FR Doc 03-27249 [Federal Register: October 30, 2003 (Volume 68, Number 210)] [Proposed Rules] [Page 61943-61985] From the Federal Register Online via GPO Access [wais.access.gpo.gov] [DOCID:fr30oc03-34] [[Page 61943]] ----------------------------------------------------------------------- Part IV Department of Agriculture ----------------------------------------------------------------------- Agricultural Marketing Service ----------------------------------------------------------------------- 7 CFR Part 60 Mandatory Country of Origin Labeling of Beef, Lamb, Pork, Fish, Perishable Agricultural Commodities, and Peanuts; Proposed Rule [[Page 61944]] ----------------------------------------------------------------------- DEPARTMENT OF AGRICULTURE Agricultural Marketing Service 7 CFR Part 60 [No. LS-03-04] RIN 0581-AC26 Mandatory Country of Origin Labeling of Beef, Lamb, Pork, Fish, Perishable Agricultural Commodities, and Peanuts AGENCY: Agricultural Marketing Service, USDA. ACTION: Proposed rule. ----------------------------------------------------------------------- SUMMARY: The Farm Security and Rural Investment Act of 2002 (Farm Bill) and the 2002 Supplemental Appropriations Act (Appropriations Act) amended the Agricultural Marketing Act of 1946 (Act) to require retailers to notify their customers of the country of origin of covered commodities beginning September 30, 2004. The law also requires the Department of Agriculture (USDA) to issue regulations to implement a mandatory country of origin labeling (COOL) program not later than September 30, 2004. Covered commodities include muscle cuts of beef (including veal), lamb, and pork; ground beef, ground lamb, and ground pork; farm-raised fish and shellfish; wild fish and shellfish; perishable agricultural commodities (fresh and frozen fruits and vegetables); and peanuts. This proposed rule contains definitions, the requirements for consumer notification and product marking, and the recordkeeping responsibilities of both retailers and suppliers. DATES: Comments must be submitted on or before December 29, 2003 to be assured of consideration. ADDRESSES: Send written comments to: Country of Origin Labeling Program, Room 2092-S; Agricultural Marketing Service (AMS), USDA; STOP 0249; 1400 Independence Avenue, SW.; Washington, DC 20250-0249, or by facsimile to 202/720-3499, or by e-mail to cool@usda.gov. State that your comments refer to Docket No. LS-03-04. Comments received will be posted to the AMS Web site at: http://www.ams.usda.gov/cool/. Comments sent to the above location that specifically pertain to the information collection and recordkeeping requirements of this action should also be sent to the Desk Officer for Agriculture, Office of Information and Regulatory Affairs, Office of Management and Budget (OMB), New Executive Office Building, 725 17th Street, NW., Room 725, Washington, DC 20503. FOR FURTHER INFORMATION CONTACT: Robert Keeney, Deputy Administrator, Fruit and Vegetable Programs, AMS, USDA, by telephone on 202/720-4722, or via e-mail at: robert.keeney@usda.gov; or William Sessions, Associate Deputy Administrator, Livestock and Seed Program, AMS, USDA, by telephone on 202/720-5705, or via e-mail at: william.sessions@usda.gov. SUPPLEMENTARY INFORMATION: Questions and Answers Concerning This Proposed Rule What Are the General Requirements of Country of Origin Labeling? The Farm Bill (Public Law 107-171) and the Appropriations Act (Public Law 107-206) amended the Act (7 U.S.C. 1621 et seq.) to require retailers to notify their customers of the country of origin of beef (including veal), lamb, pork, fish, perishable agricultural commodities, and peanuts beginning September 30, 2004. The law also requires USDA to issue regulations to implement this program no later than September 30, 2004. The law defines the terms ``retailer'' and ``perishable agricultural commodity'' as having the meanings given those terms in the Perishable Agricultural Commodities Act of 1930 (PACA)(7 U.S.C. 499 et seq.). Food service establishments are specifically excluded. In addition, the law specifically outlines the criteria a covered commodity must meet to bear a ``United States country of origin'' label. Why Can't USDA Track Only Imported Products and Consider All Other Products To Be of ``U.S. Origin?'' The COOL provision of the Farm Bill applies to all covered commodities. Moreover, the law specifically identifies the criteria that products of U.S. origin must meet. For beef, pork, and lamb, for example, U.S. origin can only be claimed if derived from animals that are born, raised, and slaughtered in the United States. The law further states that ``Any person engaged in the business of supplying a covered commodity to a retailer shall provide information to the retailer indicating the country of origin of the covered commodity.'' And, the law does not provide authority to control the movement of product, imported or domestic. In fact, the use of a mandatory identification system that would be required to track controlled product through the entire chain of commerce is specifically prohibited. The Internal Revenue Service Essentially Uses Self-Certification, Backed Up by Selective Audits, for Those of Us Who File Income Taxes. Why Couldn't Self-Certification Work for COOL? The COOL law requires firms or individuals that supply covered commodities to retailers to provide information indicating the product's country of origin. This information must address the production steps included in the origin claim (i.e., born, raised, and slaughtered or produced). Self-certification documents or affidavits may play a role in assuring that auditable records are available throughout the chain of custody, but the auditable records must themselves also be available to ensure credibility of country of origin labeling claims. With a Number of Covered Commodities, Particularly Produce Items, Already Labeled as to Country of Origin at Retail, How Big a Burden Will Mandatory Country of Origin Labeling Actually Cause? It is certainly true that some covered commodities, particularly produce items, are already being labeled as to country of origin at retail establishments. It is also the case that existing Federal law and regulation (e.g., PACA) help ensure the truthfulness of such labels. At the same time, the labeling of such commodities with country of origin information is neither mandatory nor universal at the current time. Thus, while the burden of implementing country of origin labeling for those commodities should be lessened, some additional effort may still be required. For example, suppliers will need to ensure that documentation is complete and properly maintained. Retailers will need to manage their product displays to ensure country of origin information is being properly conveyed to their customers. Why Can't USDA Use The Same System To Verify Compliance With Country of Origin Labeling That It Uses for Meat Products Under USDA's Commodity Procurement Program? There are several reasons why the systems must be different. First, the requirements for origin are not the same. The COOL law for U.S. origin requires meat products to be from cattle, hogs, and sheep that are born, raised, and slaughtered in the United States. USDA's commodity procurement program requires meat products to come from U.S.- produced livestock. The definition of U.S.-produced livestock excludes only imported meat and meat [[Page 61945]] from livestock imported for direct slaughter. The system for verifying compliance with USDA's commodity procurement program is a ``command and control'' type system. USDA, through various certification or audit programs, confirms the applicable claim at the beginning of the process, then tracks and controls the movement of the product throughout the rest of the marketing chain. A similar system for COOL would require USDA to verify that livestock were born in the United States, then track and control the movement of those livestock and resulting meat products through the marketing chain to retail. However, the COOL law specifically precludes USDA from imposing this type of control. How Will the Mandatory Country of Origin Labeling Requirements Impact Existing U.S. Cow and Bull Herds? The law requires country of origin labeling for all covered commodities sold at retail beginning September 30, 2004, and does not contain a grandfathering provision that would exclude meat from these animals from the mandatory labeling requirements. If records as to where these animals were born, raised, and slaughtered do not exist, retailers could not substantiate a country of origin claim that would comply with the law. Are Cattle, Hogs, and Sheep Covered Commodities? No. However, the law requires suppliers to provide country of origin information to retailers, including the ``born, raised, and slaughtered'' information required to make U.S. origin claims for the covered commodities beef, pork, and lamb. The records needed to substantiate this information can only be created by persons having first-hand knowledge of the country designation for each production step declared in the country of origin claim. Thus, livestock producers will need to create and/or maintain these records to enable retail suppliers to provide retailers with correct country of origin information. This proposed rule is issued pursuant to the Farm Bill and the Appropriations Act, which amended the Act. On October 11, 2002, AMS published Guidelines for the Interim Voluntary Country of Origin Labeling of Beef, Lamb, Pork, Fish, Perishable Agricultural Commodities, and Peanuts(67 FR 63367) providing interested parties with 180 days to comment on the utility of the voluntary guidelines. On November 21, 2002, AMS published a notice requesting emergency approval of a new information collection (67 FR 70205) providing interested parties with a 60-day period to comment on AMS' burden estimates associated with the recordkeeping requirements as required by the Paperwork Reduction Act of 1995 (PRA). On January 22, 2003, AMS published a notice extending this comment period (68 FR 3006) an additional 30 days. In response to these requests for comment, AMS received over 2,400 written comments. In addition, as another means to receive public input with respect to this rulemaking action, AMS held 12 formal educational and listening sessions throughout the United States to afford interested parties the opportunity to provide comments and ideas on the mandatory COOL program's development. Over 3,300 people attended the listening sessions and approximately 580 people provided oral testimony. AMS has considered all of the comments received to date in developing this proposed rule. Several key concepts have emerged from both the written comments and the public testimony from the listening and educational sessions: [sbull] General opinions of the law (i.e., both pro and con). [sbull] Conflicting testimony regarding the costs that will be incurred by the industry in complying with the law. [sbull] Opinion that the law will improve the food safety of covered commodities. [sbull] Conflicting testimony as to whether there will be improvement in the marketplace because of consumers' willingness to pay for U.S. origin of covered commodities. [sbull] Opinion that poultry will be placed at a competitive advantage because it is exempt from labeling under COOL. [sbull] Opinion that significant pricing disparity will exist between retailers required to label under COOL and those that are exempt such as fish markets and butcher shops. [sbull] Opinion that the law requiring mandatory COOL should be repealed and the program should be made permanently voluntary. [sbull] Opinions that COOL should be implemented immediately due to the Canadian BSE incident. [sbull] Considerable testimony that presumption of U.S. origin should be allowed. [sbull] Considerable testimony that only imported products should be tracked and controlled. [sbull] Considerable testimonies that COOL should be implemented in the least costly manner possible. [sbull] Conflicting testimony on how to interpret the scope of covered commodities. [sbull] Considerable testimony that producers should be allowed to self-certify the origin of their animals. [sbull] Considerable testimony that required recordkeeping should be minimized and should allow for the use of existing records to the maximum extent possible. [sbull] Testimony that this law may violate United States trade obligations under the World Trade Organization. AMS has accepted many of the commenters' recommendations in developing this proposed rule. However, several of the recommendations provided by the commenters are not in conformance with the law and were therefore not adopted. Further discussion on the key concerns raised by the commenters can be found in each applicable section. AMS has also included a ``Questions and Answers'' section to address a few of the more common questions posed by the commenters. Background Section 10816 of Public Law 107-171 (7 U.S.C. 1638-1638d) amended the Act (7 U.S.C. 1621 et seq.) to require retailers to inform consumers of the country of origin of covered commodities beginning September 30, 2004. The intent of this law is to provide consumers with additional information on which to base their purchasing decisions. It is not a food safety or animal health measure. COOL is a retail labeling program and as such does not address food safety or animal health concerns. Food products, both imported and domestic, must meet the food safety standards of FSIS and/or the Food and Drug Administration (FDA), as applicable. In addition, all food products must also meet FDA labeling standards as well as all other applicable FDA regulations and standards. The law defines the term ``covered commodity'' as muscle cuts of beef (including veal), lamb, and pork; ground beef, ground lamb, and ground pork; farm-raised fish and shellfish; wild fish and shellfish; perishable agricultural commodities (fresh and frozen fruits and vegetables); and peanuts. The law defines the terms ``retailer'' and ``perishable agricultural commodity'' as having the meanings given those terms in PACA. The law specifically outlines the criteria a covered commodity must meet in order to bear a ``United States country of origin'' declaration. In the case of beef, lamb, and pork, the covered [[Page 61946]] commodity must be derived from an animal that was exclusively born, raised, and slaughtered in the United States. In the case of beef, this definition also includes cattle exclusively born and raised in Alaska or Hawaii and transported for a period not to exceed 60 days through Canada to the United States and slaughtered in the United States. In the case of farm-raised fish and shellfish, the covered commodity must be derived from fish or shellfish hatched, raised, harvested, and processed in the United States. In the case of wild fish and shellfish, the covered commodity must be derived from fish or shellfish harvested in the waters of the United States or by a U.S. flagged vessel and processed in the United States or aboard a U.S. flagged vessel. In addition, the law also requires the country of origin declaration to distinguish between wild and farm-raised fish and shellfish. In the case of perishable agricultural commodities and peanuts, the products must be produced in the United States. To convey the country of origin information, the law states that retailers may use a label, stamp, mark, placard, or other clear and visible sign on the covered commodity or on the package, display, holding unit, or bin containing the commodity at the final point of sale to consumers. Food service establishments, such as restaurants, cafeterias, food stands, and other similar facilities are exempt from these labeling requirements. The law makes reference to the definition of ``retailer'' in PACA as the meaning of ``retailer'' for the application of the labeling requirements under the COOL law. Under PACA, a retailer is any person who is a dealer engaged in the business of selling any perishable agricultural commodity solely at retail when the invoice cost of all purchases of produce exceeds $230,000 during a calendar year. This definition excludes butcher shops, fish markets, and small grocery stores that either sell fruits and vegetables at a level below this dollar volume threshold or do not sell any fruits and vegetables at all. The law requires any person engaged in the business of supplying a covered commodity to a retailer to provide the retailer with the product's country of origin information. In addition, the law states the Secretary of Agriculture (Secretary) may require that any person that prepares, stores, handles, or distributes a covered commodity for retail sale maintain a verifiable recordkeeping audit trail. The law prohibits the Secretary from using a mandatory identification system to verify the country of origin of a covered commodity and provides examples of existing certification programs that may be used to certify the country of origin of a covered commodity. The law contains enforcement provisions for both retailers and suppliers that include civil penalties of up to $10,000 for each violation. The law also encourages the Secretary to enter into partnerships with States with enforcement infrastructure to the extent possible to assist in the program's administration. Key Components of the Law Defining Covered Commodities The law defines the term ``covered commodity'' as: Muscle cuts of beef (including veal), lamb, and pork; ground beef, ground lamb, and ground pork; farm-raised fish and shellfish; wild fish and shellfish; perishable agricultural commodities; and peanuts. Exclusion for Ingredient in a Processed Food Item The law excludes items from needing to bear a country of origin declaration when a covered commodity is an ``ingredient in a processed food item.'' However, Public Law 107-171 does not define a ``processed food item.'' Therefore, AMS must define what constitutes a ``processed food item'' for each covered commodity in the context of Public Law 107-171 for the purposes of this proposed regulation. In defining ``processed food item'' in the voluntary guidelines (67 FR 63367), AMS recognized that the term ``processed'' has been previously defined in other regulations promulgated by AMS, such as those issued in conjunction with the National Organic Program. AMS also stated that it did not believe that these definitions were suitable for use in the COOL program because using such a broad definition would exempt commodities that Congress clearly intended to be governed under this law. AMS received numerous comments relating to the definition of a ``processed food item.'' Many commenters suggested that the definition of processed food item published in the voluntary guidelines (67 FR 63367) resulted in significantly reducing the number of food items Congress intended to be covered by the Act. These commenters contend, for example, that a roast remains a muscle cut of beef even if cooked, salted, or flavored. Conversely, many other commenters suggested that the definition published in the voluntary guidelines (67 FR 63367) was too narrow and resulted in the inclusion of products that Congress did not intend to be covered by the Act. These commenters contend that any item bearing an ingredient statement should not be required to be labeled under COOL. As this is a retail labeling law, to help guide AMS in determining how to define a ``processed food item,'' AMS viewed the scope of covered commodities in the context of how these products are marketed at the retail level. For example, most peanuts sold at retail are shelled and roasted. To interpret the law as only applying to green peanuts would result in the exclusion of most peanuts sold at retail. Similarly, to exclude canned fish would result in the exclusion of a large share of the fish products sold at retail. To address the concerns raised by the commenters, AMS has chosen to define a ``processed food item'' utilizing a 2-step approach. First, a retail item derived from a covered commodity that has undergone a physical or chemical change, causing the character to be different from that of the covered commodity is deemed to be a processed food item. Examples include oranges that have been squeezed and made into orange juice, a fresh leg of pork that has been cured and made into a ham, peanuts that have been ground and made into peanut butter, or flesh of a fish that has been restructured and made into a fish stick. These retail items have undergone a physical or chemical change such that they no longer retain the characteristics of the covered commodity and thus consumers would not use the items in the same manner as they would the covered commodities. Second, a retail item derived from a covered commodity that has been combined with either (1) other covered commodities, or (2) other substantive food components (e.g., chocolate, stuffing) resulting in a distinct retail item that is no longer marketed as a covered commodity. Examples include a salad mix that contains lettuce and tomatoes, peanuts in a candy bar, a stuffed pork chop, or seafood medley. Alternatively, some commenters suggested that a processed food item could be defined as to exclude any product that bears an ingredient statement. These commenters contend that this would establish a bright line standard that would enable companies throughout the marketing chain to readily determine whether the commodities they produce or sell would be covered commodities. Utilizing such a definition would result in the exclusion of many products, including those products in which the ingredient statement lists only the commodity itself. Accordingly, AMS invites further [[Page 61947]] comment on the practicality of this alternative definition. Similarly, some commenters suggested that any covered commodity that has undergone processing as defined by other existing Federal regulations (e.g., PACA, National Organic Program, and AMS Processed Fruit and Vegetable Inspection Program) should be defined as an ingredient in a processed food item, thereby being excluded from country of origin labeling under this law. Under this alternative any food item that represents additional transformation (e.g., canning, cooking, dehydration, drying, fermentation, milling, the addition of chemical substances, etc.) of a covered commodity would be considered a processed food item. In addition, a covered commodity that has been combined with other covered commodities or other ingredients would also be considered an ingredient in a processed food item and excluded from labeling. Utilizing such a definition could result in the exclusion of many retail products. Accordingly, AMS invites further comment on the practicality of this alternative definition. As another alternative, some commenters suggested that a covered commodity that is further processed (i.e., cured, restructured, etc.) should not be excluded unless the covered commodity is mixed with other commodities to create a distinct food item such as a pizza or TV dinner. Accordingly, AMS also invites further comment on the practicality of this alternative definition. AMS invites further comment on its preferred approach, the three identified alternatives, or any other alternative to the statutory exclusion for an ingredient in a processed food item. Muscle Cuts of Beef, Lamb, and Pork All muscle cuts of beef (including veal), lamb, and pork whether chilled, frozen, raw, cooked, seasoned, or breaded are covered commodities and would be subject to these regulations unless they are an ingredient in a processed food item. In cases where a retail item is derived from a muscle cut of beef, lamb, or pork that has undergone a physical or chemical change, causing the character to be different than that of the covered commodity, that item is considered a processed food item and would be excluded from needing to bear a country of origin declaration under these regulations. For example, products such as restructured steaks and cured products like hams, corned beef briskets, and bacon would be considered processed food items as they no longer retain the characteristics of the covered commodity and thus consumers would not use them in the same manner as they would the covered commodity. A consumer who desires a fresh pork leg for roasting would not substitute a cured product such as ham for the same purpose. In addition, these products also are not typically marketed with muscle meats at a retail establishment, but are generally marketed with other excluded meat products. In cases where a retail item is derived from a covered commodity that has been combined with non-substantive components, and the character of the covered commodity is retained, the resulting product would not be considered a processed food item and would be subject to these regulations. Examples include products such as needle-tenderized steaks; fully-cooked entrees containing beef pot roast with gravy; seasoned, vacuum-packaged pork loins; and water-enhanced case ready steaks, chops, and roasts. These items would not be considered processed food items because the combination of non-substantive components and a muscle cut of beef, lamb, or pork does not result in a retail item with characteristics that are different from that of the covered commodity and would generally be used by consumers in the same manner. In cases where a retail item consists of a muscle cut of beef, lamb, and pork and another covered commodity or other substantive food components resulting in a distinct retail item that is no longer marketed as a covered commodity, such an item is considered a processed food item and would be excluded from these regulations. An example includes an item such as a shish kabob containing beef and lamb, which would not be marketed as a muscle cut of beef or lamb, but would instead be marketed as a shish kabob. Ground Beef, Lamb, and Pork Under the law, ground beef, ground lamb, and ground pork are required to bear a country of origin declaration. FSIS rules and regulations specifically define the requirements for products to be labeled as ``ground beef,'' ``ground pork,'' and ``ground lamb.'' As such, only those products that meet FSIS requirements to be labeled as ``ground beef,'' ``ground pork,'' or ``ground lamb,'' must bear a country of origin declaration in accordance with this proposed rule. Fresh and Frozen Fruits and Vegetables Under the law, perishable agricultural commodities as defined by PACA are required to bear a country of origin declaration. PACA defines perishable agricultural commodities as ``any of the following, whether or not frozen or packed in ice: Fresh fruits and vegetables of every kind and character; and * * * includes cherries in brine as defined by the Secretary in accordance with trade usages.'' Therefore, frozen fruits and vegetables (e.g., a package of frozen strawberries or frozen french fried potatoes made from sliced potatoes) would be covered commodities subject to these regulations; however, cooked and canned fruits and vegetables would be exempt. In order to maintain consistency with PACA, a frozen fruit or vegetable would be a covered commodity as long as it is not an ingredient in a processed food item and thus its ``kind or character'' has not been altered. For example, a retail item derived from a perishable agricultural commodity that has undergone a physical or chemical change, causing the character to be different from that of the covered commodity, is considered to be a processed food item and would be excluded from these regulations. For example, oranges that have been squeezed and made into orange juice or apples that have been mashed and made into fresh apple sauce would be considered processed food items as they no longer retain the characteristics of the covered commodity and thus consumers would not use them in the same manner as they would the covered commodity. In cases where a retail item is derived from a perishable agricultural commodity combined with non-substantive components and the character of the covered commodity is retained, the resulting product is not considered a processed food item and would be subject to these regulations. Examples include products such as strawberries packaged with sugar, a preservative, or other flavoring. These items would not be considered processed food items because the addition of non- substantive components does not result in a retail item with characteristics that are different from that of the covered commodity and would generally be used by consumers in the same manner as the covered commodity. In cases where a retail item is derived from a perishable agricultural commodity that has been combined with another covered commodity or other substantive food components resulting in a distinct retail item that is not marketed as a covered commodity, such an item is considered a processed food item and would be excluded from [[Page 61948]] these regulations. Examples include a frozen prepared pie that includes frozen sliced apples, a fruit cup containing cantaloupe, honeydew, and watermelon, or a vegetable tray containing both carrots and celery. Peanuts All peanuts, whether raw, roasted, in-shell, shelled, salted, seasoned, or canned are subject to these regulations unless they are an ingredient in a processed food item. Under the law, the term ``covered commodity'' includes ``peanuts.'' Because the vast majority of peanuts sold at retail are shelled, roasted, and salted, AMS believes these products were intended to be covered by the law. Accordingly, shelled and/or roasted peanuts would be subject to these regulations as these retail items do not have characteristics that are different from that of a covered commodity. Further, peanuts that have been combined with other non-substantive ingredients such as oil, salt, or other flavorings would also be subject to these regulations. However, peanut products such as candy coated peanuts, peanut brittle, and peanut butter would not be subject these regulations as they are processed food items with a character that is different than that of the covered commodity. In addition, in cases where the peanuts are ingredients in other food products (e.g., peanuts in a candy bar), they would also be excluded from these regulations as they are not marketed as a covered commodity. Wild and Farm-Raised Fish and Shellfish All fish and shellfish, whether chilled, frozen, raw, cooked, breaded, or canned would be subject to these regulations unless they are an ingredient in a processed food item. This includes fillets, steaks, nuggets, and other flesh from wild or farm-raised fish and shellfish. In cases where a retail item is derived from fish or shellfish that has undergone a physical or chemical change, causing the character to be different than that of the covered commodity, that item is considered a processed food item and would be excluded from these regulations. For example, items such as restructured shrimp or fish sticks and smoked and cured products would be considered processed food items because they no longer retain the characteristics of the covered commodity and thus consumers would not use them in the same manner as they would the covered commodity. In cases where a retail item is derived from a fish or shellfish that has been combined with non-substantive ingredients such as seasonings, preservatives, or breading, that item would not be considered a processed food item as it does not result in a retail item with characteristics that are different from that of the covered commodity and would generally be used by consumers in the same manner as the covered commodity. In cases where a retail item is derived from a fish or shellfish that has been combined with another covered commodity or other substantive ingredients, that item would be considered a processed food item and would not be subject to these regulations as it results in a distinct retail item that is no longer marketed as a covered commodity. Examples include a bag of seafood medley, stuffed salmon, or surimi. Labeling Country of Origin for Products Produced Exclusively in the United States The law prescribes specific criteria that must be met for a covered commodity to bear a ``United States country of origin'' declaration. The specific requirements for each commodity are as follows: (a) Beef--covered commodities must be derived exclusively from an animal that was born, raised, and slaughtered in the United States (including from an animal exclusively born and raised in Alaska or Hawaii and transported for a period not to exceed 60 days through Canada to the United States and slaughtered in the United States). (b) Lamb and Pork--covered commodities must be derived exclusively from an animal that was born, raised, and slaughtered in the United States. (c) Farm-raised Fish and Shellfish--covered commodities must be derived exclusively from fish or shellfish hatched, raised, harvested, and processed in the United States. (d) Wild Fish and Shellfish--covered commodities must be derived exclusively from fish or shellfish either harvested in the waters of the United States or by a U.S. flagged vessel and processed in the United States or aboard a U.S. flagged vessel. (e) Fresh and Frozen Fruits and Vegetables, and Peanuts--covered commodities must be derived exclusively from perishable agricultural commodities or peanuts grown in the United States. Products otherwise meeting the requirements of ``United States country of origin'' may retain that designation after export for further processing in a foreign country and reentry into the United States for retail sale provided a verifiable recordkeeping audit trail is maintained. However, in the case of meat and meat products, additional labeling information may be required by other Federal agencies. Labeling Country of Origin for Imported Products (i.e., Produced Entirely Outside of the United States) Currently, under the Tariff Act of 1930, as amended (19 U.S.C. 1304)(Tariff Act), most imported items, including food items, are required to be marked to indicate the ``country of origin'' to the ``ultimate purchaser.'' The U.S. Bureau of Customs and Border Protection (CBP), which administers the Tariff Act, generally defines ``ultimate purchaser'' as the last person in the United States who will receive the article in the form in which it was imported and defines ``country of origin'' as the country of manufacture, production, or growth of any article of foreign origin entering the United States. For example, under the Tariff Act, containers (e.g., cartons and boxes) holding imported fresh fruits and vegetables must bear a country of origin declaration (as defined by current CBP regulations) when entering the United States. However, under current law, a retailer may remove loose produce from a labeled container and display it in an open bin, selling each individual piece of produce without a country of origin declaration. In contrast, this proposed rule would require the retailer to notify the consumer as to the country of origin of all covered commodities whether individually packaged or displayed in a bin. Currently, under the Federal Meat Inspection Act (FMIA)(21 U.S.C. 601 et seq.), all meat products imported into the United States are required to bear the country of origin on the labeling of the container in which the products are shipped. If imported meat or meat products are intended to be sold intact to a grocer or household consumer (i.e., consumer-ready packaging), the country of origin is conveyed to those recipients. For example, if a bulk shipping container imported from country X, consists of pre-packaged and labeled meat cuts that are intended to be sold to grocers or at retail to household consumers as they are packaged, each package would bear a country of origin declaration (e.g., product of country X). Currently, under the Tariff Act, if an article is destined for a U.S. processor or manufacturer in which it will undergo ``substantial transformation,'' that processor or manufacturer is generally considered the ``ultimate [[Page 61949]] purchaser.'' As such, products that have been substantially transformed by a U.S. processor generally are not required to bear a country of origin declaration. Similarly, under current FSIS policies and directives, imported meat and meat products that are further processed in the United States are not required to bear country of origin declarations on the newly produced products or subsequent products made from them as these products are now considered to be domestic. Under this proposed rule, imported covered commodities for which origin has already been established as defined by this regulation (e.g., born, raised, and slaughtered in the case of meat products or grown in the case of peanuts), shall retain their origin, as determined by CBP at the time the product entered the United States, through retail sale. For example, if an imported lamb carcass derived from an animal that was born, raised, and slaughtered in country X, was further processed in the United States, the resulting products derived from that carcass would be labeled as ``product of the country X.'' However, in this example, additional labeling information may be required by FSIS. Products imported in consumer-ready packages, including food products (e.g., frozen green beans or canned ham), are currently required to bear a country of origin declaration on each individual package under both the Tariff Act and FMIA. This proposed rule would not change these requirements. Labeling Country of Origin When the Product Has Entered the United States During the Production Process (i.e., Mixed Origin That Includes the United States) The law specifically defines the requirements for covered commodities to bear a ``United States country of origin'' declaration. However, the law is less specific for products produced completely or in part outside of the United States. In these instances, the law requires only that retailers inform consumers as to the country of origin of a covered commodity at the final point of sale. Beef, Lamb, and Pork The law states that only covered commodities derived from animals that were born, raised, and slaughtered in the United States may bear a ``United States country of origin'' declaration. AMS recognizes that a number of animals born in foreign countries are raised and slaughtered in the United States. In addition, some animals born in the United States are raised in foreign countries and then either slaughtered in that foreign country or returned to the United States for slaughter. The requirements for products to bear a ``Product of the United States'' declaration do not permit products derived from animals that were born, raised, or slaughtered in a foreign country to be labeled as ``Product of the United States.'' However, AMS recognizes that to label products of an animal that was only born in country X, but raised and slaughtered in the United States solely as ``Product of country X'' does not reference the significant production steps that occurred in the United States. Therefore, under this proposed rule, products that were produced in both a foreign country and the United States would be labeled at retail as being imported from the foreign country and also for the production steps that occurred in the United States. For example, pork products derived from a pig that was born in country X, raised and slaughtered in the United States would be labeled as ``Imported from country X, Raised and Slaughtered in the United States.'' Alternatively, products may also be labeled to specifically identify the production step(s) that occurred in the country other than the United States if the animal's identity was maintained along with records to substantiate the origin claims. For example, products derived from a pig that was born and raised in country X and slaughtered in the United States could either be labeled as ``Imported from country X, Slaughtered in the United States'' or ``Born and Raised in country X, Slaughtered in the United States.'' AMS invites further comment on the use of alternative terms for the term ``slaughtered.'' AMS also recognizes that in some cases, an animal will undergo production steps in two or more foreign countries prior to entering the United States for additional processing or a final process such as slaughter. In these cases, the meat products derived from an animal that was born in country X, raised in country Y, and slaughtered in the United States would be labeled at retail as being imported from country Y and for any production steps occurring in the United States. For example, if a calf was born in country X and raised in country Y before being imported for slaughter in the United States, the resulting meat products derived from this animal would be labeled as ``Imported from country Y, Slaughtered in the United States.'' Alternatively, if the animal's identity was maintained along with the records to substantiate the origin claims, the product could be labeled to specifically identify the production step(s) (e.g., born, raised) occurring in the country(ies) other than the United States. In the example cited above, the product could be labeled ``Born in country X, Raised in country Y, Slaughtered in the United States.'' AMS invites further comment on this approach to the labeling of beef, lamb and pork, and requests identification of alternative approaches to labeling such products. Wild and Farm-Raised Fish and Shellfish In the case of wild fish and shellfish, the law states that a covered commodity can only bear a ``United States country of origin'' declaration if it is harvested in the waters of the United States or aboard a U.S. flagged vessel and processed in the United States or aboard a U.S. flagged vessel. In the case of farm-raised fish and shellfish, the law states that a covered commodity can only be labeled as ``Product of the U.S.'' if it is hatched, raised, harvested, and processed in the United States. However, the law does not define the term processed. AMS received numerous comments requesting that the regulations for the mandatory COOL program conform to existing regulations of CBP wherever possible to eliminate redundancies, costs, and conflicts. As such, for wild and farm-raised fish and shellfish, AMS has defined ``processed'' as any process that effects substantial transformation as defined by CBP Rules of Origin. In the case of wild fish and shellfish, if a covered commodity was harvested in the waters of the U.S. or by a U.S. flagged vessel and processed in country X or aboard a country X flagged vessel, the covered commodity shall be labeled at retail as ``Product of country X.'' For example, if a fish was caught in U.S. waters and processed into individually quick-frozen fillets in country Y, such product would be labeled as ``Product of country Y'' because it has been substantially transformed as defined by CBP and thus does not meet the requirements to bear a U.S. origin declaration. Alternatively, the product may also be labeled to include the production step occurring in the United States if the product's identity was maintained along with records to substantiate the origin claims. In the example provided above, the product could be labeled as ``product of country Y, harvested in the United States.'' If a covered commodity was harvested in country Y and processed in the United States or aboard a U.S. flagged vessel, the product shall be labeled at retail as ``Imported from country Y, processed in the United States.'' In all cases, the covered commodity must also [[Page 61950]] be labeled to indicate that it was derived from wild fish and/or shellfish. In the case of farm-raised fish, if a covered commodity was hatched in country X, and raised, harvested and/or processed in the United States, the product would be labeled as being imported from country X and for the production step(s) occurring in the United States. For example, if a fish was hatched in country X and processed in the United States, the product would be labeled as ``Imported from country X, Processed in the United States.'' If a covered commodity was hatched, raised, and harvested in the United States and processed in country X, the product shall be labeled at retail as ``Product of country X.'' Alternatively, the product may also be labeled to include the production step(s) occurring in the United States if the product's identity was maintained along with records to substantiate the origin claims. In the example given above, the product could be labeled as ``Product of country X, hatched, raised, and harvested in the United States.'' In all cases, the covered commodity must also be labeled to indicate that it was derived from farm-raised fish and/or shellfish. Farm-raised fish means fish or shellfish that have been harvested in controlled or selected environments, including ocean-ranched (e.g., penned) fish and shellfish confined in managed beds; and fillets, steaks, nuggets, and any other flesh from a farm-raised fish or shellfish. For example, mussels on rope culture and oysters on leased land would be considered farm- raised. AMS invites further comment on this approach to the labeling of wild and farm-raised fish and shellfish and requests identification of alternative approaches to labeling such products. Defining Country of Origin for Blended Products Many of the covered commodities required to bear a country of origin declaration under the law are commingled or blended products that were prepared from raw material sources having different origins (e.g., bagged lettuce, ground beef, shrimp, etc.). However, the law does not specify how these products should be labeled. In defining country of origin for blended or mixed products in the voluntary guidelines (67 FR 63367), AMS recognized that it could be misleading to consumers if only a small percentage of a covered commodity mixture met the definition of United States origin and yet the mixture could list the United States first ahead of other countries in the country of origin declaration on the package. As such, under the voluntary guidelines, the country of origin declaration was to reflect the country of origin for each raw material source of the mixed or blended retail item by order of predominance by weight. In addition, under the voluntary guidelines, containers of mixed or blended products in which the individual constituents could be separately identified, would have to bear a country of origin declaration individually identifying the country of origin of each constituent. AMS received numerous comments on this issue stating that to require labeling in the order of predominance by weight and for each individual constituent would be cumbersome, impractical, and costly. In response to these comments, under this proposed rule, the country of origin declaration of blended or mixed retail food items comprised of the same covered commodity (e.g., bag of lettuce or package of ground beef) that are prepared from raw material sources having different origins must list alphabetically the countries of origin for all of the raw materials contained therein. For example, a bag of red and green leaf lettuce from country A and country B would be labeled as ``Product of country A, Product of country B.'' However, under this proposed rule, items such as a salad mix or a fruit cup would not be required to bear a country of origin declaration because these items would be considered processed food items and would be excluded from these regulations. Method of Notification The law states that the country of origin declaration may be provided to consumers by means of a label, stamp, mark, placard, or other clear and visible sign on the covered commodity or on the package, display, holding unit, or bin containing the commodity at the final point of sale to consumers. Under this proposed rule, market participants can utilize a variety of different labeling nomenclatures to denote the country of origin of a covered commodity. For example, ``U.K.'' and ``United Kingdom of Great Britain and Northern Ireland'' would both be allowed under this proposed rule. AMS received numerous comments requesting acceptance for labels containing only the name of the country such as ``USA'' due to the limited amount of space on many retail items. Therefore, under this proposed rule, country of origin declarations may be in the form of a statement such as ``Product of USA,'' ``Grown in Mexico,'' or they may only contain the name of the country such as ``USA'' or ``Mexico'' provided it is in conformance with other existing Federal laws. However, the labeling requirements under this proposed rule do not supercede any existing labeling requirements, unless otherwise specified, and any such country of origin notification must not obscure other labeling information required by existing regulatory requirements. For those entities that are regulated by FSIS, all country of origin labels must be submitted to FSIS for pre-approval as required by current FSIS regulations. In order to provide the industry with as much flexibility as possible, this proposed rule does not contain specific requirements as to the exact placement or size of the country of origin declaration. However, such declaration must be conspicuous and allow consumers to determine the country of origin when making their purchases and provided that existing Federal labeling requirements must be followed. State and Regional Labeling Programs The law requires retailers to notify consumers of the country of origin of covered commodities. Therefore, State and regional labeling programs such as ``Washington apples,'' ``Idaho potatoes,'' and ``California Grown'' do not meet this requirement and cannot be accepted in lieu of country of origin labeling. Existing State-Level Country of Origin Labeling Laws Several States have implemented mandatory programs for country of origin labeling of certain commodities. For example, Alabama, Arkansas, Mississippi, and Louisiana have origin labeling requirements for certain seafood products. Other States including Wyoming, Idaho, North Dakota, South Dakota, Louisiana, Kansas, and Mississippi have origin labeling requirements for particular meat products. In addition, the State of Florida and the State of Maine have origin labeling requirements for fresh produce items. AMS received several comments asserting that these State programs, particularly the State of Florida's program, should serve as models for the Federal mandatory COOL program. AMS has reviewed these existing programs and concluded that most of these programs do not meet the requirements of the Act. Accordingly, AMS has determined that, in general, these programs are not suitable models on which to base the regulations for the Federal mandatory COOL program. With regard to enforcement activities, while some of these States actively enforce their respective origin labeling [[Page 61951]] laws and impose fines on those found to be in violation and/or seize product found to be mislabeled, other States conduct no such enforcement activities. With respect to the Florida law that is actively enforced by the State, verification of a product's origin generally consists of the inspector observing the primary container the product was packaged in to determine if the retailer has accurately characterized the origin of the product on the shelf. This enforcement program is based on a presumption of truthfulness that allows the retailer to rely on the information printed either on the shipping container or on the product itself. Therefore, AMS does not believe this type of enforcement program could serve as a model for enforcement of the Federal program. Remotely Purchased Products Many consumers are now purchasing products from retailers prior to having an opportunity to observe the final package (e.g., Internet sales, home delivery sales, etc.). In the voluntary guidelines (67 FR 63367), AMS stated its belief that consumers should be made aware of the country of origin of a covered commodity before the purchase is made. Thus, under the voluntary guidelines retailers were required to provide the country of origin information on the sales vehicle (i.e., Internet site, home delivery catalog, etc.) as part of the information describing the covered commodity for sale. Numerous commenters stated that it would be nearly impossible and extremely impractical to have current country of origin information on an Internet site or catalog as this information changes rapidly depending on the store location or warehouse at which an order is processed and filled. Therefore, under this proposed rule, retailers must provide notification of country of origin at the time the product is delivered to the customer. Recordkeeping Requirements The law states that the Secretary may require any person that prepares, stores, handles, or distributes a covered commodity for retail sale to maintain a verifiable recordkeeping audit trail that will permit the Secretary to verify compliance. As such, records and other documentary evidence to substantiate origin declarations and, if applicable, designations of wild or farm-raised, are necessary in order to provide retailers with credible information on which to base origin declarations. Under this proposed rule, any person engaged in the business of supplying a covered commodity to a retailer, whether directly or indirectly (i.e., distributors, handlers, etc.), would be required to maintain records to establish and identify the immediate previous source and immediate subsequent recipient of a covered commodity, in such a way that identifies the product unique to that transaction, for a period of 2 years from the date of the transaction. The supplier of a covered commodity that is responsible for initiating a country of origin declaration and, if applicable, designation of wild or farm- raised, must possess or have legal access to records that substantiate that claim. For an imported covered commodity, the importer of record as determined by CBP, must ensure that records: (1) Provide clear product tracking from the U.S. port of entry to the immediate subsequent recipient, and (2) substantiate country of origin claims, and, if applicable, designations of wild or farm-raised and maintain such records for a period of 2 years from the date of the transaction. To the extent that existing records contain the necessary information to substantiate an origin declaration and, if applicable, designations of wild or farm-raised, it is not necessary to create or maintain additional records. AMS invites comment on all aspects of recordkeeping requirements. In particular, comment is invited on whether a shorter record retention requirement would still afford adequate time to conduct compliance activities. For example, FDA proposed a 1-year record retention requirement for perishable goods in their proposed rule, published on May 9, 2003, implementing sections of the Bioterrorism Act of 2002, and many firms would have to retain records for both this rulemaking and the FDA recordkeeping rule. At the same time, retailers and others in the marketing chain subject to PACA must continue to comply with its 2 year record retention requirement. For suppliers that handle similar covered commodities from more than one country, the supplier must be able to document that the origin of a product was separately tracked, while in their control, during any production or packaging processes to demonstrate that the identity of the product wasmaintained. Under this proposed rule, retailers also have recordkeeping responsibilities. AMS received numerous comments requesting clarification of the types of records that must be kept at the retail level. Many of these commenters also suggested that a 2-year requirement for maintaining records at the store level was too onerous and unnecessary given the relatively short amount of time a product is on the shelf before it is sold. Therefore, under this proposed rule, records and other documentary evidence relied upon at the point of sale by the retailer to establish a product's country of origin and, if applicable, designation of wild or farm-raised, must be maintained at the point of sale or otherwise be reasonably available to any duly authorized representatives of USDA for at least 7 days following the retail sale of the product. Records that identify the retail supplier, the product unique to that transaction, and the country of origin information, and, if applicable, designation of wild or farm-raised, must be maintained for a period of 2 years from the date the origin declaration is made at retail. Such records may be located at the retailer's point of distribution, warehouse, central offices, or other off-site location. AMS invites comment on all aspects of recordkeeping requirements. In particular, comment is invited on whether a shorter record retention requirement would still afford adequate time to conduct compliance activities. For example, FDA proposed a 1-year record retention requirement for perishable goods in their proposed rule, published on May 9, 2003, implementing sections of the Bioterrorism Act of 2002, and many firms would have to retain records for both this rulemaking and the FDA recordkeeping rule. At the same time, retailers and others in the marketing chain subject to PACA must continue to comply with its 2 year record retention requirement. AMS also received numerous comments from retailers emphasizing the need to hold retail suppliers accountable as the retailer would be unable to determine a product's country of origin in the absence of credible information from thesupplier. Under the statute, suppliers of covered commodities are required to supply country of origin information to retailers and sanctions may be assessed against retailers only for willful violations. However, to help address the concerns of retailers, AMS invites further comment on the practicality of requiring suppliers to provide an affidavit for each transaction to the immediate subsequent recipient certifying that the country of origin claims and, if applicable, designations of wild or farm-raised, being made are truthful and that the required records are being maintained. [[Page 61952]] Enforcement The law encourages the Secretary to enter into partnerships with States to the extent practicable to assist in the administration of this program. As such, USDA will seek to enter into partnerships with States that have enforcement infrastructure to conduct retail compliance reviews. Routine compliance reviews may be conducted at retail establishments and associated administrative offices, and suppliers subject to these regulations. USDA would coordinate the scheduling and determine the procedures for reviews. Only USDA will be able to initiate enforcement actions against a person found to be in violation of the law. USDA may also conduct investigations of complaints made by any person alleging violations of these regulations when the Secretary determines that reasonable grounds for such investigation exist. Retailers, upon being notified of the commencement of a compliance review, must make all records or other documentary evidence material to this review available to USDA representatives and provide any necessary facilities for such inspections. AMS invites further comment on all aspects of enforcement of this retail labeling rule. Specific comment is requested on the implications of the statutory mandate for retail labeling beginning September 30, 2004, relative to the amount of lead time necessary for firms in the supply chain to comply with this rule. Violations The law contains enforcement provisions for both retailers and suppliers that include civil penalties of up to $10,000 for each violation. For retailers, the law states that if the Secretary determines that a retailer is in violation of the Act, the Secretary must notify the retailer of the determination and provide the retailer with a 30-day period during which the retailer may take necessary steps to comply. If upon completion of the 30-day period the Secretary determines the retailer has willfully violated the Act, after providing notice and an opportunity for a hearing, the retailer may be fined not more than $10,000 for each violation. AMS received numerous comments requesting a clarification as to how AMS will apply the standard of willfulness. These commenters urge USDA to recognize that if a majority of covered commodity items bear a label indicating the product's country of origin, the retailer has met their obligation under these regulations. AMS recognizes that many suppliers, particularly in the case of produce, will apply stickers to individual covered commodities indicating the country of origin and that such labeling technology does not result in a 100 percent adhesion level. AMS also recognizes that consumers may separate hands of bananas that may only have one or two stickers per hand or otherwise move an item from one bin to another as they make their selections. AMS will take these and all other circumstances into account in determining whether or not a retailer has committed a willful violation. In addition to the enforcement provisions contained in the Act, statements regarding a product's origin must also comply with other existing Federal statutes. For example, if a firm misrepresents the State, country, or region of origin of a perishable agricultural commodity, the firm is in violation of PACA. In addition, both FMIA and the Federal Food, Drug, and Cosmetic Act prohibit labeling that is false or misleading. Thus, inaccurate country of origin labeling of covered commodities may lead to additional penalties under these statutes as well. Executive Order 12988 The contents of this proposed rule were reviewed under Executive Order 12988, Civil Justice Reform. This rule is not intended to have a retroactive effect. States and local jurisdictions are preempted from creating or operating country of origin labeling programs for the commodities specified in the Act and these regulations. With regard to other Federal statutes, all labeling claims made in conjunction with this regulation must be consistent with other applicable Federal requirements. Further, the Act does not restrict or modify the authority of the Secretary to administer or enforce FMIA(21 U.S.C. 601 et seq.) or PACA (7 U.S.C. 499 et seq.). There are no administrative procedures that must be exhausted prior to any judicial challenge to the provisions of this rule. Civil Rights Review AMS has considered the potential civil rights implications of this rule on minorities, women, or persons with disabilities to ensure that no person or group shall be discriminated against on the basis of race, color, national origin, gender, religion, age, disability, sexual orientation, marital or family status, political beliefs, parental status, or protected genetic information. This review included persons that are employees of the entities that are subject to these regulations. This proposed rule does not require affected entities to relocate or alter their operations in ways that could adversely affect such persons or groups. Further, this proposed rule would not deny any persons or groups the benefits of the program or subject any persons or groups to discrimination. Executive Order 13132 This proposed rule has been reviewed under Executive Order 13132, Federalism. This Order directs agencies to construe, in regulations and otherwise, a Federal statute to preempt State law only where the statute contains an express preemption provision or there is some other clear evidence to conclude that the Congress intended preemption of State law, or where the exercise of State authority conflicts with the exercise of Federal authority under the Federal statute. This proposed rule is required by the Farm Bill. While this statute does not contain an express preemption provision, it is clear from the language in the statute that Congress intended preemption of State law. Several States have implemented mandatory programs for country of origin labeling of certain commodities. For example, Alabama, Arkansas, Mississippi, and Louisiana have origin labeling requirements for certain seafood products. Other States including Wyoming, Idaho, North Dakota, South Dakota, Louisiana, Kansas, and Mississippi have origin labeling requirements for certain meat products. In addition, the State of Florida and the State of Maine have origin labeling requirements for fresh produce items. To the extent that these State country of origin labeling programs encompass commodities which are not governed by this regulation, the States may continue to operate them. With regard to consultation with States, as directed by the law, AMS has consulted with the States that have country of origin labeling programs. Further, State officials were invited to attend, and in many cases did participate in, the 12 educational and listening sessions AMS held across the United States. Further, States are expressly invited to comment on this proposed rule as it relates to existing State programs. Executive Order 12866 USDA has examined the economic impact of this proposed rule as required by Executive Order 12866. USDA has determined that this regulatory action is economically significant, as it is likely to result in a rule that would have an annual effect on the economy of $100 million or more and therefore has been reviewed by OMB. Executive Order [[Page 61953]] 12866 requires that a regulatory cost-benefit assessment be performed on all economically significant regulatory actions. In accordance with Executive Order 12866, this preliminary economic impact assessment contains a statement of need for the proposed rule, an examination of alternative approaches, and an analysis of benefits and costs. Summary of the Economic Analysis The estimated benefits associated with this rule are likely to be negligible. The estimated first-year incremental cost for growers, producers, processors, wholesalers, and retailers ranges from $582 million to $3.9 billion. The estimated cost to the U.S. economy in higher food prices and reduced food production in the tenth year after implementation of the rule ranges from $138 million to $596 million. Note that this analysis does not quantify certain costs of the proposed rule such as the cost of the rule after the first year, or the cost of any supply disruptions or any other ``lead-time'' issues. Except for the recordkeeping requirements, there is insufficient information to distinguish between first year start up and maintenance costs versus ongoing maintenance costs for this proposed rule. Maintenance costs beyond the first year are expected to be lower than the combined start up and maintenance costs required in the first year. AMS invites further comment on start up costs and maintenance costs for the first year and beyond for firms directly affected by this proposed rule. USDA finds little evidence that consumers are willing to pay a price premium for country of origin labeling. USDA also finds little evidence that consumers are likely to increase their purchase of food items bearing the U.S. origin label as a result of this rulemaking. Current evidence does not suggest that U.S. producers will receive sufficiently higher prices for U.S.-labeled products to cover the labeling, recordkeeping, and other related costs. The lack of participation in voluntary programs for labeling products of U.S. origin provides evidence that consumers do not have a strong preference for country of origin. Statement of Need This proposed rule is the direct result of statutory obligations to implement the COOL provisions of the Farm Bill, which amended the Act by adding Subtitle D--Country of Origin Labeling. There are no alternatives to Federal regulatory intervention for implementing this statutory directive. The country of origin labeling provisions of the Farm Bill change current Federal labeling requirements for muscle cuts of beef, pork, and lamb; ground beef, ground pork, and ground lamb; farm-raised fish; wild fish; perishable agricultural commodities; and peanuts (hereafter, covered commodities). Under current Federal laws and regulations, country of origin labeling is not universally required for covered commodities. In particular, labeling of U.S. origin is not mandatory, and labeling of imported products at the consumer level is required only in certain circumstances. The Tariff Act, FMIA, and other legislation require most imports to bear labels informing the ``ultimate purchaser'' of the country of origin. ``Ultimate purchaser'' is defined as the last U.S. person who will receive the article in the form in which it was imported. The Tariff Act requires country of origin declarations on containers (e.g., cartons and boxes) holding imported fresh fruits and vegetables when entering the United States. Under the provisions of this statute, loose produce in a labeled container can be displayed and sold in an open bin at retail outlets without country of origin labels on each individual piece of produce. A placard or other bin label indicating country of origin is not required. If the produce in a shipping container is packed in consumer-ready packaging, however, those packages must bear a country of origin declaration. For example, grapes packaged in bags or shrink-wrapped English cucumbers must have country of origin labels on each consumer-ready package. Further, if the food item is destined for a U.S. processor or manufacturer where it will undergo ``substantial transformation,'' that processor or manufacturer is considered the ultimate purchaser. As a result, under the Tariff Act, these covered commodities are not required to carry a country of origin mark after processing in the United States. The strongest case for establishing a market failure justification for mandatory COOL is inadequate or asymmetric information. Country of origin is clearly a credence attribute, which means that consumers cannot observe the attribute before or after purchasing the product. Without labeling, there is no way for consumers to know the country of origin of a covered commodity. If the country of origin of the commodities covered by this proposed rule is an attribute desired by consumers and there is market failure that impedes the voluntary provision of this information, then market efficiency could be improved by providing credible information to consumers. With credible country of origin information, consumers could select products based on their preferences for country of origin, and the food industry could respond to consumer demand signals by providing products according to the expressed demands of consumers. Consumer surveys indicate that some consumers desire country of origin information on foods (Refs. 1, 2, and 3). The consumer surveys also indicate that consumers may desire COOL not out of any intrinsic value they place knowing the country of origin, but because it represents to them a proxy for product safety or quality, serves as an indicator of desirable environmental or labor practices, or represents a means for them to support U.S. or another country's producers. An important question to consider in weighing the economic basis for mandatory COOL is whether there are any barriers to the voluntary, private provision of the optimal level of country of origin information. Private costs incurred by firms in the supply chain represent the primary barrier to the voluntary provision of country of origin information. There are no significant regulatory barriers to the voluntary provision of this information. For the market to voluntarily provide credible country of origin declarations, information regarding country of origin must flow between firms involved in all stages of the food supply chain. Just as it is for consumers, country of origin information is a credence attribute for firms in the food supply chain. Firms must incur costs to provide credible country of origin information. If the increase in price firms in the supply chain expect to receive for providing consumers with country of origin information is less than the cost of providing it, then firms will not voluntarily incur the costs of providing this information. If there were profits to be made from country of origin labeling, there would be strong incentives for firms to advertise and market country of origin labeled foods. Firms in the food supply chain would not be expected to forgo opportunities for additional profits. Retailers would demand that food manufacturers supply them with products having verifiable origin information. If consumers favored product by origin, food manufacturers would demand food commodities specifying origin and verifiable origin information. U.S. farmers and fish harvesters could benefit financially from country of origin labels if consumers prefer domestic products to imports. In this [[Page 61954]] case labels would allow consumers to distinguish between imports and domestic products and make their choices accordingly. As a result, demand for domestic food products in the United States would rise along with domestic food prices. Further, domestic products would increase their market share relative to imports. However, if consumers do not generally prefer domestic products, labeling would confer little to no economic benefits to domestic producers. Overall, there does not appear to be a compelling market failure argument regarding the provision of country of origin information. There appear to be no barriers to the provision of this information other than private costs to firms in the supply chain and low expected returns. Firms that would incur private costs to provide country of origin information would also enjoy the private benefits, if any, from consumer demand for the information. Thus, from the point of view of society, market mechanisms would ensure that the optimal level of country of origin information would be provided. Alternative Approaches Many aspects of the mandatory COOL provisions of Pub. L. 107-171 are prescriptive and provide little regulatory discretion for this proposed rulemaking. The law requires a statutorily defined set of food retailers to label covered commodities regarding their country of origin. The law also prohibits USDA from using a mandatory identification system to verify the country of origin of covered commodities. In its guidance for conducting analyses of regulatory benefits and costs, OMB suggests several categories of alternative approaches that agencies should consider during their analysis. Applicable categories of alternative approaches for this proposed rule are discussed below. Different requirements for different segments of the regulated population: The mandatory COOL law explicitly defines the retailers required to provide country of origin labeling for covered commodities (namely, retailers as defined by PACA). Thus, there is no discretionary authority for designating which retailers are subject to the COOL labeling requirements. The law also requires that any person supplying a covered commodity to a retailer provide information to the retailer indicating the country of origin of the covered commodity. Again, the law provides no discretionary authority to this requirement. Neither the law nor the proposed rule requires that any entity that produces or supplies covered commodities must market those commodities to retailers as defined by the law. Suppliers of covered commodities could completely avoid the requirements of this proposed rule by distributing their products through channels other than to the retailers subject to the law. Examples include retailers not subject to the law, foodservice firms, or exports. The proposed rule does not require specific types of recordkeeping systems. Thus, retailers and suppliers of covered commodities will be able to develop their own least-cost systems to implement COOL requirements. For example, one firm may depend primarily on manual identification and paper recordkeeping systems, while another may adopt automated identification and electronic recordkeeping systems. Alternative levels of stringency: USDA interprets the law as providing essentially no discretionary authority for providing alternative levels of stringency regarding the provision of country of origin information for covered commodities by retailers as defined by the statute. That is, retailers either provide the required country of origin information to their customers or they do not, which provides no scope for alternative levels of stringency. There is, however, some degree of discretionary authority with regard to how the required information may be substantiated and how USDA may enforce the law and ensure compliance with this proposed rule. USDA received numerous comments suggesting self-certification as a means to identify country of origin, particularly for producers. USDA does not consider self-certification alone, absent records to substantiate the information, as a viable or credible alternative for compliance with this proposed rule. In addition, with no mechanism to verify compliance, such a system could be highly vulnerable to misrepresentation. USDA believes that some type of certification could be used as a means to transfer country of origin information from one level of the supply chain to the next, but such certification would need to be supported by adequate documentation to verify country of origin claims. An alternative to the proposed recordkeeping requirements would be to supplement the recordkeeping requirements with required affidavits attesting to the veracity of country of origin claims. Suppliers could be required to provide an affidavit for each transaction to the immediate subsequent recipient certifying that the country of origin claims and, if applicable, designations of wild or farm-raised, being made are truthful and that the required records are being maintained. This system of providing affidavits could provide enhanced assurance that each participant in the supply chain is fully accountable for providing valid country of origin claims. Alternative effective dates of compliance: The law states that country of origin labeling shall apply to the retail sale of a covered commodity beginning September 30, 2004. USDA interprets this requirement as providing no discretionary authority for alternative effective dates of compliance. Alternative methods of ensuring compliance: Country of origin labeling is, by its very nature, an information-based activity. Thus, USDA believes that there are essentially no alternatives for verifying compliance other than through the use of an audit-based system to review the information which is both generated to substantiate country of origin claims and passed along the supply chain. USDA is precluded by law from implementing any mandatory system that might be used to verify country of origin information. In terms of compliance activities, the law states that USDA shall, to the maximum extent practicable, enter into partnerships with States having enforcement infrastructure to assist in the administration of the law. USDA will seek to enter into such partnerships with States where possible to conduct compliance activities at retail establishments. Because suppliers of covered commodities are often located outside of a particular State's boundaries and jurisdictions, USDA concludes that it would be most practicable for States to focus their enforcement activities on entities in the supply chain within their boundaries. Informational measures: Providing information to consumers is the intent of this proposed rule and is the chosen regulatory alternative. More market-oriented approaches: There is no regulatory alternative to implementation of mandatory COOL by the statutorily specified retailers. The proposed rule, however, provides flexibility in allowing market participants to decide how best to implement mandatory COOL in their operations. Considering specific statutory requirements: Within the parameters established by the legislation, one area which allows for regulatory discretion relates to the definition of an ingredient in a processed food item. The legislation provides that the term ``covered commodity'' does not include an item [[Page 61955]] ``if the item is an ingredient in a processed food item.'' The legislation does not, however, define a processed food item, nor what constitutes an ingredient in a processed food item. Therefore, alternative definitions of a processed food item are possible. The scope of commodities, or number of items, covered by the proposed rule changes under alternative definitions of a processed food item. Analysis of Benefits and Costs The baseline for this analysis is the present state of the affected industries absent mandatory COOL. USDA recognizes that some directly affected firms have already begun to implement changes in their operations to accommodate the law and the expected requirements of this proposed rule. The benefits and costs examined in the analysis represent incremental impacts relative to their state prior to any changes resulting from the mandatory COOL statute or this proposed rule. If consumers would pay extra for the certainty that their food was produced in a particular country, and if labeling is relatively inexpensive, there is an economic incentive to make consumers aware of this product characteristic. Retailers, food manufacturers, and producers would share the increased net revenues and have an incentive to voluntarily label. Given that retailers and food manufacturers have the greatest incentive to be informed about what consumers desire, the fact that they do not currently provide country of origin information to consumers on a widespread basis suggests that they believe that the costs of labeling outweigh the returns. Some analysts argue that country of origin information does not matter to U.S. consumers (See, for example, Ref. 4). Freshness, quality, price, and other factors may be more important to consumers than country of origin. If country of origin does not influence demand, there is no incentive to provide country of origin labels. Retailers or food manufacturers providing country of origin labels would incur labeling costs (including the cost of segregating domestic and imported products) but receive no corresponding benefits. Even if consumers do favor labeled products over unlabeled products, labeling costs may outweigh the increase in market returns from increased demand and prices. In any event, economic efficiency of mandatory COOL will be maximized by implementing the program so that it reduces the cost of providing this information as much as possible. Benefits: The expected benefits from implementation of this rule are difficult to quantify. However, we believe that the benefits will be small and will accrue mainly to those consumers who desire country of origin information. We find little evidence to support the notion that consumers' stated preferences for country of origin labeling will lead to increased demands for covered commodities bearing the U.S.- origin label. There is considerable research indicating that a majority of consumers have at least some interest in their food's origin, and a smaller but significant proportion of consumers that have a strong desire to know where their food was produced. However, this research indicates that consumer desire for country of origin labeling stems primarily from their concerns about the safety of the food they eat. To a lesser extent, this research indicates that consumer desire for country of origin labeling stems from concerns about the quality and freshness of products and a preference to support U.S. producers. There is less research on how much consumers would pay to know the origin of the food they eat. Some recently conducted surveys, however, report that 71 percent to 73 percent of consumers are willing to pay more to know the origin of their food (Refs. 1 and 2). Measures of willingness to pay, however, do not necessarily translate directly into measures of what consumers would actually pay when faced with marketplace decisions. One frequently cited study, Umberger, et al. (Ref. 2) assessed consumers' willingness to pay for labeled beef of U.S. origin. They found that 73 percent of survey participants in Denver, Colorado, and Chicago, Illinois, were willing to pay premiums of 11 percent or more for steak and 24 percent or more for ground beef when labeled as beef of U.S.-origin. These findings have been cited by others as an indicator of the potential benefits that would accrue from country of origin labeling. For example, using the average amounts that consumers were willing to pay for U.S.-labeled beef from the Umberger, et al. study, VanSickle, et al. (Ref. 5) estimated that benefits to consumers for country of origin labeling of fresh beef muscle cuts and ground beef would equal $5.8 billion per year based on recent per-capita consumption figures and price data for January and February 2003. We believe, however, that this estimate is based on an inappropriate use of the results from the Umberger, et al. study. There are several limitations with the willingness-to-pay studies that call into question the appropriateness of using this approach to make determinations about the benefits of this proposed rule. First, consumers in such studies often overstate their willingness to pay for a product. This typically happens because survey participants are not constrained by their normal household budgets when they are deciding which product or product feature they most value. In the case of the Umberger, et al. study, consumers ranked the importance of country of origin information 8th out of 17 factors, with food safety and freshness receiving the highest rankings. This suggests that, when faced with a real budget constraint, consumers might actually be willing to pay considerably less for the country of origin information than they indicate when surveyed. Second, in most of these willingness-to-pay studies, consumers are not faced with the actual choices they would face at retail outlets. For example, consumers in the Umberger, et al. study were only faced with making a hypothetical choice between U.S. beef and generic beef. Under the proposed rule, however, they may be faced with choosing between U.S. beef, beef from several other specific countries, and beef from a mixture of countries including the United States. In addition, the labels they see in the store will contain information about price and quality that may also affect the value they place on country of origin information. Visual characteristics and presentation of products in the store would also influence choice in addition to label information. Third, consumers' willingness-to-pay as elicited from a survey is a function of the questions asked. Different questionnaires will yield different results. For example, if consumers were told that nearly all of the beef they currently consume came from the United States before they were asked about their willingness to pay for U.S.-labeled beef, the strength of their preference for origin information would probably be less than if consumers were not told about the correct origin of the beef they consume. Finally, the results reported from these studies do not take into account changes in consumers' preferences for a particular product or product attribute over time. While consumers may be willing to pay more for a given attribute initially, as time goes on and they gain more experience with the product attribute, they may be less willing to pay for products with this attribute. The authors of the Umberger, et al. study acknowledge many of these limitations (Ref. 6). They state that the [[Page 61956]] results obtained from these types of surveys do not always predict consumer behavior. They also state that because of the limitations inherent in willingness-to-pay studies, the results of their study should not be used to determine the economic impact of COOL. This is not to say that willingness-to-pay studies, such as the study conducted by Umberger, et al., are not useful. They are valuable for improving our understanding of consumer preferences for product characteristics. The results of these studies support the notion that at least some consumers desire this information and are willing to pay some amount for it. With respect to agricultural producer benefits, even if consumers are willing to pay more for U.S.-labeled products, this does not necessarily mean that U.S. producers would benefit from an increase in the demand for their products. U.S. producers will only benefit if the country of origin labeling increases demand and ultimately the farm price enough to cover producers' costs of labeling itself. Current evidence on country of origin labeling, however, does not suggest that U.S. producers will receive sufficiently higher farm prices for U.S.- labeled products to cover the costs of labeling. Moreover, it is even possible that producers could face lower farm prices as a result of labeling costs being passed back from retailers and processors. For the past 3 years, FSIS and AMS have offered a voluntary program by which suppliers can place U.S.-origin declarations (certified to be accurate by USDA) on many of the meat products covered by this rule. However, no suppliers of these covered commodities have participated in this program. The lack of participation in government-provided programs for labeling products of U.S. origin provides evidence that consumers do not have a strong preference for country of origin labeling. At the very least it indicates that retailers and food manufacturers do not believe consumer preferences for country of origin information are strong enough to cause demand and prices for labeled products to increase sufficiently to pay for the costs of implementing a labeling program. We can see what happens when consumers do have a strong desire for labeling by contrasting the lack of participation in the U.S.-origin labeling programs to the high level of participation in the organic labeling program. Labeling provided under the organic program provides compelling evidence that processors and retailers will provide consumers with the information they desire when they believe that consumers have a strong preference for this information and are willing to pay for it. Some may point to the fact that many of the commodities covered by this rule are already labeled as to country of origin as proof that consumers do desire this information. The existence of country of origin information by itself, however, does not indicate that consumers place any value on this information. For many covered commodities, the cost of identifying country of origin is minimal, and producers and processors face little added expense in differentiating their product from others by country of origin. The primary indication of the strength of consumer preference for country of origin information would be whether processors and retailers were able to extract a price premium for promoting this information. While many products sold by retailers have country of origin labels, there appear to be far fewer of these products that retailers attempt to sell based on this information. Even when they do, there is little evidence that they are able to extract a premium for country of origin information. The results from consumer surveys provide additional evidence that country of origin labeling may not lead to higher demand and prices for U.S.-labeled products. The results from these surveys indicate that the number of consumers with strong preferences for U.S.-origin labeled products is not sufficient for U.S. producers to benefit from labeling. This occurs because the supply of U.S.-origin products is likely to exceed the total quantity demanded by those who would pay a higher price for U.S. origin products (see, for example, Ref. 7). While consumers often state a preference for country of origin information, they also indicate that they desire this information because they believe it provides them with important information about the safety of their food. This suggests that consumers may use country of origin labeling as a proxy for food safety information. Country of origin labeling, as formulated under the proposed rule, does not provide valid information regarding food safety. This is because the proposed rule does not provide the traceability required to permit the government to rapidly respond to a contamination or disease outbreak. Furthermore, the country of origin information provided under this rule could cause some consumers to incorrectly attribute greater risks to products from a specific country than is justified. If this sentiment causes enough consumers to avoid this product and consequently pay a higher price for a competing country's product, the result would lead to a decline in consumer welfare. Costs: To estimate the costs of this proposed rule, USDA employed a two-pronged approach. First, USDA estimated implementation costs for firms in the industries directly affected by the proposed rule. The implementation costs on directly affected firms represent increases in capital, labor, and other input costs that firms will incur to comply with the requirements of the proposed rule. These costs are expenses that these particular firms must incur, but are not necessarily costs to the U.S. economy as measured by the value of goods and services that are produced. USDA then applied the implementation cost estimates to a general equilibrium model to estimate overall impacts on the U.S. economy after a 10-year period of economic adjustment. The model provides a means to estimate the change in overall consumer purchasing power after the economy has adjusted to the requirements of the proposed rule. To develop its estimates of implementation costs, USDA drew upon available studies, comments and testimony received on the voluntary COOL guidelines and this rulemaking, and its knowledge of the affected industries. USDA developed a range of estimated implementation costs to reflect the likely range of first-year costs for directly affected firms. At a minimum, all directly affected firms will need to comply with the recordkeeping requirements of the proposed rule. Thus, the lower range of incremental cost estimates reflect the costs to modify and maintain current recordkeeping systems. USDA believes, however, that firms will incur other capital and operational costs to comply with the proposed rule. For example, firms may need to modify their production, storage, distribution, and handling systems to enable country of origin information to be tracked and maintained from start to finish. Thus, the upper range of incremental cost estimates reflect not only additional recordkeeping costs, but also additional payments by the directly affected firms for capital, labor, and other expenses that will be incurred as a result of operational changes to comply with the proposed rule. Estimated first-year incremental costs for directly affected firms range from $582 million to $3.9 billion. Estimated costs per firm range from $180 to $443 for producers, $4,048 to $50,086 for intermediaries (such as handlers, [[Page 61957]] importers, processors, and wholesalers), and $49,581 to $396,089 for retailers. Although the estimated incremental costs represent additional payments individual firms will incur to comply with the proposed rule, the sum of such payments does not represent the overall impacts of the proposed rule on the entire U.S. economy. In effect, these incremental costs represent increases in the costs of production for the affected firms. Firms will need to recover these costs to stay in business in the long run. To do this, firms will either pass the higher costs back to their suppliers by paying lower prices for inputs or pass the higher costs forward to their customers by charging higher prices for outputs. The directly affected industries as well as other, indirectly affected sectors of the economy will thus adjust over the longer run to the higher costs imposed by the proposed rule. To estimate the overall impacts of the higher costs of production resulting from the proposed rule, USDA used a model of the entire U.S. economy. USDA adjusted the model by imposing the estimated implementation costs on the directly impacted segments of the economy in a computable general equilibrium model developed by the USDA's Economic Research Service (ERS). The model estimates changes in prices, production, exports, and imports as the directly impacted industries adjust to higher costs of production over the longer run (namely, 10 years). Because the model covers the whole U.S. economy, it also estimates how other segments of the economy adjust to changes emanating from the directly affected segments and the resulting change in overall productivity of the economy. Annual costs to the U.S. economy in terms of reduced purchasing power resulting from a loss in productivity after a 10-year period of adjustment are estimated to range from $138 million to $596 million. Domestic production for all of the covered commodities at the producer and retail levels is estimated to be lower and prices to be higher. In percentage terms, however, the production declines are larger than the price increases, so estimated industry revenue declines for all of the covered commodities. In addition, U.S. exports are estimated to decrease for all covered commodities, and U.S. imports also are estimated to decrease for all covered commodities except fish, which shows no change to a slight increase. It may appear counterintuitive to have first-year incremental costs ranging from $582 million to $3.9 billion for directly impacted firms, but smaller overall costs ranging from $138 million to $596 million in reduced consumers' purchasing power after 10 years of adjustment. Nonetheless, these results are consistent with each other. Directly affected firms incur additional costs to implement the requirements of the proposed rule, which take the form of additional payments for capital, labor, and other operating expenses. For the most part, however, such additional expenses for directly affected firms ultimately return to the economy. For example, additional human resource costs incurred to develop and maintain recordkeeping systems, segregate and display product properly, and so forth are also wages that will be spent on food, transportation, housing, and other goods and services in the economy. Likewise, capital costs for warehouse reconfiguration or changes in processing plants involve equipment and supplies purchased from firms that pay wages, purchase raw materials, and supply goods and services. Thus, the implementation costs incurred by directly affected firms are not entirely lost to the economy, but these incremental costs do increase the costs of production and decrease the productivity of the affected industries. The findings indicate that directly affected industries recover the higher costs imposed by the proposed rule through slightly higher prices for their products. With higher prices, the quantities of their products demanded also decline to the extent that total industry revenues also decline. Consumers pay slightly more for the products and purchase less of the covered commodities. Overall, however, the covered commodities account for a comparatively small portion of the U.S. economy and of consumers' budgets. Thus, the ``deadweight'' economic burden of the proposed rule is considerably smaller than the incremental costs to directly affected firms. The remainder of this section describes in greater detail how USDA developed the estimated direct, incremental costs and the overall costs to the U.S. economy. Cost assumptions: The industries directly affected by this proposed rule are those responsible for producing and marketing the covered commodities at retail stores as defined by the law. Consumers of the covered commodities at these retail outlets are also directly affected by this proposed rule. This proposed rule directly regulates the activities of retailers (as defined by the law) and their suppliers. Retailers are required by the proposed rule to provide country of origin information for the covered commodities that they sell, and firms that supply covered commodities to these retailers must provide them with this information. In addition, all other firms in the supply chain for the covered commodities are potentially affected by the proposed rule because country of origin information will need to be maintained and transferred along the entire supply chain to enable retailers to correctly label the products at the point of final sale. In general, the supply chains for the covered commodities consist of farm or fishing operations, processors, wholesalers, and retailers. Table 1 contains a listing of the number of entities in the supply chains for each of the covered commodities. The total cost of this proposed rule will depend on the number of entities affected and the incremental cost to each affected firm in the supply chain for the covered commodities. The proposed rule requires that retailers provide consumers with country of origin information for the covered commodities and also requires that their suppliers provide them with the information needed to substantiate these country of origin claims. To provide credible country of origin claims, firms in the supply chain will need to create, maintain, and transfer information from one level of the chain to the next. The proposed rule allows industry participants to determine the recordkeeping and information transfer mechanisms needed for compliance. Consequently, firms will modify existing recordkeeping systems and business practices as necessary to ensure compliance with the proposed rule. Number of firms and number of establishments affected: USDA estimates that approximately 1,377,000 establishments owned by approximately 1,339,000 firms would be either directly or indirectly affected by this rule. In general, the supply chain for each of the covered commodities includes agricultural producers or fish harvesters, processors, wholesalers, and retailers. Imported products may be introduced at any level of the supply chain. Other intermediaries, such as auction markets, may be involved in transferring products from one stage of production to the next. Table 1 provides estimates of the affected firms and establishments. [[Page 61958]] Table 1.--Estimated Number of Affected Entities ------------------------------------------------------------------------ Type Firms Establishments ------------------------------------------------------------------------ Beef, Lamb, and Pork: Cattle and Calves...................... 1,032,670 1,032,670 Sheep and Lambs........................ 64,170 64,170 Hogs and Pigs.......................... 67,150 67,150 Stockyards, Dealers & Market Agencies.. 7,775 7,775 Livestock Processing & Slaughtering.... 3,098 3,358 Meat & Meat Product Wholesale.......... 3,185 3,305 Fish: Farm-Raised Fish and Shellfish......... 3,540 3,540 Fishing................................ 76,499 76,452 Seafood Product Preparation & Packaging 741 823 Fish & Seafood Wholesale............... 2,897 2,980 Perishable Agricultural Commodities: Fruits & Vegetables.................... 47,986 47,986 Frozen Fruit, Juice & Vegetable Mfg.... 163 257 Fresh Fruit & Vegetable Wholesale...... 9,026 12,879 Peanuts: Peanut Farming......................... 12,221 12,221 Roasted Nuts & Peanut Butter Mfg....... 140 159 Peanut Wholesalers..................... 83 83 General Line Grocery Wholesalers........... 3,183 3,993 Retailers.................................. 4,512 37,176 -------------- Totals: Producers.................... 1,303,846 1,303,799 Intermediaries............... 30,291 35,612 Retailers.................... 4,512 37,176 -------------- Grand Total............. 1,338,649 1,376,587 ------------------------------------------------------------------------ Supply chains for the covered commodities are mostly specialized from farm production through manufacturing levels. After manufacturing, the degree of specialization diminishes, until products reach retail outlets where most affected retailers sell many of the covered commodities. Even after manufacturing, however, there are specialized wholesalers who distribute the products to retail outlets. Firms and establishments that specialize in the production and distribution of each covered commodity are listed within each group. General-line wholesalers and retailers that handle several of the covered commodity groups are listed separately at the bottom of the table. For all covered commodities, the numbers of manufacturing and wholesaling establishments are estimated from the 2001 County Business Patterns (Ref. 8) and the 2000 Statistics of U.S. Businesses (Ref. 9). An establishment is a single physical location where business is conducted or where services or industrial operations are performed. A firm is a business organization consisting of one or more domestic establishments in the same industry that was specified under common ownership or control. The firm and the establishment are the same for single-establishment firms. County Business Patterns and Statistics of U.S. Businesses report data for companies with at least one paid employee. Nonemployer Statistics are also reported by the U.S. Census Bureau (Ref. 10). Nonemployer Statistics reports data for companies with no paid employees, such as independent contractors. Because nonemployer businesses are generally very small, we assume that nonemployer manufacturing and wholesaling businesses do not supply commodities to retailers of the size covered by this proposed rule (i.e., retailers selling fresh and frozen fruits and vegetables with an invoice value of at least $230,000). Such small businesses likely are engaged in localized specialty operations that would not supply larger retailers. Therefore, nonemployer businesses are not included in the assessment of the firms and establishments impacted by the proposed rule. We invite comments on the validity of this assumption. We assume that all firms and establishments identified in Table 1 will be impacted by the proposed rule, although some may not produce or sell products ultimately within the scope of the proposed rule. While this assumption likely overstates the number of affected firms and establishments, we believe that the assumption is reasonable. Detailed data on the number of entities categorized by the marketing channels in which they operate and the specific products that they sell are not available. Beef, lamb, and pork: USDA estimates that there are 1,032,670 operations with cattle and calves (Ref. 11), 64,170 operations with sheep and lambs (Ref. 12), and 67,150 operations with hogs and pigs (Ref. 13). For farming operations, the firm and the establishment are considered to be one and the same. We assume that all of these livestock production operations are affected by the proposed rule, even though we recognize that substantial portions of the covered commodities produced from the livestock of these operations will fall outside of the proposed rule. Covered commodities sold at foodservice establishments, exported, used as ingredients in processed food items, or sold at retail outlets not covered by the proposed rule are outside the scope of the proposed rule. When livestock are born, the producer typically does not know the ultimate destination for the final product. We assume that all producers will seek to keep their market options open, whether the final product moves to a covered retailer or to another marketing outlet. In addition, there are 7,775 posted stockyards, bonded dealers and market agencies that are involved in [[Page 61959]] buying, selling, and marketing livestock (Ref. 14). Some of these stockyards, dealers, and market agencies may deal exclusively with other species such as horses, but that number is small and expected to minimally impact the estimated number of firms and establishments. We estimate that there are 3,358 livestock slaughtering and processing establishments and operated by 3,098 firms. These numbers may be slightly overstated, since businesses that do not slaughter or process cattle, sheep, or hogs are included in these totals. For example, a plant that slaughtered only bison would be included in the totals, but the number of such businesses is very small. Also, some plants that process beef, lamb, or pork may produce only processed products that are excluded from the scope of the proposed rule. The number of such firms and establishments is unknown, but expected to be small. The number of meat and meat product wholesale firms is estimated to be 3,185 and the number of establishments is estimated to be 3,305. Fish. Fish production includes both farm-raised or aquaculture production and wild-caught fishing operations. Aquaculture operations include those producing food fish, crustaceans, and mollusks, and the estimated number of operations is 3,540 (Ref. 15). Most wild fish harvesting operations are nonemployer businesses. Census Bureau data are used to estimate the number of fishing, seafood product preparation and packaging, and fish and seafood wholesale establishments and firms (Refs. 8, 9, and 10). As with the beef, lamb, and pork firms and establishments, some of these fish and seafood firms and establishments may not produce or sell covered commodities. While the number of such entities is unknown, we assume that all firms and establishments will be impacted by the proposed rule. Perishable agricultural commodities: Census of Agriculture data provide estimates of the number of fruit and vegetable farming operations (Ref. 16). The total number of fruit farms is estimated at 81,956 and the total number of vegetable farms at 31,030. USDA estimates that 34.6 percent of fruit production and 62.0 percent of vegetable production is used for fresh and frozen products. USDA assumes that fruit and vegetable producers generally know whether their production is destined for fresh or processing use, meaning that some producers will be unaffected by the proposed rule depending upon the marketing channels for which they produce. Data on the number of farming operations categorized by the ultimate end uses of the products do not exist. Therefore, USDA assumes that the number of farms producing fruits and vegetables for fresh and frozen use is proportional to the production of fresh and frozen fruits and vegetables relative to total production. Hence, the number of affected fruit farms is estimated at 28,357 and the number of vegetable farms at 19,339, for a total of 47,696 farming operations producing fruits and vegetables that will be impacted by this proposed rule. Businesses that process frozen fruits and vegetables and fresh fruit are estimated from Census Bureau data (Refs. 8, 9, and 10), and are estimated to include 163 firms operating 257 establishments. These estimates may be overstated by the inclusion of businesses that produce frozen juice and businesses that produce frozen fruits and vegetables in forms not covered by the proposed rule. Businesses wholesaling frozen fruits and vegetables are included in packaged frozen food wholesale firms and include 9,026 firms operating 12,878 establishments. Peanuts: Census of Agriculture data provide an estimate of 12,221 peanut farming operations (Ref. 16). Businesses that roast nuts and manufacture peanut butter are estimated from Census Bureau data to include 140 firms operating 159 establishments (Refs. 8, 9, and 10). These numbers include companies that produce only peanut butter (not a covered commodity) or that may roast nuts not covered by the proposed rule, but the number of such operations is unknown. Businesses that wholesale peanuts are estimated from peanut marketing agreement data (Ref. 17) to include 83 firms and the same number of establishments. General-line wholesalers and retailers: In addition to specialty wholesalers that primarily handle a single covered commodity, there are also general-line wholesalers that handle a wide range of products. We assume that these general-line wholesalers likely handle at least one and possibly all of the covered commodities. Therefore, we include the number of general-line wholesale businesses among entities affected by the proposed rule. This includes 3,183 firms operating 3,993 establishments. Retailers covered by this proposed rule must meet the definition of a retailer as defined by PACA. The number of such businesses is estimated from PACA data (Ref. 18). The PACA definition includes only those retailers handling fresh and frozen fruits and vegetables with an invoice value of at least $230,000 annually. Therefore, the number of retailers impacted by this rule is considerably smaller than the total number of food retailers nationwide. Census Bureau data show that there were 92,383 food store firms and 102 warehouse club and superstore firms in 2000 (Ref. 9). There were 127,566 food store establishments and 2,051 warehouse club and superstore establishments in 2001 (Ref. 8). Thus, we estimate that there are 92,485 retail firms and 129,617 retail establishments that account for most of the retail sales of the covered commodities. However, only 4,512 retail firms operating 37,176 retail establishments are included under the statutory definition of a PACA retailer. Source of cost estimates: Data on costs to implement mandatory COOL are largely unavailable. There are State programs for country of origin labeling of some products, CBP and regulations specify labeling requirements for imported products, and some companies choose to provide country of origin labels for marketing purposes. There are, however, no mandatory programs with similar requirements and coverage that would provide substantive guidance for estimating the costs of this proposed rule. On October 11, 2002, USDA published voluntary guidelines (67 FR 63367) for country of origin labeling of the covered commodities. USDA invited public comments on the utility of these guidelines, including the costs and benefits of the program. USDA also prepared an estimate of the information collection burden that would be associated with implementation of the voluntary guidelines and invited comments on the estimated information collection burden. In addition, USDA also sought comments on this rulemaking for mandatory COOL and held 12 public listening and information sessions across the country. We also met with many industry groups and individuals to discuss this rulemaking and visited facilities at all levels of the supply chain to learn about current industry practices and changes that would be required to implement mandatory COOL. In addition, a number of studies have been produced to address various issues relating to the economic impacts associated with implementation of mandatory COOL. To develop estimates of the cost of implementing this proposed rule, we reviewed the comments received on the voluntary guidelines, the comments received regarding this rulemaking for mandatory COOL, and available economic studies. No single source of information, however, provided [[Page 61960]] comprehensive coverage of all economic benefits and costs associated with mandatory COOL for all of the covered commodities. We applied our knowledge about the operation of the supply chains for the covered commodities to synthesize the available information about the proposed rule's potential costs. Cost drivers: This proposed rule is a retail labeling requirement. Retail stores subject to this proposed rule will be required to inform consumers as to the country of origin of the covered commodities that they sell. To accomplish this task, individual package labels or other point-of-sale materials will be required. If products are not already labeled by suppliers, the retailer will be responsible for labeling the items or providing the country of origin information through other point-of-sale materials. This may require additional retail labor and personnel training. A recordkeeping system will be required to ensure that products are labeled accurately and to permit compliance and enforcement reviews. For most retail firms of the size defined by the statute (i.e., those retailing fresh and frozen fruits and vegetables with an invoice value of at least $230,000), we assume that recordkeeping will be accomplished primarily by electronic means. Modifications to recordkeeping systems will require software programming and likely will entail additional computer hardware. We expect that retail stores will also undertake efforts to ensure that their operations are in compliance with the proposed rule. Prior to reaching retailers, most covered commodities move through distribution centers or warehouses. Direct store deliveries (such as when a local truck farmer delivers fresh produce directly to a retail store) are an exception. Distribution centers will be required to provide retailers with country of origin information. This will require additional recordkeeping processes to ensure that the information passed from suppliers to retail stores permits accurate product labeling and permits compliance and enforcement reviews. Additional labor and training may be required to accommodate new processes and procedures needed to maintain the flow of country of origin information through the distribution system. There may be a need to further segregate products within the warehouse, add storage slots, and alter product stocking, sorting, and picking procedures. Packers and processors of covered commodities will also need to inform retailers and wholesalers as to the country of origin of the products that they sell. To do so, their suppliers will need to provide documentation regarding the country of origin of the products that they sell. Maintaining country of origin identity through the packing or processing phase is more complex if products from more than one country are involved. For example, the identity of fresh kiwi fruit from California and New Zealand entering the same packing house would need to be maintained throughout the packing operation. The efficiency of operations may be affected as products are segregated in receiving, storage, processing, and shipping operations. For packers and processors handling products from multiple origins, there may also be a need to separate shifts for processing products from different origins, or to split processing within shifts. In either case, costs are likely to increase. Records will need to be maintained to ensure that accurate country of origin information is retained throughout the process and to permit compliance and enforcement reviews. Processors handling only domestic origin products or products from a single country of origin may have lower implementation costs compared with processors handling products from multiple origins. A processor that already sources products from a single country of origin would not face additional costs associated with product segregation and tracking. Procurement costs also may be unaffected in this case, if the processor is able to continue sourcing products from the same suppliers. Alternatively, a processor that currently sources products from multiple countries of origin may choose to limit its source to a single country of origin to avoid costs associated with product segregation and tracking. In this case, such cost avoidance would be partially offset by additional procurement costs to source supplies from a single country of origin. Additional procurement costs may include higher transportation costs due to longer shipping distances and higher acquisition costs due to supply and demand conditions for products from a particular country of origin, whether domestic or foreign. At the production level, agricultural producers and fish harvesters will need to create and maintain records to establish country of origin information for the products they sell. This information will need to be transferred and maintained as the products move through the supply chains. In general, additional producer costs include the cost of establishing and maintaining a recordkeeping system for country of origin information, animal or product identification, and labor and training. Recordkeeping burden: On November 21, 2002, USDA published in the Federal Register a Notice of Request for Emergency Approval of a New Information Collection (67 FR 70205) for the interim guidelines for Voluntary Country of Origin Labeling for Beef, Lamb, Pork, Fish, Perishable Agricultural Commodities, and Peanuts that were published on October 11, 2002 (67 FR 63367). The Notice provided USDA's estimate of the recordkeeping burden imposed by voluntary COOL, under the requirements of PRA. That PRA cost estimate related solely to the recordkeeping burden and did not consider other costs imposed by COOL. Also, PRA requirements do not address the benefits of a program. Thus, PRA recordkeeping burden published by USDA did not reflect the full costs and benefits of voluntary COOL. Cost analyses: Despite the numerous comments that USDA has received on the voluntary guidelines and on this rulemaking, there is surprisingly little quantitative evidence on the likely costs of mandatory COOL. The proposed rule does not specify the systems that affected entities must put in place to implement mandatory COOL. Instead, market participants will be given flexibility to develop their own systems to comply with the proposed rule. There are many ways in which the proposed rule's requirements may be met, and this contributes to the difficulty in arriving at a quantitative assessment of cost impacts. Nonetheless, a number of studies and submitted comments shed light on the potential costs of mandatory COOL. Generally, comments addressed costs for a particular firm or a segment of a particular supply chain for a given covered commodity. Of the studies on potential economic impacts of mandatory COOL, only a handful developed estimated incremental implementation costs for market participants. We use the results of these studies, comments received, and knowledge of the affected industries to develop a range of the estimated incremental cost impacts of this proposed rule. [[Page 61961]] Estimated costs from the studies considered by USDA are summarized in Table 2. The studies are VanSickle, McEowen, Taylor, Harl, and Connor (Ref.5); Sparks Companies Inc. (Ref. 19); Hayes and Meyer (Ref. 20); and Davis (Ref. 21). All of the studies report annual costs, and the costs shown in Table 2 are assumed to represent first-year costs for mandatory COOL. In those cases in which the studies do not state so explicitly, USDA infers from the construction of the estimates that they represent first-year costs. BILLING CODE 3410-02-P [GRAPHIC] [TIFF OMITTED] TP30OC03.005 BILLING CODE 3410-02-C [[Page 61962]] At a minimum, mandatory COOL will entail the transfer of information through the respective supply chains, from production through retail sales. While information currently flows through the system as products move through the supply chains, there is little evidence that country of origin information typically is a component of this information flow. Thus, we believe that transfer and maintenance of records to establish COOL claims will be accomplished through modification of the current recordkeeping and systems used for accounting, purchasing, sales, production, and related operations. VanSickle, et al. (Ref. 5) address the recordkeeping cost to producers in their critique of USDA's estimate of the recordkeeping burden for the voluntary COOL guidelines. This study notes that producers currently maintain a variety of records for taxes, health rules, and other programs and they conclude that producers would require no new recordkeeping. As part of their critique of USDA's recordkeeping burden estimates, VanSickle, et al. recalculated the recordkeeping burden using different producer numbers and different labor costs. Although the study does not separately show calculations for each type of producer, the report permits such calculations to be made. Table 2 shows the results of these calculations, with the estimated recordkeeping for producers of each covered commodity calculated separately. VanSickle, et al. used the National Agricultural Statistics Service (NASS) data to determine the number of producers, and although in disagreement with the assumption, they used USDA's assumption that producers would require 8 hours to establish a recordkeeping system and 12 hours annually to maintain it. They then applied Bureau of Labor Statistics (BLS) data showing that the median value of farm labor is $7.67 per hour. Using these procedures, VanSickle, et al. estimated that the recordkeeping burden for cattle producers would be $63.2 million to establish a mandatory COOL recordkeeping system and $94.8 million to maintain it. Thus, the total first-year cost to cattle producers would be $158 million. Table 2 shows the results of similar calculations for lamb, pork, fruit, vegetable, and peanut producers, as well as processors and retailers. As discussed previously, however, recordkeeping costs are not the only costs that we anticipate will be incurred by many market participants when implementing the proposed rule. In addition, Vansickle, et al. did not adjust labor rates to account for benefits and other labor costs such as social security, unemployment insurance, and workers compensation. Thus, we believe that these estimated recordkeeping costs underestimate the total costs for affected entities to implement mandatory COOL. Sparks Companies, Inc., and Cattle Buyers Weekly (Sparks/CBW) submitted to USDA a study that provides estimated costs of mandatory COOL for the beef, pork, fish, and perishable agricultural commodity supply chains (Ref. 19). For each supply chain, the study identifies cost estimates for producers, packers/processors, retail distributors, and retailers. The Sparks/CBW study identifies additional cost factors expected to be incurred to implement mandatory COOL. For example, at the cow/calf rancher and backgrounder production level of the beef supply chain, the Sparks/CBW study identifies additional costs for animal identification tags/chips, data input and recordkeeping, and scanner hardware and software to read electronic tags. This study provides estimated costs for these processes, although supporting documentation for the cost estimates is not extensive. USDA concludes that most industry