1 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

. D epartment of A griculture (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 dep opulation of birds affected with the H5 and H7 subtypes (H5/H7 LPAI )

. In general, benefits of containing the spread of a livestock or poult r y disease fall into three categories: 1) avoided producer losses from disease morbidity and mortality; 2) avoided

c onsumer 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 occurrenc e, 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 are2 consumers and those owners/growers whose flocks have remained healthy. Owners and growers of the depopulated flocks bear the primary burden of an era dication 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 1 9 83

- 84 outbreak. A 2002 o utbreak in Virginia also exemplifies the types of costs incurred due to an avian influenza incident. While t hese 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 outbreak s 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 AP HIS 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 cost s to producers and States of parti cipating in the program’s disease prevention efforts. Under the rule, producers w ill be required to keep flocks and facilities clean, slaughter plants w ill be required to conduct sampling, and States w ill be required to conduct annual inspections and devel op response and containment plans. APHIS w ill 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 appropria tions for
LPAI control efforts, including approximately $ 2 million paid through cooperative agreements with 24 States for ongoing surveillance.3 1. Introduction Contents of th e Analysis This regulatory impact analysis has six sections. In this introduct ion, 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 se ctors of the U.S. poultry industry in terms of production and trade. In section 3, we discuss the cur rent 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 n umerical example of the normal pattern of cost

- sharing between owners and growers

. We then explain the procedures by which indemnity payments will be c alculat ed and apportion ed 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 di s ease 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 R ule 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 clean ing 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 are4 identical to the costs for which indemni ty was provided for the LPAI outbreaks in Virginia and
Texas

. 1,2
T he 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 pro vides 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 w ith an outbreak. Although the November 2002 1 and July 2003 2

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 [Do cket 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 Onlin e 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 (Vo lume 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 . The y may also provide for p ayment to the States of the cost of administering the vaccine. V accination 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, t he 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 mi llion. 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.
T he 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 Sta tes 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 e ligible 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 ser ious 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 very6 similarly to HPAI by member countries. Therefo re, 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 poult ry 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 pa rticipate 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 indemni fy owners and contract growers for losses due to LPAI outbreaks in Vi rginia 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
D isease indemnification programs are usually developed to address a market failure that

occur s w hen 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. P ayment of indemnity encourage s individuals to participat e in depopulation program s, even when market signals might suggest that the individual should do otherwise. Payment of indemnities corrects for market failure by accountin g for7 negative externalities associated with residual pockets of disease. Alternatively, when individual s act against their own economic interests by participating in depopulation program s that confer positive externalities or benefits on other producers w hose flocks remain disease

- free, the
F ederal government can correc t for market failure after

- the

- fact through paying indemnity

. Another key issue for th is final rule is that the grower of the bird is not the owner of the bird, and that both the owner of th e 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, p rivate 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 b y 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 req uested. 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
S tate boundaries , the magnitude and scale of a disease control program typic ally require s 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

– for8 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 wa s 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 indem nity 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.) F or 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.) Howeve r, 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 inde mnity, 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

.9 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 whe ther 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
pu t out of business (as shown in the Connecticut example). The availability of 100 percent indemnity allow s 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
pro ducers 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. T hat program p laces a much greater cost burden on States and industry than it does on APHIS. W hile 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.10 indemnity incentives provided by the interim rule expect that a larger proportion of States and industry would participate than the proportion that currently participates in LPAI surveillance

— in p art 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 tha t 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 men tioned 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 g roups of entities from whom the rule is designed to elicit participation, we assume that it will be effective at doing so. W e 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.11 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 20 07 was $ 31.9 billion. 6

Broiler production is concentrated in a group of States stretch ing from Delaware, south along the Atlantic coast to Georgia, then westward through Alabama, Mississippi, and Arkansas.
In 200 7 , 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 Carolin a 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

.12 U.S. turkey production in 200 7 totaled 2 7 2 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 expo rts 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 200 7

.13 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 egg

producing States in 2007 were as shown in Table 2.14 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 prod uction, 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
Trade 8
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. T he larg est 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.15 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 55 4 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 , ship ments 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 bird s. 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

.16 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 w as 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.
T he program has two elements, first , addressing prevention and control of LPAI from the perspective of the L ive B ird M arketing (LBM) system , and , second, monitoring the commercial poultry industry through the National Poultry Improvement Plan (NPIP). The P rogram Standards for the LBM s ystem 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 particip ants, trace backs for positives, and compliance actions for Program violations. The Uniform Standards for the Program in the LBM s ystem 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 p rograms 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 s ystem , resulting in cooperative State and Federal interactions. These occurred in Maryland, Delaware, and Texas. There wer e also positive cases of HPAI17 reported in Texas and in British Columbia at the Washington S tate boundary with Canada. The program successfully eliminated all of these infections before they were able to spread into other areas and caus e significant incide nts. 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 Uni ted 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 govern ment. 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 (Dela w are, 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. F urther testing has fou nd 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 D elaware/New Jersey outbreak. New Jersey 2004: In Februar y, LPA I 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 th e flock showed no clinical signs to indicate illness.
Texas , 2004: In June, i t was confirmed that a flock of 14 birds in NE Texas was infected with the H7N3 strain of LPAI. Av ian 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

.18 Virginia, 2007: In July, a turkey flock in Shenandoah County tested positive under pre

slaughter

- 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.19 4. Indemnity Payments to Owners and Growers under the Fin al 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

- pou nd 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 prod uction. 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 fo r 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 housin g facilities, utilities, and other operating expenses, such as repairs and maintenance.

USDA believes that it is impor tant to formalize provisions to share indemnity payments between poultry owners and poultry growers, both of who m have productive assets imbedded in the value of the bird. “...C ompensation to growers is an important issue because equity and potentially larg e sums of money are involved

... [T] he problem ...will co ntinue 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 Gre en, 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 referr ed 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 requir ement 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 c urrent 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 L asley , F. A., S hort , S. D., and H enson , W. L. 1985. Economic Assessment of the 1983

- 84 Avian Influenza Er adication Program. USDA, ER S , 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 Und er 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) c alculation of the per bird values based on the age and type of bird; 2) apportioning indemnity between growers and owners ; 3) and p ayout p rocedures

. Calculation of Per Bird Values22 Indemnity for the destruction of poultry infected with or exposed to H5/H7 LPAI will be based on the fair market value of th e 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 appr aisals 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,
A PHIS 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 ha ve been used to determine compensation in outbreaks such as the outbreak of H5/H7 LPAI in Virginia and Texas in 2002. APHIS apprais es poultry during an H5/H7 LPAI outbreak by using a cost

- of

- production approach for commercial meat

- type poultry and an inco me 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 produc e 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 fi rst 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 slaugh ter 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 t he 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 table

egg 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 statement24 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 thi s 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

- producin g 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 a ssigns 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 alloc ated 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 t o 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 indi viduals 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 contra ct 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, wi th the result that the diagnostic surveillance program would be less25 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 associate d 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 c ontract 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 multip lied 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 participate s 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 which26 half of the duration had elapsed. The contractor would be eligible to receive $250 in indemnity,

a nd 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 ti me 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 th em 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 o f 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 c osts. Part 56.3(b) describes the eligibility criteria for 100 percent indemnity

. G rowers will recoup 100% of their costs regardless of the age at which the bird is depopulated

. Grower payments will be based on historical contract se ttlement sheets or hi storical dollars per bird paid by companies in the past. Company/ o wner payments will equal 10 0% of27 the estimated value of the bird minus grower indemnity

. A general outline for calculating owner and grower indemnity is as follows:
Grower LPAI Indemnit y P er 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 indem nity paid by USDA ( 100 %)

= total indemnity

- net grower A.I. indemnity

= net owner A.I. indemnity from USDA Numerical Example
T able 3 presents a simplified illustrative example of how indemnity payments for a single depopulated meat turkey hen wou ld be apportioned between growers and owners. The second column shows the full estimated value s of a turkey hen for weeks 1

– 18. The third column shows the 10 0% 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 $8.1 6 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 ) i s estimated to start at $1.59 and increase at a constant rate in this example . This is only an example to show how payments w ill be calculated. I n reality cost information to calculate payments w ill be taken from historical payout documents. Owner indemn ity is the difference between the 10 0% 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 tha t 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 re ported 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 charact eristics 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. Benefit s and Costs of the Rule In general, benefits of containing the spread of a livestock or poult r y 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, wit h 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

e ffects. 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 be nefit 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 minimiz ing 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 an31 outbreak occur. While we hav e 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 high ly pathogen ic 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 rul e would have had on compensation

costs had it been in place at that time. Virginia and Texas Outbreaks in 2002 Table 4 illustrate s the cost of compensation for the 2002 LPAI outbreak s in Virginia and Texas. While this final rule differs from the ru les 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.

— AP HIS 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 Breeder s 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 gr ower 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 cos ts 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 los ses might have been only one

- fourth of what actually occurred. We estimate that the savings w ould have be en approximately $11 million assuming a33 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, name ly , 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 j ust 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 E conomic Research Service Cost Benefit Analysis of 1983/84 Outbreak 13 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 previou sly, recent outbreaks have been relatively small . W e 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 inde mnities, 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 n ot 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 ind emnity, 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 L asley , F. A., S hort , S. D., and H enson , 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. Gov ernment 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.
T he 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

mont h 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 suffer ed losses as well. Howeve r, increased prices due to the e ffects of AI be nefit ed 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 mill ion 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 A I outbreak affecting the entire Eastern U nited S tates 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 outbreak35 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, u ntil 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 cost s, 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 agr eements, 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 S tate 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

14 These 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 informa tion 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 char ge 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 impa ct 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 r ule 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. Object ives 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, th e interim rule adopted a s final by this rule establishe d a new part 146, titled “National Poultry Improvement Plan for Commercial P oultry,” in 9 CFR chapter I, subchapter G.
Th e interim rule also establishe d 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 er adication 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 th e38 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 i ndemnity 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 Nation al 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 Sta tes, 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 establish ed provide s 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 w ith 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 i ssues 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 operat ions 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

accoun ted 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 vertica lly 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, T he 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 turke y 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 o ver 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 exa ctly 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

- part icipating 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 Administratio n, 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.