[Federal Register: March 15, 2004 (Volume 69, Number 50)]
[Rules and Regulations]
[Page 12053-12057]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr15mr04-1]
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Rules and Regulations
Federal Register
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[[Page 12053]]
DEPARTMENT OF AGRICULTURE
Commodity Credit Corporation
7 CFR Part 1427
RIN 0560-AH03
Extra Long Staple Cotton Outside Storage and Strength Adjustment
for Loan
AGENCY: Commodity Credit Corporation, USDA.
ACTION: Final rule.
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SUMMARY: This rule revises and adopts as final an interim rule
published on August 18, 2003. The Commodity Credit Corporation (CCC)
uses these regulations to provide marketing assistance loans for extra
long staple (ELS) cotton that is stored outside while pledged as loan
collateral. This final rule revises the interim rule in three ways.
First, it more generally states the rainfall requirement applicable to
approved storage areas. Second, it makes warehouse-receipted ELS cotton
ineligible for this loan. And third, it establishes that the loan rate
provided for this outside-stored loan will be the national average loan
rate without application of any premiums and discounts. This rule also
establishes that, effective for the 2004 crop of cotton, ELS cotton
must be of a strength, and other factors, specified in CCC's schedule
of loan rates for ELS to be eligible for loans. The rule will allow CCC
to adjust its ELS cotton loan rate to reflect market adjustments for
strength and other factors so that loan collateral is marketed and
forfeitures to CCC are minimized.
DATES: This rule is effective March 15, 2004.
FOR FURTHER INFORMATION CONTACT: John Johnson, Deputy Administrator for
Farm Programs, Farm Service Agency, at (202) 720-3175, or via e-mail at
johnjohnson@wdc.usda.gov. Persons with disabilities who require
alternative means for communication (Braille, large print, audiotape,
etc.) should contact the USDA Target Center at (202) 720-2600 (voice
and TDD).
SUPPLEMENTARY INFORMATION:
Background
CCC is amending the existing regulations that allow outside storage
of ELS loan collateral by producers. CCC regulations have historically
required ELS loan collateral to be represented by a warehouse receipt
and that such collateral be within an approved warehouse when a loan
has been made on such cotton. The amended regulations provide that
loans will be made on ELS cotton not represented by a warehouse receipt
and stored outside but that otherwise meets the packaging and storage
requirements of this rule.
CCC is making this change to reduce the costs to producers of
storing ELS cotton in areas of the country where outside storage is a
cost-effective and accepted industry practice. CCC has determined that
outside storage may be effective in lowering the costs of ELS cotton
storage with minimal increased risk.
CCC published an interim rule implementing this provision on August
18, 2003 at 68 FR 49327. CCC received 36 timely letters containing 24
different comments. Respondents included 5 national organizations, 6
local organizations, and 25 individuals or companies. Comments were
received from the States of California, Georgia, Tennessee, Washington,
and the District of Columbia.
In this rule, CCC is also amending regulations at 7 CFR part 1427
to provide that ELS cotton must be of a strength, and other factors,
specified in a schedule of loan rate premiums and discounts for loan
and LDP eligibility. This regulation is effective for the 2004 and
subsequent crops of ELS cotton.
This regulatory change arises from the availability of a new ELS
hybrid variety that is high-yielding but that has an elevated incidence
of low-strength. ELS cotton comes from the species Gossypium
barbadense, which varies from upland cotton primarily in staple length
and strength. According to United States standards, cotton is
considered to be ELS cotton if it is 1\3/8\ inch long or longer.
Generally, ELS cotton strength and uniformity measurements are also
considerably higher than those of upland cotton. Because of these
special characteristics, ELS cotton generally commands a market price
above that of upland cotton and is provided a higher loan value by CCC.
There is concern that this new variety may be less marketable than
other ELS cotton because of its lower strength.
Production of the new ELS hybrid is expected to expand due to its
high yield. Because it may be less marketable than other ELS cotton,
there is concern of increased forfeitures of this new cotton variety to
CCC under the agency's loan program unless the CCC loan value for
cotton can be adjusted to reflect market discounts for low strength. To
address this concern, this rule establishes that to be eligible for a
CCC loan, ELS cotton must be of a strength and other factors specified
in the schedule of ELS loan rates and premiums and discounts. CCC will
establish such loan adjustments based on market price observations of
the Agricultural Marketing Service.
Discussion of Comments and Changes
The comments received, and changes made to the interim rule, are
addressed in the sequence of the final rule, are as follows:
Approved Packaging Materials
Five comments urge USDA not to accept cotton as loan collateral
unless it is packaged using materials approved by the Joint Cotton
Industry Bale Packaging Committee (JCIBPC). JCIBPC has never
specifically approved packaging materials or ties for outside storage.
The respondents stated that USDA, for many years, has required the use
of industry-approved materials as a condition for loan eligibility, and
the adoption of the interim rule would end that assumed joint support
for JCIBPC standards.
CCC values the work of the JCIBPC but concludes that the testing
and approval functions of the JCIBPC do not need to apply to outside-
stored cotton. This is because, under the terms of the revised
regulations, the producer of the cotton, in requesting this loan,
voluntarily assumes all responsibility and risk related to maintaining
the quality of outside-stored cotton. This is different from the need
for established packaging standards for warehouse-stored cotton where
the packaging standards reduce CCC's risk related to
[[Page 12054]]
quality maintenance. CCC will continue to require that warehouse-stored
cotton be packaged in materials approved by the JCIBPC.
Limit the Applicable Time and Area for Outside Storage
Three comments request that area eligible for outside storage not
be expanded and the program not be allowed beyond 2003. CCC plans to
not expand the program beyond the initially approved areas. However,
the program will be available in future years. A test period to
evaluate this change serves no purpose since outside storage has
already been demonstrated successfully. Therefore, CCC sees no need to
test this change before implementing it or to limit it to the 2003 crop
year.
Warehouse Receipts for ELS Cotton
This rule also provides that CCC will offer outside-stored ELS
loans only on the basis of the gin code, bale number, and bale weight,
and will not permit another entity to hold negotiable warehouse
receipts for loan collateral. This is consistent with CCC requirements
for farm-stored grain, oilseed, and rice loans. These loans are similar
to this new cotton loan in several respects, and for such loans CCC
does not permit another entity to hold negotiable warehouse receipts.
This is mainly because, for farm-stored loans, CCC does not inspect,
and bears no legal responsibility for, the condition of the storage
site; loan rates are based on the national average rate or local rates;
and, warehouse receipts do not represent the collateral. CCC acceptance
of a warehouse receipt as collateral for an outside-stored ELS loan
program would imply CCC inspection and approval of storage locations
and could imply to buyers that the cotton is in a warehouse. Thus, this
final rule provides that warehouse-receipted ELS cotton is ineligible
for an outside-stored cotton loan.
One respondent stated that permitting collateral for this loan
program to not have a warehouse receipt could cause marketing problems.
CCC understands that the electronic warehouse receipt (EWR) is the
basis of cotton trading and that cotton not so represented may be less
marketable in some circumstances. However, even under the traditional
loan requirements, some cotton, including upland cotton, has been
directly marketed after ginning without being receipted by a warehouse.
Producers engaged in direct cotton marketing have always been able to
consider the need to have their cotton receipted, and CCC has never
required receipting as a condition of eligibility for loan deficiency
payments. Consistent with those past practices, CCC considers it
appropriate to allow producers to weigh the marketing implications of
receipting, without requiring receipting for all program benefits.
Standards for Approved Storage
One respondent supports outside storage within a system that has
been proven over many years, but is concerned about overly broad
approval for all types of outside storage. Further, two respondents
stated that the interim rule failed to provide appropriate engineering
standards for either the outside location or the packaging materials.
One respondent presented material concerning an outside packaging and
storage system that has been commercially successful for many years,
and urged CCC to adopt similar standards. CCC agrees with these
respondents, and, as a result, the final rule allows outside storage
only under conditions that have been commercially successful. CCC has
adopted, within the rule, standards for the storage area and packaging
that have been successfully used for outside-stored cotton for many
years.
One respondent stated that allowing any commercial entity to self-
certify that they meet the storage standards is not sufficient to
protect CCC's financial interests. CCC disagrees with this view. The
rule specifies in section 1427.10 that the producer must certify to
several requirements for outside storage sites in the loan application.
For many years, producer certification of storage suitability for loan
collateral has been used for CCC farm-stored loans for grains and rice,
and this certification process has been adequate. CCC concludes that
the storage savings and marketing benefits of this loan should not be
denied to producers willing to assume the risks associated with outside
storage of cotton.
Perfection of CCC Security Interest
One respondent stated that if CCC does not hold title to loan
collateral, CCC's risk is increased, as are opportunities for the
cotton to be used more than once as loan collateral. CCC's legal
interest in the cotton is the same whether the cotton itself serves as
collateral or whether a warehouse receipt representing the cotton is
held as collateral. As with other commodity loans, CCC will file
financing statements following state law procedures. Further, CCC's
risk from this rule is consistent with other farm-stored program crops.
Under this cotton loan, CCC will further reduce its risk by calculating
the settlement value of forfeited collateral based on its delivered
quality. Also, the collateral for these loans will be subject to spot
inspections. Thus, this comment was not adopted in the final rule.
Maximum Rainfall and Limiting Program to ELS
A respondent stated that CCC did not sufficiently support its
decision to restrict outside storage to areas with 10-inches per year
maximum rainfall, and to ELS cotton. The respondent stated that, as a
result, the rule contains restrictive provisions that are arbitrary and
vulnerable to a legal challenge. The respondent provided no technical
information that would contradict the CCC determination and support
extending this program for upland cotton, in higher rainfall or
humidity areas.
After careful consideration, CCC limited this new loan to ELS
cotton in low-rainfall areas, and excluded upland cotton, after
concluding that humidity levels, rainfall amounts, and bale packaging
practices in upland cotton producing areas may make outside storage
impractical for such cotton. Additionally, all other comments opposed
expanding the program beyond that prescribed in the interim rule.
Nonetheless, the final rule is revised so that the rainfall threshold
for approved storage areas may or may not be defined as entire
counties. National rainfall data shows that such records are not always
established by county borders, as CCC assumed in the interim rule.
These records may reflect the area near the weather station and not
necessarily county average rainfall. Accordingly, in the final rule
specific references to 10 inches have been removed to ease
administration of this standard. CCC anticipates that this rule will be
implemented by limiting approved storage areas to areas for which the
official 10-year average annual rainfall is 10 inches or less.
Liability to the Producer
The interim rule provides that a producer certify as to the
packaging, storage, and handling requirements of the rule. One comment
states that producers cannot certify to requirements that are beyond
their control, or to standards that do not exist. CCC does not feel
that this is a problem. Under this option, the required producer
certifications relate to technical requirements of the ginner or
storage provider selected by the producer. Gins and entities providing
storage are able to inform producers if their services meet the
standards proscribed by the rule. Therefore, as
[[Page 12055]]
with all other commodity loans, CCC feels that certification by the
producer is appropriate, and sufficient. As in other farm-stored loan
programs, producers must maintain the quality of the commodity; thus,
it is reasonable for producers to acquire the required bagging,
storage, and handling services just as they have done under ordinary
warehouse loans.
The interim rule at section 1427.5(b)(10) requires that materials
approved by the JCIBPC may be used, and that JCIBPC approval is not
required for outside-stored cotton. This section requires only that
packaging materials used for outside storage must meet industry
standards for bag characteristics such as size, tear and impact
resistance, and tie characteristics such as elongation, and break and
joint strength.
In a related comment, a respondent stated that some producers will
not maintain either the cotton or the facility as specified by
regulations, and suggested withdrawing the rule. CCC does not expect
producers to knowingly place their production at risk under this new
loan option any more than they would under other loan programs. CCC
does not deny loan eligibility to warehouse-stored loan cotton even
though there are occasional lapses by gins or warehouses to meet
storage and bagging requirements, so long as CCC has determined that
its interests are protected. Therefore, this comment was not adopted.
Based upon the comments received, and consistent with CCC
management of other farm-stored commodity loans, it is appropriate that
producers who apply for this loan fully understand that they must
accept the risk of quality maintenance of outside stored cotton. These
risks are contained in the producer certification that must be signed
as part of the note and security agreement for this loan. Consistent
with the terms of this loan, the final rule is amended in Sec.
1427.18(k)(2) to provide a more complete list of certifications
required to be made by the producer to obtain an outside-stored ELS
loan.
Bale Sampling
One respondent stated that sampling a hermetically sealed bag will
void the bag seal, requiring re-bagging of the bale. CCC does not feel
that sampling will be a problem. Under conventional ginning and bale-
sampling procedures, initial bale sampling occurs at the gin before the
bale is bagged and sealed. Any subsequent sampling required by CCC
would occur after the bale has been moved inside an approved cotton
warehouse. A broken seal, in such location, would not cause the cotton
quality to deteriorate.
Guaranteed Minimum Loan Rate
Another respondent stated that the transfer of risks to the
individual ELS cotton producer may undermine the CCC ``guaranteed
minimum loan rate'' because charges on forfeited cotton may exceed the
loan value. Assumption of risk by producers has not undermined other
farm-stored type loans and CCC does not see this risk transfer as
affecting its responsibilities under the program. CCC loans do not
guarantee that a minimum loan value is provided on an individual basis.
Thus, CCC does not expect this loan to reduce the average loan value of
ELS cotton.
Outside Storage Is Inadequate
One respondent states that CCC's requirement that forfeited
collateral must be delivered into a warehouse is an admission that
outside storage is inadequate to protect CCC's interests. The
respondent feels that such cotton is more likely to be forfeited.
Further, they stated that the program has no financial security
arrangements, as with warehouses, to address the increased risk and
ensure that the owners of storage areas fulfill their obligations under
the regulation. A related comment, from another respondent, was that
there will be weather damage to outside-stored cotton and collecting
damages from the gin or grower will be impossible.
CCC has determined that outside storage of ELS cotton is a viable
option as provided in this rule. The agency has a long history of
providing commodity marketing assistance loans on collateral that is
not warehouse-stored. Under such loans, the risk of quality maintenance
is primarily borne by the producer. When loan collateral is warehouse-
stored, the risk is borne by the warehouse and the producer. In neither
case does CCC bear the responsibility for maintaining the quality of
the loan collateral prior to any forfeiture that may occur. CCC will
protect its interests under this loan because any value loss is
restored though the loan settlement process.
CCC's experience with farm-stored loans is that forfeiture
decisions are based on market price levels. Quality loss resulting from
poor producer storage management has not been shown to increase
forfeitures. Participating producers must certify that their storage
meets the regulatory requirements and assume the risk for the cotton
while stored outside. Any obligation by the owners of a storage area to
fulfill their obligations under this regulation would be obligations to
the producer. CCC has no reason to regulate agreements between
producers and outside storage providers. CCC anticipates that producers
and merchants alike understand the specialized bagging and handling
needed to protect outside-stored cotton. Collection of any loan
overages on damaged cotton will be no more problematic for CCC than are
such collections under existing farm-stored loans for other
commodities. However, based on the comments received, the final rule is
revised to emphasize that producer certifications are required with a
loan application, and that producers are responsible for maintaining
the quality of loan collateral stored outside.
Other General Comments
Three respondents stated that the approval process of the rule
lacks objectivity, and thus fails to meet minimum standards for
administrative rulemaking. During the comment period, CCC received
considerable evidence that, as provided by the provisions of this
program, ELS cotton can be successfully stored outside. Thus, the
agency feels that it has sufficient basis for promulgating this rule.
Four comments state that commercial entities have invested in
warehouses under existing loan eligibility requirements that were
created to protect cotton, and that inside storage of cotton remains a
valid purpose today. Two additional respondents stated that the rule
creates an unfair competitive advantage due to lower costs incurred by
those who store cotton outside. Outside storage has been successfully
demonstrated under carefully managed circumstances. CCC's past policy
of requiring inside storage as a condition of loan eligibility has
imposed increased costs on cotton where, in limited circumstances,
lower-cost storage can be used. This result is contrary to the program
objective of assisting commodity marketings of producers.
Six comments state that bypassing traditional protections and
oversight by the JCIBPC is counter to demonstrating quality control in
export markets. Quality reductions will reduce the industry's
reputation for quality in export markets and reduce the ability to
obtain quality premiums, if not export volume. To reduce these
concerns, CCC will not allow outside storage, or relaxed packaging
standards, for all types of cotton or all production areas. CCC
established requirements for this loan that restrict its availability.
CCC's view is that this loan will not reduce exports, and may even
increase exports
[[Page 12056]]
if it helps producers reduce marketing costs.
CCC received 24 comments that this rule will insure protection of
cotton and afford an opportunity to reduce costs in areas where such
storage is accepted practice. Those respondents further state that the
rule provides a voluntary alternative to reduce costs in areas where
producers are economically disadvantaged.
One respondent stated that processing loans under this rule will
initially require a manual process and any automation modifications
will not be timely for 2003-crop loan applications. CCC acknowledges
that until automation revisions occur, such loans will be processed
based on the weight of the cotton and the national average ELS loan
rate. This manual process is immediately available and will not impede
the administration of the program.
One respondent supports the rule as written, and three respondents
request that the rule be reconsidered or repealed. These comments were
submitted without any additional explanations.
Notice and Comment
Section 1601(c) of the Farm Security and Rural Investment Act of
2002 (2002 Act) provides that the regulations needed to implement Title
I of the 2002 Act, which include those involved here, may be
promulgated without regard to the notice and comment provisions of 5
U.S.C. 553 or the Statement of Policy of the Secretary of Agriculture
effective July 24, 1971, (36 FR 13804) relating to notices of proposed
rulemaking and public participation in rulemaking. Because this rule
involves technical storage and packaging requirements, it was
determined that it was in the public's interest to solicit comments on
the interim rule. The final rule is effective upon publication in order
to provide its benefit to producers for 2003, and because the rule is
consistent with successfully used commercial storage practices.
Executive Order 12866
This rule has been has been designated ``not significant under
Executive Order 12866'' and therefore has not been reviewed by the
Office of Management and Budget.
Federal Assistance Programs
This final rule applies to the following Federal assistance
program, as found in the Catalog of Federal Domestic Assistance:
10.051--Commodity Loans and Loan Deficiency Payments.
Regulatory Flexibility Act
The Regulatory Flexibility Act does not apply to this rule because
CCC is not required by 5 U.S.C. 553 or any other law to publish a
notice of proposed rulemaking for the subject of this rule.
Environmental Assessment
The environmental impacts of this rule have been considered under
the National Environmental Policy Act of 1969 (NEPA), 42 U.S.C. 4321 et
seq., the regulations of the Council on Environmental Quality (40 CFR
parts 1500-1508), and regulations of the Farm Service Agency (FSA) of
the Department of Agriculture (USDA) for compliance with NEPA, 7 CFR
part 799. An environmental evaluation was completed and the action has
been determined not to have the potential to significantly impact the
quality of the human environment and no environmental assessment or
environmental impact statement is necessary. A copy of the
environmental evaluation is available for inspection and review upon
request.
Executive Order 12778
This rule has been reviewed under Executive Order 12778. This rule
preempts State laws that are inconsistent with it and is not
retroactive. Before judicial action may be brought concerning this
rule, all administrative remedies must be exhausted.
Executive Order 12372
This program is not subject to Executive Order 12372, which
requires intergovernmental consultation with State and local officials.
See the notice related to 7 CFR part 3015, subpart V, published at 48
FR 29115 (June 24, 1983).
Unfunded Mandates
Title II of the Unfunded Mandates Reform Act of 1995 (UMRA) does
not apply to this rule because CCC is not required by 5 U.S.C. 553 or
any other law to publish a notice of proposed rulemaking for the
subject of this rule. Further, this rule contains no unfunded mandates
as defined in sections 202 and 205 of UMRA.
Paperwork Reduction Act
Section 1601(c) of the 2002 Act provides that these regulations may
be promulgated and the programs administered without regard to chapter
5 of title 44 of the United States Code (the Paperwork Reduction Act).
Accordingly, these regulations and the forms and other information
collection activities needed to administer the provisions authorized by
these regulations are not subject to review by the Office of Management
and Budget under the Paperwork Reduction Act.
Government Paperwork Elimination Act
CCC is committed to compliance with the Government Paperwork
Elimination Act, which requires Federal Government agencies to provide
the public the option of submitting information or transacting business
electronically to the maximum extent possible. Forms used under this
regulation will be available on the agency's Internet web site. Loan
forms may be submitted electronically by users that have met CCC
electronic authentication requirements.
List of Subjects in 7 CFR Part 1427
Agricultural commodities, Cottonseeds, Price support programs,
Warehouses.
0
Accordingly, the interim rule amending 7 CFR part 1427 which was
published at 68 FR 49327 on August 18, 2003, is adopted as a final rule
with the following changes:
PART 1427--COTTON
0
1. The authority citation for part 1427 is revised to read as follows:
Authority: 7 U.S.C. 7231-7237 and 7931-7939; and 15 U.S.C. 714b
and 714c.
0
2. Amend Sec. 1427.5 by revising paragraph (c)(1) to read as follows:
Sec. 1427.5 General eligibility requirements.
* * * * *
(c) * * *
(1) Be of a grade, strength, staple length, and other factors
specified in the schedule of loan rates for ELS cotton;
* * * * *
0
3. Amend Sec. 1427.10 by revising paragraphs (e)(1) and (e)(3) to read
as follows:
Sec. 1427.10 Approved storage.
* * * * *
(e) * * *
(1) At a commercial entity that is involved in the handling or
storage of cotton in a county or area determined and announced by CCC
as approved for outside storage of loan collateral;
(2) * * *
(3) As otherwise provided in the loan agreement. The collateral for
such loan shall be as specified in the loan agreement and may include
the actual bale of cotton.
0
4. Amend Sec. 1427.18 by revising paragraph (k)(2)(i) to read as
follows:
[[Page 12057]]
Sec. 1427.18 Liability of the producer.
* * * * *
(k) * * *
(2) * * *
(i) Certify the quantity of such cotton on the loan application;
certify the cotton is packaged in a hermetically sealed bag with an
internal humidity level established by the gin as appropriate to
safeguard the cotton; certify that packaging materials meet or exceed
industry minimum standards; certify that the storage area is suitable
for cotton storage and is in an area approved by CCC; certify that the
storage area is constructed to prevent water accumulation under the
cotton and is outside a 100-year floodplain; and certify that the
storage area is serviced by bale handling and transport equipment that
will not damage the sealed bag or degrade the storage area;
* * * * *
Signed in Washington, DC, on March 4, 2004.
James R. Little,
Executive Vice President, Commodity Credit Corporation.
[FR Doc. 04-5708 Filed 3-12-04; 8:45 am]
BILLING CODE 3410-05-P