National Organic Program (NOP); Request for Comment on Organic Livestock and Poultry Practices Economic Analysis Report, 22664-22677 [2020-08548]

Agencies

• Agricultural Marketing Service
• DEPARTMENT OF AGRICULTURE

[Federal Register Volume 85, Number 79 (Thursday, April 23, 2020)]
[Proposed Rules]
[Pages 22664-22677]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-08548]


========================================================================
Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

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Federal Register / Vol. 85, No. 79 / Thursday, April 23, 2020 / 
Proposed Rules

[[Page 22664]]



DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

7 CFR Part 205

[Document Number AMS-NOP-20-0037; NOP-20-03]
RIN 0581-AD75


National Organic Program (NOP); Request for Comment on Organic 
Livestock and Poultry Practices Economic Analysis Report

AGENCY: Agricultural Marketing Service, USDA.

ACTION: Request for comment.

-----------------------------------------------------------------------

SUMMARY: The USDA Agricultural Marketing Service (AMS) requests public 
comment on an Economic Analysis Report related to the Organic Livestock 
and Poultry Practices final rule (OLPP Rule), published on January 19, 
2017, and the final rule withdrawing the OLPP Rule (Withdrawal Rule), 
published on March 13, 2018. The public comment process for the 
Economic Analysis Report is being conducted consistent with an Order of 
the United States District Court for the District of Columbia, which 
granted USDA's Motion to Remand a legal challenge to the Withdrawal 
Rule for purposes of clarifying and supplementing the record regarding 
the economic analysis underlying both the OLPP Rule and the Withdrawal 
Rule. (See Organic Trade Association v. USDA; Civil Action No. 17-1875 
(RMC) (March 12, 2020), ECF No. 112).

DATES: Comments must be received by May 26, 2020.

ADDRESSES: You may submit comments on this document via the Federal 
eRulemaking Portal at https://www.regulations.gov/. Search for docket 
number AMS-NOP-20-0037; NOP-20-03. Comments may also be sent by mail 
to: Dr. Jennifer Tucker, National Organic Program, USDA-AMS-NOP, 1400 
Independence Ave SW, Room 2642-So., Ag Stop 0268, Washington, DC 20250-
0268. Instructions: All submissions received must include docket number 
AMS-NOP-20-0037; NOP-20-03 or Regulatory Information Number (RIN): 
0581-AD75. You should clearly indicate the topic to which your comment 
refers, state your position(s), and include relevant information and 
data to support your position(s). All comments and relevant background 
documents posted to https://www.regulations.gov will include any 
personal information provided.

FOR FURTHER INFORMATION CONTACT: Jennifer Tucker, Ph.D., Deputy 
Administrator, National Organic Program, Telephone: (202) 720-3252. 
Fax: (202) 205-7808.

SUPPLEMENTARY INFORMATION: The Organic Foods Production Act of 1990 
(OFPA), as amended (7 U.S.C. 6501-6524), authorizes the United States 
Department of Agriculture (USDA or Department) to establish national 
standards governing the marketing of certain agricultural products as 
organically produced to assure consumers that organically produced 
products meet a consistent standard and to facilitate interstate 
commerce in fresh and processed food that is organically produced. 
USDA's Agricultural Marketing Service (AMS) administers the National 
Organic Program (NOP) under 7 CFR part 205.
    The Economic Analysis Report summarizes the agency's further review 
of the Regulatory Impact Analysis (RIA) for both the OLPP Rule (Final 
RIA) and Withdrawal Rule (Withdrawal RIA). The Economic Analysis Report 
includes findings that the Final RIA contained several material errors. 
The Withdrawal RIA corrected some of those errors, did not identify 
some of those errors and thus incorporated them in its analysis, and 
did not fully correct one of the errors. USDA seeks comment on the 
findings in the Economic Analysis Report and their impact on the 
Withdrawal Rule. The public comments will inform a final analysis, to 
be published in the Federal Register in the form of a second document 
later in 2020, explaining USDA's final conclusions pertaining to the 
Economic Analysis Report. The full Economic Analysis Report is included 
below.
    On January 19, 2017 (82 FR 7042), AMS published the OLPP Rule. 
After delaying the effective date of the OLPP Rule (82 FR 9967, 82 FR 
21677, and 82 FR 52643), AMS published the Withdrawal Rule on March 13, 
2018 (83 FR 10775), which withdrew the OLPP Rule. AMS explained the 
withdrawal on the basis that, among other things, the Final RIA had 
incorrectly calculated the costs and benefits of the OLPP Rule and had 
wrongly concluded that the benefits of the rule exceeded the costs. AMS 
also published the Withdrawal RIA in support of the Withdrawal Rule 
that sought to correct for three identified errors in the Final RIA. In 
the Withdrawal RIA, AMS found that the projected costs of the OLPP Rule 
likely exceeded its benefits. As separate and independent bases for the 
Withdrawal Rule, AMS also concluded that it lacked the legal authority 
under the Organic Foods Production Act to promulgate the OLPP Rule and 
that there was no market failure in the organic industry sufficient to 
warrant the particular regulations established by the OLPP Rule.
    In the fall of 2017, the Organic Trade Association (OTA) filed a 
lawsuit in the U.S. District Court for the District of Columbia, 
challenging AMS's delay of the OLPP Rule's effective date; OTA 
subsequently amended its complaint to challenge the Withdrawal Rule. On 
October 31, 2019, OTA filed a motion for summary judgment accompanied 
by several extra-record attachments, including a privately commissioned 
analysis of the Withdrawal RIA performed by Dr. Thomas Vukina, a 
consultant and professor of economics at North Carolina State 
University. In the course of reviewing Dr. Vukina's analysis, AMS 
independently discovered additional flaws in the Final RIA, which had 
inadvertently been carried through to the Withdrawal RIA.
    In light of those flaws, on January 3, 2020, USDA filed a motion to 
suspend the summary judgment proceedings and requested voluntary 
remand. On March 12, 2020, the District Court granted that request. 
Subsequently, AMS completed its initial review of the flaws in the 
Final RIA and Withdrawal RIA and is now publishing the results of the 
review, i.e., the Economic Analysis Report, in this document for public 
comment. AMS intends to publish its final analysis, as informed by 
public comment, in time to report back to the District Court by the 
court-ordered deadline of September 8, 2020.
    AMS commissioned one of its economists, Dr. Peyton Ferrier, to 
conduct a thorough review of both RIAs

[[Page 22665]]

and to prepare the Economic Analysis Report cataloguing his findings. 
Dr. Ferrier was not involved in the administrative processes leading to 
the OLPP Rule or the Withdrawal Rule and therefore was able to provide 
an independent perspective on the integrity of the methodology and 
calculations underlying the prior rulemakings. The Economic Analysis 
Report describes his principle findings and appears below. AMS is 
seeking comment on this Report by May 26, 2020.

Economic Analysis Report: Peer Review of Regulatory Impact Analysis for 
the Organic Livestock and Poultry Practices Rule and the Withdrawal 
Rule

Table of Contents

Summary
Background
Errors Detailed in This Report
    1. Discounting Error in the Final RIA
    2. Willingness To Pay Value Was Too High in the Final RIA
    3. Depreciation Errors
    A. Depreciation of Future Benefits Error in the Final RIA
    B. Depreciation Treatment Not Fully Removed From Benefits 
Calculations in the Withdrawal RIA
    C. Depreciation Treatment Not Fully Removed From Scenario A Cost 
Calculations in the Withdrawal RIA
    4. Inconsistent or Incorrect Documentation of Underlying 
Assumptions in the Final RIA
    A. Baseline Egg Production Values Used in Calculations Differ 
From Those Described in Text
    B. Baseline Egg Production Figures Used in Final RIA Differ From 
Those in Cited Market News Reports
    C. Separate Descriptions of Scenario C in the Final RIA Do Not 
Match
    D. Number of Eggs With New Outdoor Access Not Stated for Two of 
Three Scenarios
    E. Benefits Values Reported in Summary Tables Do Not Match the 
Text
    F. Costs Estimates for Scenario A in Final RIA Text Are 
Inconsistent
    G. Transposition Error Likely Affected Scenario C Benefit 
Calculation in Final RIA
    H. Poor Justification for the General Specification of Scenario 
B in Final RIA
    5. Error in the Volume Specification Affecting Benefits 
Calculations in Two of Three Scenarios
    6. Incorrect Use of the Production Levels That Do Not Account 
for Increased Mortality When Calculating Benefits
    7. Errors in Cost Calculations in the Final RIA
    A. Production Levels Used To Calculate Costs and Benefits Differ
    B. AMS Did Not Appropriately Consider the Costs to Aviaries That 
Could Not Obtain Land
    C. Production Shares Not Updated for Firm Exit
Non-Material Errors in the Final and Withdrawal RIAs
    1. Other Transposition Errors
    2. Weighting of WTP values
    3. Different Depreciation Periods Are Used in Different Sections 
of the Analysis

Summary

    On January 19, 2017, the Agricultural Marketing Service (AMS) 
promulgated the Organic Livestock and Poultry Practices Final Rule 
(OLPP Rule), (82 FR 7042), and published the associated regulatory 
impact analysis (Final RIA). AMS subsequently completed a rulemaking 
that withdrew the OLPP Rule, (83 FR 10775) (Mar. 13, 2018), and 
published the regulatory impact analysis in support of the withdrawal 
(Withdrawal RIA). This Economic Analysis Report (Report) describes a 
number of areas in which the Final RIA contained flaws in methodology 
and calculations that materially affected AMS's economic analysis of 
the costs and benefits of the OLPP Rule.
    The Withdrawal RIA documented and sought to correct three of these 
errors: The incorrect application of the discounting formula; the use 
of an incorrect willingness to pay value for eggs produced under the 
new open access requirements; and the incorrect application of a 
depreciation treatment to the benefit calculations. This Report 
identifies four additional categories of errors in the Final RIA that 
were not detected or corrected during the rulemaking to withdraw the 
OLPP Rule and were carried forward into the Withdrawal RIA. Those 
errors are: Inconsistent or incorrect documentation of key calculation 
variables; an error in the volume specification affecting benefits 
calculations in two of three scenarios considered; the incorrect use of 
production values that do not account for increased mortality loss in 
the benefits calculations; and aspects of the cost calculations that 
resulted in certain costs being ignored, underreported, or 
inconsistently applied.
    This Report also identifies additional issues related to the 
erroneous depreciation methodology applied in the Final RIA. First, the 
Final RIA contained errors in its treatment of depreciation of 
benefits. The Withdrawal RIA attempted to correct the error; however, 
it did not fully do so and therefore its final calculations were 
inaccurate. The Final RIA included another error related to 
depreciation of costs that was not previously identified and was 
carried forward into the Withdrawal RIA.
    In addition to the material errors, there were minor errors in the 
Final RIA and the Withdrawal RIA. This Report describes three such 
minor errors that do not have a material effect on cost and benefit 
calculations.

Background

    In April 2016 (81 FR 21956), AMS published the OLPP proposed rule 
pertaining to certain aspects of organic livestock production certified 
under the NOP. Among other provisions, the rule would have imposed 
stricter requirements for producers of organic eggs to provide layers 
with access to outdoor space and established stricter stocking density 
requirements for broiler producers. In the preliminary regulatory 
impact analysis (Preliminary RIA), AMS estimated that, despite the 
added costs of complying with these requirements, all existing broiler 
producers would become fully compliant with the new rule. On the other 
hand, AMS expected the rule to cause a large portion of organic egg 
producers to exit the industry. At the same time, because the organic 
egg industry had experienced high rates of production growth in the 
preceding years, AMS assumed that the organic egg industry would grow 
substantially throughout the five year period between the rule's date 
of publication and the date on which it required operations to become 
fully compliant. For these reasons, both the Preliminary and Final RIAs 
considered three alternative scenarios with different assumptions 
regarding both firm exit and entry (i.e., industry growth). These 
scenarios and underlying assumptions about firm exit and entry were 
subsequently retained without change in the Withdrawal RIA.
    As stated in the Final RIA (Passage 1, pages 6-7), these scenarios 
are:
     Scenario (A)--Full Compliance--``All producers remain in 
the organic market; Organic layer and broiler populations continue 
historical growth rates after the rule.''
     Scenario (B)--Entry and Exit--``50 percent of organic 
layer production in year 6 (2022) moves to the cage free market. 
Organic layer and broiler populations continue historical growth rates 
after the rule.''
     Scenario (C)--Entry and Exit, No Non-Compliant Entry--``50 
percent of organic layer production in year 6 (2022) moves to the cage 
free market. There are no new entrants after publication of this rule 
who cannot comply.''
    Following public comment on the Preliminary RIA, AMS published the 
OLPP Rule and Final RIA in the Federal Register in January 2017. 
Between the Preliminary RIA and the Final RIA, AMS changed two key 
assumptions. First, based on updated data, AMS

[[Page 22666]]

revised its expected growth rate of organic egg production upward from 
2 percent to 12.7 percent, a change that would directly impact 
Scenarios A and B, which assume continued industry growth.
    Second, in the Preliminary RIA, AMS had previously applied a 
depreciation treatment to both costs and benefits calculations whereby 
the expected annual costs and benefits for egg producers were reduced 
by one-thirteenth (1/13) each year until they reach zero in the 
thirteenth year. This depreciation treatment differs from the commonly 
understood accounting concept of depreciation that converts the loss in 
value of a durable asset that is only infrequently purchased (i.e., 
tractor, barn, truck) to an annual cost. Instead, the depreciation 
treatment used by AMS in the Preliminary RIA was intended to adjust the 
costs of incumbent producers who were pre-committed to producing in the 
organic industry (due to already owning a layer house) for the period 
necessary to recover the value of their industry-specific assets. After 
that point, the costs and benefits realized by these producers under 
the OLPP Rule were no longer deemed to be attributable to the OLPP Rule 
and were not included in the costs or benefits calculations of the 
analysis. The justification for the application of this depreciation 
treatment was that, as the value of a producer's industry-specific 
assets become fully depreciated, that producer would no longer be 
treated as pre-committed to the industry so that that producer's costs 
and benefits were no longer, strictly speaking, due to the OLPP Rule 
rather than the producer's independent decision to stay in the organic 
market notwithstanding the OLPP Rule. In the Preliminary RIA, AMS based 
its expected share of production that becomes fully depreciated each 
year on Internal Revenue Service (IRS) schedules allowing for 13 years 
of depreciation for specialized farm production structures (see Non-
Material Errors (3)). In the Final RIA, AMS removed the depreciation 
treatment from its cost calculations, but not from its benefit 
calculations. In the Withdrawal RIA, AMS acknowledged that it should 
also have removed the depreciation treatment from its benefit 
calculations as well.
    In March 2018, AMS published the Withdrawal Rule, after notice-and-
comment, and the Withdrawal RIA. The Withdrawal RIA described three 
errors in the Final RIA, which were: (1) The incorrect application of 
the discounting formula, (2) the use of an incorrect willingness to pay 
value for organic eggs produced under the OLPP Rule, and (3) the 
application of depreciation to the values of calculated benefits. These 
three errors pertained only to the calculation of benefits and did not 
affect the analysis of costs described in the Final RIA. With the 
Withdrawal RIA, AMS also published a spreadsheet that contained 10 
pages that related Final RIA calculations to intermediary components of 
the benefits calculation as modified in the Withdrawal RIA. This 
document (Withdrawal Workbook) did not include detailed documentation 
to allow simple cross-referencing of some key figures with the cost and 
benefit values presented in the Final RIA or the Withdrawal RIA. 
Appendix A provides that cross-referencing. Moreover, the Withdrawal 
Workbook did not include new calculations for benefits that corrected 
all three errors identified within the Withdrawal RIA, despite the 
Withdrawal RIA presenting values intending to correct all identified 
errors. For this reason, the benefit values in Table C of the 
Withdrawal RIA do not correspond to the benefit values calculated in 
sheets 6, 7, and 8 in the Withdrawal Workbook.
    The OLPP Rule's egg producer requirements did not become fully 
effective until the sixth year following the rule's publication to give 
producers time to come into compliance.\1\ Both RIAs assumed that costs 
of the OLPP Rule (other than administrative costs, which are ignored in 
the analysis) would first be accrued in the third year following the 
Rule's publication by producers who would need to acquire land to meet 
the OLPP Rule's space requirements. The Final RIA assumed that benefits 
would not accrue until the sixth year after publication, when full 
compliance was required. These assumptions were retained in the 
Withdrawal RIA. Since annual growth was assumed to be 12.7 percent in 
both RIAs as well, firm entry and exit over the period between the 
rule's year 1 publication and year 6 full compliance date would 
potentially have a large effect on measured costs and benefits. In 
general, differences in the assumptions regarding firm entry and exit 
can dramatically affect the calculations of benefits and costs because 
these values are tied to the number of eggs being produced each year. 
Certain errors described by this Report pertain only to flaws in the 
analysis of one or two of the three scenarios.
---------------------------------------------------------------------------

    \1\ To avoid confusion, this Report uses year 1 to refer to the 
publication date and year 6 to the full compliance date. The Final 
RIA and Withdrawal RIA use 2017 as year 1 and 2022 as year 6 since 
the OLPP Rule was published in 2017, became effective one year 
later, and had a five-year regulatory phase-in period.
---------------------------------------------------------------------------

Errors Detailed in This Report

    Below are the descriptions and analyses of the errors found in the 
Final RIA and the Withdrawal RIA.

1. Discounting Error in the Final RIA

    As explained in the Withdrawal RIA, the Final RIA incorrectly 
applied the discounting formula to the future benefits reported in the 
Summary Table (pages 6-7) and Table 1 (pages 8-11). The OLPP Rule 
considered costs and benefits over a period of 15 years. With 
discounting practices used by economists, benefits or costs occurring 
sooner are more valuable than those occurring later. To compare costs 
or benefits across time, economists apply a discounting formula that 
adjusts the value of future benefits and costs to their present value 
equivalent. Guidance to Federal agencies \2\ describes the rationale 
for discounting and methods of its application in detail. Specifically, 
to convert future costs and benefits to their present value, they are 
to be multiplied by 1/(1 + r)t where t is the number of years in the 
future that the benefits or costs occur and r is the discount rate, 
which the guidance recommends to be applied at the 3 and 7 percent 
rates. Benefits or costs that have been adjusted in this way are called 
(discounted) present values.
---------------------------------------------------------------------------

    \2\ Office of Management and Budget Circular A-4, dated 
September 17, 2003, provides guidance on best practices associated 
with cost-benefit analysis to Federal agencies undertaking 
rulemaking.
---------------------------------------------------------------------------

    A total present value of benefits (TB) can then be calculated by 
simply summing the present values of benefits across years. Denoting 
the value of benefits in year t as Bt, the correct formula for TB over 
the 15 years considered in the rule is:
[GRAPHIC] [TIFF OMITTED] TP23AP20.016


[[Page 22667]]


However, in the Final RIA, an incorrect formula was used to calculate 
total benefits. In the case where r is 3 percent, that formula, denoted 
TBIncorrect,r=0.03, was:
[GRAPHIC] [TIFF OMITTED] TP23AP20.017

In this case, the exponent in the denominator for all periods after the 
second year was incorrectly set to 2.
    A different error was present for the total benefits formula in the 
case where r is 7 percent, denoted 
TBIncorrect,r=7[percnt] below as:
[GRAPHIC] [TIFF OMITTED] TP23AP20.018

In this case, the exponent in the denominator was incorrectly set to 1 
for all periods.
    This Report agrees with both the Withdrawal RIA's assessment and 
correction of the discount rate error in the benefits calculations of 
the Final RIA.

2. Willingness To Pay Value Was Too High in the Final RIA

    The Final RIA contained an error that made the willingness to pay 
(WTP) value used in the benefits calculations too high. Specifically, 
the Final RIA drew upon an inappropriate estimate for the value of eggs 
produced with the new outdoor access requirements. This error was 
identified and corrected in the Withdrawal RIA.
    The Final RIA drew primarily upon a 2013 article by Yan Heng, 
Hikaru Hanawa Peterson, and Xianghong Li involving a choice experiment 
conducted on 924 surveyed consumers.\3\ In the experiment, consumers 
were asked to choose between eggs that differ in terms of the growing 
conditions of the laying hens. Price and growing conditions were 
adjusted across choices to optimize the ability to identify consumers' 
value for eggs produced under different growing conditions. The study 
applied a stated preference method of estimating the WTP for eggs that 
now meet the new outdoor access requirement in the OLPP Rule. In brief, 
the Final RIA focused on the article's text (Passage 2, page 419) 
stating:
---------------------------------------------------------------------------

    \3\ The article is titled ``Consumer Attitudes toward Farm-
Animal Welfare: The Case of Laying Hens'' and published in the 
Journal of Agricultural and Resource Economics,38(3):418-434 (2013).

    Our estimates suggest that the majority of consumers are willing 
to pay an average premium of $0.21 to $0.49 per dozen for eggs 
produced in a cage-free environment with outdoor access or without 
---------------------------------------------------------------------------
induced molting.

Based on this text, the Final RIA assigned a premium value per egg to 
the outdoor access characteristic of $0.49 on the high side and of 
$0.21 on the low side. However, the Withdrawal RIA notes that under 
existing rules, organic eggs are already required to be produced cage-
free. The Withdrawal RIA notes that the actual benefit attributable to 
the OLPP Rule should be comprised of only the portion of the WTP 
described by Heng, Peterson, and Li (2013) that may be ascribed to the 
addition of new outdoor access requirements to existing organic egg 
production requirements.
    Table 8 (``Statistics of Simulated WTP Distributions'') of the 
Heng, Petersen, and Li (2013) study provides estimates of the WTP for 
eggs produced by hens under the new outdoor access requirements 
(Passage 3, page 429), explaining that in a subsample of consumers that 
received additional information regarding the environmental benefits of 
cage-free systems and outdoor access:

    89% (59%) of respondents were willing to pay a premium for eggs 
from hens given outdoor access (more space), with a mean premium of 
$0.25. In [a second] subsample that did not receive the additional 
information, the mean premium for outdoor access (more space) was 
lower, at $0.16, with 81% (43%) of those willing to pay a premium.

To correct for this error, the Withdrawal RIA therefore replaced the 
Final RIA's high WTP estimate of $0.49 and its low WTP estimate of 
$0.21 with new high and low WTP estimates of $0.25 and $0.16 (with all 
dollar values referring to price per dozen eggs).
    This Report finds that the Withdrawal RIA corrected the WTP value 
error in an appropriate manner. We note in (2) of our Non-Material 
Errors section, however, that the correction contained a minor error 
that did not have a material effect on the calculations.

3. Depreciation Errors

A. Depreciation of Future Benefits Error in the Final RIA
    The Preliminary RIA applied the depreciation treatment to both the 
benefit and costs calculations. The Final RIA applied the depreciation 
treatment only to the benefits calculations, not to costs. The Final 
RIA (Passage 4, pages 111-112) states that:

    For each cohort, AMS applied the full compliance costs for each 
year after the rule must be fully implemented. These recurrent costs 
are incurred through year 15, relative to the without-regulation 
baseline. Given the uncertainty in these cost estimates and 
forecasting impacts in the organic egg market, AMS is presenting 
estimates without depreciation to capture the full range of 
potential impacts. . . . . While AMS is presenting the costs 
associated with this methodology as the primary costs estimates, we 
discuss the rationale for an alternative methodology based on 
linearly reducing costs over the depreciation time period for 
poultry houses.
    The following description of applying the depreciation to the 
cost estimates would yield a lower cost estimate. This also assumes 
that costs only accrue to legacy organic producers. . . . . [italics 
added]

The ``alternative methodology'' text refers to the method of applying 
the depreciation treatment while computing cost calculations. The ``AMS 
is presenting estimates without depreciation'' text indicates that 
costs calculations in the Final RIA did not incorporate the 
depreciation treatment as they had in the Preliminary RIA. Finally, the 
``assumes that costs only accrue to legacy organic producers'' text 
explains that the inclusion of the discussion regarding depreciation 
treatment as an alternative rationale was motivated by the specific 
assumption that costs and benefits only arise from the actions of 
legacy producers and only to those producers until their capital 
investments under the prior regulatory regime were fully depreciated.

[[Page 22668]]

    Notwithstanding this discussion, the Final RIA states in footnotes 
92 and 94 that the depreciation treatment was being applied to benefits 
calculations because it had also been applied to costs. Specifically, 
Footnote 92 (Passage 5, page 97) states:

    The 13 year period accounts for the time needed to fully 
depreciate layer houses. We use a 13 year timeframe to align with 
the methodology used to calculate the costs, below [in footnote 94].

In short, despite concluding at pages 111-112 of the Final RIA that it 
would not apply the depreciation treatment to costs, footnote 92 
explained AMS's application of the depreciation treatment to its 
benefits calculations in the Final RIA as a way to be consistent with 
an application of the depreciation treatment to costs.
    The Preliminary RIA included cost and benefits calculations in 
which the 13-year depreciation treatment was both applied and not 
applied. For instance, Table 9 (pages 126-127) shows layer costs as 
falling in a range each year. The upper limit to the range is constant 
and reflected the estimated costs without the depreciation treatment. 
For layers, this is $28,160,000. The lower limit to the range is the 
depreciated value and it falls by one-thirteenth of the $28,160,000, or 
$2,166,000, each year.
    The Final RIA's removal of the depreciation treatment from costs 
appears to have been intended to be associated with its same removal 
from the benefits calculations as well. The Withdrawal RIA (Passage 6, 
page 11) states that:

    In initial drafts of the OLPP final rule RIA, AMS applied a 
straight-line reduction in both costs and benefits over time to 
reflect the economic life of egg and broiler structures. Both 
benefits and costs declined every year as a fraction of the industry 
structures became fully depreciated and reached the end of their 
economic lifetimes.

Footnotes 92 and 94 of the Final RIA show that the depreciation 
treatment was not removed from the benefits calculations in that 
analysis. The Withdrawal RIA (Passage 7, page 11) states as much in the 
text:

    Costs were instead estimated to be constant over time, but 
benefits were still straight line reduced over time. The same 
reasoning should have been applied to the benefits to make the 
calculation of costs and benefits consistent.

The Withdrawal RIA calculated new values for benefits without the 
straight-line depreciation treatment applied. This Report concurs with 
the Withdrawal RIA's assessment that the Final RIA contained an error 
in its inconsistent application of the depreciation treatment to 
benefits but not costs. However, as we describe in Section 3.B to 
follow, the Withdrawal RIA does not fully address that error.
B. Depreciation Treatment Not Fully Removed From Benefits Calculations 
in the Withdrawal RIA
    The Withdrawal RIA attempts to correct the depreciation error in 
the Final RIA by removing the treatment of depreciation from the 
calculation of benefits, but it failed to do so entirely.\4\ This new 
benefit calculation has the following five steps: \5\
---------------------------------------------------------------------------

    \4\ Other sections to this Report evaluate the treatment of 
depreciation, production growth, and firm exit from the industry in 
their totality.
    \5\ Note that these steps are similar to those described in 
Footnote 94 of the Final RIA with three key differences. First, 
straight-line depreciation treatment is not applied. Second, 
discounting is applied. Third, total discounted payments are 
converted to their annual benefit values.

    i. Estimate the number of eggs produced that would newly have 
outdoor access, as defined by the OLPP Rule, after the Rule takes 
effect in year 6 (Ey6);
    ii. Multiply Ey6 by the WTP for the new outdoor access to obtain 
the benefit value by year;
    iii. Apply time discounting to each year's benefits (at either 
the 3 or 7 percent rate);
    iv. Sum the benefits over years 6 to 13; and
    v. Convert the summed discounted benefits to an annual benefit 
over 15 yearly periods.\6\
---------------------------------------------------------------------------

    \6\ This conversion was done using the Microsoft Payment 
function. The formula for the annual benefit, AB, is a function 
based on r; the discount rate, N; the number of years (i.e., 15); 
and TB, the summed discounted benefits. The value is given as: AB = 
(TB x r)/(1-(1+r)-N).

The number of eggs projected to be produced after the Rule took effect 
depends on which of the three scenarios, described in the Introduction 
to this Report, is being considered. Several omissions in the 
Preliminary and Final RIAs stymie the independent review and 
replication of key figures provided in the Withdrawal RIA and the 
Withdrawal Workbook to this Report. Those concerns are described in 
Section 5 of this Report. To assess the Withdrawal RIA corrections, one 
can recover the values for Ey6 in the Withdrawal Workbook by dividing 
the year one benefit values by $0.21 (in the low case) and $0.49 (in 
the high case). Table 1 provides the Ey6 values and the location where 
they are stated for each scenario.
---------------------------------------------------------------------------

    \7\ Sheet 8 erroneously contains the same values as Sheet 7 for 
the benefits in its top half. From its bottom half, the production 
level of 89,361,091 can be inferred by dividing the first year 
undiscounted benefits value of $18,765,829.11 by 0.21.

        Table 1--Production Estimates in the Withdrawal Workbook
------------------------------------------------------------------------
                                                   Withdrawal workbook
            Scenario                    E                location
------------------------------------------------------------------------
Scenario A.....................     355,289,326  Sheet 6--Production
                                                  with newly acquired
                                                  outdoor access.
Scenario B.....................      97,708,552  Sheet 7--Production
                                                  with newly acquired
                                                  outdoor access.
Scenario C.....................      89,361,091  Sheet 8--Inferred from
                                                  Values of Undiscounted
                                                  Benefits.\7\
------------------------------------------------------------------------

    The Withdrawal RIA generates benefit values (i.e., those realized 
in year 6 of the analysis period when the requirement for full 
compliance takes effect) based on the WTP values of $0.16 and $0.25 per 
dozen eggs. The benefits used in the Withdrawal RIA should be constant 
across all years and continue into year 14 and 15 since they are no 
longer subject to the depreciation treatment. However, in the 
implementation of its corrections, the Withdrawal RIA used the year 6 
benefit value from the Final RIA to determine the constant annual 
benefit value with the depreciation treatment removed. Since that year 
6 value incorporated 5 periods of depreciation treatment pursuant to 
the erroneous depreciation treatment, the value is five-thirteenths (or 
38.4 percent) less than the value the Withdrawal RIA should have used.
    For this reason, while this Report agrees with the Withdrawal RIA's 
assessment of the Final RIA's error in depreciating benefits as 
described in Section 3(A), it finds that the Withdrawal RIA retained a 
benefits calculation affected by the flawed application of the 
depreciation treatment methodology and thus failed to fully correct for 
that error.
C. Depreciation Treatment Not Fully Removed From Scenario A Cost 
Calculations in the Withdrawal RIA
    Although the Final RIA stated that it did not apply the 
depreciation treatment to the cost calculations, an artifact of the

[[Page 22669]]

depreciation treatment actually was retained in some of its cost 
calculations. Table 15 on page 116 of the Final RIA reported annual 
costs for Scenario A. Layer houses were assumed to be comprised of the 
same ratio composition as described (i.e., 70 percent aviaries, 30 
percent non-aviaries). Table 15 of the Final RIA shows that for layer 
houses greater than 4-years old, costs are $3.81 million in year 3 
(representing one-time land-acquisition costs) and $24.29 million from 
years 6 to 15; for 2-years old layer houses, costs are $6.62 million 
from years 6 to 15; for 1-year old layer houses, costs are $13.23 
million. Page 111 of the Final RIA assumed that 4-year old houses 
represent 64 percent of production facilities, 2-year old houses 
represent 24 percent of production facilities, and 1-year old houses 
represent 12 percent of production facilities. Underlying AMS 
calculations (described in Section 6 of this Report) show that the sum 
of total (physical) costs and lost revenue is $55.13 million under 
Scenario A. Table 2 shows the decomposition of producers' costs to the 
OLPP Rule by age of operation.

                   Table 2--Decomposition of Producers' Costs to the OLPP Rule by Age of House
----------------------------------------------------------------------------------------------------------------
                                                                                                   Years 6 to 15
                          Age of house                               Share of      Year 3 costs        costs
                                                                    houses (%)       (million)       (million)
----------------------------------------------------------------------------------------------------------------
Older than 4-year-old houses....................................              64           $3.81          $24.29
2-year-old houses...............................................              24              $0           $6.62
1-year-old houses...............................................              12              $0          $13.32
                                                                 -----------------------------------------------
    Total.......................................................             100           $3.81          $44.13
----------------------------------------------------------------------------------------------------------------

    AMS's removal of the depreciation treatment from its costs 
calculations in the Final RIA implied that the age of facilities should 
have no bearing on annualized calculations of costs. However, in Table 
15 of the Final RIA, the depreciation treatment was applied for four 
years for the 64 percent of houses that were more than 4 years old. 
Rather than using $35.29 million (= 64% x $55.13 million) for this 
class of houses, the number is $24.43 million (= 64% x (9/13) x $55.13 
million).\8\ Table 15 applied no similar depreciation to 2- and 1-year 
old houses whose values correspond to their respective share of the 
market multiplied by $55.13 million. The calculation for the 4-year old 
houses in Table 15 reflects that the depreciation treatment was not 
fully removed from the cost analysis.
---------------------------------------------------------------------------

    \8\ The $24.43 Million figure is stated in cell F29 of the 
``Stay in Organic'' Worksheet of B-Layer, along with intermediary 
steps in the equations. The $24.29 Million figure in Table 2 is 
stated in the page 1 of the Withdrawal Workbook. This Report cannot 
explain the discrepancy in values.
---------------------------------------------------------------------------

    This Report finds that the Withdrawal RIA's downward adjustment of 
costs by 4/13th for houses that are four years old or greater was 
inappropriate because, first, it applies to all costs (i.e., feed, 
labor, etc.), not just the industry-specific assets that depreciate 
over time and, second, it is inconsistent with the ordinary 
depreciation of assets applied elsewhere in the analysis (see Final 
RIA, page 103). In this case, the downward adjustment reduced layer 
costs by 18.2 percent for Scenario A.

4. Inconsistent or Incorrect Documentation of Underlying Assumptions in 
the Final RIA

    This section notes instances where the Final RIA contained 
conflicting or omitted data on key figures used in calculations and 
inconsistent descriptions of certain scenarios regarding entry and 
exit. Many of these omissions or inconsistencies interact with errors 
previously discussed in this Report. This Report finds that, due to 
these inconsistencies and omissions, a knowledgeable external reviewer 
would have had substantial difficulty replicating the key findings of 
the Final RIA.\9\
---------------------------------------------------------------------------

    \9\ OMB Circular A-4 providing guidance on Federal rule-making 
states (page 17): A good analysis should be transparent and your 
results must be reproducible. You should clearly set out the basic 
assumptions, methods, and data underlying the analysis and discuss 
the uncertainties associated with the estimates. A qualified third 
party reading the analysis should be able to understand the basic 
elements of your analysis and the way in which you developed your 
estimates.
---------------------------------------------------------------------------

A. Baseline Egg Production Values Used in Calculations Differ From 
Those Described in Text
    In the Final RIA, AMS assumed the organic egg industry would 
continue at its historical growth of an average of 12.7 percent per 
year during the 6 years following the publication of the OLPP Rule 
until full implementation of the Rule in 2022. Table 3 of the Final RIA 
(page 46) states the baseline quantities of 325.83M doz. eggs in 2016, 
367.21M doz. in 2017, and 667.63M doz. in 2022. The Withdrawal Workbook 
projected that 390.83M doz. eggs would be produced in 2017. Footnote 89 
(page 96) and Footnote 94 (page 97) of the Final RIA alternatively list 
710.58M doz. in 2022. Both Table 3 of the Final RIA and Footnotes 89 
and 94 of the Final RIA reflect the assumption of 12.7 percent annual 
industry growth, but because the two sets of numbers have different 
starting values, the Final RIA baseline production figures in Table 3 
on page 46 are 6.4 percent lower than the baseline production figures 
used in the calculations in footnotes 89 and 96 in every year, without 
any explanation for that difference. The 390.83M doz. eggs figure in 
the Withdrawal Workbook appears to be based on 14,087,500 organic 
laying hens reported in the AMS Weekly USDA Certified Organic Poultry 
and Eggs Report first reported for November 15th 2016.\10\ In each 
period, organic laying hens produced 24.77 dozen eggs per year, a 
figure that is not documented explicitly in the Final RIA (See Section 
4.B).\11\
---------------------------------------------------------------------------

    \10\ The 14,087,500 figure is, itself, rounded to 14,000,000 in 
the analysis.
    \11\ One can only infer the 24.77 dozen eggs per year value from 
the Withdrawal Workbook.
---------------------------------------------------------------------------

    This Report notes that reproduction of the Final RIA calculations 
would be very difficult without the actual baseline production estimate 
and this number would be very difficult to ascertain from the Final RIA 
in light of the inconsistent figures and omissions described above.
B. Baseline Egg Production Figures Used in Final RIA Differ From Those 
in Cited Market News Reports
    Page 17 of the Final RIA (Passage 8) states:

    In April 2016, AMS Market News reported 14 million organic layers 
currently in production.


[[Page 22670]]


This statement is incorrect. AMS Market News reported a count of 
11,350,500 organic layers in each of the four reporting weeks in April 
of 2016 in its ``Weekly USDA Certified Organic Poultry and Eggs'' 
reports. It was not until November 14, 2016, that the AMS Market News 
report began reporting 14,087,500 organic layers.\12\ The highest level 
of organic eggs recorded as being produced between April 2016 and 
January 2017 was 207,497 30-dozen cases, or 6,224,910 dozen per week. 
Based on 52.143 weeks per year, this corresponds to 324,584,3593 dozen 
egg produced per year for an average of 276.49 eggs, or 23.0406 dozen, 
per laying hen per year. Separately, the National Agricultural 
Statistics Service (NASS) Chickens and Eggs Summary for 2015, which 
includes organic and conventional eggs, lists the average number of 
eggs per layer as 276, or 23 dozen, in 2015 and 276.6, or 23.05 dozen, 
in 2016. In contrast, based on AMS's calculation in Tables 6, 7, and 8 
of Withdrawal Workbook,\13\ AMS assumed, without explanation, that the 
average annual dozen eggs laid per bird was 24.7708. This higher 
production value increased the estimated number of eggs produced by 
7.51 percent over the estimate in the contemporaneous Market News 
Report.
---------------------------------------------------------------------------

    \12\ The AMS Market News report adjusts organic egg production 
figures only every month or so.
    \13\ Specifically, 24.7708 Eggs Per Layer is the ratio of 
``Eggs'' to ``Layers #'s'' for each year except for year 4. As 
explained in the section on Non-material Errors (1.B), the year 4 
Eggs value likely reflects a transposition error.
---------------------------------------------------------------------------

    This Report finds that the use of the 24.7708 dozen eggs-per-layer 
assumption was inappropriate for two reasons. First, the data source of 
egg-per-layer value used is poorly documented and significantly exceeds 
other readily available data collected by USDA at the national level. 
Second, it deviates from the AMS Weekly Report data relied upon in the 
Final RIA for the layer numbers. It is generally considered a best 
practice to use a single, consistent data set because doing so limits 
the possible ways that biases arising from methodological differences 
and data-collection error may influence the analysis.
C. Separate Descriptions of Scenario C in the Final RIA Do Not Match
    The Final RIA calculates costs and benefits under three sets of 
assumptions regarding the entry of operations to the industry (i.e., 
industry growth at a 12.7 percent rate in the five years preceding the 
full compliance date) and the exit of operations when firms must become 
compliant in year 6. This Report previously described Scenario C based 
on descriptions from pages 6 and 7 of the Final RIA. However, pages 98 
and 118 of the Final RIA include an alternative description of Scenario 
C (labeled hereafter as Scenario C.2, to distinguish it from the 
description of Scenario C described in the Summary Table on pages 6-7 
in the Final RIA) that has an important difference affecting the cost 
and benefit calculations applicable to that scenario. Specifically, 
Scenario C.2 is described on page 98 (Passage 9) as assuming that:

    . . . 50 percent of current production would exit the organic 
market in 2022 and that there would be no new entrants until that 
time. [italics added]

Page 118 seems to reflect the same description stating:

    We base costs on . . . the layer population in 2017, and no new 
entrants to the organic egg market during the implementation period 
for this rule. [italics added]

However, page 118 later states that:

    In addition, we expect that any producers who cannot comply with 
this rule will not enter the organic egg market during the 
implementation period.

The page 98 quote assuming ``no new entrants until [2022]'' and the 
page 118 quote assuming ``no new entrants . . . during the 
implementation period [through 2022]'' support the description in 
Scenario C.2. The second quote on page 118, suggests, however, that 
entry continues but only by compliant producers. Page 7 of the Final 
RIA describes Scenario C similarly to the description in the second 
quote on page 118, which suggests that entry (i.e., growth) continues 
but that ``there are no new entrants after publication of this rule who 
cannot comply'' with the OLPP Rule. The he ``who cannot comply'' 
language is superfluous unless there are also entrants who can comply. 
If entry (i.e., growth) continues as assumed by Scenario C, 711 million 
eggs are projected to be produced in year 6 and the share of production 
that is already compliant exceeds 50 percent. If no entry occurs as 
assumed by Scenario C.2 (i.e., no growth), 390M eggs are produced in 
year 6 and the share of production that is already compliant is less 
than 50 percent. As we discuss in Section 5, cost and benefit 
calculations for Scenario C depend only on the number of non-compliant 
producers that become compliant as a result of the OLPP Rule in year 6. 
If a large number of compliant producers enter the industry after the 
rule is announced, then the share of industry that is non-compliant in 
year 6 becomes smaller. In Section 5, this Report describes how 
Scenario C implies that less than 50 percent of operations are non-
compliant in year 6 so that the 50 percent share of producers that AMS 
assumes will remain in the industry after the OLPP Rule takes effect 
would all already be compliant. For this reason, the discrepancy 
between the Scenario C and Scenario C.2 descriptions has a direct 
impact on cost and benefit calculations.
    This Report notes that confusion over the exact assumptions 
involving Scenario C is likely to have prevented external reviewers 
from replicating key cost and benefit calculations, especially when 
this problem occurs in conjunction with other documentation errors 
surrounding baseline production values.
D. Number of Eggs With New Outdoor Access Not Stated for Two of Three 
Scenarios
    Neither pages 97 and 98 of the Final RIA nor any other section of 
the Final RIA states the number of eggs that are subject to the OLPP 
Rule (Ey6) in Scenario B and C. While the Ey6 value of 97,708,552 for 
Scenario B was subsequently provided later in the Withdrawal Workbook, 
the Scenario C value of 89,361,091 is not explicitly stated and can 
only be inferred from calculations in the tables. See Sections 5.G and 
the footnote to Table 1 of this Report for discussion. While these 
omissions do not represent errors in the calculations unto themselves, 
they would have, especially in conjunction with other errors mentioned 
in this section, severely hampered the ability of external reviewers to 
replicate and examine key calculations regarding both the benefit and 
cost calculations of the Final RIA.
E. Benefits Values Reported in Summary Tables Do Not Match the Text
    The Summary Table (pages 6-7) and Table 1 (pages 8-11) of the Final 
RIA present benefit calculations that do not match the descriptions of 
those calculation on pages 97 and 98 (Passage 10). Specifically, 
Scenario A benefits:

    ``. . . range between $13.77 million to $ 32.1 million annually 
with a mean value of $23 million over a 15-year period.''

Scenario B benefits:

    ``. . . range from $3.79 million to $8.84 million per year''

Scenario C benefits:

    ``. . . range from $6.93 million to $16.17 million per year.''

In contrast, the Summary Table and Table 1 list Scenario A benefits at 
$16.3 to $49.5 million, Scenario B benefits at

[[Page 22671]]

$4.5 to $13.8 million, and Scenario C benefits at $4.1 to $12.4 
million.
    The Summary Table and Table 1 show the sum of benefits to which 
discounting (which had been done improperly) and the depreciation 
treatment have been applied and which was then converted to an 
annualized benefit using the Microsoft Excel Payment (PMT) function 
(see footnote 6). The page 97 text, however, presents the average 
annual benefits to which the depreciation treatment but not discounting 
had been applied. Also, the page 97 values do not annualize the total 
benefit using the Payment function, but instead sum the yearly benefits 
and then divide that sum by the total number of years considered, 15. 
The Final RIA does not present the benefit values stated in the Summary 
Table and Table 1 elsewhere in the document, nor does it describe the 
function used to convert total benefits to an annualized figure. These 
discrepancies would likely have prevented a knowledgeable reader from 
independently replicating the AMS calculations.
F. Costs Estimates for Scenario A in Final RIA Text Are Inconsistent
    Page 110 of the Final RIA (Passage 11) states:

    For the organic egg sector, AMS estimates that the costs of this 
rule will average $15 million to $21.9 million annually, over 15 
years, if all producers comply (the discounted annualized estimated 
costs are $24.7 million to $27.5).

These costs align with the cost figures in the Summary Table and Table 
1 for Scenario A only. Note that across all the scenarios considered, 
the discounted annualized estimated costs of the broiler rule are 
unchanged at $3.541 million at the 3 percent discount rate and $4.092 
million at the 7 percent discount rate, figures reflected in the last 
two columns of Sheet 1 in the Withdrawal Workbook. That same sheet 
shows that the sum of the layer and broiler cost components of the rule 
is $31.036 million at the 3 percent level and $28.699 million at the 7 
percent level. These figures correspond to the Summary Table (pages 6-
7), Table 1 (pages 8-11), and Table 15 (page 116) of the Final RIA.\14\
---------------------------------------------------------------------------

    \14\ Similarly, page 114 also states that ``[i]n summary, the 
average annual costs for the organic poultry sector are estimated to 
range from $17.4 to $24.7 million annually over 15 years.''
---------------------------------------------------------------------------

    In contrast, pages 111-112 (Passage 12) of the Final RIA states:

    If all currently certified organic egg producers comply with 
this rule and the organic production continues to grow at 12.7 
percent each year, we estimated that the annual cost of the rule is 
$32.3 million ($17 million at 7 percent discount; 24.2 million at 3 
percent discount.)

The preface indicates that this passage also describes Scenario A but 
the figures do not match those previously stated, any of the figures 
found in Summary Table, Table 1, or Table 15 of the Final RIA, or the 
figures presented in the first three sheets of the Withdrawal 
Workbook.\15\ \16\
---------------------------------------------------------------------------

    \15\ The Withdrawal RIA made no corrections to the cost 
calculations in the Final RIA. For this reason, an error in the 
Final RIA cost calculations extends into the Withdrawal RIA as well.
    \16\ Pages 121-23 of the Final RIA consider Scenarios B and C 
together, with Table 16 (page 122) corresponding to Scenario C and 
Table 17 (page 123) corresponding to Scenario B.
---------------------------------------------------------------------------

G. Transposition Error Likely Affected Scenario C Benefit Calculation 
in Final RIA
    The number of eggs used in Scenario C in the Final RIA should 
likely have been 88,822,332 rather than 89,361,091. The value 
88,822,332 is one-eighth of the total number of eggs produced after 5 
years of growth at the 12.7 percent rate, or \1/4\ x (24.77083335 x 
14,343,051) where 24.77083335 is the number of dozen eggs produced per 
layer annually and 14,343,051 is half of 28,686,102, the number of 
layers after 5 years of growth. The incorrect value of 89,361,091 (= 
\1/4\ x 357,444,364) eggs used in Scenario C corresponds with the 
incorrect substitution of 14,430,050 for 14,343,051. The italicized 
material suggests where a transposition error likely occurred, an error 
that carried through from the Final RIA to the Withdrawal RIA.\17\
---------------------------------------------------------------------------

    \17\ The Excel File titled ``C-OLPP All Costs Benefits FINAL'' 
contained the sheet ``Benefits--cage-free no entry'' forming some of 
the calculations in Sheet 8 of the Withdrawal Workbook. In this 
Excel file, the value of 357,444,364 eggs did not have an underlying 
formula or source associated with it, but the 89,361,091 value for 
the number of eggs that entered the benefits equation was defined as 
\1/4\ of that value.
---------------------------------------------------------------------------

H. Poor Justification for the General Specification of Scenario B in 
Final RIA
    Scenario B in the Final RIA made the assumption that between the 
time the rule was published in 2017, and five years later, when full 
compliance was required, industry production would grow at a 12.7 
percent annual growth rate. This rate predicted industry growth of 81.8 
percent from year 1 to year 6.\18\ Then, scenario B assumes that after 
5 years of such growth, 50 percent of firms would exit the organic egg 
industry. Because the ratio of producer types stays constant, the 
scenario implies that half of the producers who entered the industry 
after the rule was published in year 1 would then leave the industry at 
the compliance date. Under a modest assumed level of industry growth, 
this specification might be inconsequential. However, given the high 
assumed rate of production growth (81.8 percent), this specification 
implies that a production volume equal to 40.6 percent of the baseline 
production level both enters and departs the organic egg industry over 
the span of five years with full knowledge of the regulatory 
requirements expected to cause the departure of half of the market upon 
the compliance date. Page 47 of the Final RIA seems to preclude this 
possibility (Passage 13), stating:
---------------------------------------------------------------------------

    \18\ This rate of growth is substantially larger than the 2 
percent growth rate assumed in the preliminary RIA and is explained 
in footnote 131 on page 126 of the Final RIA as reflecting new data.

    After publication of the rule, AMS projects continued entry into 
the organic egg market (see Table 3). The implementation dates of 
the rule as drafted would give those operations--certified after the 
publication of the rule but prior to 3 years after publication--5 
years to comply. This is intended to provide additional time to 
producers who had intended to enter organic production near the time 
this rule is published to prepare land to meet the organic 
requirements (the required preparation time lasts three years). 
Given that the proposal was published early in 2016, the majority of 
new entrants from publication (2017) until three years later (2020) 
would be aware of the new requirements and construct facilities that 
comply with the outdoor space requirements. Because there is no 
economic rationale for a producer to incur the licensing and 
construction expenses associated with organic production, only to be 
out of compliance within a few years, late entrants into the market 
are assumed to comply. However, in the cost estimates below, AMS 
considered that there may be new entrants up until full 
implementation for layers and that there may be costs to these 
entrants. We believe this could significantly overestimate the 
costs, but are providing this to capture a range of potential 
---------------------------------------------------------------------------
outcomes given uncertainties in the underlying assumption.

In Passage 13, AMS states that it assumes that all late entrants (i.e., 
those entering the industry after the rule is published) would be 
compliant with the new rule because there is ``no economic rationale'' 
to believe that they would not be. However, by allowing for growth in 
non-compliant operations, particularly aviaries, within the underlying 
costs calculations, AMS assumed that such firms continue to enter. The 
implication of AMS's later statement that the inclusion of ``new [non-
compliant] entrants . . . could significantly overestimate the costs'' 
would only have the effect of increasing costs in the final 
calculations is misleading because a higher number of non-compliant 
operations moving into compliance

[[Page 22672]]

increases the size of the estimated benefits. Within the structure of 
AMS cost and benefit calculations, operations that are already 
compliant with the rule in year 6 do not create have new costs to 
become compliant, nor do they create any new benefits. As described in 
Section 5, if all entrants to the industry after year 1 are compliant 
with the new outdoor access requirement, then greater than 50 percent 
of operations are already compliant in year 6 when AMS assumes that the 
50 percent of presumably non-compliant operations leave the industry. 
This suggests that there would be no new benefits and no new costs if 
only compliant firms enter the industry before year 6 but after the 
OLPP Rule's publication.
    Given the costs and time for firms to enter the organic industry, 
this Report finds that AMS's assumption that non-compliant operations 
continue to enter the industry in the period after the OLPP Rule's 
publication date but before its compliance date is not well-justified.

5. Error in the Volume Specification Affecting Benefits Calculations in 
Two of Three Scenarios

    In the Final RIA, AMS stated that the outdoor access requirement 
established by the OLPP Rule for organic egg production is a ``credence 
good'' because it is a characteristic that cannot be independently 
verified by the consumer at the time of consumption and therefore 
requires trust in a label to ascertain that the quality characteristic 
is present. AMS did not specify how consumers of compliant eggs know 
that the layers of these eggs have open access to the outdoors, whether 
operations advertise their eggs as having that characteristic, or 
whether consumers of such eggs pay a premium (above the ordinary 
organic premium) for eggs with this characteristic. The presence of 
such premiums would likely affect the content of the RIA. Regardless of 
these mechanisms, AMS assumed that only organic eggs that did not 
previously have the outdoor access production characteristic and now 
acquired it as a result of the OLPP Rule would generate new benefits 
for consumers.
    On page 27 of the Final RIA (Passage 14), AMS wrote:

    In response to the descriptions in public comment, AMS is 
modifying the estimated proportion of organic operations that have 
adequate land to comply with this rule. In the proposed rule, we 
estimated this could be 50 percent of organic egg production. As 
discussed above, AMS is assuming that all aviary operations, which 
account for an estimated 70 percent of organic egg production, would 
need to acquire additional land. Based on public comments, we are 
also projecting that a portion, 17 percent, of single-story (non-
aviary) operations, which account for an estimated 5 percent of all 
organic egg production, would also need to acquire additional land 
because they may not have two barn footprints of outdoor space due 
to various conditions specific to the operation.

Scenarios A, B, and C specify that growth occurs in the industry at a 
12.7 percent rate from year 1 to year 6.\19\ Scenario C (but not 
Scenario C.2) indicates that the proportion of facilities of each type 
in the industry changes as the industry grows. The construction of 
Scenarios A and B, however, strongly suggests that there is no change 
in the proportions of production facilities of each type through year 
6. Page 27 (Passage 15) then states:
---------------------------------------------------------------------------

    \19\ Non-aviary systems account for 30 percent of production. 
One-sixth of these producers (16.67 percent) is 5 percent of all 
production.

    In summary, AMS assumes that operations representing 75 percent 
of organic egg production could incur costs for purchasing and 
maintaining additional land to comply with the outdoor stocking 
---------------------------------------------------------------------------
density requirement.

This statement, in which the outdoor stocking density requirement 
refers to the new requirements for outdoor access under the OLPP Rule, 
implies that if the proportions of all operations of each type remain 
in production and no firms exit the industry (as Scenario A indicates), 
then 75 percent of current organic egg production will gain new outdoor 
access as a result of the rule.
    Scenario A assumes that all producers become compliant. The Final 
RIA calculates benefits for Scenario A by multiplying the WTP values by 
one-half of year 6 production. In this case, multiplying production by 
50 percent is likely a correction for the proportion of existing 
production that is already compliant. If so, this proportion likely 
reflects the Preliminary RIA's lower assumed proportion of production 
occurring under aviary systems. The Preliminary RIA states (Passage 16, 
page 115):

    For this analysis, we assumed that pasture housing, floor litter 
housing and slatted/mesh floor housing systems collectively account 
for 50 percent of organic egg production and either currently comply 
with the outdoor space requirements or have the land available to 
comply with the proposed outdoor stocking rate without significant 
changes to the number of birds or facilities.

In the Preliminary RIA, AMS assumed that 50 percent of production was 
from non-aviary type facilities (i.e., pasture housing, floor litter 
housing, and pit litter housing systems) and already compliant with the 
OLPP Rule and that the other 50 percent was of the aviary type and not 
compliant. Under these assumptions for Scenario A (Full Compliance), 
the share of production that would acquire new outdoor access and 
provide new benefits to consumers was 50 percent of production.
    In the Final RIA, AMS altered this assumption and instead assumed 
that 30 percent of production was from non-aviaries (with only 25 
percent of total production being already compliant) and that the other 
70 percent of production was from non-compliant aviary operations. 
Under these new assumptions, 75 percent of production would provide new 
benefits to consumers because that is the share of production not 
already in compliance with the OLPP Rule before it takes effect. For 
this reason, this Report finds that calculations in the Final RIA that 
assume that new benefits only arise from 50 percent of the organic egg 
produced in year 6 in Scenario A are inconsistent with assumptions 
stated elsewhere.
    Scenario B assumes that the industry and production grow at the 
12.7 percent rate annually between year 1 and year 6 and that 50 
percent of current production exits the industry in year 6 when the 
rule becomes effective.\20\ Page 27 of the Final RIA (Passage 15) 
indicates that 75 percent of production must incur costs to become 
compliant with the open access requirement. If the 50 percent of 
production that exit the organic market are noncompliant producers, 
then 25 percent of production will have been noncompliant, become 
compliant as a result of the rule, and now gained new outdoor access. 
Scenario B calculates benefits based on 25 percent of year 6 production 
gaining new outdoor access (which are subsequently multiplied by the 
WTP value). This Report assesses those calculations as being accurate 
given the description of assumptions made on the composition of 
production with regard to compliance.
---------------------------------------------------------------------------

    \20\ In the Withdrawal Workbook, AMS presented tables that 
projected future volumes based on a 12.7 growth rate for the entire 
15-year period considered in the analysis. The higher egg volume 
projections after year six, however, had no bearing on the actual 
calculations of costs and benefits.
---------------------------------------------------------------------------

    As described previously, Scenario C assumes that 50 percent of 
current production exits the industry in year 6. Between year 1 and 
year 6, growth was assumed to occur at the 12.7 percent rate but no 
non-compliant producers were expected to enter the industry. To find 
the amount of production by incumbent firms that now provide new 
benefits to consumers, let QALL be all producers in year one 
and 0.75 x QALL

[[Page 22673]]

be all non-compliant producers in year one. If production grows by 12.7 
percent for 5 years, production in year 6 is 1.818 x QALL 
(=1.127[supcaret]5 x Q). Of these producers, there are still 0.75 x 
QALL non-compliant producers in the industry (i.e., the same 
number of non-compliant producers from year one). Subsequentially, the 
remaining 1.068 x QALL are all compliant.
    If half of production exits the industry under Scenario C, then 
0.91 x QALL leave the industry. Presumably, only non-
compliant producers leave the industry in year 6. This implies that all 
of the non-compliant production from year 1 leaves the industry (0.75 x 
QALL) along with an additional 0.16 x QALL of 
production that is already compliant. Since already compliant 
operations that remain in the industry do not generate any new 
benefits, no new benefits are created under the assumed conditions of 
Scenario C. In the Final RIA, however, AMS based its benefit 
calculations on a production volume getting newly acquired outdoor 
access of one-eighth (12.5 percent) of year 6 production or 0.225 x 
QALL (=.0125 x 1.818 x QALL) to calculate its 
benefit value.\21\ This Report finds that the benefit calculation AMS 
used in Scenario C is incorrect and overestimates the total value of 
benefits.
---------------------------------------------------------------------------

    \21\ The likely transposition error discussed in Section 5.G 
affected this calculation. Year 6 production is 710,578,652, or 
1.127[supcaret]5 (or 1.818) multiplied by Year 1 production of 
390,834,208. One-eighth of year 6 production is 88,822,332. Section 
5.G describes how that number was likely incorrectly transcribed to 
be 89,361,091.
---------------------------------------------------------------------------

    Alternatively, AMS might have intended to have described Scenario 
C.2 rather than Scenario C in its benefits calculation. Scenario C.2 
assumes that 50 percent of current production exits the industry in 
year 6 and no growth occurs until that time (See Section 4.C). In this 
case, the benefits calculated for C.2 would be the same as the benefits 
calculated for Scenario B. In that Scenario, 25 percent of year 1 
production (0.25 x QALL) gains new outdoor access and this 
volume would be multiplied by the WTP to find benefits. Since this also 
differs from the 0.225 x QALL value used in the Final and 
Withdrawal RIAs, this Report also finds that the calculated benefit for 
that Scenario in the Final RIA is inconsistent with the description of 
Scenario C.2.

6. Incorrect Use of the Production Levels That Do Not Account for 
Increased Mortality When Calculating Benefits

    In the Final RIA, AMS stated that it expected layer mortality to 
increase from 5 to 8 percent as a result of the OLPP Rule's new outdoor 
access requirement, which exposed layers to increased risks of disease 
and predation. As a result, AMS developed estimates of after-the-rule 
production levels that were 1.4 percent lower than the before-the-rule 
levels that specifically reflected this mortality adjustment. While the 
cost estimates correctly utilized the relevant after-the-rule 
production level, the benefits calculations were calculated based on 
the quantity levels that did not take into account the expected 
increase in mortality. Details for specific values of the production 
before the rule (with the lower mortality rate) and after the rule are 
provided in the following section. Because the production level enters 
into the benefit calculation multiplicatively, the benefit calculation 
is over-estimated by 1.4 percent. This Report finds that AMS erred by 
using the before-the-rule production level when the after-the-rule 
production level was appropriate.

7. Errors in Cost Calculations in the Final RIA

    The cost calculations were not fully documented in the Final RIA 
with regard to how the OLPP Rule affected average costs across 
operation types. This section describes the cost calculations and notes 
several concerns, including how production levels used to calculate 
costs and benefits differ, how AMS did not appropriately consider the 
costs to aviaries that could not obtain land, and how production shares 
were not updated for firm exit. By not appropriately considering the 
costs to aviaries that could not obtain land and not updating 
production shares for firm exit, AMS likely underestimated the costs to 
implementing the rule in specific instances.
    The main documentation for the cost and transfer calculations of 
the Final RIA was included in workbooks titled ``A-OLPP layer costs--
cage free'' (A-OLPP) and ``Barn and Layer projections FR 01 2017 OMB'' 
(B-Layer). For the four types of operations (pasture raised, floor 
litter, pit litter, and aviary), the A-OLPP file enumerates the costs 
of producing organic or cage-free eggs (i.e., feed costs, machinery, 
labor, etc.). A-OLPP documents layer numbers, production levels, and 
adjustment factors including the death loss rate, which AMS expected to 
increase under the OLPP Rule. A-OLPP also reports calculations for 
production levels, fixed costs, variable costs, average total costs, 
revenue (based on price assumptions), and cost differentials before and 
after the OLPP Rule. The cost burden of the rule has two components for 
egg producers--increased physical costs and reduced revenue. In the 
Final RIA's Tables 16 and 17 on pages 122-123 (which correspond to 
Withdrawal Workbook sheets 2 and 3), the ``Cost: Layers'' column refers 
to the sum of increased physical costs and reduced revenue.
    The A-OLPP file has six sheets. The A-OLPP sheets titled Industry 
Cost No Entry (No Entry Sheet) and Industry Cost Entry (Entry Sheet) 
calculate total aggregate costs of the rule, including increased 
physical costs and reduced revenue for all operation types, under the 
alternative assumptions that the industry production did not grow and 
that it grew at the 12.7 percent rate. In the Entry and No Entry 
Sheets, cell E67 reports total costs, cell E65 reports lost revenue, 
and cell E59 reports increased physical costs. These values are the 
sums of the values for each operation type, with only the pasture 
raised operations incurring no additional increased physical costs or 
lost revenue. Cells G36:G38 and D35:D38 show production levels for each 
operation type before and after the rule takes effect, the difference 
arising from the increase in death loss following the OLPP Rule's 
promulgation.\22\ The difference between rates of death loss (reported 
in cells B18 and B19) drives the difference in the production levels 
before and after the rule takes effect. The A-OLPP file reports total 
costs in year 6 of $55,135,426 in the Entry Sheet and $30,325,723 in 
the No Entry Sheet. These computations do not consider whether 
operations exit in year 6, but are instead based on cells G36:G38, the 
production levels after the OLPP Rule takes effect if all operations 
are producing.
---------------------------------------------------------------------------

    \22\ Death loss rates before and after are presented in B18 and 
B19.
---------------------------------------------------------------------------

    Note that production for each operation in the Entry Sheet is 
1.818107555 times greater than its value in the No Entry Sheet. This 
indicates that growth does not change the proportions of operation 
types in the industry. Also, note that production levels after the rule 
takes effect (G39) are 1.4 percent lower than their levels before the 
rule takes effect (D39). The higher before-rule production levels form 
the baseline production levels in the benefits calculations.
    The A-OLPP total cost values in the Entry and No Entry Sheets do 
not consider the effect of operation exit. Instead, the B-Layer file 
adjusts the total cost values for the shares of year 6 production that 
remains in the industry to compute costs under the different Scenarios. 
As described in Section 5, AMS expected different proportions of the 
producer types to exit the industry in Scenario B and C where exit 
occurs.

[[Page 22674]]

Specifically, the 70 percent share of egg production from aviaries 
would fall to 25 percent and the 30 percent share of non-aviary 
production would fall to 25 percent. Since AMS had different cost 
calculations for each type of producer, it should have used these 
expected changes in shares to scale costs specifically by operation 
type. Instead, it applied a single scaling multiplier to total costs 
(across all operation types) based on the aggregate share of year 6 
production that remains in the organic egg industry.
    In B-Layer, the cell H8 value of $7,541,431 in the ``Transfer--No 
Entry'' sheet describes annual layer costs in Scenario C, which 
corresponds to Table 16 of the Final RIA.\23\ This value reflects the 
$30,325,723 total cost from the Entry Sheet being scaled by \1/4\.\24\ 
The cell H8 value of $13,784,001 in the ``Transfer to Cage Free'' Sheet 
describes annual layer costs in Scenario B, which corresponds to Table 
17 of the Final RIA.\25\ This value is \1/4\ of the total cost value of 
$55,135,426 recorded in the ``Industry Cost--Entry'' sheet.\26\ The 
interpretation of the \1/4\ multiplier is discussed later in this 
section.
---------------------------------------------------------------------------

    \23\ The cell I8 value of $170,042,253 is the annual transfers 
value reported in sheet 4 of the Withdrawal Workbook.
    \24\ In the sheet, the $7,542,431 is the sum of four component 
values, but each has the same multiplier and sum to \1/4\ of total 
costs in the ``Industry Cost--No Entry'' sheet by construction.
    \25\ The cell I8 value of $93,527,000 is the value of annual 
transfers value reported in sheet 5 of the Withdrawal Workbook.
    \26\ In the sheet, the $13,784,001 is the sum of four component 
values, but each has the same multiplier and sum to \1/4\ of total 
costs in ``Industry Cost--No Entry'' sheet by construction.
---------------------------------------------------------------------------

    In B-Layer, the cell H9 value of $3,812,000 in the ``Stay in 
Organic'' sheet reflects the one-time fixed costs of aviaries acquiring 
land and is equal to Scenario A's year 3 costs in Table 15 of the Final 
RIA. Cell H10 of that same sheet calculates recurring annual costs of 
$55,135,426 after year 6. As previously discussed in Section 3.C, Table 
15 of the Final RIA presents annual cost figures for layers for three 
groups of producers divided by the age of the producer.\27\ The values 
for the one-and two-year old producer groups correspond to their share 
(12 and 24 percent) multiplied by $55,135,426. Section 3.C describes an 
error in the Withdrawal RIA whereby the depreciation error was not 
entirely removed from the cost calculations for houses older than four 
years.
---------------------------------------------------------------------------

    \27\ The distribution of the productive type for this group is 
assumed to be the same as it was previously--70 percent aviaries, 10 
percent pasture, 10 percent pit litter, and 10 percent floor litter.
---------------------------------------------------------------------------

    The Final RIA's costs calculations for layers of a certain type 
(pasture, floor litter, pit litter, and aviaries) reflect two 
components--increased physical costs for the portion of production 
remaining in the industry and lost revenue for the portion of 
production exiting the industry. For each producer type, increased 
physical costs equals the number of eggs multiplied by the difference 
in the estimated average costs of production before and after the rule. 
Lost revenue for layers is the difference in the number of eggs 
produced before and after the rule multiplied by the break-even organic 
price before the rule. Table 3 provides values of average costs and 
break-even price \28\ for each type of operation.
---------------------------------------------------------------------------

    \28\ The break-even price reflects the (before rule) average 
costs with an adjustment for the 20 percent of output that goes to 
the less-lucrative breaker egg market.

                         Table 3--Average Costs and Break-Even Prices by Operation Type
----------------------------------------------------------------------------------------------------------------
                                                                   Average costs                  Break-even egg
                         Operation type                             before the     Average costs   price before
                                                                       rule       after the rule     the rule
----------------------------------------------------------------------------------------------------------------
Pasture.........................................................         $3.0427          $3.043          $3.403
Floor Litter....................................................          1.8972           1.947           2.121
Pit Litter......................................................          1.8972           1.947           2.121
Aviary (Can Get Land)...........................................          1.8344           1.891           2.043
Aviary (Can't Get Land).........................................          1.8344           2.399           2.043
----------------------------------------------------------------------------------------------------------------
Note: All values are in dollars per dozen.

    Since pasture operations are already fully compliant with the OLPP 
Rule, their average costs are equal before and after the rule. A-OLPP 
sheet ``Layers-Aviary'' provides average cost and break-even price 
calculations for both aviaries that could not obtain land and aviaries 
that could. As Table 3 shows, aviaries that could not obtain land faced 
a much higher average cost (after the rule) than aviaries that could 
obtain land. The ``Aviary (Can't Get Land)'' average cost values 
reflect costs if the baseline aviary's post-rule production was one-
third of its pre-rule production, a production level reduction that 
mirrors the level of firm exit AMS assumed for the aviaries after the 
rule in Scenarios B and C.\29\ Based on comments, AMS increased the 
production share of aviaries from 50 percent in the Preliminary RIA to 
70 percent in the Final RIA, but assumed that two-thirds of aviaries 
would not be able to acquire land. The Final RIA (Passage 17, pages 27-
28) states:
---------------------------------------------------------------------------

    \29\ In AMS cost calculations in A-OLPP, total cost is the sum 
of total fixed costs and total variable costs for a baseline 
enterprise budget AMS estimated for a large organic layer operation. 
Between firms able to purchase land and firms unable to purchase 
land, fixed costs are roughly equal at $420,626 and $418,234, 
respectively. On the other hand, total variable costs differ by 
approximately an order of three at $4,236,938 and $1,552,299. This 
reflects a production level differing by approximately an order of 
three at 2,464,000 dozen eggs for farms that can acquire land and 
821,333 dozen eggs for farms that cannot acquire land. The average 
total cost for farms that can acquire land of $1.8902 per dozen 
reflects the sum of fixed and variable costs equaling $4,657,564 
divided by 2,464,000 dozen eggs. The average total cost for farms 
that cannot acquire land of $2.3992 reflects the sum of fixed and 
variable costs $1,970,533 divided by 821,333.

    AMS is estimating that about two-thirds of the aviaries, 
equivalent to 45 percent of organic egg production, and that a 
portion of non-aviary production, which accounts for 5 percent of 
organic egg production, will not be able to acquire additional land 
and will move to the cage-free market. In summary, AMS believes that 
50 percent of organic production may transition to cage-free egg 
production, while the remainder would be incentivized to remain in 
---------------------------------------------------------------------------
the organic market and obtain needed land.

Despite calculating this figure within internal spreadsheets, AMS did 
not apply or publish the ``aviary (can't get land)'' average cost 
values in the Final RIA. In the Final RIA, AMS (Passage 18, page 24) 
writes:

    AMS acknowledges that some producers may opt to remain in 
organic production by obtaining non-adjacent land and constructing 
new facilities. While AMS is not estimating aggregate costs based on 
assumptions about what proportion of organic producers may decide to 
remain in organic production by constructing new facilities, we are 
providing some parameters of such costs. Based on information from 
the

[[Page 22675]]

organic egg producers, AMS estimates that the costs of aviary 
housing is [sic] $70/hen. Further, we believe that larger organic 
operations have a minimum of 100,000 hens; medium scale have between 
30,000-100,000 birds and smaller scale less than 30,000 birds. 
Therefore, the corresponding estimates for housing costs for 
producers of each size category: $7 million minimum (large scale); 
$2.1-$7 million (medium); $2.1 million maximum (smaller scale). In 
addition, producers that construct new aviary facilities to house 
100,000 birds would need approximately 6.12 acres of land for 
housing and outdoor space. This amounts to nearly $28,000 in land 
costs.
    Since AMS deviated from those provisions, we are not utilizing 
the associated cost projections. [italics added]

In the first italicized passage, AMS states that some aviary operations 
that could not acquire additional (adjacent) land might be forced to 
buy land elsewhere and build new facilities to remain in operation. AMS 
then outlines ``parameters of such [building] costs'' before stating in 
the second italicized passage that it would not utilize these costs.
    Table 4 lists the production levels before and after the OLPP Rule 
for each type of operation for Scenario A. The total level of eggs 
before accounting for the rule's impact on mortality--710,578,627 
dozen--corresponds to the level of eggs in year 6 as listed on Table 6 
of the Withdrawal Workbook. The numbers of eggs before and after the 
rule differ because AMS expected layer mortality to increase with 
outdoor access. As we note in Section 6, AMS used the higher before-
the-rule production level rather than the lower after-the-rule 
production levels in the benefits calculations and this led to their 
over-estimation.

                 Table 4--Production Values, Cost Increases, and Lost Revenues From Entry Sheet
----------------------------------------------------------------------------------------------------------------
                  Type                     Eggs after rule  Eggs before rule   Increased costs    Lost revenue
----------------------------------------------------------------------------------------------------------------
Pasture.................................        64,495,917        64,495,917                $0                $0
Fl. Litter..............................        70,682,553        71,786,968         3,506,265         2,343,009
Pit Litter..............................        70,682,553        71,786,968         3,507,153         2,343,009
Aviary..................................       494,777,870       502,508,774        27,641,969        15,794,020
                                         -----------------------------------------------------------------------
    Total...............................       700,638,893       710,578,627        34,655,387        20,480,038
----------------------------------------------------------------------------------------------------------------

Increased costs and lost revenues equal $55,134,539. As we note in 
Section 3.C, this value would have been the total cost to egg producers 
in Scenario A if the depreciation treatment had not been applied for 4-
year-old houses. This value is the sum of total increased costs--
$34,655,387--and total lost revenue--$20,480,038. Importantly, the 
computation for increased costs for aviaries uses only the average 
costs for aviaries that can obtain land. Because AMS estimated that 
about 45 percent of production was comprised of aviaries that could not 
obtain land and because these aviaries have far higher costs than 
aviaries that can obtain land, using only the average cost for aviaries 
that can obtain land for all aviaries will lead AMS estimate of costs 
for Scenario A to be underestimated.
    Under Scenario B, the organic egg industry grows at a 12.7 percent 
rate between year 1 and year 6, after which time half of the market 
participants leave the industry. To obtain the increased costs 
estimate, AMS used \1/4\ of the year 6 production levels for each type 
of operation and then multiplied these values by the difference in 
average costs before and after the OLPP Rule, as with Scenario A. 
Similarly, for decreased revenues, AMS used production values before 
and after the rule that were \1/4\ of the values used in Scenario A. 
This Report notes that production levels enter linearly into the 
formulas for increased costs and lost revenue. As a result, the total 
costs reported in Table 17 for layers are $13,784,000.
    In Scenario C, the industry grows at the 12.7 percent rate with no 
entry from non-compliant producers and then, in year 6, 50 percent of 
producers exit and transition to cage-free production. Table 5 below 
shows the level of eggs produced before and after the OLPP Rule with no 
growth. Based on these levels, Table 5 shows that total increased costs 
are $19,061,241 and lost revenue is $11,264,482 so that total costs are 
$30,325,723. As with Scenario B, the numbers of eggs used in the 
calculations (both before and after the rule) are multiplied by \1/4\ 
and the estimated value calculated for Scenario B is \1/4\ of 
$30,325,723 (the sum of increased costs and lost revenue) in Table 5 
below, or $7,541,431.

               Table 5--Production, Increased Costs, and Lost Revenues From A-OLPP No Entry Sheet
----------------------------------------------------------------------------------------------------------------
                  Type                     Eggs after rule  Eggs before rule   Increased costs    Lost revenue
----------------------------------------------------------------------------------------------------------------
Pasture.................................        35,474,203        35,474,203                $0                $0
Fl. Litter..............................        38,876,992        39,484,445         1,928,524         1,288,707
Pit Litter..............................        38,876,992        39,484,445         1,929,013         1,288,707
Aviary..................................       272,138,944       276,391,115        15,203,704         8,687,067
                                         -----------------------------------------------------------------------
    Total...............................       385,367,131       390,834,208        19,061,241        11,264,482
----------------------------------------------------------------------------------------------------------------

Based on these figures, this Report finds three errors with the cost 
calculations in the Final RIA, as described in the following sections.
A. Production Levels Used To Calculate Costs and Benefits Differ
    The Final RIA (Passage 19, page 27) indicates that:

    AMS assumes that operations representing 75 percent of organic 
egg production could incur costs for purchasing and maintaining 
additional land to comply with the outdoor stocking density 
requirement.

Seventy five percent of the year 6 production (711 million dozen eggs) 
is 532 million dozen eggs. In its calculation of benefits, AMS sought 
to include only benefits from production

[[Page 22676]]

of organic eggs that gained new outdoor access as defined under the 
OLPP Rule and used 50 percent of year 6 production, or 355,289,326 
dozen eggs, to reflect that production. The share of houses that were 
projected to gain new outdoor access under this scenario is higher than 
50 percent because, at a minimum, all aviary production remaining in 
the industry would gain outdoor access and aviaries comprise 70 percent 
of production. For this reason, this Report finds that the assumed 50 
percent share of production that gains new outdoor access is 
inconsistent with the page 27 text.\30\
---------------------------------------------------------------------------

    \30\ Despite the page 27 statement that 75 percent of production 
would need to purchase additional land, the Entry and No Entry 
Sheets describe three producer types (pit-litter, floor-litter, and 
aviary) that comprise 90 percent of production and would incur 
increased costs as a result of the OLPP Rule. A close reading of the 
cost figures in A-OLPP indicates that little or no cost for added 
land for pit-litter and floor-litter producers was included in the 
cost calculations. It is unclear whether AMS considered production 
that gained outdoor access under the rule as production by 
operations paying additional costs under the rule or firms needing 
to acquire land under the rule. If it is firms needing to acquire 
land, the 75 percent figure may be accurate.
---------------------------------------------------------------------------

    In Scenario B, AMS computes costs based on \1/4\ of total costs in 
the Entry Sheet (relating to year 1 production levels). In the benefits 
section, AMS computes benefits based on \1/8\ (of year 6) production 
(after correcting for the error described in Section 3.C). In this 
case, AMS assumed that only 50 percent of production would gain new 
outdoor access as a result of the OLPP Rule and thereby create new 
consumer benefits. However, this Report finds the 50 percent share to 
be inconsistent with the page 27 text indicated that 75 percent of 
production would need to acquire land to gain new outdoor access and 
its costs calculations that approximately 90 percent of production 
volume pays a higher cost.
    For Scenario C, AMS computes costs based on \1/4\ of total costs 
reported in the No Entry Sheet (relating to year 1 production levels) 
but computes benefits based on \1/8\ of year 1 production. Following 
the same logic as with Scenarios A and B, this Report finds the 50 
percent share to be inconsistent with the page 27 text.
B. AMS Did Not Appropriately Consider the Costs to Aviaries That Could 
Not Obtain Land
    Aviaries comprised 70 percent of organic egg production and AMS 
estimated that approximately two-thirds of aviary producers would be 
unable to acquire the land required under the OLPP Rule. Scenario A 
calculates costs under the assumption that all current firms continue 
to operate under the new rule conditions, regardless of their ability 
to acquire additional land. Whether aviaries would become compliant by 
acquiring non-adjacent land and building new facilities (as suggested 
in Passage 17) or reducing production volumes is unclear. Despite 
acknowledging that the aviaries that comprised 45 percent of production 
that could not acquire land would face far higher average costs than 
the aviaries comprising 25 percent of production that could acquire 
land, AMS applied the lower average cost to all aviaries. This Report 
further notes that because AMS did not present any of these key 
underlying cost calculations in the Final RIA, outside reviewers may 
not have been aware of the modeling specification. Despite stating in 
Passage 18 that a cost estimate for aviaries that could not acquire 
land would not be used, this Report finds that AMS still did not fully 
explain why the lower cost estimate was used and concludes that costs 
for Scenario A were underestimated as a result.
C. Production Shares Not Updated for Firm Exit
    In Scenarios B and C, AMS assumed that, following industry growth 
for five years, 50 percent of firms exit the industry as a result of 
the rule. In Passage 17, AMS indicated that \2/3\ of aviaries would 
exit the industry after the OLPP Rule took effect. This implies that 
the ratio of aviaries to non-aviaries (pasture, floor litter, and pit 
litter) falls considerably after the rule. In Scenario B, however, AMS 
used cost calculations that assume the shares of operation types are 
unchanged. This is significant for two reasons. First, a larger share 
of remaining firms may be comprised of pastured raised operations. 
Within the context of the AMS analysis, an increased share of pasture 
raised operations causes both costs and benefits to fall. This occurs 
because operations that are already compliant with the rule do not 
produce any new benefit after the rule takes effect and do not incur 
any costs to become compliant.
    Second, a change in the composition of operations after the rule 
takes effect is likely to cause the average price of eggs to increase 
to reflect its new higher break-even level across all producers. 
Following the rule, firms will exit the industry if the average price 
of eggs is less than the break-even price. Price, however, will rise as 
firms leave the industry. Eventually, the average price reaches the 
break-even price level and firms no longer exit the market. If the 
proportion of firm types is unchanged, the increase in the break-even 
will be close to the average cost of implementing the rule. Table 3 
indicates that the maximum change in average costs across all 
operations is relatively small at 6 cents. Pasture raised operations, 
however, have far higher average costs (and related break-even costs) 
before the rule than other operation types. By assuming that the share 
of producer types is unchanged after the rule, AMS constrained the 
rule's effect on the break-even price to be the cost of compliance 
(i.e., the change in average costs) within an operation type and 
precluded a separate industry composition effect due to the industry 
shift from aviaries to non-aviaries. This industry composition effect 
will increase production costs on average for the industry independent 
of the increased cost of compliance.

Non-Material Errors in the Final and Withdrawal RIAs

1. Other Transposition Errors

    a. Costs in Withdrawal RIA--In the Withdrawal RIA's Table C, the 
cost savings are erroneously stated as ``$28.7 to $29.9'' under the 
assumed conditions of: ``All producers remain in organic market; 
Organic layer and broiler populations continue growth rates after 
rule.'' The correct values are reported in Table A as: ``$28.7 to 
$31.0.''
    b. Year 4 Egg Production--The Withdrawal Workbook Sheets 6, 7, 8, 
and 9 list 599,453,903 eggs being produced in year 4. Based on the 
stated 12.7% growth rate this value should have been 559,453,904. The 
italicized material suggests that a transposition error likely 
occurred.

2. Weighting of WTP Values

    This Report notes that Passage 1 refers to the WTP of ``the 
majority of the consumers'' while Passage 2 refers to the ``mean 
premium'' for each of the two subsets of additional consumers' WTP. 
This Report assesses the mean premium as the more appropriate value to 
apply for rulemaking purposes. This rationale is not cited in the 
Withdrawal RIA but supports AMS's decision to correct the Final RIA 
numbers.
    This Report also notes that Table 8 provides WTP estimates 
(identical to the ``mean premium'' cited in Passage 2) for two other 
subsets of all consumers--consumers differing by their perception of 
quality of an animal-friendly product and consumers differing by their 
perception of management practices on hen welfare. In the Final RIA and 
Withdrawal RIA, the high-end and low-end values for the WTP are then 
used to create separate high-end and low-end

[[Page 22677]]

estimates of the benefits under the rule. Also, despite the 
availability of the other subsets, only the ``receiving of additional 
information'' subset is used for the high and low values. Later those 
two estimates are averaged in the computation of the net benefits of 
the rule without regard for any weighing of what proportions of 
consumers actually belong to those subsets.
    From a methodological standpoint, this Report notes that the use of 
the estimate of the ``receiving of additional information'' subset, 
rather than the other subsets, is inappropriate. The ``receiving of 
additional information'' is a treatment variable where subjects receive 
additional information (relative to the control treatment of no 
additional information) on the environmental consequences of their 
choices. The other two subsets--consumers organized by perception of 
quality and consumers organized by perception of management--represent 
true control variables because they reflect consumer perceptions formed 
outside of the choice experiment, as opposed to information provided by 
the experimental designers. A more appropriate method of developing and 
compiling the WTP from the two subsets would have been to use values of 
the WTP from one of the two control groups and weight their effect on 
the final benefit values by the share of consumers in each group. In 
the case of the information provided, there is no reason to assume that 
the proportion of the consumers to which the authors provided this 
information is equal to the share of actual consumers purchasing eggs 
who might have that information.
    Despite the methodological concerns in the choice of subsets and 
the weighting of the subset groups, benefit calculations are unlikely 
to change materially when either change is applied. Because the 
``received additional information'' and ``did not receive additional 
information'' treatment groups had nearly equal numbers of consumers--
499 and 475--the weighted and unweighted averages--20.5 cents and 20.2 
cents--are very similar. Moreover, the weighted averages of the other 
two subsets--20.9 cents for ``perceptions of quality'' and 20.3 cents 
for ``perception of management practices''--are very similar to the 
``received additional information'' subset.
    This Report concurs with the assessment of the Withdrawal RIA that 
the Final RIA used inappropriate values for the WTP in its calculation 
of the benefits. The Report cites two methodological concerns in the 
Withdrawal RIA's correction of this error. However, this Report also 
notes that using benefits values with a more appropriate specification 
in the benefits calculation would not change the findings 
substantially.

3. Different Depreciation Periods Are Used in Different Sections of the 
Analysis

    In the proposed OLPP Rule published April 13, 2016 (81 FR 21956), 
AMS states that it applied a depreciation period for hen layer houses 
of either 12.5 or 13 years, the difference presumably reflecting the 
need for a round number. AMS applied the depreciation rate in three 
ways. First, a 12.5-year depreciation period is used to set the 
compliance phase period. Specifically, in the proposed OLPP Rule, AMS 
states that the difference between the depreciation rate (12.5 years) 
and average age of organic aviary layer houses (7.6 years) is roughly 5 
years. Therefore, a 5-year implementation period would allow organic 
egg producers, on average, to recover the costs of a poultry house. 71 
FR 21986.
    Second, a 13-year period is used in the depreciation treatment of 
costs and benefits in the proposed OLPP Rule. Despite the errors 
already mentioned in this section, the depreciation treatment was 
intended to be removed from calculations in the Final RIA. Third, AMS 
followed the standard accounting practice of converting the single 
period cost of a durable asset to a recurring annual cost using the 
depreciation concept. In this method, AMS divided an asset's costs by 
its depreciable life to create an equivalent annual cost in using the 
asset. In using a longer depreciation period of 20 rather than 13 
years, AMS decreased the annual costs of using the asset by 
approximately 35 percent (7/20).\31\ However, since this asset 
depreciation cost (the term being used in the ordinary accounting 
sense) is a relatively small portion of annual costs, this Report 
assesses this discrepancy as being non-material.
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    \31\ If a 20-year depreciation period is used, then annual costs 
are 5 percent of the asset's cost. If a 13-year depreciation period 
is used, then annual costs are 7.69 percent of the asset's cost.
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Appendix A--Cross Referencing of Withdrawal Workbook Page Numbers and 
Final RIA Tables

     Withdrawal Workbook Sheet 1 corresponds to Final RIA, 
Table 15 titled ``Estimated costs for organic egg and poultry 
sector--full compliance.''
     Withdrawal Workbook Sheet 2 corresponds to Final RIA, 
Table 16 titled ``Estimated cost for organic egg and poultry 
production--some operations move to cage free in year 6 (2022).''
     Withdrawal Workbook Sheet 3 corresponds to Final RIA, 
Table 17 titled ``Estimated cost for organic egg and poultry 
production--some operations move to cage free in year 6 (2022); new 
entry continues after rule.''
     Withdrawal Workbook Sheet 4 corresponds to Final RIA, 
Table 18 titled ``Estimated transfers (foregone profit) for organic 
egg and poultry production--some operations move to cage free in 
year 6 (2022).''
     Withdrawal Workbook Sheet 5 corresponds to Final RIA, 
Table 19 titled ``Estimated cost for organic egg and poultry 
production--some operations move to cage free in year 6 (2022); new 
entry continues after rule.''
     Withdrawal Workbook Sheet 6 includes intermediate 
calculations to support the benefit figures associated with Scenario 
A.
     Withdrawal Workbook Sheet 7 includes intermediate 
calculations to support the benefit figures associated with Scenario 
B.
     Withdrawal Workbook Sheet 8 includes intermediate 
calculations to support the benefit figures associated with Scenario 
C.
     Withdrawal Workbook Sheet 9 corresponds to Figure 6 of 
the Final RIA.
     Withdrawal Workbook Sheet 10 includes calculations 
based on data from the National Animal Health Monitoring Survey that 
describes the age distribution of layer houses.

Bruce Summers,
Administrator, Agricultural Marketing Service.
[FR Doc. 2020-08548 Filed 4-22-20; 8:45 am]
BILLING CODE P