December 5, 2003
                                
Mr. A. J. Yates
Administrator, Agricultural Marketing Service
Room 2092-S
United States Department of Agriculture
STOP 0249
1400 Independence Avenue, S.W.
Washington, DC 20250-0249

          Re: Mandatory Country of Origin Labeling of Beef, Lamb,
          Pork, Fish, Perishable Agricultural Commodities, and
          Peanuts (68 Fed. Reg. 61944, October 30, 2003).

Dear Administrator Yates:

The Office of Advocacy of the U.S. Small Business Administration
submits this comment letter in response to the above-referenced
notice of proposed rulemaking.  Shortly after the enactment of
the legislation giving rise to the proposed rule,(1) small
entities contacted the Office of Advocacy with concerns about the
potential economic impact of regulations to implement mandatory
country-of-origin labeling (COOL).  Advocacy's comment letter
represents the views of small entities and economic impact data
shared with our office pursuant to the Office of Advocacy's small
entity roundtables on COOL held in May and November 2003.

I.   Advocacy Background

Congress established the Office of Advocacy (Advocacy) under Pub.
L. 94-305 to represent the views of small business before Federal
agencies and Congress.  Advocacy is an independent office within
the U.S. Small Business Administration (SBA), so the views
expressed by Advocacy do not necessarily reflect the views of the
SBA or of the Administration.  Section 612 of the Regulatory
Flexibility Act (RFA) requires Advocacy to monitor agency
compliance with the RFA, as amended by the Small Business
Regulatory Enforcement Fairness Act.(2)

On August 13, 2002, President George W. Bush enhanced Advocacy's
RFA mandate with Executive Order 13272, which directs Federal
agencies to implement policies protecting small entities when
writing new rules and regulations.(3) Executive Order 13272
instructs Advocacy to provide comment on draft rules to the
agency that has proposed the rule, as well as to the Office of
Information and Regulatory Affairs (OIRA) of the Office of
Management and Budget.(4( Executive Order 13272 also requires
agencies to give every appropriate consideration to any comments
provided by Advocacy.  Under the Executive Order, the agency must
include, in any explanation or discussion of a final rule
accompanying publication in the Federal Register, the agency's
response to any written comments submitted by Advocacy on the
proposed rule, unless the agency certifies that the public
interest is not served by doing so.(5)

II.  The RFA Requires AMS to Identify Economic Impacts on Small
Entities Affected by the Mandatory COOL Regulations

Section 603 of the RFA requires agencies to consider the economic
impact a proposed rulemaking will have on small entities.  Unless
the head of the agency certifies that the proposed rule will not
have a significant economic impact on a substantial number of
small entities, the agency is required to prepare an initial
regulatory flexibility analysis (IRFA).  In preparing its IRFA,
an agency may provide a quantifiable or numerical description of
the effects of a proposed rule or alternatives to the proposed
rule, or more general descriptive statements if quantification is
not practicable or reliable.

Advocacy agrees with AMS' determination that the proposed rule is
likely to have a significant economic impact on a substantial
number of small entities, triggering the need for an IRFA.
Advocacy reached out to AMS and the affected small entities early
in the rulemaking process.  Advocacy sought to help ensure that
the IRFA on the proposed rule would capture the economic impacts
on the wide array of small entities affected by mandatory COOL
requirements. In the preamble, AMS states "that despite the
numerous comments that USDA received on the voluntary guidelines
and on this rulemaking, there is surprisingly little quantitative
evidence on the likely costs of mandatory COOL."(6) Based on the
impact information provided to Advocacy from industry, Advocacy
encourages AMS to further study its economic analysis and
consider significant alternatives to minimize the rule's impact
on small entities while accomplishing AMS' legislatively mandated
policy goals.

A.  The definition of "retailer" under PACA does not
significantly reduce the number of small entities affected by the
mandatory COOL regulations.

Section 603 of the RFA requires that AMS describe the impact of
the proposed rule on small entities, including, inter alia, a
description and estimate of the number of small entities to which
the proposed rule will apply.  Advocacy acknowledges that the
IRFA of the proposed rule
estimates the number of small entities that will be affected by
the rule.  However, Advocacy questions AMS' assertion that the
number of affected small entities is significantly reduced by the
definition of "retailer."

As required by the authorizing statutes, the term "retailer" for
the mandatory COOL regulations is defined under the Perishable
Agricultural Commodities Act of 1930 (PACA),(7) which applies to
retailers that handle fresh and frozen fruits and vegetables with
an invoice value of at least $230,000 annually.  AMS asserts that
the PACA definition greatly reduces the number of food retail
stores covered by the rule.  Based on the 1997 Economic Census
data, AMS estimates that of the 67,916 food retail stores in the
United States (including food stores, warehouse clubs and
superstores), 66,868 of the food retail stores are considered
small under the SBA's size definition.(8) According to AMS, most
of those stores will be excluded from compliance with the rule
because the PACA definition of "retailer" does not include all
food retailers.  In support of this assertion, AMS estimates that
there are 4,512 retail firms as defined by and licensed under
PACA (of which 3,464 are small).

While Advocacy does not dispute the validity of the data, AMS'
conclusion that the majority of retail stores in the U.S. will be
excluded from the rule (and its economic impacts) is a source of
concern for two reasons.  First, the 4,512 retail firms licensed
under PACA are made up of tens of thousands of establishments
that must comply with COOL and will incur any associated costs.
The majority of these establishments are small.  Second, many of
the PACA-exempt retail firms and establishments will be directly
affected by the rule.  The rule requires producers/growers and
suppliers to provide PACA-licensed retailers with the information
needed for the retailers to label the covered commodities
correctly.(9) This will require producers and suppliers to incur
costs (e.g. labeling, recordkeeping and storage), and these costs
will flow to all retailers, because it does not make economic
sense for the producers and suppliers to bifurcate their handling
and labeling to segregate products potentially destined for those
retailers exempt from COOL by the PACA definition.  All retailers
will receive a more expensive product because of the added costs
of complying with COOL at the production/supply stage.  The
percentage of the cost increase that can be passed on to
consumers will depend on the elasticity of demand in each market.
Industry representatives participating in Advocacy's roundtables
were doubtful that the total cost increases could be passed on to
their consumers.  Consequently, all food retailers stand to
suffer economic losses as a result of the costs of complying with
the mandatory COOL regulations.  Those losses will most likely be
in the form of lower profit margins, and small entity
representatives told Advocacy that grocery retailers currently
operate on narrow profit margins.

Also, increased costs are likely to flow from retailers through
suppliers to producers/growers.  Retailers will impose a cost of
compliance on their suppliers by requiring them to better label
their products.  The proposed rule does not provide a small
business or small volume exemption for producers/growers.  Most
producers/growers seek to maximize their revenues by selling to
retailers, suppliers, food services, convenience stores and small
specialty markets.  As suppliers respond to the demands of
retailers, they too will exert compliance pressure and costs on
producers/growers in an effort to comply with COOL.  As a result,
unless a producer/grower decides to stop growing certain
products, it will have to comply with the COOL regulations across
the board, regardless of whether some of its product is sold to
retailers exempted by the PACA definition.

Roundtable participants were skeptical of AMS' belief that the
PACA definition would limit the overall impact of the rule on
small businesses.  One of the fresh produce representatives was
particularly concerned with the prospect that retailers will
dictate to producers/manufacturers (who are not PACA-licensed)
the terms necessary to comply with mandatory COOL.  The
individual was particularly concerned about the potential for
increased labeling costs.  Advocacy was told that a small tomato
producer recently priced a labeling machine at $25,000.  Labeling
cost concerns were also raised by meat processors who attended
the roundtable.  A meat processor representative told Advocacy
that meat processors currently buy labels in bulk in order to
save considerable printing costs.  They will not be able to do so
under the proposed rule because the specific labeling
requirements of the rule are not conducive to bulk purchases of
uniform labels.  He estimated that this will cost businesses in
his industry between $100,000 and $200,000 a year.  AMS projected
that this scenario was a possibility when it stated that, "most
manufacturers of covered commodities will likely print country-of-
origin labeling information on retail packages supplied to
retailers."(10) These industry representatives questioned AMS'
conclusion that the costs for producers will be "relatively
limited" and will generally include costs involved in
establishing and maintaining a recordkeeping system for country-
of-origin information.

One roundtable participant, a small meat producer, described how
retailers are already exerting pressure on the supply chain in
preparation for the mandatory COOL program.  Retailers are
reacting to the potential liability that attaches for failure to
comply with the rule's food documentation requirements.  The
small meat producer stated that retailers are requiring him to
sign a hold-harmless agreement in connection with his country-of-
origin labeling documentation, but suppliers refuse to sign the
hold-harmless document, which leaves him in a precarious
liability position.  He stated that it is unreasonable for AMS to
assume that he could simply stop selling to retailers covered by
the proposed regulation and still remain in business.

Advocacy believes that AMS should expand its analysis to take
into consideration that the rule will likely have an economic
effect on all entities along the supply chain, from
producer/grower through distributors and retailers, and not just
those PACA-licensed retailers described in the IRFA and preamble
to the proposed rule.  Such an expanded analysis will better
capture the costs of the proposed rule on the broad array of
affected entities, many of which operate on relatively small
profit margins.

 B.  Allowing market participants to decide how to best implement
COOL in their operations does not offer the degree of flexibility
that AMS asserts in the proposed rule.

AMS suggests in the IRFA and preamble to the proposed rule that
it has provided some flexibility in the mandatory COOL
regulations by allowing market participants to decide how best to
implement the provisions of mandatory COOL in their
operations.(11) While Advocacy understands that the 2002 Farm
Bill gives AMS little latitude to provide flexibility to small
businesses affected by the proposed rule, the flexibility
provided by AMS is not particularly helpful to small entities.

Participants in Advocacy's roundtables voiced concern about their
industries' ability to comply with the recordkeeping requirements
of the proposed rule by September 30, 2004.  There is not
currently an infrastructure in place to communicate COOL
requirements and information among retailers, suppliers, and
producers/growers.  For example, representatives from the beef
and cattle industry stated that while electronic tags are now
available and used in an effort to track cattle, there is no
infrastructure in place for producers to communicate the tracking
information to supplier and retailers.  There are 800,000
cow/calf producers in the United States, most of which are small
businesses.  According to industry, to build the information
infrastructure, the 1500 stockyards in the United States will
have to purchase $100,000-$200,000 worth of equipment to scan
tags and create a recordkeeping database.  Electronic tags are
about $2 each.  The required infrastructure and data will
increase the cost of compliance with COOL to $5 to $7 per animal.

Meat processors/packers voiced concerns about the need and
associated cost to segregate product under mandatory COOL.
Industry representatives estimated that it will cost small meat
packers approximately $15 per head to change their slaughter and
fabrication departments so they can track carcasses and primals,
and an estimated nine cents per pound to maintain the identity of
the products in retail facilities.  Small meat processors/packers
believe that they already operate at a price disadvantage
compared with their larger counterparts and wholesalers in
straight commodity (beef and pork) pricing.  They are worried
that the costs of the COOL program will be disproportionately
higher per pound for smaller operations, either requiring them to
go to an even higher pricing disadvantage, or putting them out of
business altogether.

Roundtable participants were also concerned that the
"implementation" flexibility would create inefficiencies as
affected entities have to comply with numerous differing
implementation approaches in the absence of a standardized
practice on how best to implement the COOL provisions.  While the
affected industries understand that the governing statute does
not allow AMS to mandate a standardized identification system,
they would welcome AMS providing guidance to affected industries
(especially small entities that do not have the resources of
large businesses) on ways to minimize the rule's commodity
identification and recordkeeping burden. Section 212 of the Small
Business Regulatory Enforcement Fairness Act (SBREFA) requires
agencies to publish compliance guides for rules requiring a final
regulatory flexibility analysis pursuant to the RFA.(12) By
issuing compliance guides, AMS can explain the rule, provide
compliance scenarios to illustrate and clarify any complexities,
lessen small businesses' anxiety about complying with the rule's
complexities, and provide suggestions on how to structure COOL
data collection and recordkeeping systems.

C.  The alternatives contained in the IRFA will not lessen the
burden on small entities. AMS should consider reducing the rule's
recordkeeping burden.
  
Section 603(c) of the RFA requires that the IRFA contain a
description of any significant alternatives to the proposed rule
to accomplish the stated objectives of the applicable statutes
and minimize any significant economic impact of the proposed rule
on small entities.  The roundtable participants agreed that AMS'
alternative suggesting that "market participants other than those
retailers defined by statute may decide to sell products through
marketing channels not subject to the proposed rule,"(13) was not
realistic as far as market conditions were concerned.  Advocacy
was told that under the alternative, producers/growers would be
left having to sell to food services where current sales are
small.  Any argument that producers/growers could sell only to
exempted retailers is not reasonable.  Producers/growers are
going to have to comply with the regulation because profit-
maximizing principles dictate that they sell product to both PACA-
licensed and PACA-exempt retailers; it would be uneconomical for
them to segregate their business practices to accommodate each
type of retailer.

As another alternative, AMS suggests that "retailers may seek to
limit the number of entities from which they purchase covered
commodities."(14) According to small entity representatives, this
alternative is unworkable for the same reasons that the
producers/growers alternative is impracticable.  Both of these
alternatives would create a situation in which the marketplace is
artificially limited and where market disincentives and
disruptions could result.  Neither alternative would minimize the
significant economic burden on small entities as contemplated by
the RFA.

AMS acknowledges in the preamble to the proposed rule that both
the suppliers and retailers have commented that the two year
recordkeeping requirement was too onerous, given the short amount
of time the product is on the shelf.  AMS solicited comment on
whether a shorter record retention would still afford adequate
time to conduct compliance activities.  Advocacy recommends that
AMS give careful consideration to crafting a significant
alternative to reduce the record retention requirements of the
rule.  Advocacy encourages AMS to conform the COOL regulations to
the 1-year record retention requirement utilized by the U.S. Food
and Drug Administration (FDA) in its bioterrorism rule.  This
would significantly reduce compliance costs because many of the
entities affected by the COOL regulations will also have to
comply with the FDA's rule.
 D.  The definition of "processed" confuses small businesses and
may increase economic burden on those entities.

The 2002 Farm Bill excludes a covered commodity from COOL when it
is an "ingredient in a processed food item."  However, the 2002
Farm Bill does not define "processed food item," leaving AMS to
define the term for the purposes of the mandatory COOL program.
Advocacy commends AMS for discussing in the rule's preamble
numerous public comments regarding what the definition of
"processed food item" should be. Because small entities continue
to voice considerable confusion over the definition, Advocacy was
pleased that AMS is seeking further public comment on the
definition of "processed food item."

Advocacy recommends that AMS continue to work with affected
industries in an effort to derive a workable definition of
"processed food item." One roundtable participant offered that
the meat industry is constantly creating new and different
products based on consumer demand.  He thought that AMS' belief
that a product is "processed," if it "undergoes a physical or
chemical change such that the product no longer retains the
characteristics of the covered commodity" was too vague.(15) He
stated that if a product has more than one ingredient, it should
be viewed as "processed."  If AMS does not use such a bright line
standard that producers and others can follow, it will not be in
a position to enforce what products are covered, or not, under
the definition of processed.

Further clarification of the term "processed" will result in a
better regulation and could greatly reduce the rule's economic
effect on small entities.  To the extent that Advocacy can
facilitate AMS' outreach with small entities on this issue, we
would be happy to do so.

III. The Cost of the COOL Regulations May Exceed AMS Estimates
  
During Advocacy's COOL roundtables, several participants shared
information derived from their best efforts to assess the cost of
compliance with the mandatory COOL regulations.  Advocacy found
the following information to be very informative, and hopes that
each of the following small entities or their association
representatives will provide their detailed analysis and
assessments to the AMS record.

Retail and Wholesale Groceries

Joseph Colalillo, the owner of four Shop Rite grocery stores and
a cooperative (coop) wholesaler in New Jersey, implemented the
COOL rules in his stores as a demonstration project to determine
the costs of compliance.(16) The demonstration was limited to
produce, seafood, meats and frozen foods.  He discussed the
impact of the COOL rule's requirements on the stores' and
wholesalers' handling of bananas as an example to demonstrate the
difficulties labeling and tracking covered commodities would
cause in conducting day-to-day business.  Prior to the study, all
bananas from all origins were in one bin consisting of a wrapped
section and an unwrapped section; under COOL, he needed a bin
with 14 areas (he currently receives bananas from 7 countries).
He concluded that COOL will increase the cost of doing business
because of increased labeling costs, training of labor (with a
thirty percent turnover rate), signage, display allocation,
recordkeeping, equipment purchase, increased storage space and
liability costs (customers never return goods to the proper
place).

Mr. Colalillo further suggested that more concrete data were
available from his analysis.  All his stores would experience
increased costs of $7,000 on a weekly basis due to segregation
and labeling of covered commodities.  In the coops that his Shop
Rite stores purchase from and help manage, costs are broken down
as follows: $9 million for equipment costs, $5 million for
recordkeeping, and $75 million for facility upgrade to increase
product handling ability.
  
On the wholesale side, the impact is restricted to "slotting."
According to Mr. Colallilo's experience, wholesalers will need to
increase the number of slots (dictated by increased segregation
of products).  That translates into an estimate of $4 million
annually for hiring more labor to do the job, $140,000 a year for
record keeping, and a possible one-time expenditure of $65
million to build a bigger facility with more available slots.

Cattlemen and Beef Packers

There are 6,000 beef dealers and 339 packing companies.
According to industry representatives, it will cost these
industries approximately $10-$20 million in increased cooler
capacity to segregate products in order to comply with the COOL
regulations.

Meat Processors/Wholesalers

Chris Huff, a small meat/frozen hamburger producer with 140
employees, shared his analysis of the cost of complying with
mandatory COOL.  Mr. Huff purchases six to seven truckloads of
meat per week for hamburger processing.  In order to comply with
the proposed regulation, Mr. Huff's business will have to add six
to seven bins in the truck that delivers the meat and 50 percent
more freezer space in his plant.  He concluded that this will
result in an additional cost of nine cents per pound for the
product during the first year.  Mr. Huff doubted that the
retailers he contracts with will agree to absorb a nine cent
increase per pound.  Mr. Huff suggested that if the retailers
were to absorb the nine cent cost it would result in a twelve
cent per pound cost increase to the consumer.  Mr. Huff
calculated that compliance with mandatory COOL will cost his
small company $2.7 million annually, which eradicates his profit.

VI.  Conclusion

Advocacy appreciates being given the opportunity to comment on
the proposed rule.  Advocacy requests that as AMS proceeds from
proposed to final rule, it take the necessary steps to minimize
the regulation's impact on small businesses while it fulfills its
statutory mandate under the 2002 Farm Bill.

Thank you for your attention to the above matters.  If you have
any questions about this correspondence, please do not hesitate
to contact Linwood Rayford or Radwan Saade at (202) 205-6533.

Sincerely,

Thomas M. Sullivan
Chief Counsel for Advocacy



Linwood L. Rayford, III
Assistant Chief Counsel for Advocacy



Radwan Saade, Ph.D.
Regulatory Economist, Office of Advocacy

Cc:  Dr. John D. Graham, Administrator
     Office of Information and Regulatory Affairs

ENDNOTES

1.  The Farm Security and Rural Investment Act of 2002 (Farm
Bill), and other laws, mandated that the U.S. Department of
Agriculture (USDA) issue regulations to implement a mandatory
country-of-origin labeling (COOL) program.  The laws, and
resulting regulations, require retailers to notify their
customers of the country-of-origin of covered commodities
beginning on September 30, 2004.
2.  Pub. L. No. 96-354, 94 Stat. 1164 (1981) (codified at 5
U.S.C.  601-612) amended by Subtitle II of the Contract with
America Advancement Act, Pub. L. No. 104-121, 110 Stat. 857
(1996). 5 U.S.C.  612(a).
3.  Exec. Order No. 13272  1, 67 Fed. Reg. 53461 (Aug. 13,
2002).
4.  E.O. 13272, at  2(c).
5.  Id. at  3(c).
6.  68 Fed. Reg. at 61960.
7.  7 U.S.C. 499 et seq.
8.  The SBA considers as small those grocery stores with less
than $23 million in annual sales and specialty food stores with
less than $6 million in annual sales.
9.  Based on data from the 2000 Statistics of U.S. Businesses,
AMS states that approximately 94% of wholesalers are classified
as small businesses (68 Fed. Reg. at 61974), and that
approximately 95% of manufacturers are small businesses (68 Fed.
Reg. at 61976).
10. 68 Fed. Reg. at 61976.
11. 68 Fed. Reg. at 61974.
12. Subtitle II of the Contract with America Advancement Act,
Pub. L. No. 104-121, 110 Stat. 857 (1996). 5 U.S.C. 612(a).
13. 68 Fed. Reg. at 61974.
14. 68 Fed. Reg. at 61977.
15. 68 Fed. Reg. at 61946.
16. Mr. Colalillo's study and related documentation is on file at
Advocacy and it will be made available upon request by AMS.