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Animal and Plant Health Inspection Service

Economic Analysis and Final Regulatory Flexibility Analysis

Final Rule: Low Pathogenic Avian Influenza, Voluntary Control Program and Payment of 

Indemnity

Docket No. 05-0109-2

July 15, 2008

Executive Summary

Under the final regulation, the U.S. Department of Agriculture (USDA) will establish a 

voluntary control program for low pathogenic avian influenza (LPAI). As part of the program, 

participating owners and growers will be indemnified for losses arising from depopulation of 

birds affected with the H5 and H7 subtypes (H5/H7 LPAI). 

In general, benefits of containing the spread of a livestock or poultry disease fall into 

three categories: 1) avoided producer losses from disease morbidity and mortality; 2) avoided 

consumer losses due to price increases resulting from decreased supplies (net of avoided gains to 

producers attributable to the price increases); and 3) avoided reduced demand if markets are 

closed to affected commodities. LPAI is rarely fatal to infected birds. However, the longer an 

outbreak is not controlled, with more birds becoming infected with H5/H7 LPAI, the more likely 

it is that the virus may mutate into a highly pathogenic form. The more timely and well-planned 

the response to an LPAI occurrence, the less likely it will result in harmful price and trade 

effects. This final rule has the objectives of reducing the risk of H5/H7 LPAI outbreaks, and 

improving responsiveness and eradication measures at the grower, industry, and State levels 

when the disease does occur. 

The groups who enjoy the primary benefit of a disease eradication campaign are 
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consumers and those owners/growers whose flocks have remained healthy. Owners and growers 

of the depopulated flocks bear the primary burden of an eradication effort, if not indemnified. In 

addition to the value of lost production, the owners/growers of affected birds may also bear costs 

of cleanup, disinfection, transportation, forgone income, and other financial hardships.

The benefits of a voluntary avian influenza control program derive from disease 

prevention and from cost minimization when an outbreak does occur. Evidence of the types of

benefits gained from control of avian influenza is found in a USDA-ERS study of a 1983-84 

outbreak. A 2002 outbreak in Virginia also exemplifies the types of costs incurred due to an 

avian influenza incident. While these occurrences show that the costs of an avian influenza 

outbreak can be substantial, recent outbreaks have typically been smaller in scale. An ongoing 

surveillance program contributes to our ability to detect outbreaks early and limit their effects.

To the extent that the final rule contributes to the elimination of AI, all affected entities 

should benefit over the long term. The program that APHIS is establishing is a voluntary 

program; producers are not required to participate. The benefits of this rule, from preventing

LPAI outbreaks and minimizing losses should an outbreak occur, are expected to exceed costs to 

producers and States of participating in the program’s disease prevention efforts.

Under the rule, producers will be required to keep flocks and facilities clean, slaughter 

plants will be required to conduct sampling, and States will be required to conduct annual 

inspections and develop response and containment plans. APHIS will provide full indemnities 

for specific costs to participating producers and States should an outbreak occur. Related to, but 

separate from, this LPAI rule, APHIS received about $16 million in FY 2008 appropriations for 

LPAI control efforts, including approximately $2 million paid through cooperative agreements 

with 24 States for ongoing surveillance.
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1. Introduction

Contents of the Analysis

This regulatory impact analysis has six sections. In this introduction, we describe the 

final rule, discuss the need for the action, and consider alternatives to the final rule. Section 2 

provides an overview of major sectors of the U.S. poultry industry in terms of production and 

trade. In section 3, we discuss the current program for control of low pathogenic avian influenza 

(LPAI) and identify recent LPAI incidents. Indemnity payments that will be made under the 

final rule are addressed in section 4, beginning with a description of the contract growing system

and a numerical example of the normal pattern of cost-sharing between owners and growers. We 

then explain the procedures by which indemnity payments will be calculated and apportioned

under the final rule. Expected benefits and costs of the rule are considered in section 5. We 

refer to two large AI outbreaks in comparing benefits, in terms of forgone costs of disease 

spread, and costs, in terms of public and private expenditures for disease eradication. Effects for 

small entities are addressed in section 6, in a final regulatory flexibility analysis.

Description of the Final Rule

The new part 56 we are establishing will provide indemnity for (1) the market value, 

destruction, and disposal of poultry that have been infected with or exposed to the H5/H7

subtypes of LPAI; (2) the destruction of any eggs destroyed during an outbreak for testing for 

H5/H7 LPAI; and (3) cleaning and disinfection of premises, conveyances, and materials that 

were exposed to H5/H7 LPAI, or, in the case of materials, if the cost of cleaning and disinfection 

would exceed the value of the materials or cleaning and disinfection would be impracticable for 

any reason, indemnity for the destruction and disposal of the materials. These types of costs are 
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identical to the costs for which indemnity was provided for the LPAI outbreaks in Virginia and 

Texas.

1,2 

The new part 56 also establishes mechanisms to address some additional costs not 

explicitly included in the indemnity provided for the outbreaks in Virginia and Texas. This final

rule provides for the establishment of cooperative agreements with Official State Agencies to 

pay for the costs of certain surveillance and monitoring, of transferring vaccine from APHIS to a 

State under certain controls, and of vaccine administration associated with an outbreak. 

Although the November 20021 and July 20032

Cooperative agreements established under this final rule will provide for payment of the 

costs of surveillance and monitoring only as they relate to a specific disease outbreak. We are 

providing for the authority to pay the cost of surveillance and monitoring as they relate to a 

disease outbreak because we believe it is appropriate for APHIS to pay for actions undertaken at 

APHIS’ direction to confirm successful eradication of an outbreak of H5/H7 LPAI. Related to, 

but separate from, this rule, APHIS received about $16 million in FY 2008 appropriations for 

LPAI control efforts, including approximately $2 million paid through cooperative agreements 

with 24 States for ongoing surveillance.

rules did not discuss the issue, the costs of 

surveillance and monitoring were also assumed by APHIS in the Virginia and Texas outbreaks; 

vaccination was not used in those control and eradication efforts.

Cooperative agreements established under this final rule may provide for the transfer of 

vaccine from APHIS to a State for disease-control purposes, provided that the vaccine is 

 1 DEPARTMENT OF AGRICULTURE Animal and Plant Health Inspection Service 9 CFR Part 53

[Docket No. 02-048-1] Low Pathogenic Avian Influenza; Payment of Indemnity ACTION: Interim rule and request 

for comments. [Federal Register: November 4, 2002 (Volume 67, Number 213)] [Rules and Regulations] [Page 

67089-67096] From the Federal Register Online via GPO Access [wais.access.gpo.gov] [DOCID:fr04no02-2]. 2 DEPARTMENT OF AGRICULTURE Animal and Plant Health Inspection Service, 9 CFR Part 53 [Docket No. 

02-048-2] Low Pathogenic Avian Influenza; Payment of Indemnity [Federal Register: July 18, 2003 (Volume 68, 

Number 138)] [Rules and Regulations] Page 42565-42570] From the Federal Register Online via GPO Access 

[wais.access.gpo.gov] [DOCID:fr18jy03-2].
5

transferred and used in accordance with a previously approved initial State response and 

containment plan. They may also provide for payment to the States of the cost of administering 

the vaccine. Vaccination of poultry can be a more cost-effective method of controlling the 

spread of LPAI than depopulation. (It should be noted that, under this final rule, vaccination for 

H5/H7 LPAI may not be performed except as a disease control method after an outbreak has 

occurred.) For example, a commercial table-egg layer can be vaccinated for AI with two 

inoculations at a total cost of 25 cents per bird. By comparison, the total cost to APHIS, the 

Official State Agency, and the producer of depopulating and replacing a table-egg layer can 

reach $10 per bird. Thus, for a typical 2-million-bird table-egg layer complex, the difference in 

cost between vaccination and depopulation could reach $19.5 million. Therefore, we believe it is 

important to explicitly provide for both the transfer of vaccine and its administration, subject to 

appropriate controls, to ensure that this means of controlling the spread of LPAI is available to 

APHIS and to Official State Agencies. 

The new regulations in part 56 will provide for the authority to pay indemnity of 100 

percent of eligible costs for participants, and will provide for the establishment of cooperative 

agreements with participating States through which States will be eligible to receive 100 percent 

of the costs covered under the cooperative agreements. Other producers eligible for 100 percent 

indemnity are described in Part 56.3(b) of the rule. We believe that providing for the payment of 

100 percent of eligible costs, rather than 75 percent as in the July 2003 final rule, is appropriate 

because the World Organization for Animal Health (also known as the Office International des 

Epizooties, or OIE) lists all H5 and H7 AI viruses, both LPAI and HPAI, as serious diseases that 

are required to be reported by member countries.

3

 3 http://www.oie.int/eng/normes/mcode/en_chapitre_2.7.12.htm

 In essence, the premise of the OIE guidelines 

is that, because H5/H7 LPAI has the potential to mutate into HPAI, it should be treated very 
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similarly to HPAI by member countries. Therefore, we believe that it is consistent to provide for 

payment of 100 percent indemnity for costs associated with H5/H7 LPAI to large commercial 

poultry producers and breeding poultry producers who participate in the voluntary control 

program, all small poultry producers, and participating States, as we do for costs associated with 

HPAI under the general indemnity regulations in § 53.2(b). Given expected participation rates, 

this will mean that 100 percent indemnity will be available for almost all producers and States.

The final rule provides for indemnification of 25 percent of H5/H7 LPAI costs for the 

small number of commercial poultry producers and States who do not participate in the National 

Poultry Improvement Plan and breeding poultry producers who participate in the Plan but not in 

its AI programs. Partial indemnification will serve to encourage participation in the voluntary 

control program, whose surveillance requirements are consistent with the OIE guidelines.

Finally, the indemnity regulations established in this final rule also provide for the 

distribution of payments between owners and contract growers. The distribution of payments is 

similar to the one APHIS used to indemnify owners and contract growers for losses due to LPAI 

outbreaks in Virginia and Texas in 2002. This will help ensure full participation by contract 

growers in the passive surveillance program, and is described in section 4 of this document.

Need for the Action – Market Failure

Disease indemnification programs are usually developed to address a market failure that 

occurs when individual actions impose uncompensated benefits or costs on others. Depopulation 

of a diseased flock is a cost incurred by the owner/grower of that flock for the benefit of others, 

that is, to prevent the spread of the disease. Payment of indemnity encourages individuals to 

participate in depopulation programs, even when market signals might suggest that the individual 

should do otherwise. Payment of indemnities corrects for market failure by accounting for 
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negative externalities associated with residual pockets of disease. Alternatively, when individuals

act against their own economic interests by participating in depopulation programs that confer 

positive externalities or benefits on other producers whose flocks remain disease-free, the 

Federal government can correct for market failure after-the-fact through paying indemnity.

Another key issue for this final rule is that the grower of the bird is not the owner of the 

bird, and that both the owner of the bird and the grower of the bird have economic losses when a 

flock is depopulated. In the past, only poultry owners have been compensated, so that poultry 

growers may have suffered uncompensated losses from participating in depopulation programs. 

When the government compensates for losses, all who suffer losses should be equitably 

compensated.

Alternatives to the Rule

When a pest or disease affects a small area or a small number of individuals or farms, or 

if the consequences of an event are not severe, private responses from affected individuals or 

industry can provide economically efficient solutions. When a large number of farms or an 

entire region is involved, infected flocks are depopulated to prevent the virus from spreading. 

This is often handled by individuals with the assistance of industry and the State where 

warranted by the scope and scale of the outbreak. When it becomes apparent that State and 

industry resources are not sufficient to undertake adequate control measures, Federal cooperation 

is requested. For example, when the economic consequences are potentially devastating 

(possibly affecting several sectors of the economy), or if the disease is likely to move across 

State boundaries, the magnitude and scale of a disease control program typically requires Federal 

resources and Federal coordination. Certain aspects of large-scale disease control and eradication 

efforts fall into the realm of public goods which are best provided by public authorities – for 
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example, surveillance, tracebacks, and information provision.4

Three possible alternatives to the rule would be (a) to provide Federal funding on a 

matching-fund basis, for example, by matching 50% of all costs or unreimbursed losses paid or 

assumed by the State, local government and industry; (b) to provide Federal indemnity as was 

done for the Virginia outbreak in 2002, at 75%; or (c) to provide Federal funding for 

surveillance, but no or minimal funding for indemnity in the event of an outbreak

In addition, States, industry, and 

individuals typically do not have access to the level of disease control technology or institutional 

response capacity required for an effective, sustained, and coordinated response.

We do not believe that matching funds would be an effective means of providing 

indemnity to producers affected by H5/H7 LPAI, for the simple reason that most States and 

industry do not have funds available for indemnification. (The industry indemnity program for 

poultry disease on the Delmarva Peninsula is the exception in this case.) For example, in a 

recent LPAI outbreak at a table-egg laying premises in Connecticut, the lack of available State 

indemnity funds led the State to pursue vaccination rather than depopulation. (Depopulation 

would have cost many millions of dollars.) However, a vaccination strategy would not be likely 

to be effective or practical in a State with large populations of commercial meat-type poultry, 

due to the risk of the virus spreading to meat-type flocks. 

Given the lack of State and industry funds for indemnity, the 100 percent indemnity 

incentive will be necessary in order to secure industry involvement in the voluntary control 

program. Much of the meat-type chicken industry has recently begun conducting surveillance 

exactly in accordance with the active surveillance program in this final rule, in anticipation of its 

publication and the availability of 100 percent indemnity. There has been some similar activity 

 4 UN Food and Agriculture Organization, The State of Food and Agriculture 2001. 
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in the meat-type turkey industry.5

Before the publication of the interim rule, the table-egg layer industry did not participate 

in surveillance, and there remain questions regarding whether it would continue to participate 

were 100 percent indemnity not available. Depopulation of large table-egg layer premises 

without 100 percent indemnity is not likely to result in cooperation from the table-egg layer 

industry, since its large premises typically have in excess of 1 million birds. The cost of the 

birds and cleaning and disinfection of commercial table-egg laying complexes is extremely high. 

Without 100 percent indemnity, an affected table-egg layer premises would almost certainly be 

put out of business (as shown in the Connecticut example). The availability of 100 percent 

indemnity allows affected States and industry to move quickly to eradicate H5/H7 LPAI in 

commercial poultry and subsequently reduce the potential extraordinary costs.

 However, it is unknown whether the commercial meat-type 

producers would continue these surveillance activities without the availability of 100 percent 

indemnity. 

We do not believe that repeating the approach taken in Virginia would be appropriate 

because unlike in the Virginia outbreak, the recipients of indemnity under the final rule would 

largely be participants in the LPAI surveillance program. That program places a much greater 

cost burden on States and industry than it does on APHIS. While APHIS has recently provided 

funding to States for ongoing LPAI surveillance under cooperative agreements, these do not 

come close to covering the total State and industry cost of participation in the program. 

We expect that the States and industry would continue to bear most of the cost burden 

after the publication of the final rule, and we believe that a larger proportion of States and 

industry will participate than the proportion that would participate in the absence of the 

 5 Experience with the interim rule validates APHIS’ belief that paying 100 percent indemnity will provide the 

necessary incentive to report disease. Since the interim rule was published, APHIS has paid indemnity on several 

occasions, and these actions have proven successful at averting larger scale outbreaks.
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indemnity incentives provided by the interim ruleexpect that a larger proportion of States and 

industry would participate than the proportion that currently participates in LPAI surveillance—

in part due to the indemnity incentives provided by the final rule.

The third alternative would be to pay for surveillance and provide no or minimal 

indemnity. However, given that LPAI is rarely fatal to infected birds and given that there would 

be little or no incentive for owners of poultry to destroy them to prevent the spread of disease, 

this would have the potential to create a program failure, and, as a result, a market failure. The 

more birds that are infected with H5 or H7 LPAI, the more likely it is that the virus will mutate 

into the highly pathogenic form. We want to be able to secure the cooperation of owners of 

poultry quickly in order to ensure that the least possible number of poultry is infected with 

H5/H7 LPAI when an outbreak occurs and, as mentioned above, reduce potential extraordinary 

costs of the kind incurred in the Virginia outbreak in 2002.

The 25 percent level of indemnity for nonparticipating industry and States was chosen 

based on industry and State requests. The purpose was for the 25 percent indemnity to provide 

something to nonparticipating industry and States but to give industry and States an 

overwhelming incentive to participate and thus be eligible to receive 100 percent indemnity. 

Since the percentage was chosen by the same groups of entities from whom the rule is designed 

to elicit participation, we assume that it will be effective at doing so. We expect participation 

from 48 States and over 90 percent of industry.

In sum, none of the alternatives examined would provide the level of Federal indemnity 

needed to ensure State and industry participation and program success. 
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2. The U.S. Poultry Industry

Production

The United States is the world's largest producer, the second-largest exporter of poultry 

meat, and the second-largest egg producer. In 2007, U.S. poultry meat production totaled 56.8

billion pounds, of which 87 percent was broiler meat, 13 percent was turkey meat, and less than 

1 percent was other chicken meat. The total farm value of U.S. poultry production in 2007 was 

$31.9 billion.6

Broiler production is concentrated in a group of States stretching from Delaware, south 

along the Atlantic coast to Georgia, then westward through Alabama, Mississippi, and Arkansas. 

In 2007, these States accounted for over 70 percent of broilers in the United States. The five top 

broiler-producing States are shown in Table 1.

Broiler production accounts for the majority of the value at $21.5 billion, 

followed by eggs at $6.7 billion, turkey at $3.7 billion, and other chicken at $50.8 million.

Table 1. —Top broiler producing states, 2007

Number Produced 1,000 

Head

Pounds Produced 1,000 

Pounds

Georgia 1,398,800 7,413,600

Arkansas 1,172,300 6,213,200

Alabama 1,014,900 5,582,000

Mississippi 824,000 4,614,400

North Carolina 781,200 5,390,300

Source - Poultry - Production and Value 2007 Summary, NASS, April 

2008.

 6 USDA NASS Poultry – Production and Value 2007 Summary, April 2008, 

http://usda.mannlib.cornell.edu/usda/current/PoulProdVa/PoulProdVa-04-28-2008.pdf.
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U.S. turkey production in 2007 totaled 272 million birds with a combined live weight of 

7.5 billion pounds. Production of turkeys is somewhat more scattered geographically than broiler 

production. The top five turkey-producing States are Minnesota, North Carolina, Arkansas, 

Virginia, and Missouri. 

The United States is by far the world's largest turkey producer, followed by the European 

Union. Even though exports are a major component of U.S. turkey use, the United States 

consumes more turkey than any other country, at 17.5 pounds per capita in 2007.
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U.S. egg operations in 2007 produced 90.6 billion eggs. In 2007, approximately 85 

percent of egg production was for human consumption (the table-egg market). The remainder of 

production is for the hatching market. These eggs are hatched to provide replacement birds for 

the egg-laying flocks and to produce broiler chicks for growout operations. The top five eggproducing States in 2007 were as shown in Table 2.
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Table 2. —Top egg producing states, 2007

Eggs Produced 

Million

Value of Production 

1,000 Dollars

Iowa 13,868 824,806

Ohio 7,151 483,441

Indiana 6,673 422,640

Pennsylvania 6,392 389,119

Texas 4,994 373,403

Source - Poultry - Production and Value 2007 Summary, NASS, April 

2008.

The large majority of the U.S. table-egg production is consumed domestically. U.S. egg 

and egg product exports are a relatively minor proportion of domestic production, only about 3 

percent in 2007. U.S. per capita consumption of eggs and egg products in 2007 was the 

equivalent of 257 eggs.7

Trade8

The United States is the world's second-largest exporter of broilers behind Brazil. In 

2007, broiler exports totaled 5.8 billion pounds (16 percent of total production), valued at $2.7

billion. Demand for U.S. broiler products has fluctuated over the last several years due to 

changing economic conditions and currency exchange rates in major exporting countries. The 

largest importers of U.S. broiler products were Russia (including the Baltic countries), China 

(including Hong Kong), and Mexico. Together, these markets accounted for over 50 percent of 

exports of U.S. broiler products, on a quantity basis.

 7 USDA NASS Agricultural Statistics 2007, 

http://www.nass.usda.gov/Publications/Ag_Statistics/2007/CHAP08.PDF. 8

Information in this section is derived from USDA’s Economic Research Service Poultry Briefing Room, 

http://www.ers.usda.gov/briefing/poultry/trade.htm, and Census data.
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The United States imports only small amounts of broiler products. In 2007, imports 

amounted to 49 million pounds, or less than 1 percent of domestic production. 

The United States is also the world's largest exporter of turkey products. In 2007, U.S. 

turkey exports were 554 million pounds and were valued at $405 million. Less than 1 percent of 

turkey exports were as whole birds, with the majority of shipments being lower valued turkey 

parts or ground or mechanically deboned meat (MDM). Many importing countries mix the 

ground or MDM turkey meat with other meats in sausage production.

Mexico is by far the largest importer of U.S. turkey meat. In 2007, shipments of turkey 

meat to Mexico totaled 309 million pounds, or 56 percent of all turkey exports. The United 

States imported a relatively small amount of turkey products, totaling 20 million pounds in 2007. 

Most imported products come from turkey producers in Canada. 

There are three categories of U.S. egg exports. The first is exports of shell eggs for 

consumption. In 2007, shipments of eggs in this category totaled 79 million dozen. Most of these 

exports went to Canada, Hong Kong, and Mexico. The second category is exports of shell eggs 

for hatching. These eggs are for hatching out into egg laying-type birds or broiler-type birds. 

Shipments of hatching eggs were 60 million dozen in 2007, going chiefly to Canada and Mexico. 

The third category is exports of egg products. Egg products (dried or whole) are used mainly in 

the baking and prepared-foods industries. On an egg-equivalent basis, exports of egg products 

totaled 113 million dozen in 2007.

 

 
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3. Previous LPAI Prevention and Control Activities and Recent AI Incidents

The LPAI Program in place prior to the publication of the interim rule was developed 

with the collaboration of State government, industry, and the United States Animal Health 

Association (USAHA). It was initiated in FY 2004 following serious outbreaks of H7N2 LPAI

in Virginia (2002) and Pennsylvania (1996-1998). The Virginia outbreak resulted in 

depopulation of approximately 4.7 million birds and expenditure of approximately $65 million of

Commodity Credit Corporation (CCC) funds. The losses to the Virginia poultry industry were 

estimated at $140 million. 

The program has two elements, first, addressing prevention and control of LPAI from the 

perspective of the Live Bird Marketing (LBM) system, and, second, monitoring the commercial 

poultry industry through the National Poultry Improvement Plan (NPIP). The Program 

Standards for the LBM system include requirements for licensing of all LBMS participants, 

biosecurity education and training for all LBM employees, testing of all flocks entering the LBM 

system, monitoring and surveillance of all LBM system participants, trace backs for positives, 

and compliance actions for Program violations. 

The Uniform Standards for the Program in the LBM system were completed in October 

2004. In July 2004, the poultry industry approved an avian influenza monitoring plan in the

NPIP for commercial broilers, egg producers, and turkeys. The goals of both programs are the 

protection of the $25 billion commercial poultry industry from future episodes of LPAI and from 

the possible emergence of highly pathogenic avian influenza (HPAI). 

 In FY 2004, there were several cases of LPAI in the commercial poultry industry that 

likely originated from the LBM system, resulting in cooperative State and Federal interactions. 

These occurred in Maryland, Delaware, and Texas. There were also positive cases of HPAI 
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reported in Texas and in British Columbia at the Washington State boundary with Canada. The 

program successfully eliminated all of these infections before they were able to spread into other 

areas and cause significant incidents. APHIS received about $14 million in FY 2006 

appropriations for LPAI control efforts, including almost $2 million paid through cooperative 

agreements with 24 States for surveillance.

There have been several notable avian influenza incidents in the United States. On 

average, these outbreaks have been contained and eradicated while they are relatively small and 

before they could cause a significant economic impact to producers or consumers, and without 

significant intervention on the part of the government. We anticipate that future outbreaks 

would resemble the outbreaks that have occurred in the recent past. Therefore, we do not expect 

significant economic consequences. Examples of recent LPAI outbreaks are as follows: 

Delaware, 2004: A flock of 12,000 chickens were destroyed after they were found to 

have LPAI. 

Delmarva (Delaware, Maryland, Virginia) 2004: In mid-November 2004, two ducks on a 

farm in southern Worcester County tested positive for a form of the avian flu. Further 

testing has found no other ducks with the disease.

Maryland, 2004: In March, a four-house poultry farm in Maryland was diagnosed as 

avian influenza positive. The strain was similar to the strain involved in the 

Delaware/New Jersey outbreak. 

New Jersey 2004: In February, LPAI was detected at four live bird markets in northern 

New Jersey. 

Pennsylvania, 2004: LPAI was discovered in a layer flock in Lancaster County, 

Pennsylvania. The virus, an H2N2 strain, was discovered during routine surveillance 

testing for AI and the flock showed no clinical signs to indicate illness.

Texas, 2004: In June, it was confirmed that a flock of 14 birds in NE Texas was infected 

with the H7N3 strain of LPAI. Avian influenza was also detected in small flock in 

Hopkins County.

Texas, 2004: In May, a broiler breeder flock of 24,000 had to be destroyed after H7N3 

Avian Influenza was found in the flock.
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Virginia, 2007: In July, a turkey flock in Shenandoah County tested positive under preslaughter-testing conducted on poultry flocks. 

West Virginia, 2007: In April, avian influenza was detected on a turkey farm, requiring 

the slaughter of 25,000 birds.
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4. Indemnity Payments to Owners and Growers under the Final Rule

The Contract Growing System

Contract production dominates in the U.S. chicken, turkey, and egg industry.

9

Specific contract terms vary greatly from situation to situation. Growers of meat birds 

are compensated by owners at the end of the grow-out period; however, growers of breeding 

birds receive periodic payments during the production cycle. In some cases the production cycle 

can include regularly scheduled downtime. The compensation typically consists of three 

components: 1) a base payment (per-bird payment or a per-pound fee); 2) an incentive or 

performance payment to reward efficient producers; and 3) a disaster clause that may 

compensate the grower for losses resulting from natural disasters, such as flood, excessive heat, 

fire, or for damage or loss of potential production. Some contracts may have provisions under 

which contractors can compensate growers for losses arising from depopulation and others may 

not. In some contracts the grower may be responsible for the cost of depopulation. 

Owners 

place poultry on farms and the farmer (or contract grower) cares for the birds until they reach 

processing size (usually 6.5 weeks for broilers, and 17 – 24 weeks for turkeys). Typically the 

owner provides chicks, feed, veterinary supplies and services, management services, field 

personnel, and transportation for the birds to and from the farm. The grower provides labor, land 

and housing facilities, utilities, and other operating expenses, such as repairs and maintenance. 

USDA believes that it is important to formalize provisions to share indemnity payments 

between poultry owners and poultry growers, both of whom have productive assets imbedded in 

the value of the bird. “...Compensation to growers is an important issue because equity and 

potentially large sums of money are involved ... [T]he problem ...will continue to grow as 

 9 The information in this and the following paragraph is taken from Broiler Farms’ Organization, Management, and 

Performance by Janet Perry, David Banker, and Robert Green, ERS/USDA, AIB-748, pp. 1- 14.
20

financial commitment and cost responsibility become more separated from ownership, whether it 

be poultry or other type of livestock.”10

For example, a poultry company (hereinafter referred to as the company, owner, or 

contractor) may own large numbers of birds contracted out to many different farms where they 

are cared for by contract growers who provide the housing, equipment, labor, and other inputs. 

There is at present no formal requirement or procedure for ensuring that an indemnity payment is 

shared with the contract grower. Some contractor-owners may pass on a portion of the 

indemnity payment to the grower, depending on the terms of the contractual arrangement, but if 

the contractor-owner does not pass on an equitable amount to the grower, the grower loses 

production expenditures when flocks under his/her care are depopulated. 

Poultry Production Costs – An Illustrative Example

The chart below describes production costs in a typical contract grower broiler operation 

from week two through the end of the production cycle. It was developed from data in an 

Economic Research Service (ERS) study on the 1983/4 AI outbreak.11

 10 Economic Assessment of the 1983-84 Avian Influenza Eradication Program, USDA/ERS, Lasley, Short, Henson, 

p. 39.

 The numbers themselves 

are outdated and are not meant to reflect current costs and prices. They are presented for 

illustrative purposes to demonstrate the functional relationships between total broiler production 

costs, owner/contractor costs, and grower/producer costs over the production cycle. Total costs 

(yellow line, triangle symbol) = Contractor costs (pink line, square symbol) + Grower Costs 

(dark blue line, diamond symbol). Feed costs (turquoise line, “x” symbol), which are the 

owner/contractor’s largest expense and the most critical input, increase dramatically as the birds 

11 Lasley, F. A., Short, S. D., and Henson, W. L. 1985. Economic Assessment of the 1983-84 Avian Influenza 

Eradication Program. USDA, ERS, National Economics Division. 
21

grow. Grower’s costs (flat blue line at bottom) represent a small and relatively fixed percent of 

the cost of a bird. 

From this illustrative example we can see that if affected poultry are depopulated early in 

the production cycle (week 2), owner costs are relatively low. When birds are depopulated later 

in the cycle (for example, week 6), owner costs are far greater than grower costs, and the 

difference is largely a function of feed costs. We can also see that grower costs, such as poultry

house mortgage payments, remain more or less fixed throughout the production cycle. Again, 

these numbers are for illustrative purposes only, and relate only to broilers (not turkeys or 

breeders).

Cumulative Production Costs of Raising 

1000 Broiler Chicks in 1983/84 

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

1 3 5 7 9

Grow er

Costs

Contractor

Costs

Total Costs

Feed Cost

Calculation and Apportionment of Indemnity Payments

Under the final rule USDA will indemnify both owners and growers for losses arising 

from depopulation of birds affected with LPAI. The process of indemnifying growers and 

owners has three separate steps: 1) calculation of the per bird values based on the age and type of 

bird; 2) apportioning indemnity between growers and owners; 3) and payout procedures.

Calculation of Per Bird Values
22

Indemnity for the destruction of poultry infected with or exposed to H5/H7 LPAI will be 

based on the fair market value of the poultry, as determined by an appraisal. Poultry infected 

with or exposed to H5/H7 LPAI that are removed by APHIS or by an Official State Agency from 

a flock will be appraised by an APHIS official appraiser and a State official appraiser jointly, or, 

if APHIS and State authorities agree, by either an APHIS official appraiser or a State official 

appraiser alone. For laying hens, the appraised value should include the hen’s projected future 

egg production. 

Appraisals for poultry differ somewhat from appraisals for other livestock. In a typical 

livestock appraisal, an animal’s value is determined by finding sale prices for comparable 

animals – for example, a cow would be appraised by reviewing sales of cows of similar age, 

weight, and breed. This method is unworkable for most poultry, because the poultry are not sold 

at market but rather are owned by the same entity throughout the production process; the first 

price data available for poultry are often wholesale prices for carcasses or eggs. Therefore, 

APHIS economists have developed means to determine the fair market value of poultry at 

various stages of production by examining the costs involved in the production of the poultry and 

the wholesale prices of the resulting carcasses or eggs. These means have been used to 

determine compensation in outbreaks such as the outbreak of H5/H7 LPAI in Virginia and Texas 

in 2002.

APHIS appraises poultry during an H5/H7 LPAI outbreak by using a cost-of-production 

approach for commercial meat-type poultry and an income approach for commercial table-egg 

layers and breeding poultry. Each approach assumes that the market price of the commodity 

produced by the poultry is at least equal to the cost of its production; otherwise, owners would 

not make the decision to produce the poultry in the first place. In order to use these approaches, 
23

APHIS gathers cost data from several sources to determine industry averages. These are used to 

produce estimates of value that can be applied broadly.

The cost-of-production approach first determines the value of a meat-type bird at the time 

of slaughter by adding together the relevant costs associated with producing a meat-type bird: 

The cost of the chick, feed cost, contract grower cost (labor and facilities), fuel cost, litter cost, 

etc. If the wholesale value of processed meat-type birds (or bird parts) is greater than the 

production and processing costs to produce the processed meat-type birds (or parts), then a 

positive margin exists; the positive margin is equal to the difference between the wholesale value 

and the production and processing costs. Some of this margin can be allocated to a meat-type 

bird and is added to production costs to determine appraisal value. 

To determine the value of a meat-type bird younger than slaughter age, we use the bird’s 

age to determine what percentage of the production process that bird had completed, which we 

use as a proxy for the percentage total costs the bird has incurred and percentage of margin 

earned. (This method thus assumes that per-day production costs remain constant throughout the 

production process.) We then subtract the day-old chick value from the value at slaughter and 

multiply the difference by the percentage of the production process the bird had completed and 

add back in the day old chick value. This provides an estimate of the value of the meat-type bird 

that can be used as an appraisal.

However, the cost-of-production approach does not work as well for commercial tableegg layers or for breeding poultry, since they are worth the most at the beginning of their laying 

period, when their potential to produce eggs is greatest. As egg-producing birds continue to 

produce eggs, the number of eggs that they can be expected to produce in the future declines, 

until the birds are spent and must be disposed or salvaged. (The regulations include a statement 
24

that, for laying hens, the appraised value should include the hen’s projected future egg 

production; as discussed here, this is standard practice for APHIS. We are including this 

statement in the regulations for clarity.) Using the income approach, APHIS economists first 

derive the value of an egg (either a table egg or an egg laid to produce a chick) from wholesale 

carcass and egg prices. The amount of revenue the egg-producing bird could be expected to 

produce is then determined based on how long the bird has been laying eggs. Subtracting 

production costs from this figure produces the fair market value for the egg-producing bird.

Without adjustments, however, this approach assigns no value to a male breeding bird. 

To assign a value to a male breeding bird, the revenue from the breeding female must be 

allocated between male and female breeder birds. Fair market value for both male and female 

breeding birds is then this allocated revenue minus all relevant production costs.

There may be some circumstances in which APHIS would appraise poultry outside of 

this framework. For example, breeding poultry with exceptional genetics might need to be 

appraised independently in order to arrive at their fair market value.

Apportioning Payment Between Growers and Owners 

It is important to provide indemnity for contract growers because poultry are typically not 

grown by the person who owns them, but rather by contract growers; these individuals have the 

closest contact with the birds they are growing and consequently would be relied upon in the 

passive surveillance program to report any symptoms of illness in poultry that could suggest an 

infection with H5/H7 LPAI. However, if the contract grower does not have assurance that he or 

she will receive indemnity for costs associated with the possible destruction of the flock for 

which the contract grower is caring, the contract grower may not wish to report symptoms of 

illness in the flock, with the result that the diagnostic surveillance program would be less 
25

effective than it otherwise could be. Contracts may exist for the production and maintenance of 

eggs as well, and this program provides for the destruction of eggs in order to accomplish LPAI 

testing; therefore, similar incentives may exist in egg production. We believe it is important to 

ensure that all participants in the poultry industry with a stake in the continued health of the U.S. 

poultry stock are indemnified for costs associated with the eradication of outbreaks of H5/H7 

LPAI.

Therefore, § 56.8 provides that when poultry or eggs have been destroyed pursuant to 

part 56, the Administrator may pay claims to any party with which the owner of the poultry or 

eggs has entered into a contract for the growing or care of the poultry or eggs. Section 56.8 also 

sets out a formula for calculating the proportion of indemnity paid to the owner of poultry or 

eggs destroyed under part 56 that may be paid to the contract grower:

• The value of the contract the owner of the poultry or eggs entered into with another party 

for the growing or care of the poultry or eggs in dollars is divided by the duration of the 

contract as it was signed prior to the H5/H7 LPAI outbreak in days.

• This figure is multiplied by the time in days between the date the other party began to 

provide services relating to the destroyed poultry or eggs under the contract and the date 

the birds were destroyed due to H5/H7 LPAI.

If indemnity is paid to a grower under this section, the owner of the poultry or eggs will 

be eligible to receive the difference between the indemnity paid to the growers and the total 

amount of indemnity that may be paid for the poultry or eggs. For example, a meat-type chicken 

flock belonging to an owner who participates in the Plan is destroyed and disposed, and is 

appraised at $1,000. The flock was being grown by a contractor with a $500 contract on which 
26

half of the duration had elapsed. The contractor would be eligible to receive $250 in indemnity, 

and the owner would be eligible to receive the difference, $750.

Additionally, § 56.8 sets out provisions to prevent the double payment of contract 

growers. If a contract grower has received payment under the terms of the contract from the 

owner at the time the poultry are destroyed, the amount of indemnity for which the contract 

grower is eligible will be reduced by the payment amount the contract grower has already 

received. This will ensure contract growers are equitably indemnified while preventing them 

from being able to receive double payments under the system.

For losses resulting from the H5/H7 LPAI outbreak in Virginia and Texas, the 

Administrator was authorized to pay 100 percent of the costs contract growers incurred and up to 

75 percent of the total costs poultry owners incurred related to destruction and disposal of 

poultry affected by H5/H7 LPAI. This section does not structure indemnity payments in this 

manner. Under paragraph (b) of § 56.8, the Administrator is authorized to pay contract growers 

and other parties with contractual claims 100 percent of eligible costs related to the destruction 

and disposal of poultry infected with or exposed to H5/H7 LPAI, and 100 percent of eligible 

costs related to the destruction of eggs during testing of commercial poultry for H5/H7 LPAI 

during outbreaks, if the producers of the poultry or eggs participate in the voluntary control 

program and their State has met certain requirements; otherwise, the Administrator is authorized 

to pay 25 percent of those costs. Part 56.3(b) describes the eligibility criteria for 100 percent 

indemnity. 

Growers will recoup 100% of their costs regardless of the age at which the bird is 

depopulated. Grower payments will be based on historical contract settlement sheets or historical 

dollars per bird paid by companies in the past. Company/owner payments will equal 100% of 
27

the estimated value of the bird minus grower indemnity. A general outline for calculating owner 

and grower indemnity is as follows: 

Grower LPAI Indemnity

Per bird payment based appraisal value 

x number of birds depopulated (based on company and grower records)

= estimate grower payment if outbreak hadn’t occurred

- any company grower payment already received

= gross grower A.I. compensation

x percent of indemnity paid by USDA (100%)

= net grower LPAI indemnity from USDA

Owner LPAI Indemnity

 Indemnity value per bird (based on Compensation Plan Tables)

x number of birds depopulated

= total bird value loss

x percent of indemnity paid by USDA (100%)

= total indemnity

- net grower A.I. indemnity

= net owner A.I. indemnity from USDA

Numerical Example

Table 3 presents a simplified illustrative example of how indemnity payments for a single 

depopulated meat turkey hen would be apportioned between growers and owners. The second 

column shows the full estimated values of a turkey hen for weeks 1 – 18. The third column

shows the 100% cap. 
28

Table 3. —Turkey hen indemnity, illustrative numerical example of 

indemnity payments to owners and growers

Appraisal 

Value 

Turkey Hens 

(meat)

100% Cap 

on Turkey 

Hens

Less 

Compensation 

to Grower 

(Estimated)

Equals Net 

Compensation 

to Owner

(weeks)

0 $5.40 $5.40 1.59 $3.81 

1 $5.65 $5.65 1.69 $3.96 

2 $5.90 $5.90 1.79 $4.11 

3 $6.15 $6.15 1.89 $4.26 

4 $6.41 $6.41 1.99 $4.42 

5 $6.66 $6.66 2.09 $4.57 

6 $6.91 $6.91 2.19 $4.72 

7 $7.16 $7.16 2.29 $4.87 

8 $7.41 $7.41 2.39 $5.02 

9 $7.66 $7.66 2.49 $5.17 

10 $7.91 $7.91 2.59 $5.32 

11 $8.16 $8.16 2.69 $5.47 

12 $8.42 $8.42 2.79 $5.63 

13 $8.67 $8.67 2.89 $5.78 

14 $8.92 $8.92 2.99 $5.93 

15 $9.17 $9.17 3.09 $6.08 

16 $9.42 $9.42 3.19 $6.23 

17 $9.67 $9.67 3.29 $6.38 

18 $9.92 $9.92 3.39 $6.53 

Grower indemnity (column 4) is estimated to start at $1.59 and increase at a constant rate 

in this example. This is only an example to show how payments will be calculated. In reality 

cost information to calculate payments will be taken from historical payout documents. Owner 

indemnity is the difference between the 100% compensation cap and net payout to the grower. 
29

Other Costs

In addition to costs for indemnity, USDA may also reimburse producers for costs 

associated with cleaning and disinfecting (C&D) and disposal. Costs that are included in 

calculating indemnity for C&D are fuel, equipment, cleaning supplies and equipment, and labor. 

Since the interim rule was implemented, APHIS has paid these costs on a few occasions. 

However, these costs vary widely and are, thus, not reported here. The variations may be 

attributed to factors such as the type of production, where the operation is located, the size of the 

operation, the company involved in the C&D, and other factors. The cost is highly dependent on 

the particular characteristics of the production operation, and an average of the costs paid to date 

would not provide an accurate estimate of C&D costs for a given operation. 

It is important to note that the final rule will explicitly provide for indemnity for C&D for

LPAI infected or exposed birds that are moved for controlled marketing and sold through normal 

channels. 

Other than for the fair market value of depopulated birds, only C&D and disposal costs 

will be considered for reimbursement.
30

5. Benefits and Costs of the Rule

In general, benefits of containing the spread of a livestock or poultry disease fall into 

three categories: 1) avoided producer losses from disease morbidity and mortality; 2) avoided 

consumer losses due to price increases resulting from decreased supplies (net of avoided gains to 

producers attributable to the price increases); and 3) avoided reduced demand if markets are 

closed to affected commodities. LPAI is rarely fatal to infected birds. However, the longer an 

outbreak is not controlled, with more birds becoming infected with H5/H7 LPAI, the more likely 

it is that the virus may mutate into a highly pathogenic form. The more timely and well-planned 

the response to an LPAI occurrence, the less likely it will result in harmful price and trade 

effects. This final rule has the objectives of reducing the risk of H5/H7 LPAI outbreaks, and 

improving responsiveness and eradication measures at the grower, industry, and State levels 

when the disease does occur. 

The groups who enjoy the primary benefit of a disease eradication campaign are 

consumers and those owners/growers whose flocks have remained healthy. Owners and growers 

of the depopulated flocks bear the primary burden of an eradication effort, if not indemnified. In 

addition to the value of lost production, the owners/growers of affected birds may also bear the 

costs of cleanup, disinfection, transportation, forgone income, and other financial hardships.

The benefits of this final rule, from reducing the risk of LPAI outbreaks and minimizing 

losses should an outbreak occur, are expected to exceed the costs to industry and States of 

participating in disease prevention efforts. Under the rule, producers will be required to keep 

flocks and facilities clean, slaughter plants will be required to conduct sampling, and States will 

be required to conduct annual inspections and develop response and containment plans. APHIS 

will provide full indemnities for specific costs to participating producers and States should an 
31

outbreak occur.

While we have not prepared a quantitative assessment of the costs and benefits of 

avoiding a widespread HPAI outbreak, we do provide examples of indemnity payouts taken from 

the 2002 LPAI outbreaks and a review of a cost benefit analysis of the 1983/84 highly

pathogenic avian influenza outbreak, the findings of which, particularly with respect to consumer 

losses, reflect the type of effects expected to be associated with this final rule. With regard to the 

2002 LPAI outbreaks, we estimate the effect that the final rule would have had on compensation 

costs had it been in place at that time. 

Virginia and Texas Outbreaks in 2002

Table 4 illustrates the cost of compensation for the 2002 LPAI outbreaks in Virginia and 

Texas. While this final rule differs from the rules under which compensation was paid in 2002, 

the 2002 outbreak provides a point of comparison for costs that would be incurred under the new 

final rule. The table is based on compensation of owners (Company Compensation) of 37%. 
32

Table 4. —APHIS estimates of compensation for industry losses using the standard USDA formula

Company 

Compensation

Grower 

Compensation

Total 

Compensation

(approximately 37% 

compensation)

(at 100% 

compensation)

Chicken number

Pullets and Breeders 565,952 $3,202,966 $3,010,865 $6,213,830 

Broilers 862,511 376,558 215,628 592,185

Sub Total Chicken 1,428,463 $3,579,523 $3,226,492 $6,806,016 

Turkey 

Breeder Toms (3) 28,926 $1,156,490 $0 $1,156,490 

Breeder Hens 395,860 15,585,093 5,664,750 21,249,843

Commercial Toms 1,038,532 2,650,463 2,087,450 4,737,913

Commercial Hens 1,882,720 4,328,731 2,993,524 7,322,255

Sub Total Turkey 3,346,037 $23,720,777 $10,745,725 $34,466,502 

 Grand Totals 4,774,500 $27,300,300 $13,972,217 $41,272,517 

1 Source: Stephen Ott, USDA/APHIS/CEAH. Note: Columns may not sum due to rounding error.

2 Based on the composition of flocks depopulated as of 5/10/02.

3 No contract grower compensation for toms because toms are raised on company-owned farms 

without contract growers.

Based on experiences in North Carolina, which has disease response measures in place 

similar to those required by the final rule, APHIS estimates that costs associated with an 

outbreak of the size that occurred in Virginia in 2002 could be reduced under the final rule. 

These cost savings would be attributable to the early detection and rapid response provisions of 

the program. In other words, poultry losses might have been only one-fourth of what actually 

occurred. We estimate that the savings would have been approximately $11 million assuming a 
33

75 percent reduction in egg losses and the number of birds depopulated.

12

A second consideration of the effect the final rule could have had in minimizing losses 

due to the 2002 Virginia outbreak estimates that, with the rule, the disease might have been 

contained within a very limited area, namely, five turkey breeder farms belonging to the same 

company that had a total population of approximately 120,000 birds. If this were the case, only

those 120,000 birds would have been lost, compared to the 147 million birds that actually were 

depopulated.

 For smaller outbreaks 

that involve just a few flocks and can be relatively quickly brought under control, such as 

occurred in Texas in 2002, the final rule is not expected to result in the depopulation of fewer 

poultry. Also, the final rule may increase Federal costs if the number of small outbreaks 

detected increases. 

USDA Economic Research Service Cost Benefit Analysis of 1983/84 Outbreak13

While this rule concerns LPAI, an HPAI outbreak in 1983/84 provides evidence of the 

types of economic costs and benefits associated with a widespread AI outbreak. As noted 

previously, recent outbreaks have been relatively small. We do not expect the same magnitude 

of benefits and costs as described in the ERS study, particularly because it is based on a HPAI 

event. However, the study does illustrate that even with payment of indemnities, a program to 

eradicate an avian influenza outbreak does pass a benefit-cost test: program and indemnity costs

are small when compared to losses avoided (consumer losses from increased prices). The ERS 

study looked at consumer price effects but not at trade impacts, which are also likely to be 

 12 In preparing this representative example, we added the loss of two million table egg layers to the poultry losses 

reported for the 2002 Virginia outbreak. Total compensated costs--including indemnity, euthanasia and disposal, 

and cleaning and disinfection—would total $27.77 million under current regulations, compared to $16.97 million 

under the final rule, assuming a 75 percent reduction in depopulated poultry and egg losses under the final rule. 

13 Lasley, F. A., Short, S. D., and Henson, W. L. 1985. Economic Assessment of the 1983-84 Avian Influenza 

Eradication Program. United States Department of Agriculture, Economic Research Service, National Economics 

Division. Washington, D.C.: U.S. Government Printing Office.
34

significant. In addition, the ERS study discussed short-term producer gains qualitatively, but did 

not attempt to estimate them. The scenarios and conclusions of this study are presented in brief 

below. 

The ERS cost benefit analysis of the 1983-1984 Federal-State AI eradication program 

found that: 1) benefits of the AI indemnification program substantially exceeded compensation 

and other program costs; and 2) Federal involvement was preferable to allowing AI to spread 

unchecked throughout the entire Eastern United States. 

Government program costs of eradicating the 1983/84 AI outbreak totaled almost $55 

million -- $38 million for indemnities and the rest for other program costs. In the short term (six 

month horizon), supply shortages related to the outbreak caused U.S. consumers to pay $349 

million more for eggs, fowl, broilers, turkeys, pork, and beef. Producers affected by AI suffered

losses as well. However, increased prices due to the effects of AI benefited producers who were

not affected. The ERS study discusses short term producer gains but did not attempt to estimate 

them.

The ERS study estimated that if AI had spread to the Delmarva Peninsula, direct 

producer losses would have approached $70 million and consumer losses due to increased prices 

would have approached $492 million. Government indemnity and other program costs would 

have totaled $69.7 million in the Delmarva Peninsula scenario.

The ERS study estimated that losses from an uncontrolled AI outbreak affecting the 

entire Eastern United States would have approached $6.1 billion in 1984. This total included 

$500 million in direct producer losses and almost $5.6 billion in increased consumer prices for 

eggs, fowl, broilers, turkeys, pork, and beef. Effects on trade were not counted in this total. It is 

important to note that ongoing surveillance is designed to ensure that an uncontrolled outbreak 
35

does not occur. Recent outbreaks have been relatively small events; the costs of these outbreaks 

do not approach the costs that an uncontrolled outbreak would incur.

State and Industry Expenditures

In addition to costs borne by the Federal government, States and firms will incur costs by 

participating in this voluntary program. In fact, until the H5/H7 LPAI program was considered, 

no Federal funds were supplied to the States for the implementation and enforcement of NPIP 

provisions. It is estimated by the NPIP that states supplied approximately 29 percent and 

industry supplied 70 percent of NPIP costs, and only 1 percent was supplied by the Federal 

government. In the event that APHIS did not receive appropriated funds to conduct LPAI 

surveillance, these ratios would likely prevail for the commercial poultry program. Georgia, for 

example, spent just under $5 million for ongoing surveillance in 2007.

With the rule, we expect that the States and industry will continue to bear most of the cost 

burden. While APHIS has recently provided funding to States for ongoing LPAI surveillance 

under cooperative agreements, these far from cover the total State and industry cost of 

participation in the program. For example, the NPIP budgeted $2 million in fiscal year 2006 for 

cooperative agreements with 24 States for LPAI surveillance in commercial poultry, but the State 

costs for surveillance for LPAI were reported to be $15 million, while the industry costs were 

reported to be $25 million based on the costs of the testing conducted in the NPIP.

14

In our judgment, the States that already have control measures in place to address H5/H7 

LPAI may be able to adapt those measures to meet the guidelines that this final rule sets out for 

surveillance and emergency response measures with few or no changes. We also expect that 

 14These totals are derived from the cost of 4,000,000 individual tests for avian influenza (the number administered 

under the cooperative agreements), including sample collection, sample transportation, laboratory tests, and 

information collection and reporting. The figures were derived from calculating the costs of laboratory tests, and 

information collection for the States, and sample collection and sample transportation to the laboratories for the 

industry. Since the States charge fees for laboratory costs as direct costs, they have been added to the industry costs.
36

because this is a voluntary program, firms are in the best position to judge whether or not the 

benefits they derive from the program exceed the costs they incur by participating. 
37

6. Final Regulatory Flexibility Analysis 

The Regulatory Flexibility Act requires that agencies consider the economic impact of 

rule changes on small businesses, organizations, and governmental jurisdictions. Section 604 of 

the Act requires agencies to prepare and make available to the public a final regulatory flexibility 

analysis (FRFA) describing any changes made to the rule as a result of comments received and 

the steps the agency has taken to minimize any significant economic impacts on small entities. 

Section 604(a) of the Act specifies the content of a FRFA. In this section, we address these 

FRFA requirements.

Objectives and Need for the Rule

This action is being taken to limit the damage that would result from occurrences of low 

pathogenic avian influenza. This final rule amends an interim rule that established a voluntary 

control program within the National Poultry Improvement Plan (NPIP) for the H5/H7 subtypes 

of low pathogenic avian influenza (H5/H7 LPAI) in commercial table-egg layers, meat-type 

chickens, and meat-type turkeys. Until the publication of the interim rule, the NPIP has only 

addressed disease issues, including avian influenza, in flocks of breeding poultry; to 

accommodate the addition of commercial poultry to the NPIP, the interim rule adopted as final 

by this rule established a new part 146, titled “National Poultry Improvement Plan for 

Commercial Poultry,” in 9 CFR chapter I, subchapter G.

The interim rule also established a new part 56, titled “Control of H5/H7 Low Pathogenic 

Avian Influenza,” in 9 CFR chapter I, subchapter B, to provide for the payment of indemnity for 

costs associated with the eradication of H5/H7 LPAI in breeding flocks of waterfowl, exhibition 

poultry, and game birds and both commercial and breeding flocks of table-egg layers, meat-type 

chickens, and meat-type turkeys. To provide producers with an incentive to participate in the 
38

voluntary control programs for avian influenza, this final rule provides for the payment of 

indemnity to participants in the voluntary control program for 100 percent of costs associated 

with eradication of H5/H7 LPAI. Others eligible for 100 percent indemnity are described in 

Part 56.3(b) of the rule. Nonparticipants in the voluntary control programs may receive 

payment for 25 percent of costs associated with the eradication of H5/H7 LPAI in commercial 

and breeding poultry under this part.

The National Poultry Improvement Plan (NPIP, also referred to below as "the Plan") is a 

cooperative Federal-State-industry mechanism for controlling certain poultry diseases. The Plan 

consists of a variety of programs intended to prevent and control certain poultry diseases. 

Participation in all Plan programs is voluntary, but flocks, hatcheries, and dealers of breeding 

poultry must first qualify as "U.S. Pullorum-Typhoid Clean" as a condition for participating in 

the other Plan programs. 

The Plan identifies States, flocks, hatcheries, and dealers that meet certain disease control 

standards specified in the Plan's various programs. As a result, customers can buy poultry that 

have tested clean of certain diseases or that has been produced under disease-prevention

conditions. Prior to the publication of this final rule, the regulations in 9 CFR parts 145 and 147 

(referred to below as the regulations) contained the provisions of the Plan.

The new part 56 the interim rule established provides indemnity for the costs of purchase, 

care and maintenance, destruction, and disposal of poultry that have been infected with or 

exposed to H5/H7 LPAI; purchase of any eggs destroyed during testing for H5/H7 LPAI; 

surveillance, vaccination, monitoring, and euthanasia associated with poultry that has been 

infected with or exposed to H5/H7 LPAI; and cleaning and disinfection of premises, 

conveyances, and materials that were exposed to H5/H7 LPAI.
39

Summary of Significant Issues Raised During Comment Period

There were no significant issues raised during the comment period that have direct 

bearing on the economic impacts of the interim rule or the final rule.

Description and Estimated Number of Small Entities Regulated

The Small Business Administration (SBA) defines small poultry operations as those 

earning gross receipts of no more than $750,000 annually.15 The poultry companies/integrators 

that own the birds are all large, vertically integrated companies that do not meet the Small 

Business Administration (SBA) small-entity criterion. According to the 2002 Census of 

Agriculture, in 2002, 18,621 farms sold 202 million layers. 16 Of these, 15,220 (or 81%) sold 

fewer than 3,200 layers 20 weeks old and older. Farms with sales of fewer than 3,200 birds 

accounted for a total of 781,614 birds sold, or 0.3%. In 2002, a total of 32,006 farms sold 8.5 

billion broilers. Of these, 10,869 (or 34%) sold fewer than 2,000 broilers and other meat-type 

chickens. Out of the 8.5 billion broilers sold, farms with sales of fewer than 2,000 broilers 

accounted for 1.1 million birds sold or approximately 0.01%. These figures give a rough 

estimate of the numbers of farms that might qualify as small entities. It is not clear if these farms 

are contract growers or a segment of the industry outside the vertically integrated portion of the 

poultry industry. The vertically integrated part of the market accounts for about 90 percent of 

poultry production.

17

 15 Small Business Administration, 

 The majority of farms affected by this rule are likely to be considered 

small according to SBA guidelines. However, any costs incurred as a result of this rule are 

expected to be small and will be incurred on a voluntary basis. 

http://www.SBA.gov/size. This includes small broiler operations (NAICS 

112320), small turkey operations (NAICS 112330), small hatchery operations (NAICS 112340), and other small 

poultry operations (NAICS 112390).

16 http://www.nass.usda.gov/census/census02/volume1/us/st99_1_027_029.pdf 17 By 1977, contracts and vertical integration accounted for over 85 percent of broiler, turkey, and egg production. 

Today, these arrangements account for over 90 percent of production in each of the three sectors. 

(http://www.ers.usda.gov/AmberWaves/June03/findings/USHogandPoultry.htm)
40

The SBA defines small poultry processing plants as those plants with no more than 500 

employees.18

Description and Estimate of Compliance Requirements

 It is unclear at this time exactly how poultry processing plants will be affected by 

the final rule, and if affected, the number that are likely to be considered small. 

Participating flocks are required to be separated from non-participating flocks. 

Additionally, poultry equipment, poultry houses, and land in the immediate vicinity of the 

poultry houses must be kept in sanitary conditions. Slaughter plants will only be allowed to 

participate if they are under continuous inspection by the Food Safety and Inspection Service. 

Plants must also follow the relevant special provisions for sample collection and flock 

monitoring. Included in these provisions is testing of meat-type chickens and meat-type 

chickens. This testing may be done either at the slaughter plant or at the flock level. In the case 

of table-egg layers, testing is performed at the flock level either within 30 days of disposal or 

once every 12 months. While these compliance requirements may increase costs to producers 

and slaughter facilities, the program is voluntary, so participants will only take on this burden if 

they feel the program benefits them.

Description of Steps Taken to Minimize Significant Economic Impacts on Small Entities

Since the program is voluntary, the Agency does not expect the final rule to result in 

significant economic impacts on small entities, and has therefore not taken any steps to minimize 

such impacts.

 18 Small Business Administration, http://www.SBA.gov/size. Small poultry processing operations (311615) include 

establishments engaged in slaughtering poultry and small game and/or preparing processed poultry and small game 

meat.