### Analysis in Support of Certification that the Rule will not

have a Significant Economic Impact on a Substantial

Number of Small Entities Proposed Rule Pepper Imports from Panama

10 - 002 - 1

U.S. Department of Agriculture Animal and Plant Health Inspection Service

April 2010

### Summary

This analy sis examines impacts for U.S. small entities of a rule that would allow pepper imports from Panama
. Available data show that Panama exported 29 MT and 4 MT of peppers to the rest of the world in 2006 and 20 07, respectively . The United States does not have a history of pepper imports from Panama. We assume the pattern of import s from Panama would be similar to those of Costa Rica, El Salvador, Guatemala and Honduras, which are currently allowed to export peppers to the United States. These countries in aggregate export ed 4.1 percent of their production to the United States in 2008 . Among the group, Honduras exported the highest share of its production (9.65 percent)

. Therefore, we model three levels of pepper exports to the United States from Panama, of increasing magnitude: (i) an amount equal to the quantity Panama exported to all countries in 2006 (29 MT); (ii) an amount equal to 4.1 percent of its production (112 MT); and (iii) an amount equal to 9.65 percent of its production (261 MT). The largest assumed level of U.S. imports (scenario iii) is less than 0.02 percent of average annual U.S. consumption. Even when assuming the largest import quantity and no displacement of imports from other countries , th e welfare loss for U.S. small

- entity producers would be equivalent to less than 0.05 percent of their average revenue. U.S. producers of peppers are predominantly small. Other small entities that could be affected by

the rule include fresh pepper importer s . Based on available information, the rule would not have a significant economic impact on a substantial number of small entities.

### Introduction

This analy sis provides the basis, as required by the Regulatory

Flexibility

Act, for certification by

the APHIS Administrator that the proposed rule, if promulgated, would not have a significant economic impact on a substantial number of small entities. Th e anal ys is examines impacts for U.S. small entities of a rule that would allow fresh pepper imports from Panama
. The rule would amend 7 CFR 319.56, and is part of a continuing program to allow the importation of foreign agricultural products that APHI S has determined are without significant risk of introducing exotic plant pests into the United States. The Regulatory

Flexibility

Act requires agencies to evaluate the potential effects of their proposed and final rules on small businesses, small organizations and small governmental jurisdictions. Section 60 3 of the Act requires an agency to prepare an initial regulatory flexibility anal ys is ( I RFA) that describes the expected impact of the rule on small entities and any significant alternatives to the proposed rule which accomplish the stated objectives and that minimize any significant economic impact of the p roposed rule on small entities . In place of the I RFA, the head of the agency may certify that a rule will not have a significant economic impact on a substantial number of small entities. This analy sis provides the factual basis for certification of this rule. As background, we provide a brief overview of pepper production and trade by the United States and Panama. This is followed with an estimate of price and welfare effects of the rule based on assumed levels of pepper imports from Panama. We then describe the expected impact on small entities.U.S. Pepper Production and Trade

The United States is a major pepper producer and importer. The U.S. produced 919,532 metric tons (MT) of fresh peppers valued at $680 million in 2009, while imports that ye ar totaled 1,380,613 MT. Fresh pepper production occurs in many States. The top eight States (CA, FL, GA, MI, NM, NJ, NC, and OH) accounted for 98 percent of total production in 2009. 1 As shown in table 1, U.S. pepper production has fluctuated over recent years, while there has been an upward trend in consumption. The most recent data show production averaged 979,711 MT between 2003 and 2009. Consumption increased over this same period, from 1,850,026 to 2,206,733 MT, and U.S. imports increased from 993 ,151 to 1,380,613 MT. Mexico is the source of the largest share of imports (83.5 percent in 2009), followed distantly by Canada (11.4 percent) and the Netherlands (2.7). These three countries accounted for 97.6 percent of total pepper imports. The Unite d States was a net importer throughout the period, with average annual imports ( 1,206,951 MT) dwarfing exports ( 109,242 MT). Imports represent 58 percent of consumption. Imports from Panama are expected to be very small compared to an already l arge import base

. Panama’s total production averaged 2,705 MT between 2003 and 2008.

1 USDA/NASS, Vegetables 2009 Summary, January 2010.Table 1

-- U.S

. Fresh Pepper: Supply , Utilization and Price, 2003

- 200 9
Year Production in Metric Tons Consumption

in Metric Tons Wholesale

Price in $ per MT Exports

in Metric Ton s Imports in

Metric Tons 2003 992,742 1,850,026 1,191 135,867 993,151 2004 1,039,236 1,964,896 1,962 132,945 1,058,605 2005 1,024,721 2,049,862 1,310 122,142 1,147,283 2006 983,262 2,144,852 1,473 101,179 1,262,769 2007 950,240 2,116,396 1,623 9 2,576 1,258,732 2008 948,245 2,209,173 1,833 86,573 1,347,501 2009 919,532 2,206,733 1,569 93,412 1,380,613 7
- Year Average (2003

- 2009) 979,711 2,077,420 1,543 109,242 1,206,951 Sources: Production and consumption data are from USD A ERS, Vegetables and Melons Situation Outlook Yearbook/VGS

- 2010/January , 2010, while export and import data are from USDA FAS

. U.S. wholesale price data are from USDA AMS. Panama Pepper Production and Trade Production of peppers in Panama increased from 2,645 MT in 200 3 , to 2,765 MT in 200 8. The average quantity of peppers produced by Panama during the period was 2,705 MT. Panama has had sporadic pepper exports. It exported 29 MT in 2006 and 4 MT in 2007. 2 Most of the exports went to Canada. 3 The rule is in response to a request from the Panama for market access for the export of peppers to the United States. The re is no history of pepper exports from Panama to the United States

. Given the relatively small quantity of peppers produced in Panama, exports to the United

2 UN/FAO, Trade (FAOstat@fao.org) 3 Global Trade Atlas, Global Trade Information Services, Inc., country e dition, March 10, 2010.States are expected to be minor. Even if all of Panama’s pepper production were imported, an

unlikely situation, it would represent onl y 0.13 percent of U.S. pepper consumption. 4 The proposed rule would add Panama to the list of C entral American countries approved to export peppers to the United States. The mitigation requirements remain unchanged with the addition of Panama. For peppers (other than Capsicum pubescens ) from areas free of Mediterranean fruit fly , the sy stems appro ach consists of a preharvest inspection for the pests of concern, and a ph yt osanitary certificate. For regions in which Mediterranean fruit fly does exist, the peppers must be grown in registered production sites using pest exclusionary greenhouses, trappi ng for Medfly , and issuance of a phy tosanitary certificate. For Capsicum pubescens peppers from areas where Mexican fruit fl y exists, the peppers must be grown in registered production sites with an APHI S approved trapping program, the peppers must be pac ked in pest exclusionary

packinghouses, and a phy tosanitary certificate is required. Impact of Fresh Pepper Imports We estimate the impact of pepper imports from Panama on U.S. production, consumption, and prices using a non

- spatial partial equilibrium m odel. The data used were obtained from the Foreign Agricultural Service (FAS) and the Global Trade Atlas

. 5 U.S. pepper import prices are used as a surrogate for Panama’s export prices. 6 The demand and supply elasticities used are

- 0. 48 and 0. 12 , respect ivel y . 7

4 This percent is obtained by dividing Panama’s average production (2003

- 2008) of 2,705 MT by average total U.S. pepper consumption (2003

- 2009) of 2,077,420 MT. 5 UN/FAO, FAO stat data ( http://faostat.fao.org ) and Global Trade Atlas, Global Trade Information Services, Inc., country e dition, March 20 10
. 6 Global Trade At las, Global Trade Information Services, Inc., country e dition, March 20 10
. 7 The demand elasticity is from Gian Carlo Moschin, and Pier Luigi Rizzi, “Deriving a Flexible Mixed Demand Sy stem: The Normalized Quadratic Model,” American Journal of Agricultural Economics, Vol. 89, #4 (November 2007), pp. 1034

- 1045 ; and elasticity of supply is from Jaime E. Malaga, Gary W. Williams, and Stephen W. Fuller, “U.S. Mexico fresh vegetable trade: the effects of liberalization and economic growth,” Agricultural Economic s, Vol. 26 (2001), pp. 45

- 55
.Available data show that Panama exported 29 MT and 4 MT of peppers to the rest of the

world in 2006 and 2007, respectivel y. The United States does not have a history of pepper imports from Panama. We assume the pattern of import s from Panama wo uld be similar to those of Costa Rica, El Salvador, Guatemala and Honduras , which are currentl y allowed to export peppers to the United States. These countries in aggregate exported 4.1 percent of their production to the United States in 2008
. Among the group, Honduras exported the highest share of its production (9.65 percent) . We use these percentages in our trade scenarios. Therefore, we model three levels of pepper exports to the United States from Panama, of increasing magnitude: (i) an amount equal to the quantity Panama exported to all countries in 2006 (29 MT); (ii) an amount equal to 4.1 percent of its production (112 MT); and (iii) an amount equal to 9.65 percent of its production (261 MT). The largest assumed level of imports is equivalent to l ess than 0.02 percent of average annual consumption by the United State during this same period. Table 2 presents the changes we estimate could result from the assumed levels of U.S. pepper imports from Panama . These include annual changes in U.S. consumption, production, wholesale price, consumer welfare , producer welfare, and net welfare

. The maximum level of assumed pepper imports to the United States of 261 MT would result in a price decline of $0.37 per MT in the wholesale price of peppers and a fa ll in U.S. production of 25 MT . Consumption
c ould increase b y 236 MT . Producer welfare c ould decline by $ 318,000 and consumer welfare
c ould increase b y $ 759,000, yi elding an annual net welfare of about $ 441,000
.Table 2: Estimated Impact on the U.S. Ec onomy of Pepper Imports from Panama for Three Import Scenarios Assumed annual pepper imports from Morocco, MT 29 1 112 2 261 3 Change in U.S. consumption, MT 26.25 101.38 236.25 Change in U.S. production, MT

- 2.75

- 10.62

- 24.75 Change in wholesale pri ce of peppers, dollars per MT - $0.04

- $0.16

- $0.37 Change in consumer welfare $84,384 $352,903 $759,494 Change in producer welfare

- $35,358

- $136,554

- $318,216 Annual net benefit $49,026 $189,349 $441,278 Note: The baseline data used are seven - ye ar annual averages for production, consumption, prices, exports and imports, as reported in the last row of t able 1. The demand and supply elasticities used are

- 0. 48 and 0. 12 , respectivel y ( see footnote 8). 1 An amount equal to peppers exported by Panama to all countries in 2006 (29 MT)

. 2 An amount equal to 4.1 percent of Panama’s total production (112 MT)

. 3 An amount equal to 9.65 percent of Panama’s total production (261 MT)

. In all three scenarios, consumer welfare gains outweigh producer welfare losses. Even in the third scenario in which we assume Panama would export 261 MT to th e United States , the decline in producer welfare represents about 0.05 percent of revenue received from the sale of domestically

produced fresh pepper. 8 The price decline in this third scenario is less than 0.03 percent. The price and welfare effects are likel y to be even smaller than are indicated b y the three scenarios, to the extent that pepper imports from Panama displace pepper imports from other countries.

8 $354,000 divided by $680 million equals 0.052 percent.

### Potential Impact on Small Entities

The Small Business Administration (SBA) has established guidelines for determining which firms are to be considered small under the Regulatory Flexibility

Act. This rule could affect U.S. producers of fresh peppers (classified under Othe r Vegetable (except Potato) and Melon Farming, NAI CS 111219) and some importers of peppers. Vegetable

- producing establishments are classified as small if their annual receipts are not more than $750,000. 9 According to the 2007 Census of Agriculture (most recent data on farm sizes), there were 15,696 farms producing peppers in the United States. About 74 percent of these farms had less than one acre in peppers. Overall, 15,480 farms (98.6 percent) had a total of 25,292 acres in peppers (about 25.4 percent of the total planted area) and are considered small, with an average of about 1.6 acres and an average annual income of about $12,960 in 2007. The remaining 1.4 percent of the farms planted a total of 74,444 acres in peppers (74.6 percent of the planted area). They averaged 345 acres, with an average annual income of about $2.2 million. As shown in table 3, the impact of potential pepper imports on U.S. small

- entity producers as a result of this rule would be small. The annual decrease in producer welf are per small entity

is estimated to be about $ 5.00, or about 0.04 percent of average annual sales by small entities, when we assume that 261 MT of peppers ( the third scenario shown in table 2 ) would be exported to the United States because of this rule. The dollar decrease in welfare for most small pepper producers would be even smaller, given that the majority planted less than an acre in peppers. Table 3 : The E conomic I mpact of P otential Pepper Imports from Panama on U.S. S mall E ntities, assuming Annu al Exports of 261 M etric T ons to the United States Total decline in producer welfare 1

- $318,216

9 SBA, Small business s ize s tandards matched to the North American Industry Classification System 200 7 , Effective August 22, 200 8 (www.sba.gov/size/sizetable2002 .html).Decrease in welfare incurred b y small entities 2

- $80,827

Average decrease per acre, small entities 3

- $3.20 Average decrease per small entity 4

- $5.12 Average decrease as % of average sales, small entities 5

- 0.04% 1 From t able 2. 2 Change in producer welfare multiplied by 25.4 percent, the percentage of total acreage planted b y producers with annual revenues of not more than $750,000, that is, small e ntities. We assume that the change in producer welfare would be proportional to acreage share. 3 Decrease in producer welfare for small entities divided by 25,292 , the number of acres planted b y small entities. 4 Average decrease per acre multiplied by 1.6 , the average number of acres per small entity

. 5 Average decrease per small entity divided by

$ 12,960 , the average annual revenue per small entity

. The 2007 Census of Agriculture also contains data on certain sub

- categories of pepper operations , namel y, smal l family farms, limited resource farms, and farms having operators who belong to sociall y disadvantaged groups. 10 Most farms that produce peppers qualify as small family farm s (gross farm sales of less than $500,000), and man y also qualify as limited resource farms (gross farm sales of not more than $100,000 and low household income). Categories of socially disadvantaged operators are women , persons of Hispanic origin , American Indian or Alaska Native , Asian , African American , and Native Hawaiian or other Pacific. As described above for small pepper farms generall y, an y economic impacts of the rule for operations categorized as small family farms, limited resource farms, or farms having operators who belong to socially

disadvantaged groups would be insigni ficant , given the small quantity of pepper s expected to be import ed from Panama compared to domestic production and current imports

.

10 For definitions and information, see : USDA ERS. Structure and Finances of U.S. Family Farms: Family Farm Report, 2007 edition , EIB

- 24.The rule has no mandatory reporting, recordkeeping, or other compliance requirements. Any reporting or other requirements would be those normally associated with the regular transactions involved in doing business. Based on the above information, the rule would not have a significant economic impact on a substantial number of small entities.