the operation and administration of the Order and
                to assist in the marketing of California walnuts.
                 Board meetings regarding these proposals, as well as the hearing
                date and location, were widely publicized throughout the California
                walnut industry, and all interested persons were invited to attend the
                meetings and the hearing to participate in Board deliberations on all
                issues. All Board meetings and the hearing were public forums, and all
                entities, both large and small, were able to express views on these
                issues. Interested persons are invited to submit information on the
                regulatory impacts of this action on small businesses.
                 AMS is committed to complying with the E-Government Act, to promote
                the use of the internet and other information technologies to provide
                increased opportunities for citizen access to Government information
                and services, and for other purposes.
                Paperwork Reduction Act
                 Current information collection requirements that are part of the
                Federal marketing order for California walnuts (7 CFR part 984) are
                approved under OMB No. 0581-0178 Vegetables and Specialty Crops. No
                changes in these requirements are anticipated as a result of this
                proceeding. Should any such changes become necessary, they would be
                submitted to OMB for approval.
                 As with all Federal marketing order programs, reports and forms are
                periodically reviewed to reduce information requirements and
                duplication by industry and public sector agencies.
                Civil Justice Reform
                 The amendments to the Order proposed herein have been reviewed
                under Executive Order 12988, Civil Justice Reform. They are not
                intended to have retroactive effect. If adopted, the proposed
                amendments would not preempt any State or local laws, regulations, or
                policies, unless they present an irreconcilable conflict with this
                proposal.
                 The Act provides that administrative proceedings must be exhausted
                before parties may file suit in court. Under section 608c(15)(A) of the
                Act, any handler subject to an order may file with USDA a petition
                stating that the order, any provision of the order, or any obligation
                imposed in connection with the order is not in accordance with law and
                request a modification of the order or to be exempted therefrom. A
                handler is afforded the opportunity for a hearing on the petition.
                After the hearing, USDA would rule on the petition. The Act provides
                that the district court of the United States in any district in which
                the handler is an inhabitant, or has his or her principal place of
                business, has jurisdiction to review USDA's ruling on the petition,
                provided an action is filed no later than 20 days after the date of
                entry of the ruling.
                Rulings on Briefs of Interested Persons
                 Briefs, proposed findings and conclusions, and the evidence in the
                record were considered in making the findings and conclusions set forth
                in this recommended decision. To the extent that the suggested findings
                and conclusions filed by interested persons are inconsistent with the
                findings and conclusions of this recommended decision, the requests to
                make such findings or to reach such conclusions are denied.
                General Findings
                 The findings hereinafter set forth are supplementary to the
                findings and determinations which were previously made in connection
                with the issuance of the marketing agreement and order; and all said
                previous findings and determinations are hereby ratified and affirmed,
                except insofar as such findings and determinations may be in conflict
                [[Page 47316]]
                with the findings and determinations set forth herein.
                 (1) The marketing order, as amended, and as hereby proposed to be
                further amended, and all of the terms and conditions thereof, would
                tend to effectuate the declared policy of the Act;
                 (2) The marketing order, as amended, and as hereby proposed to be
                further amended, regulates the handling of walnuts grown in the
                production area (California) in the same manner as, and is applicable
                only to, persons in the respective classes of commercial and industrial
                activity specified in the marketing order upon which a hearing has been
                held;
                 (3) The marketing order, as amended, and as hereby proposed to be
                further amended, is limited in its application to the smallest regional
                production area which is practicable, consistent with carrying out the
                declared policy of the Act, and the issuance of several orders
                applicable to subdivisions of the production area would not effectively
                carry out the declared policy of the Act;
                 (4) The marketing order, as amended, and as hereby proposed to be
                further amended, prescribes, insofar as practicable, such different
                terms applicable to different parts of the production area as are
                necessary to give due recognition to the differences in the production
                and marketing of walnuts grown in the production area; and
                 (5) All handling of walnuts grown in the production area as defined
                in the marketing order is in the current of interstate or foreign
                commerce or directly burdens, obstructs, or affects such commerce.
                 A 30-day comment period is provided to allow interested persons to
                respond to this proposal. All written exceptions received within the
                comment period will be considered, and a producer referendum will be
                conducted before any of these proposals are implemented.
                List of Subjects in 7 CFR Part 984
                 Walnuts, Marketing agreements, Nuts, Reporting and recordkeeping
                requirements.
                Recommended Further Amendment of the Marketing Order
                 For the reasons set out in the preamble, 7 CFR part 982 is proposed
                to be amended as follows:
                PART 984--WALNUTS GROWN IN CALIFORNIA
                0
                1. The authority citation for 7 CFR part 984 continues to read as
                follows:
                 Authority: 7 U.S.C. 601-674.
                0
                2. In Sec. 984.46:
                0
                a. Designate and revise the existing paragraph as paragraph (a); and
                0
                b. Add paragraphs (b) and (c).
                 The revision and additions read as follows:
                Sec. 984.46 Research and development.
                 (a) Research and development authorities. The Board, with the
                approval of the Secretary, may establish or provide for the
                establishment of production research, marketing research and
                development projects, and marketing promotion, including paid
                advertising, designed to assist, improve, or promote the marketing,
                distribution, and consumption or efficient production of walnuts. The
                expenses of such projects shall be paid from funds collected pursuant
                to Sec. 984.69 and Sec. 984.70 and may be credited back pursuant to
                paragraphs (b) and (c) of this section.
                 (b) Credit-back for promotion expenses. The Board may provide for
                crediting the pro rata expense assessment obligations of a handler with
                such portion of his or her direct expenditure for marketing promotion,
                including paid advertising, as may be authorized. The credit-back
                amount available to each handler shall be determined by that handler's
                percent of the industry's total volume of walnuts handled during the
                prior marketing year multiplied by the current marketing year's credit-
                back program budget. No handler shall receive credit-back for any
                creditable expenditures that would exceed the total amount of credit-
                back available to him or her for the applicable marketing year.
                Further, no handler shall receive credit-back in an amount that exceeds
                that handler's assessments paid in the applicable marketing year at the
                time the credit-back application is made. Marketing promotion expenses
                shall be credited at a rate recommended by the Board and approved by
                the Secretary, where the credit rate is based on the amount per dollar
                of marketing promotion expenses for creditable expenditures paid by a
                handler during the applicable marketing year. Credit may be paid
                directly to the handler as a reimbursement of assessments paid or may
                be issued as recommended by the Board and approved by the Secretary.
                The Board may also establish, subject to the approval of the Secretary,
                different credit rates for different products or different marketing
                promotion activities according to priorities determined by the Board
                and its marketing plan.
                 (c) Creditable expenditures. The Board, with the approval of the
                Secretary, may credit-back all or any portion of a handler's direct
                expenditures for marketing promotion including paid advertising that
                promotes the sale of walnuts, walnut products or their uses. Such
                expenditures may include, but are not limited to, money spent for
                advertising space or time in newspapers, magazines, radio, television,
                transit, and outdoor media, including the actual standard agency
                commission costs not to exceed 15 percent, or as otherwise recommended
                by the Board and approved by the Secretary.
                0
                3. Add subpart D to read as follows:
                Subpart D--Research and Development Requirements
                Sec.
                984.546 Credit for marketing promotion activities, including paid
                advertising.
                984.547 [Reserved]
                Subpart D--Research and Development Requirements
                Sec. 984.546 Credit for marketing promotion activities, including
                paid advertising.
                 (a) Timeliness of reimbursement claim and credit-back rate. For a
                handler to receive credit-back for his or her own marketing promotional
                activities pursuant to Sec. 984.46, the Board shall determine that
                such expenditures meet the applicable requirements of this section.
                Credit-back may be granted in the form of reimbursement for all
                creditable expenditures paid within the applicable marketing year
                subject to the effective credit-back rate; Provided, that such
                creditable expenditures are documented to the satisfaction of the Board
                within 15 days after the end of that marketing year. Credit may be
                granted for a handler's creditable expenditures in an amount not to
                exceed that handler's pro-rata share of the credit-back fund. No more
                than 70 cents ($0.70) shall be credited back to a handler for every
                dollar spent on qualified activities.
                 (b) Assessment payments. The handler assessment is due as defined
                in Sec. 984.69. A handler shall be current on all assessment payments
                prior to receiving credit-back for creditable expenditures.
                 (c) Handler eligibility for reimbursement. The Board shall grant
                credit-back for qualified activities only to the handler who performed
                such activities and who filed a claim for credit-back in accordance
                with this section.
                 (d) Applicability to marketing year. Credit-back shall be granted
                only for creditable expenditures for qualified activities that are
                conducted and completed during the marketing year for which credit-back
                is requested.
                [[Page 47317]]
                 (e) Qualified activities. The following requirements shall apply to
                all creditable expenditures resulting from qualified activities:
                 (1) Credit-back granted by the Board shall be that which is
                appropriate when compared to accepted professional practices and rates
                for the type of activity conducted. In the case of claims for credit-
                back activities not covered by specific and established criteria, the
                Board shall grant the claim if it is consistent with practices and
                rates for similar activities.
                 (2) The clear and evident purpose of each qualified activity shall
                be to promote the sale, consumption or use of California walnuts.
                 (3) No credit-back will be given for any activity that targets the
                farming or grower trade.
                 (4) Credit-back will not be allowed in any case for travel
                expenses, or for any promotional activities that result in price
                discounting.
                 (5) Credit-back shall be granted for those qualified activities
                specified (e)(5)(i) through (iv) of this section:
                 (i) Credit-back shall be granted for paid media directed to end-
                users, trade or industrial users, and for money spent on paid
                advertising space or time, including, but not limited to, newspapers,
                magazines, radio, television, online, transit and outdoor media, and
                including the standard agency commission costs not to exceed 15 percent
                of gross.
                 (ii) Credit-back shall be granted for market promotion other than
                paid advertising, for the following activities:
                 (A) Marketing research (except pre-testing and test-marketing of
                paid advertising);
                 (B) Trade and consumer product public relations (provided that no
                credit-back shall be given for related fees charged by an advertising
                or public relations agency);
                 (C) Sales Promotion (in-store demonstrations, production of
                promotional materials, sales and marketing presentation kits, etc.,
                excluding couponing);
                 (D) Trade shows (booth rental, services, and promotional
                materials).
                 (iii) For any qualified activity involving a handler promoting
                branded products, a handler selling multiple complementary products,
                including other nuts, with such activity including the handler's name
                or brand, or joint participation by a handler and a manufacturer or
                seller of a complementary product(s), the amount allowed for credit-
                back shall reflect that portion of the activity represented by walnuts.
                If the product is owned or distributed by the handler, in order to
                receive any amount of credit-back, the product must list the ownership
                or distributorship on the package and display the handler's name and
                the handler's brand. The words ``California Walnuts'' must be included
                on the primary, face label. Such activities must also meet the
                requirements of paragraphs (e)(1) through (5) of this section.
                 (iv) If the handler is engaged in marketing promotion activities
                pursuant to a contract with the Foreign Agricultural Service (FAS),
                USDA, and/or the California Department of Food and Agriculture (CDFA),
                unless the Board is administering the foreign marketing program, such
                activities shall not be eligible for credit-back unless the handler
                certifies that he or she was not and will not be reimbursed by either
                FAS or CDFA for the amount claimed for credit-back, and has on record
                with the Board all claims for reimbursement made to FAS and/or the
                CDFA. Foreign market expenses paid by third parties as part of a
                handler's contract with FAS or CDFA shall not be eligible for credit-
                back.
                 (6) Credit-back Reimbursement claims. A handler must file claims
                with the Board to obtain credit-back for creditable expenditures, as
                follows:
                 (i) All claims submitted to the Board for any qualified activity
                must include:
                 (A) A description of the activity and when and where it was
                conducted;
                 (B) Copies of all invoices from suppliers or agencies;
                 (C) Copies of all canceled checks or other proof of payment issued
                by the handler in payment of these invoices; and
                 (D) An actual sample, picture or other physical evidence of the
                qualified activity.
                 (ii) Handlers may receive reimbursement of their paid assessments
                up to their pro-rata share of available dollars to be based on their
                percentage of the prior marketing year crop total. In all instances,
                handlers must remit the assessment to the Board when billed, and
                reimbursement will be issued to the extent of proven, qualified
                activities.
                 (iii) Checks from the Board in payment of approved credit-back
                claims will be mailed to handlers within 30 days of receipt of eligible
                claims.
                 (iv) Final claims for the marketing year pertaining to such
                qualified activities must be submitted with all required elements
                within 15 days after the close of the Board's marketing year.
                 (f) Appeals. If a determination is made by the Board staff that a
                particular marketing promotional activity is not eligible for credit-
                back because it does not meet the criteria specified in this section,
                the affected handler may request the Executive Committee review the
                Board staff's decision. If the affected handler disagrees with the
                decision of the Executive Committee, the handler may request that the
                Board review the Executive Committee's decision. If the handler
                disagrees with the decision of the Board, the handler, through the
                Board, may request that the Secretary review the Board's decision.
                Handlers have the right to request anonymity in the review of their
                appeal. The Secretary maintains the right to review any decisions made
                by the aforementioned bodies at his or her discretion.
                Sec. 984.547 [Reserved]
                Bruce Summers,
                Administrator, Agricultural Marketing Service.
                [FR Doc. 2020-15135 Filed 8-4-20; 8:45 am]
                BILLING CODE P
                

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