Walnuts Grown in California; Recommended Decision and Opportunity To File Written Exceptions, 47305-47317 [2020-15135]

Agencies

• Agricultural Marketing Service
• DEPARTMENT OF AGRICULTURE

[Federal Register Volume 85, Number 151 (Wednesday, August 5, 2020)]
[Proposed Rules]
[Pages 47305-47317]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-15135]


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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. 151 / Wednesday, August 5, 2020 / 
Proposed Rules

[[Page 47305]]



DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

7 CFR Part 984

[Docket No. AO-SC-20-J-0011; AMS-SC-19-0082; SC19-984-1]


Walnuts Grown in California; Recommended Decision and Opportunity 
To File Written Exceptions

AGENCY: Agricultural Marketing Service, USDA.

ACTION: Proposed rule and opportunity to file exceptions.

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

SUMMARY: This recommended decision proposes amendments to Marketing 
Order No. 984 (Order), which regulates the handling of walnuts grown in 
California. The proposed amendments are based on the record of a public 
hearing held via videoconference technology on April 20 and 21, 2020. 
The California Walnut Board (Board), which locally administers the 
Order, recommended proposed amendments that would add authority for the 
Board to provide credit for certain market promotion expenses paid by 
handlers against their annual assessments due under the Order and 
establish requirements to effectuate the new authority. In addition, 
the Agricultural Marketing Service (AMS) proposed to make any such 
changes as may be necessary to conform to any amendment that may result 
from the public hearing.

DATES: Written exceptions must be filed by September 4, 2020.

ADDRESSES: Written exceptions should be filed with the Hearing Clerk, 
U.S. Department of Agriculture, Room 1031-S, Washington, DC 20250-9200; 
Fax: (202) 720-9776 or via the internet at https://www.regulations.gov. 
All comments should reference the docket number and the date and page 
number of this issue of the Federal Register. Comments will be made 
available for public inspection in the Office of the Hearing Clerk 
during regular business hours or can be viewed at https://www.regulations.gov.

FOR FURTHER INFORMATION CONTACT: Melissa Schmaedick, Marketing Order 
and Agreement Division, Specialty Crops Program, AMS, USDA, Post Office 
Box 952, Moab, UT 84532; Telephone: (202) 557-4783, Fax: (435) 259-
1502, or Andrew Hatch, Marketing Order and Agreement Division, 
Specialty Crops Program, AMS, USDA, 1400 Independence Avenue SW, Stop 
0237, Washington, DC 20250-0237; Telephone: (202) 720-2491, Fax: (202) 
720-8938, or Email: [email protected] or 
[email protected].
    Small businesses may request information on this proceeding by 
contacting Richard Lower, Marketing Order and Agreement Division, 
Specialty Crops Program, AMS, USDA, 1400 Independence Avenue SW, Stop 
0237, Washington, DC 20250-0237; Telephone: (202) 720-2491, Fax: (202) 
720-8938, or Email: [email protected].

SUPPLEMENTARY INFORMATION: Prior documents in this proceeding: Notice 
of Hearing issued on February 2, 2020, and published in the February 
11, 2020, issue of the Federal Register (85 FR 7669) and a Correction 
to the Notice of Hearing issued on April 9, 2020, and published in the 
April 10, 2020, issue of the Federal Register (85 FR 20202).
    This action is governed by the provisions of sections 556 and 557 
of title 5 of the United States Code and, therefore, is excluded from 
the requirements of Executive Orders 12866, 13563, and 13175. 
Additionally, because this rule does not meet the definition of a 
significant regulatory action it does not trigger the requirements 
contained in Executive Order 13771. See the Office of Management and 
Budget's (OMB) Memorandum titled ``Interim Guidance Implementing 
Section 2 of the Executive Order of January 30, 2017, titled `Reducing 
Regulation and Controlling Regulatory Costs' '' (February 2, 2017).
    Notice of this rulemaking action was provided to tribal governments 
through the Department of Agriculture's (USDA) Office of Tribal 
Relations.

Preliminary Statement

    Notice is hereby given of the filing with the Hearing Clerk of this 
recommended decision with respect to the proposed amendments to 
Marketing Order 984 regulating the handling of walnuts grown in 
California and the opportunity to file written exceptions thereto. 
Copies of this decision can be obtained from Melissa Schmaedick, whose 
address is listed above.
    This recommended decision is issued pursuant to the provisions of 
the Agricultural Marketing Agreement Act of 1937, as amended (7 U.S.C. 
601-674), hereinafter referred to as the ``Act,'' and the applicable 
rules of practice and procedure governing the formulation and amendment 
of marketing agreements and orders (7 CFR part 900).
    The proposed amendments are based on the record of a public hearing 
held via videoconference technology on April 20 and 21, 2020. Notice of 
this hearing was published in the Federal Register on February 11, 2020 
(85 FR 7669) followed by a Correction to the Notice of Hearing issued 
on April 9, 2020, and published in the April 10, 2020, issue of the 
Federal Register (85 FR 20202). The notice of hearing contained one 
proposal submitted by the Board and one submitted by USDA.
    The proposed amendments were recommended by the Board on September 
13, 2019 and were submitted to USDA on September 16, 2019. After 
reviewing the proposals and other information submitted by the Board, 
USDA made a determination to schedule this matter for hearing. The 
Board's proposed amendments to the Order would add authority for the 
Board to provide credit for certain market promotion expenses paid by 
handlers against their annual assessments due under the Order and would 
establish requirements to effectuate the new authority.
    USDA proposed to make any such changes as may be necessary to the 
Order to conform to any amendment that may be adopted, or to correct 
minor inconsistencies and typographical errors.
    Twelve witnesses testified at the hearing. Eleven witnesses 
represented walnut producers and handlers in the production area, as 
well as the Board, and one witness was from USDA. Ten industry 
witnesses supported the proposed amendments, while the eleventh had 
reservations about the program and its underlying assumptions. The USDA 
witness remained neutral. Four dissenting

[[Page 47306]]

opinions and one comment were received by AMS after the notice of 
hearing was published in the Federal Register and are therefore 
considered ex parte communications. In accordance with section 900.16 
of the Rules of Practice governing this proceeding (7 CFR 900.16), the 
ex parte communications were entered into the record but do not 
constitute testimony and were not considered in the drafting of this 
recommended decision.
    The authority to provide credit for certain market promotion 
expenses paid by handlers against their annual assessment obligations, 
also referred to as ``credit-back authority,'' does not currently exist 
under the Order. The Board's proposed amendments would authorize 
credit-back authority and establish requirements to administer a 
credit-back program.
    If implemented, the proposed amendments would allow the Board to 
set aside funds every year during its budget discussions to fund such a 
program. Under the program, certain market promotion expenses paid 
directly by handlers within a marketing year could be ``credited-back'' 
to the handler against their assessment obligation paid to the Board. 
The credit-back amount available to each handler would be determined by 
that handler's percentage of the industry's total volume of walnuts 
handled during the prior marketing year multiplied by the current 
marketing year's credit-back program budget.
    Witnesses at the hearing explained that the proposed amendments are 
necessary to encourage handlers to undertake market promotion 
activities, in addition to the Board's generic marketing efforts, to 
increase market demand for the industry's increasing supply of walnuts. 
Witnesses further explained that future increases in supply without 
additional increases in demand could result in weaker market returns. 
Therefore, proponents support the need to increase demand for walnuts 
to stabilize future market returns.
    As an indicator of untapped growth potential, witnesses referred to 
a domestic walnut consumption analysis that revealed only 40 percent of 
U.S. households consume walnuts. Witnesses argued that the proposed 
credit-back authority could stimulate domestic demand through handler-
led promotion and product innovation, and that doing so could stabilize 
future market prices.
    One witness agreed that an increase in demand for walnuts was 
necessary to stabilize future market prices but expressed concerns with 
the proposed amendments.
    The witness argued that handlers do not pay assessments under the 
Order in practice because they deduct the assessments from their 
payments to walnut producers; therefore, the producers actually pay the 
assessments.
    At the conclusion of the hearing, the Administrative Law Judge 
established a deadline of May 6, 2020, for the submission of 
corrections to the transcript, and May 22, 2020, as a deadline for 
interested persons to file proposed findings and conclusions or written 
arguments and briefs based on the evidence received at the hearing. One 
brief in favor of the proposed amendments was received from the Board.
* * * * *

Material Issues

    The material issues presented on the record of hearing are as 
follows:
    1. Whether to amend Sec.  984.46 to add authority to provide credit 
for certain market promotion expenses paid by handlers against their 
annual assessments due under the Order.
    2. Whether to add a new Sec.  984.546 to establish requirements 
effectuating Material Issue 1. Corresponding changes would also 
establish a new Subpart D with the heading ``Research and Development 
Requirements,'' under which Sec.  984.546 would be listed and reserving 
Sec.  984.547.
    3. Whether any conforming changes need to be made as a result of 
the above proposed amendments. Conforming changes may also include 
correction of non-substantive, typographical errors.
* * * * *

Findings and Conclusions

    The following findings and conclusions on the material issues are 
based on evidence presented at the hearing and the record thereof.

Material Issue Number 1--Credit-Back Authority

    Section 984.46, ``Research and Development,'' should be amended to 
add credit-back authority. This authority would authorize the Board to 
credit the pro rata assessment obligations of a handler with such 
portion of his or her direct expenditure for marketing promotion, 
including paid advertising, under an annual credit-back program. The 
credit-back amount available to each handler would be determined by 
that handler's percentage of the industry's total volume of walnuts 
handled during the prior marketing year multiplied by the current 
marketing year's credit-back program budget. The credit-back budget 
would be set annually and would be subject to approval of the 
Secretary.
    Credit-back would be limited such that no handler would receive 
credit-back for any creditable expenditures exceeding the total amount 
of calculated credit-back available to them for the applicable 
marketing year program. Further, no handler would receive credit-back 
in an amount that exceeds that handler's assessments paid in the 
applicable marketing year at the time the credit-back application is 
made.
    The proposed amendment also stipulates that marketing promotion 
expenses would be credited at a rate recommended by the Board and 
approved by the Secretary. That rate would reflect how much per dollar 
of marketing promotion expenses paid by each handler would be 
reimbursable under the proposed credit-back program during the 
applicable marketing year. In addition, the proposed amendment provides 
that a handler need not necessarily apply for reimbursement of their 
total calculated credit-back available to them; credit-back could be 
applied to all or any portion of a handler's direct expenditures.
    The proposed amendment further provides that credit could be paid 
directly to the handler as a reimbursement of assessments paid, and 
that different credit rates for different products or different 
marketing promotion activities could be established. Differing rates 
would require a recommendation by the Board, according to priorities 
determined by the Board and its marketing plan, and approval by the 
Secretary. The amendment would also allow the Board to adjust the 
credit-back program to provide for alternative methods of issuing 
credit if future advances in the industry warranted. All future 
proposed amendments would require approval by the Secretary.
    Regarding the kind of expenditures eligible for reimbursement under 
the proposed authority, also referred to as ``creditable 
expenditures,'' the proposed amendment stipulates that such 
expenditures could include, but would not be limited to: Money spent 
for advertising space or time in newspapers, magazines, radio, 
television, transit, and outdoor media, including the actual standard 
agency commission costs not to exceed 15 percent. According to the 
record, the proposed amendment specifies that creditable expenditures 
would be required to promote the sale of walnuts, walnut products or 
their uses, but not the production or farming of walnuts.
    Currently, Sec.  984.46 allows for production research, marketing 
research

[[Page 47307]]

and development projects, and marketing promotion, including paid 
advertising, designed to assist, improve, or promote the marketing, 
distribution, and consumption or efficient production of California 
walnuts. These activities are carried out directly by the Board, are 
generic in their promotion of all California walnuts, and are paid for 
by assessments as part of the Board's operating budget.
    Witnesses explained that the current authority limits the Board to 
generic marketing and promotion activities for inshell and shelled 
walnuts. While the authority does allow the Board to conduct marketing 
research and development projects, the Board does not manufacture or 
otherwise sell walnuts. Therefore, it is incumbent upon handlers to 
further develop new product formulations and deliver products to the 
market. Because product innovation and marketing can be costly, the 
Board recommended credit-back authority that would incentivize handlers 
to support such initiatives.
    If implemented, the proposal would encourage handlers to build upon 
the Board's generic marketing activities, providing additional 
visibility, awareness and sales for walnuts. Witnesses explained that 
the need for increased marketing, promotion and product innovation 
stems from the industry's growing production, increased competition in 
the export market and the need to stabilize fluctuating grower returns.
    According to the hearing record, production has nearly doubled in 
the past decade from 328,000 tons in the 2007/2008 crop year to 690,000 
tons estimated for the 2018/2019 crop year. Evidence suggests that the 
increase in production is a combination of both new plantings and 
higher yields per acre.
    High market prices in 2013 and 2014 spurred grower investment in 
new plantings, resulting in a significant jump in total industry 
planted acreage over the 2013 to 2017 time period. As trees mature and 
transition from non-bearing to bearing acreage, a process that takes 
roughly five years, total industry production increases. The 2018-2019 
crop year industry total of bearing acres is estimated at 350,000, up 
from 230,000 in the 2008-2009 crop year. Witnesses estimate that 15,000 
more acres will come into production by the end of the 2019-2020 crop 
year for a new total of 365,000 bearing acres. Moreover, an additional 
65,000 acres are due to come into production over the next five years. 
With each acre yielding roughly two tons, the Board is forecasting a 
17-percent increase in production from 750,000 tons in 2020 to 875,000 
tons in 2025.
    Record evidence also indicated that production in Chile, China and 
Europe, all competitors of California walnuts in the international 
market, is another factor in assessing future market stabilization. 
While California walnuts accounted for 57 percent of world trade in 
2017-2018, its production only accounted for 31 percent of the world 
total. Witnesses reported that while the domestic market is the largest 
consumer of California walnut production, exports currently account for 
roughly 66 percent of all industry trade. The industry's largest export 
markets are Germany, Turkey, the United Arab Emirates and Japan. As 
world production increases, witnesses expressed concern over 
maintaining market share and the potential downward impact on prices of 
increasing global supply.
    Witnesses also expressed concern over the California walnut 
industry's reliance on the export market, stating that fluctuating 
global supply and demand has contributed to domestic price volatility. 
Citing fluctuations in grower returns over the previous eleven years, a 
witness correlated record low returns of $1,280 per ton and record high 
returns of $3,710 per ton with events impacting trade relationships and 
global demand.
    Witnesses argued that less reliance on export markets and 
increasing domestic demand for California walnuts would lead to more 
stable grower returns. According to a recent study commissioned by the 
Board, only 40 percent of U.S. households purchase walnuts on a regular 
basis and domestic consumption has remained at roughly one-half pound 
of walnuts per person annually for the past twenty years. Based on this 
evidence, witnesses argued that increasing domestic demand would be a 
strategically sound approach to offsetting anticipated downward 
pressure of projected increases in domestic supply on domestic prices.
    According to the record, strategic planning efforts for future 
market stabilization began in early 2019 with the formation of the 
Board's Marketing Order Revision Committee (MORC) and a review of 
section 7 U.S.C. 608c(6)(I) of the Act, which provides credit-back 
authority for walnuts. Further, a study of similar programs under the 
Federal marketing orders for almonds and dried prunes produced in 
California piqued the MORC's interest in developing a credit-back 
program for walnuts.
    According to the record, MORC members concluded that adding credit-
back authority for promotional activities would encourage handlers to 
build upon the work the Board does to grow domestic consumption. The 
credit-back program would allow for the handlers to promote their 
brands through various activities, including but not limited to, money 
spent for advertising space or time in newspapers, magazines, radio, 
television, transit, and outdoor media. Witnesses explained that while 
promotional activities of the Board and handlers would be similar, 
handlers' ability to market their branded products would spur both 
marketing innovation and consumer demand in a way that the Board is not 
able to accomplish on its own. A full list of qualified activities is 
listed in proposed Sec.  984.546 of the proposed amendatory language of 
this recommended decision.
    The proposed amendment further specifies that all promotional 
activities and related creditable expenditures eligible for credit-back 
would be required to promote the sale of walnuts, walnut products or 
their uses, but not the production or farming of walnuts. According to 
the record, activities supporting the production or farming of walnuts 
would not be eligible because such activities would not contribute to 
increasing demand for walnuts, which is the intended purpose of the 
proposed credit-back program.
    Witnesses stated that the anticipated cost impact on the industry, 
and on individual stakeholders, as a result of this proposal would be 
minimal given that the credit-back program would be funded by 
allocating a portion of the Board's existing annual promotion and 
marketing fund to that purpose. Therefore, witnesses argued that 
overall assessments would not increase as a result of this proposal. 
Witnesses clarified that, if the Board were to consider changing the 
annual assessment rate, such recommendation would be based on an 
overall budget analysis related to the Order's operating expenses.
    One witness raised concerns over the potential lack of transparency 
between handlers and growers, arguing that handlers would be able to 
deduct marketing expenses from payments to growers and then receive 
credit for those expenses without disclosing or passing on any benefit 
to the growers. Proponents of the proposed amendment countered this 
statement by explaining that increased demand for California walnuts, 
regardless of the brand under which they are sold, would benefit all 
stakeholders within the industry. Educating consumers to incorporate 
walnuts into their diets would lead to long-term increases in demand, 
which would in turn provide a stable market for growing domestic 
production.

[[Page 47308]]

Without increased marketing, product innovation and market penetration, 
proponents argued that the anticipated supply would lead to market 
prices below the cost of production.
    The witness also argued that producers ultimately bear the 
assessment burden. USDA clarifies that California walnut handlers are 
required under both the Act and the regulation of the Order to pay 
assessments. Assessments are collected on a pro rata basis, with each 
handler's assessment due under the Order being equal to the volume of 
California walnuts handled multiplied by the assessment rate in effect 
at that time.
    Regarding the assessment burden, witnesses further explained that 
each handler's access to credit-back reimbursements would be limited to 
the pro rata assessment obligations of that handler. This means that 
the credit-back amount available to each handler would be determined by 
that handler's percent of the industry's total volume of walnuts 
handled during the prior marketing year multiplied by the current 
marketing year's credit-back program budget. For this reason, witnesses 
argued that the proposed credit-back program would equitably provide 
all California walnut handlers with access to marketing and promotion 
support commensurate to the size of their operation.
    According to the record, the amount each handler could receive as 
reimbursement per creditable expenditure would be the value of the 
expenditure multiplied by the reimbursement rate. Total reimbursements 
for any given marketing year could not exceed a handler's total 
available credit-back calculated for that year; reimbursement per 
creditable expenditure at any given time would be limited to the amount 
a handler had paid in pro rata assessments at the time of the 
reimbursement request. The credit-back program budget and the 
reimbursement rate for creditable expenditures would be recommended 
annually by the Board and would be subject to approval of the 
Secretary.
    If implemented, this authority would also allow the Board to 
recommend different credit rates for different products or different 
marketing promotion activities. Witnesses explained that having the 
flexibility to recommend different rates may be helpful in encouraging 
different types of handler activities to supplement the Board's 
marketing plan and priorities in the future.
    Witnesses explained that different rates for different activities 
would not be used immediately, and that initially one rate would be 
applied to a broad scope of activities. This approach would allow the 
industry and Board staff to become familiar with the credit-back 
concept. If successful, the Board would have the option of recommending 
differing rates for approval by the Secretary. Witnesses also noted 
that the proposed authority would not require that the Board offer a 
credit-back program annually and that the decision whether to forego 
the program in any given year would also be made during the annual 
Board budget process.
    The proposed amendment would also allow the Board to recommend 
alternative methods to reimbursement for issuing credit in the future 
if warranted. Witnesses explained that, if implemented, credit-back 
would initially be issued as a reimbursement upon approval of handler-
submitted documentation of creditable expenditures by Board staff. 
Reimbursement in the form of a check issued to the handler would 
provide a clear, traceable transaction, thereby facilitating 
recordkeeping and compliance during the program's implementation. The 
proposed rules regarding reimbursement are specifically addressed in 
Material Issue 2. Any changes to the reimbursement method for credit-
back would require a recommendation by the Board and approval by the 
Secretary.
    According to the record, the proposed amendment would benefit the 
entire industry. Given that the proposed credit-back would only offset 
a portion of handler activity costs, witnesses explained that the 
handler-paid portion would result in an overall industry increase in 
total marketing and promotion investment. If successful, the increased 
efforts would result in a growth of domestic consumer demand for 
walnuts and walnut products and could correlate into greater returns to 
both growers and handlers.
    Regarding industry stakeholder awareness of the proposed 
amendments, representatives of the Board stated that the idea of a 
credit-back program was publicly discussed at a Board meeting in May 
2019, before being presented and unanimously recommended by the Board 
as an amendment to the Order on September 13, 2019. Leading up to the 
Board's recommendation, the MORC held several meetings where members 
discussed and debated the merits of the proposed language, possible 
alternatives, potential benefits, potential costs to staff, and 
possible compliance issues.
    USDA is recommending one clarifying change to the proposed language 
in Sec.  984.46 paragraph (a), which would add credit-back authority. 
USDA has determined that the language presented in the Notice of 
Hearing lacked a reference to the proposed, new paragraph (b) and only 
included a reference to proposed, new paragraph (c). This correction 
was discussed at the hearing and a witness clarified that proposed, new 
paragraphs (b) and (c) were both necessary references in the proposed 
revision to Sec.  984.46 paragraph (a), and that the omission of the 
reference to paragraph (b) was an oversight. USDA has revised the 
proposed language so that both proposed new paragraphs are referenced. 
This new language is included in the proposed regulatory text of this 
recommended decision.
    For the reasons stated above, it is recommended that Sec.  984.46 
be amended to add credit-back authority under the Order.

Material Issue Number 2--Credit-Back Program Requirements

    A new Sec.  984.546 should be added to establish requirements 
effectuating Material Issue 1. Corresponding changes should also 
establish a new Subpart D with the heading ``Research and Development 
Requirements,'' under which Sec.  984.546 would be listed. In addition, 
Sec.  984.547 should be reserved.
    If the authority recommended under Material Issue I were 
implemented, requirements would be needed to effectuate it. Witnesses 
at the hearing expressed the need to implement the proposed credit-back 
program as quickly as possible and requested that USDA conclude the 
amendment process in tandem with the beginning of the 2020-2021 
marketing year, which begins September 1, 2020. By including proposed 
requirements alongside the proposal to add credit-back authority, 
witnesses aimed to expedite the full implementation of the program.
    According to the record, the Board is recommending a credit-back 
rate of $0.70 cents for each handler dollar spent on qualified 
activities eligible for credit-back reimbursement up to each handler's 
pro-rata share of assessments paid into the allocated credit-back fund. 
During its annual budget process, the Board would designate a credit-
back fund based on forecasted production and anticipated assessment 
revenue. The per handler pro-rata share of the credit-back fund would 
be calculated by multiplying the budgeted credit-back fund by each 
handler's percentage of walnuts handled of the previous marketing 
year's total walnuts. The Board would then communicate to handlers the 
availability of the credit-back fund and their pro-rata portion of that 
fund.

[[Page 47309]]

    The following is a sample calculation of a handler's pro-rata 
portion of a hypothetical credit-back fund based on an assumed total 
industry production of 625 million hundred weight assessed at $0.04 per 
hundred weight, and where the credit-back fund is ten percent of the 
total Board budget for that year and the handler's share of the total 
industry's walnut production handled.
    To calculate the total assessments collected for that year, 
multiply the total production by the assessment rate for a result of 
$25 million (625 million x $0.04 = $25 million). To calculate the 
credit-back budget, multiply the total Board budget by 10 percent for a 
result of $2.5 million. To calculate the pro rata share of the credit-
back fund allocated to that handler, multiply the total credit-back 
fund by the handler's pro rata share for a result of $250,000.
    If the reimbursement level is set at 70 percent, one can calculate 
the creditable expenditures the handler would have to spend on 
qualified activities promoting products containing 100 percent walnuts 
in order to receive their full amount of pro rata share by dividing the 
pro rata share by the reimbursement rate. Two hundred and fifty 
thousand dollars divided by 70 percent results in a total necessary 
expenditure of $357,143. At this rate, the handler would spend $357,143 
on qualified activities, of which $250,000 would be reimbursed, and 
$107,143 would be paid for by the handler's own investment 
($250,000/.70 = $357,143).

                 Table 1--Example of Board Credit-Back Program Budget and Handler Pro Rata Share
----------------------------------------------------------------------------------------------------------------
                                                                       Calculation                     Value
----------------------------------------------------------------------------------------------------------------
Credit-Back Program Budget:
    A. Total production (cwt)..........................  .......................................     625,000,000
    B. Assessment rate ($ per cwt).....................  .......................................           $0.04
    C. Board Annual Budget.............................  C = A * B..............................     $25,000,000
    D. Share of Board budget allocated to Credit-Back    .......................................             10%
     program.
    E. Credit-back program annual budget...............  E = C * D..............................      $2,500,000
Handler Pro Rata Share:
    F. Handler share of acquisition....................  .......................................             10%
    G. Maximum reimbursement to a handler with 10% of    G = E * F..............................        $250,000
     annual walnut acquisitions.
    H. Credit-Back percentage rate.....................  .......................................             70%
    I. Total creditable expenditures on qualified        I = G/H................................        $357,143
     promotional activities of walnut-only products for
     handler to get full reimbursement (100% walnuts).
----------------------------------------------------------------------------------------------------------------

    According to the record, the MORC discussed varying levels of 
reimbursement from 50 cents to 65 cents, and ultimately recommended 70 
cents as a level of reimbursement. The 70-cent level was determined to 
attract handlers to participate and encourage use of the proposed 
program with the goal of spurring increased investment in walnut 
promotion and marketing.
    Paragraph (a) of proposed Sec.  984.546 addresses requirements 
regarding timeliness of the reimbursement claim and the credit-back 
rate. Witnesses explained that handlers would be able to apply for 
credit-back on the expenses of qualified activities completed within 
the marketing year. Handlers would provide proof of payment and 
documentation of qualified activities to the Board for review. Once the 
Board has approved the claim, the handler would receive a reimbursement 
for 70 percent of the creditable expenditures of the qualified activity 
up to the handler's pro-rata share of the credit-back fund. If a 
credit-back claim for expenses is made prior to the end of the 
marketing year, the handler must also have paid sufficient assessments 
into the credit-back fund to cover their reimbursement.
    According to the record, a credit-back reimbursement for a 
creditable expenditure of $10,000 promoting a product containing 100 
percent walnut content, such as walnut butter, would be calculated by 
multiplying the cost of the activity by the percentage of walnut 
content and the reimbursement rate. This calculation results in a 
credit-back reimbursement of $7,000 to the handler and is captured in 
the following table, Scenario One.

                                                  Scenario One
                                              [100% Walnut product]
----------------------------------------------------------------------------------------------------------------
                                                                       Calculation                     Value
----------------------------------------------------------------------------------------------------------------
J. Walnut product contains 100% walnuts................  .......................................            100%
K. Total cost of qualified activity....................  .......................................         $10,000
L. Credit-back reimbursement rate......................  .......................................             70%
M. Amount reimbursed (credit-back) to handler for        M = K * J * L..........................          $7,000
 walnut 100% product.
----------------------------------------------------------------------------------------------------------------

    The proposed language also states that claims for credit-back on 
expenses must be made within 15 days after the end of the marketing 
year. Witnesses explained that 15 days would be reasonable given that 
most handlers have annual marketing plans that would allow them to 
accurately accrue and submit documentation on a timely basis. Further, 
witnesses explained that most handlers would be likely to submit 
credit-back claims directly after the conclusion of qualified 
activities. Therefore, handlers would most likely already have 
submitted claims prior to the end of the marketing year.
    Paragraphs (b) and (c) of proposed Sec.  984.546 address 
requirements regarding the importance of assessment payments and 
handler eligibility for reimbursement under the proposed credit-back 
program.
    Proposed Sec.  984.546(b), ``Assessment payments,'' states that 
handlers are responsible for assessment payments under Sec.  984.69 of 
the Order and that a handler must be current on all assessment payments 
prior to receiving credit-back for creditable expenditures. Witnesses 
explained that because the credit-back program would be funded by 
assessments, a handler must be current with his or her assessment

[[Page 47310]]

obligation prior to receiving a reimbursement.
    To that end, proposed Sec.  984.546(c), ``Handler eligibility for 
reimbursement,'' states that credit-back for qualified activities would 
only be issued to the handler who performed such activities. Witnesses 
explained that this requirement would prevent third parties or 
affiliates who might be partnered with a handler for a specific 
promotional activity from being eligible to claim or receive credit-
back reimbursement.
    If implemented, the credit-back program would run on an annual 
basis. As previously explained, the Board would recommend funding for 
the program as part of its annual marketing year budget process. The 
Board's activities, including the administration of the Order, are paid 
for by assessments paid by handlers during the applicable marketing 
year. For this reason, proposed Sec.  984.546(d), ``Applicability to 
marketing year,'' states that credit-back would only be granted for 
creditable expenditures for qualified activities that are conducted and 
completed during the marketing year for which credit-back is requested. 
Witnesses explained that if a handler's activities extended beyond one 
marketing year, that handler could request reimbursement only for those 
creditable expenditures applicable to the marketing year in which they 
were completed.
    Proposed Sec.  984.546(e), ``Qualified activities,'' details 
requirements applicable to creditable expenditures resulting from 
qualified activities in paragraphs (e)(1) through (4). According to the 
record, the credit given for creditable expenditures resulting from 
qualified activities would be commensurate with accepted professional 
practices and rates for the type of activity conducted. Witnesses 
explained that this requirement would be necessary to ensure that 
reimbursements are not unfairly above or below standard market rates. 
In the case of claims for credit-back for activities not covered by 
specific and established criteria, the Board would review the expenses 
claimed against rates for similar activities to ensure consistency in 
reimbursement practices.
    Regarding the kinds of activities that would be considered 
qualified for credit-back reimbursement, witnesses stated that the 
clear and evident purpose of each qualified activity should be to 
promote the sale, consumption or use of California walnuts, both 
inshell and shelled, and their products. Witnesses were careful to 
explain that qualified activities should focus on increasing demand. 
For this reason, no credit would be given for any activity that targets 
the farming or grower trade.
    Similarly, credit-back would not be allowed for travel expenses, or 
for any promotional activities that result in price discounting. Travel 
expenses are considered normal business activities that do not directly 
promote the sale or consumption of California walnuts. Witnesses 
explained that price discounting, or offering a price below market 
levels for promotional purposes, would also be excluded from 
reimbursement eligibility because the practice does not directly 
promote the sale or consumption of California walnuts at market prices.
    Regarding activities qualified for credit-back, proposed Sec. Sec.  
984.546(e)(5)(i) and (ii) put forward the following list: Paid media 
directed to end-users, trade or industrial users, and paid advertising 
space or time, including, but not limited to, newspapers, magazines, 
radio, television, online, transit, and outdoor media (including 
standard agency commission costs not to exceed 15 percent of gross 
expense); market promotion, marketing research (except pre-testing and 
test-marketing of paid advertising), and trade and consumer product 
public relations (not including advertising or public relations agency 
fees); in-store demonstrations, production of promotional materials, 
sales and marketing presentation kits, etc. (excluding couponing); and 
trade show booth rentals, services, and promotional materials.
    According to the record, expenses for pre-testing and test-
marketing of paid advertising, public relations agency fees and 
couponing would not be considered creditable expenditures as they also 
are considered a normal cost of business and do not directly meet the 
criteria of promoting sales or consumption.
    Proposed Sec.  984.546(e)(5) addresses promotional activities 
involving joint activities, handler-owned distribution of products, and 
promotional activities conducted under a State or Federal trade 
program.
    For qualified credit-back activity involving joint participation by 
a handler and a manufacturer or seller of a complementary product(s), 
or a handler selling multiple complementary products, including other 
nuts, witnesses stated that the amount allowed for credit-back would 
reflect that portion of the activity represented by walnuts. Witnesses 
explained that when walnuts are marketed with other non-walnut items 
(other nuts, dried fruits, etc.) eligible credit-back would be limited 
to the walnut percentage of that product. Creditable expenditures to 
support walnuts used as an ingredient in such a manufactured food 
product would receive credit-back based on the proportionate share of 
walnuts included in the product.
    According to the record, an example of the above would be a snack 
bar with multiple ingredients, including 30 percent of each walnuts, 
almonds and cashews and an additional 10 percent of non-nut 
ingredients. If the total cost to the handler for this activity was 
$10,000, the handler could claim the percentage of the activity related 
to walnuts, or 30 percent, which would equal $3,000 ($10,000 x .3 = 
$3,000). At a reimbursement rate of 70 percent, the handler would 
receive $2,100 in credit-back ($3,000 x .7 = $2,100). This calculation 
is replicated in the table below, Scenario Two.

                                                  Scenario Two
                                              [30% Walnut product]
----------------------------------------------------------------------------------------------------------------
                                                                       Calculation                     Value
----------------------------------------------------------------------------------------------------------------
N. Walnut product contains 30% walnuts.................  .......................................             30%
O. Total cost of qualified activity....................  .......................................         $10,000
P. Credit-back reimbursement rate......................  .......................................             70%
Q. Total creditable expenditure on partial walnut        Q = O * N..............................          $3,000
 products for handler to get partial reimbursement (for
 30% walnuts).
R. Amount reimbursed (credited-back) to handler for      R = Q * P..............................          $2,100
 partial walnut product.
----------------------------------------------------------------------------------------------------------------


[[Page 47311]]

    In addition, the handler's name or brand may be included on the 
product packaging, but the words ``California Walnuts'' must always be 
included on the product packaging. Witnesses stated that the inclusion 
of ``California Walnuts'' on packaging was important given that the 
intent of the credit-back program was to promote the consumption of all 
California walnuts, not just those under a singular brand. Witnesses 
further clarified that omission of this wording would disqualify an 
otherwise creditable expenditure from being reimbursable.
    For products owned or distributed by the handler, witnesses stated 
that the walnut product being promoted must list the ownership or 
distributorship on the package and display the handler's name and the 
handler's brand. Similarly, the words ``California Walnuts'' must 
always be included on the primary face label.
    Based on record evidence, USDA is recommending a clarifying change 
to the proposed regulatory text in Sec.  984.546(e)(5)(iii). Current 
wording of this proposed paragraph does not adequately state that in 
all promotional activities, regardless of whether a handler is 
operating independently or in conjunction with a manufacturer, or 
whether promoting a product that is solely walnut content or walnuts 
are a partial ingredient, the words ``California Walnuts'' must be 
included in the labeling in order for that activity to qualify as a 
creditable expenditure. USDA is recommending this change in conformance 
with witness testimony clarifying the intent of the proposed language. 
The revised language is included in the proposed regulatory text of 
this recommended decision.
    Regarding handler promotional activities pursuant to a contract 
with the Foreign Agricultural Service (FAS), USDA, and/or the 
California Department of Food and Agriculture (CDFA), proposed Sec.  
984.546(e)(5)(iv) states that these activities would not be eligible 
for credit-back unless the Board is administering the foreign marketing 
program, and the handler certifies that he or she would not be 
reimbursed by either FAS or CDFA for the amount claimed for credit-
back. Foreign market expenses paid by third parties as part of a 
handler's contract with FAS or CDFA would not be eligible for credit-
back.
    Witnesses explained that FAS and CDFA offer various promotional 
programs to which handlers can apply. If a handler were to receive 
support from one of those programs and apply for credit-back 
reimbursement as well, that handler would effectively be receiving two 
forms of support for the same activity. Witnesses reiterated that the 
intent of the credit-back program is to encourage handler-led promotion 
and marketing activities to increase demand for walnuts by offsetting a 
portion of those costs with a partial reimbursement of their assessment 
paid. Collecting double payments from two sources for the same activity 
defeats the purpose of extending promotional funds to increase the 
overall level of marketing activity within the industry.
    Handlers would provide proof of payment and documentation of 
qualified activities to the Board for review. Once the Board has 
approved the claim, the handler would receive a reimbursement for 70 
percent of the expense of the qualified activity up to the handler's 
pro-rata share of the credit-back fund. If a credit-back claim for 
expenses is made prior to the end of the marketing year, the handler 
must also have paid sufficient assessments into the credit-back fund to 
cover their reimbursement. The Board's proposal also states that claims 
for credit-back on expenses must be made within 15 days after the end 
of the marketing year.
    According to the record, proposed Sec.  984.546(e)(6), ``Credit-
back Reimbursement claims,'' to obtain credit-back for creditable 
expenditures, a handler's claim would need to include a description of 
the activity and when and where it was conducted and an actual sample, 
picture or other physical evidence of the qualified activity. In 
addition, copies of all invoices from suppliers or agencies, and all 
canceled checks or other proof of payment issued by the handler in 
payment of these invoices, must also be submitted to the Board for 
review.
    If the claim is validated, the Board would issue a check to the 
recipient handler within 30 days of its receipt. If a claim is not 
sufficiently documented or does not reflect qualified credit-back 
activities, the Board would deny it. An appeal process would afford a 
handler with a denied claim the opportunity to appeal the denial.
    Witnesses stated that the proposed credit-back program requirements 
were designed with an appeals process as a mechanism to address any 
unforeseen issues that may arise. If implemented, Board staff, Board 
members and walnut handlers will require time to adjust to a new 
business process. Proposed Sec.  984.546(f), ``Appeals,'' outlines this 
process and states that the appeal process would begin with the 
Executive Committee's (Committee) review of the Board staff's decision. 
To trigger this review, the affected handler would need to submit a 
written request that includes permission to share the specific 
information relating to the claim in question with the Committee. 
Appeals could be personally presented by the affected handler or 
presented by Board staff. If the Board staff presents the appeal, the 
identity of the affected handler would be kept confidential.
    The proposed paragraph further provides that if the affected 
handler disagrees with the decision of the Committee, the handler could 
request that the Board review the Committee's decision. If the handler 
disagrees with the decision of the Board, the handler, through the 
Board, could request that the Secretary review the Board's decision.
    Finally, witnesses explained that the proposed regulations would 
provide for a mechanism to make future adjustments to the program's 
operation if needed. While the MORC and the Board attempted to capture 
all pertinent operational details, implementation, if approved, could 
bring to light necessary adjustments for more efficient and effective 
operation. If any such adjustments were necessary, the Board could make 
recommendations through the notice and comment process for ultimate 
approval by the Secretary.
    In its recommendation, the Board stated that the proposed changes 
have the broadest possible support from the industry. The proposed 
amendments were presented and discussed at several meetings involving 
California walnut handlers and growers.
    For the reasons stated above, it is recommended that a new Sec.  
984.546, including the clarifying change recommended by USDA to Sec.  
984.546(e)(5)(iii) discussed above, should be added to establish 
requirements effectuating Material Issue 1. Corresponding changes 
should also establish a new Subpart D with the heading ``Research and 
Development Requirements,'' under which Sec.  984.546 would be listed. 
In addition, Sec.  984.547 should be reserved.

Small Business Considerations

    Pursuant to the requirements set forth in the Regulatory 
Flexibility Act (RFA), AMS has considered the economic impact of this 
action on small entities. Accordingly, AMS has prepared this initial 
regulatory flexibility analysis.
    The purpose of the RFA is to fit regulatory actions to the scale of 
businesses subject to such actions so that small businesses will not be 
unduly or disproportionately burdened. Marketing orders and amendments 
thereto are unique in that they are normally brought about through 
group action of essentially small entities for their own benefit.

[[Page 47312]]

    During the hearing held on April 20 and 21, 2020, interested 
parties were invited to present evidence on the probable regulatory 
impact on small businesses of the proposed amendment to the Order. The 
evidence presented at the hearing shows that the proposed amendment 
would not have a significant negative economic impact on a substantial 
number of small agricultural producers or handlers.
    Eight grower and handler witnesses testified at the hearing. All 
eight witnesses were growers and five were also handlers. Four 
testified that they were small walnut growers according to the Small 
Business Administration (SBA) definition and four were large. Of the 
five who were handlers, one was small, and four were large.
    All five who were both handlers and growers expressed support for 
the proposed amendment. Of the three remaining grower witnesses, two 
stated their support. One grower reported that he had concerns but did 
not specifically oppose the amendment. Therefore, in their role as 
growers, 7 out of 8 witnesses supported the amendment, and stated that 
they expected to see significant benefits from the additional promotion 
expenditure that would be authorized by the amendment and would not 
incur additional costs. The benefits and impacts of the proposed 
amendment are explained in the following three sections: (a) Walnut 
Industry Background and Overview, (b) Domestic Market Demand for 
Walnuts, and (c) Estimated Economic Impact of the Proposed Credit-Back 
Program.

Walnut Industry Background and Overview

    According to the hearing record there are approximately 4,400 
producers and 92 handlers in the production area. Record evidence 
includes reference to a study showing that the walnut industry 
contributes 85,000 jobs to the economy, directly and indirectly.
    A small handler as defined by the SBA (13 CFR 121.201) is one that 
grosses less than $30,000,000 annually. A small grower is one that 
grosses less than $1,000,000 annually.
    Record evidence showed that approximately 82 percent of 
California's walnut handlers (75 out of 92) shipped merchantable 
walnuts valued under $30 million during the 2018-2019 marketing year 
and would therefore be considered small handlers according to the SBA 
definition.
    Data in the hearing record from the 2017 Agricultural Census, 
published by USDA's National Agricultural Statistics Service (NASS), 
showed that 86 percent of California farms growing walnuts had walnut 
sales of less than $1 million.
    In an alternative computation using NASS data from the hearing 
record, the 3-year average crop value (2016-2017 to 2018-2019) was 
$1.24 billion. Average bearing acres over that same 3-year period were 
333,000. Dividing crop value by acres yields a revenue per acre 
estimate of $3,733. Using these numbers, it would take approximately 
268 acres ($1,000,000/$3,733) to yield $1 million in annual walnut 
sales. The 2017 Agricultural Census data show that 80 percent of walnut 
farms in 2017 were below 260 acres. Therefore, well over three-fourths 
of California walnut farms would be considered small businesses 
according to the SBA definition.
    Walnuts bloom in March and April, and the harvest of the earliest 
varieties begins in the first part of September. As later varieties 
mature, the harvest continues into November. The crop comes in from the 
field at about 25 percent moisture and the hulling and drying process 
typically takes place within 24 hours. The nuts are hulled (removal of 
the green husks) and dried to about 7 percent moisture before delivery 
to a handler. Some growers have their own hulling and drying equipment 
and others pay for this service. Drying to seven percent moisture keeps 
the nuts stable in storage and minimizes deterioration.
    Once received by the handler, shelling varieties are shelled and 
have a shelf life of approximately 12 months. Unshelled varieties are 
cleaned, sized, and put into storage. Both shelled and unshelled nuts 
are shipped and distributed to customers throughout the marketing year. 
Approximately 75 percent of the California walnut crop is sold as 
kernels (shelled). Witnesses testified that advances in processing and 
packaging technologies continue to improve product quality, 
consistency, and shelf-life.
    Weather is one of two main factors driving crop size variability, a 
significant feature of the walnut market. In some years, climatic 
conditions may contribute to fungus or other issues that damage the 
crop and cause nuts to fall prior to harvest. With walnuts grown over a 
large geographic area, some regions will have better weather than 
others in any particular year. Crops were larger in 2015 and 2018 and 
smaller in 2017 and 2019.
    The other key variability factor is ``alternate bearing'' (a 
natural tendency of several types of tree nuts, in which a large crop 
is often followed by a small crop). As trees mature, alternate bearing 
can become more pronounced, and for many years this had a big impact on 
crop size variability. With recent new plantings, the average age of 
producing trees in California has dropped. There is less of an 
alternate bearing tendency with younger trees. Crop sizes have become 
less variable as younger trees reach bearing age, which typically 
occurs in the fifth year. Older trees are replaced with varieties with 
improved quality characteristics to meet changing consumer demand. 
Newer varieties are generally more productive, contributing to higher 
yields per acre and greater production.
    The hearing record shows that crop size variability, particularly 
the reduced availability of walnuts in short crop years, continues to 
contribute to loss of demand, as some buyers of kernels as ingredients 
in baked goods and other products shift to other tree nuts. These lost 
market opportunities are additional factors in the industry's interest 
in product diversification through a credit-back program.
    Additional factors that affect current market conditions are the 
longer-term supply impacts of growers responding to market signals. If 
producers decide to plant more trees because of strong market prices, 
such as in the 2011-2014 time period, they receive those trees one or 
two years later, based on contracts that vary with the type of nursery 
stock. This time lag, and penalties associated with dropping a planting 
contract, contribute to continued planting even after market prices 
drop and growers might otherwise not want to plant. For these reasons, 
there is a delayed response in planting new trees, and a delayed 
response in reducing the level of planting when prices and revenue per 
acre decline, such as in 2015-2018. One witness estimated that the rate 
of tree planting in recent years is about three times greater than tree 
removal. Another key factor is that the time from tree planting to 
bearing nuts is typically five years.
    Record evidence shows that walnut production exceeded 600,000 
inshell tons every season starting in 2015-2016. Witnesses testified 
that a key factor in their support of new demand expansion initiatives 
is their expectation that walnut production is likely to be at or above 
700,000 tons within one or two seasons and may exceed 800,000 tons a 
few years later.
    The hearing record shows that farm management decisions made years 
ago will have a large impact on walnut supply for the coming years, 
contributing to grower and handler support for major initiatives to 
increase demand, including credit-back.
    About two-thirds of the walnut crop is typically exported, and for 
many

[[Page 47313]]

years, increasing international demand facilitated expansion of the 
walnut market. China emerged as a major walnut buyer, but also began 
large scale planting of walnuts. Prices continued to improve for years, 
reaching $1.86 per pound, ($3,710 per ton) in 2013-2014. As China's new 
plantings started coming into production, world walnut prices began to 
decline. By 2017-2018, walnut prices rebounded as Turkey and other 
Middle eastern countries took up some of the slack in world market 
demand, according to the hearing record.
    Hearing evidence provided various reasons for the decline in walnut 
crop value since the peak level of $1.9 billion in 2014-2015. One was 
reduced export market opportunities. With increased trade barriers from 
China and India, significant volumes were shifted into other export 
markets, driving prices downward. Walnut production was also growing in 
Chile and Europe. The 2018-2019 price fell to $0.65 per pound ($1,300 
per ton). With the reduced reliability of the international market, the 
industry is increasingly looking for ways to increase demand in the 
U.S. domestic market.
    The hearing record shows that most of the grower and handler 
witnesses stated that a key reason for seeking credit-back authority 
was the need to increase demand after years of unfavorable marketing 
conditions. Witnesses stated that a key factor in their support of 
seeking new ways to increase market demand was several years of 
deteriorating profitability.
    Hearing evidence included data that facilitated comparing farm 
revenue per acre to cost of production, a key measure of walnut farm 
profitability. Tables 2 and 3 illustrate the decline in profitability 
by comparing two four-year periods with very different financial 
outcomes, 2011 to 2014 and 2015 to 2018.

          Table 2--California Walnuts: Cost of Production Data From University of California Extension
----------------------------------------------------------------------------------------------------------------
                                                                                Sample yield
                                                                              (from Table 5 of  Sample costs per
                                           Average yield:    Average yield:    UC study) that    acre associated
                  Year                      tons per acre    pounds per acre    is closest to   with yield shown
                                                 \1\                            NASS yield in     in column (c)
                                                                               column (b) \2\          \2\
                                                       (a)               (b)               (c)               (d)
----------------------------------------------------------------------------------------------------------------
2011....................................              1.74             3,480  ................  ................
2012....................................              1.84             3,680             3,400            $3,318
2013....................................              1.76             3,520             4,000             4,015
2014....................................              1.97             3,940  ................  ................
                                         -----------------------------------------------------------------------
    2011-2014 avg.......................              1.83  ................  ................             3,667
----------------------------------------------------------------------------------------------------------------
2015....................................              2.02             4,040             4,500             4,509
2016....................................              2.19             4,380  ................  ................
2017....................................              1.88             3,760             4,500             5,574
2018....................................              1.93             3,860             4,500             5,283
                                         -----------------------------------------------------------------------
    2015-2018 avg.......................              2.01  ................  ................             5,122
----------------------------------------------------------------------------------------------------------------
\1\ Source: NASS, USDA.
\2\ Source: ``Table 5. Ranging Analysis--Walnuts--Costs per Acre and Per Pound at Varying Yields to Produce
  Walnuts.'' Table 5 appears in each of the following five UC Cooperative Extension studies: ``Walnuts Cost and
  Returns Study, Sacramento Valley,'' UC Coop. Extension--2012, 2015, 2018. ``Walnuts Cost and Returns Study,
  San Joaquin Valley North'', UC Coop. Extension--2013, 2017. Sample yields appear in column 2 of Table 5 in
  each publication.

    Table 2 displays cost of production numbers that represent both 
time periods. University of California Extension conducted two cost of 
production studies in the 2011-2014 time period, and three studies 
between 2015 and 2019. Each of the five studies had ranges of 
production cost figures associated with different yields. To be 
representative of a typical or average walnut producer, the costs 
selected to present in column (d) were associated with University of 
California study yields (column c) closest to the NASS average annual 
yields for that year (column b).
    The average production cost per acre figures for 2011-2014 and 
2015-2018 were $3,667 and $5,122, respectively. Those figures were 
transferred to column (d) of Table 3, and the associated average yields 
(1.83 and 2.10 tons per acre) appear in column (b) of Table 3.

               Table 3--California Walnuts: Producer Gross Return, Cost of Production, Net Return
----------------------------------------------------------------------------------------------------------------
                                Season average                                                     Producer net
                                   producer     Average yield:  Producer gross   Total cost of   return per acre
        Range of years           price, $/ton    tons per acre    return per     production per   (gross return
                                      \1\             \2\            acre           acre \3\       minus cost)
                                           (a)             (b)             (c)              (d)              (e)
                                ..............  ..............       (a) * (b)  ...............          (c)-(d)
----------------------------------------------------------------------------------------------------------------
2011-2014.....................          $3,245            1.83          $5,930           $3,667           $2,264
2015-2018.....................           1,828            2.01           3,664            5,122           -1,458
----------------------------------------------------------------------------------------------------------------
\1\ Source: NASS, USDA.
\2\ Four-year averages computed in Table 1, based on annual NASS yield data.

[[Page 47314]]

 
\3\ Computed in Table 1, based on U. of California Extension cost of production studies. For 2011-2014, the cost
  of production per acre is a two-year average (2012, 2013). For 2015-2018, the cost per acre is a 3-year
  average (2015, 2017, 2018).

    Table 3 uses the data from Table 2 to show how the walnut farm 
profitability declined between the two time periods. Producer gross 
returns per acre for each of the two four-year time periods (column 
(c)) were computed by multiplying average yield by average price. 
Subtracting cost of production in column (d) yields the producer net 
return in column (e).
    The two producer net return numbers in column(e) of Table 3 are the 
key results of this cost and return analysis. Four years of walnut farm 
profitability, represented by producer net return per acre of $2,264 
for 2011-2014, were followed by four years of difficult market 
conditions (2015-2018), with a negative average net return figure (-
$1,458). This analysis provides a numerical estimate that bears out the 
witness testimony that emphasized that a dramatic downward shift in 
their economic fortunes in recent years was a major factor in their 
support for a credit-back program that would leverage additional 
financial resources for handler-based promotional expenditures oriented 
toward increasing domestic demand for walnut products.

Domestic Market Demand for Walnuts

    With reduced export market opportunities, the industry focused in 
recent years on ways to expand the domestic market. Record evidence 
showed that domestic per capita consumption has been approximately one-
half pound for many years.
    The Board commissioned a large consumer survey (with 1,000 
respondents) showing that walnut products were reaching 40 percent of 
U.S. households, indicating significant expansion potential. The study 
pointed out significant differences among age groups, with 22 percent 
of those aged 18 to 24 being walnut consumers. Certain age groups are 
therefore the targets for demand expansion.
    The majority of walnuts going into the domestic market are kernels 
(shelled). One key segment is retail sales, with the main product being 
bags of raw kernels. Another major segment is industrial--use as an 
ingredient by food manufacturers in making pastries and other products. 
Record evidence shows that walnut industry participants consider these 
two segments to be a narrow group of uses which needs to be expanded.
    Witnesses reported that among the Board's strategic objectives, the 
top priority is retail sector growth, and the snack category in 
particular. However, current Board marketing programs are generic in 
nature and focus largely on the traditional forms of walnuts: Raw. Raw 
walnuts as a snack product are important components but expanding 
retail market development beyond the raw product is considered critical 
by industry participants, according to the hearing record. New 
consumption growth will mainly be achieved through new products and 
forms that appeal to a larger consumer audience, witnesses stated.
    According to the hearing record, opportunities for significant 
walnut demand expansion include snack products such as roasted, salted, 
glazed, and trail mixes, and other new products such as beverages, 
spreads and meat alternatives. Witnesses stated that these demand 
expansion opportunities are best achieved through brand advertising and 
other handler-based promotional approaches, rather than the generic 
promotion currently authorized through the Order. Witnesses reported 
that this is a key reason why adding credit-back authority would be 
helpful for demand expansion--by providing incentives for handler-based 
product development and promotion.
    A small handler stated that if credit-back authority is added to 
the marketing order, his firm was likely to partner with another 
company to create a snack product, providing evidence that credit-back 
authority would help small handlers as well as large ones.

Estimated Economic Impact of the Proposed Credit-Back Program

    The hearing record included evidence of the estimated impact of the 
credit-back program on walnut grower total revenue and net return. 
Table 4 presents an illustrative example of the impact of handlers 
taking advantage of the credit-back incentive by increasing their 
promotional spending. Based on the assumptions shown in the table, 
walnut growers would see increased total revenue of $21.1 million (row 
K) and increased net return of $16.8 million (row L). The table shows 
that there are four computational steps that lead up to the final 
computations in rows K and L.
    The first step is to estimate a typical annual budget of the Board 
($25 million in row C) by multiplying the current assessment rate paid 
to the board ($0.04) by a number representing an annual walnut 
production level representative of recent years (625 million 
hundredweight [cwt]).

   Table 4--Calculating the Impact of the Walnut Credit-Back Program on Producer Total Revenue and Net Return
----------------------------------------------------------------------------------------------------------------
                                                                       Calculation                     Value
----------------------------------------------------------------------------------------------------------------
A. Total production (cwt)..............................  .......................................     625,000,000
B. Assessment rate ($/cwt).............................  .......................................           $0.04
C. Total Board budget..................................  C = A * B                                   $25,000,000
D. Share of budget allocated to Credit-Back program (%)  .......................................             10%
E. Credit-Back program budget..........................  E = C * D                                    $2,500,000
F. Credit-Back rate (%)................................  .......................................             70%
G. Total advertising and promotion expenditures with     G = E/F                                      $3,571,429
 Credit-Back program.
H. Increase in advertising and promotion expenditure...  H = G-E                                      $1,071,429
I. Increase in TOTAL revenue per dollar of advertising/  .......................................          $19.75
 promotion \1\.
J. Increase in NET return per dollar of advertising/     .......................................          $15.67
 promotion \1\.
K. Increase in TOTAL revenue...........................  K = H * I                                   $21,160,714
L. Increase in NET return..............................  L = H * J                                   $16,789,286
----------------------------------------------------------------------------------------------------------------
\1\ Estimates of total revenue and net return per dollar spent on promotion are from a report prepared for the
  Board by Dr. Harry M. Kaiser of Cornell University entitled ``Economic Evaluation of the California Walnut
  Board's Advertising and Promotion Programs: An Analysis of the Direct and Indirect Impacts``, July 5, 2018.


[[Page 47315]]

    If the Board allocated 10 percent of a $25 million annual budget to 
the credit-back program, the funds available to allocate to pay 
handlers for eligible promotional spending would be $2.5 million (row 
E). According to the hearing record, this is a level of credit-back 
funding supported by growers and handlers.
    Handlers would receive 70 percent of the amount they expended on 
creditable expenditures. If the Board expended its full annual credit-
back budget of $2.5 million, the total promotional expenditure would 
rise to $3.57 million ($2.5/0.70) as shown in row G. The Credit-Back 
expenditure would create the incentive for handlers to spend the $2.5 
million plus an additional $1.07 million (row H).
    The final step is the overall economic impact on the walnut market 
of the increased spending on advertising and promotion. A 2018 economic 
analysis of walnut promotion impacts by Dr. Harry Kaiser (cited in the 
footnote of Table 4) showed that each dollar of walnut advertising and 
promotional expenditure yielded $19.75 in total revenue and $15.67 in 
net return to walnut growers (rows I and J). Multiplying $1.07 million 
by those two promotional impact-per-dollar figures yields the estimated 
increase in total revenue per year and net return per year of $21.16 
million and $16.79 million, respectively, shown in rows K and L. Net 
return is what is returned to walnut growers after accounting for the 
cost of the promotion program.
    Record evidence indicates that all industry members, growers and 
handlers, would benefit proportionally from an increase in demand 
brought about due to the credit-back program. The credit-back program 
would be funded by allocating to the credit-back program a portion of 
the total Board promotional budget, funded at the current assessment 
rate. With no increase in the Board's assessment rate, there would be 
no increased costs to growers or handlers.
    All handlers, large and small, would benefit proportionally by 
participating in the credit-back program. Handlers will participate 
only if they decide that they will benefit, and would incur no costs if 
they choose not to participate. No handler can benefit 
disproportionately from the program, since a handler's maximum credit-
back payment from the Board is based on that handler's share of total 
industry acquisitions from the prior year, according to the hearing 
record. As cited above, a small handler testified that their smaller 
size would not be a hindrance to using the credit-back program, because 
his walnut processing operation could develop a new product in 
partnership with another firm.
    Consumers would benefit from product diversification of the walnut 
market. They could choose to buy any of the new products that become 
available, thereby adding new foods to their diet, at prices that fit 
within their food budget.
    The record shows that the proposal to add authority to establish 
the credit-back program would, in itself, have no significant economic 
impact on producers or handlers of any size. If the proposed authority 
and the accompanying requirements were implemented, both benefits and 
costs could be anticipated. Costs of complying with the new program 
could include handler maintenance and delivery of receipts and 
documentation for reimbursement of creditable expenditures, but these 
would be minimal and are considered standard business practices. For 
the reasons described above, it is determined that the benefits of 
adding authority for a credit-back program would outweigh the potential 
costs of future implementation.
    USDA has not identified any relevant Federal rules that duplicate, 
overlap or conflict with this proposed rule. These amendments are 
intended to improve the operation and administration of the Order and 
to assist in the marketing of California walnuts.
    Board meetings regarding these proposals, as well as the hearing 
date and location, were widely publicized throughout the California 
walnut industry, and all interested persons were invited to attend the 
meetings and the hearing to participate in Board deliberations on all 
issues. All Board meetings and the hearing were public forums, and all 
entities, both large and small, were able to express views on these 
issues. Interested persons are invited to submit information on the 
regulatory impacts of this action on small businesses.
    AMS is committed to complying with the E-Government Act, to promote 
the use of the internet and other information technologies to provide 
increased opportunities for citizen access to Government information 
and services, and for other purposes.

Paperwork Reduction Act

    Current information collection requirements that are part of the 
Federal marketing order for California walnuts (7 CFR part 984) are 
approved under OMB No. 0581-0178 Vegetables and Specialty Crops. No 
changes in these requirements are anticipated as a result of this 
proceeding. Should any such changes become necessary, they would be 
submitted to OMB for approval.
    As with all Federal marketing order programs, reports and forms are 
periodically reviewed to reduce information requirements and 
duplication by industry and public sector agencies.

Civil Justice Reform

    The amendments to the Order proposed herein have been reviewed 
under Executive Order 12988, Civil Justice Reform. They are not 
intended to have retroactive effect. If adopted, the proposed 
amendments would not preempt any State or local laws, regulations, or 
policies, unless they present an irreconcilable conflict with this 
proposal.
    The Act provides that administrative proceedings must be exhausted 
before parties may file suit in court. Under section 608c(15)(A) of the 
Act, any handler subject to an order may file with USDA a petition 
stating that the order, any provision of the order, or any obligation 
imposed in connection with the order is not in accordance with law and 
request a modification of the order or to be exempted therefrom. A 
handler is afforded the opportunity for a hearing on the petition. 
After the hearing, USDA would rule on the petition. The Act provides 
that the district court of the United States in any district in which 
the handler is an inhabitant, or has his or her principal place of 
business, has jurisdiction to review USDA's ruling on the petition, 
provided an action is filed no later than 20 days after the date of 
entry of the ruling.

Rulings on Briefs of Interested Persons

    Briefs, proposed findings and conclusions, and the evidence in the 
record were considered in making the findings and conclusions set forth 
in this recommended decision. To the extent that the suggested findings 
and conclusions filed by interested persons are inconsistent with the 
findings and conclusions of this recommended decision, the requests to 
make such findings or to reach such conclusions are denied.

General Findings

    The findings hereinafter set forth are supplementary to the 
findings and determinations which were previously made in connection 
with the issuance of the marketing agreement and order; and all said 
previous findings and determinations are hereby ratified and affirmed, 
except insofar as such findings and determinations may be in conflict

[[Page 47316]]

with the findings and determinations set forth herein.
    (1) The marketing order, as amended, and as hereby proposed to be 
further amended, and all of the terms and conditions thereof, would 
tend to effectuate the declared policy of the Act;
    (2) The marketing order, as amended, and as hereby proposed to be 
further amended, regulates the handling of walnuts grown in the 
production area (California) in the same manner as, and is applicable 
only to, persons in the respective classes of commercial and industrial 
activity specified in the marketing order upon which a hearing has been 
held;
    (3) The marketing order, as amended, and as hereby proposed to be 
further amended, is limited in its application to the smallest regional 
production area which is practicable, consistent with carrying out the 
declared policy of the Act, and the issuance of several orders 
applicable to subdivisions of the production area would not effectively 
carry out the declared policy of the Act;
    (4) The marketing order, as amended, and as hereby proposed to be 
further amended, prescribes, insofar as practicable, such different 
terms applicable to different parts of the production area as are 
necessary to give due recognition to the differences in the production 
and marketing of walnuts grown in the production area; and
    (5) All handling of walnuts grown in the production area as defined 
in the marketing order is in the current of interstate or foreign 
commerce or directly burdens, obstructs, or affects such commerce.
    A 30-day comment period is provided to allow interested persons to 
respond to this proposal. All written exceptions received within the 
comment period will be considered, and a producer referendum will be 
conducted before any of these proposals are implemented.

List of Subjects in 7 CFR Part 984

    Walnuts, Marketing agreements, Nuts, Reporting and recordkeeping 
requirements.

Recommended Further Amendment of the Marketing Order

    For the reasons set out in the preamble, 7 CFR part 982 is proposed 
to be amended as follows:

PART 984--WALNUTS GROWN IN CALIFORNIA

0
1. The authority citation for 7 CFR part 984 continues to read as 
follows:

    Authority: 7 U.S.C. 601-674.

0
2. In Sec.  984.46:
0
a. Designate and revise the existing paragraph as paragraph (a); and
0
b. Add paragraphs (b) and (c).
    The revision and additions read as follows:


Sec.  984.46  Research and development.

    (a) Research and development authorities. The Board, with the 
approval of the Secretary, may establish or provide for the 
establishment of production research, marketing research and 
development projects, and marketing promotion, including paid 
advertising, designed to assist, improve, or promote the marketing, 
distribution, and consumption or efficient production of walnuts. The 
expenses of such projects shall be paid from funds collected pursuant 
to Sec.  984.69 and Sec.  984.70 and may be credited back pursuant to 
paragraphs (b) and (c) of this section.
    (b) Credit-back for promotion expenses. The Board may provide for 
crediting the pro rata expense assessment obligations of a handler with 
such portion of his or her direct expenditure for marketing promotion, 
including paid advertising, as may be authorized. The credit-back 
amount available to each handler shall be determined by that handler's 
percent of the industry's total volume of walnuts handled during the 
prior marketing year multiplied by the current marketing year's credit-
back program budget. No handler shall receive credit-back for any 
creditable expenditures that would exceed the total amount of credit-
back available to him or her for the applicable marketing year. 
Further, no handler shall receive credit-back in an amount that exceeds 
that handler's assessments paid in the applicable marketing year at the 
time the credit-back application is made. Marketing promotion expenses 
shall be credited at a rate recommended by the Board and approved by 
the Secretary, where the credit rate is based on the amount per dollar 
of marketing promotion expenses for creditable expenditures paid by a 
handler during the applicable marketing year. Credit may be paid 
directly to the handler as a reimbursement of assessments paid or may 
be issued as recommended by the Board and approved by the Secretary. 
The Board may also establish, subject to the approval of the Secretary, 
different credit rates for different products or different marketing 
promotion activities according to priorities determined by the Board 
and its marketing plan.
    (c) Creditable expenditures. The Board, with the approval of the 
Secretary, may credit-back all or any portion of a handler's direct 
expenditures for marketing promotion including paid advertising that 
promotes the sale of walnuts, walnut products or their uses. Such 
expenditures may include, but are not limited to, money spent for 
advertising space or time in newspapers, magazines, radio, television, 
transit, and outdoor media, including the actual standard agency 
commission costs not to exceed 15 percent, or as otherwise recommended 
by the Board and approved by the Secretary.
0
3. Add subpart D to read as follows:
Subpart D--Research and Development Requirements
Sec.
984.546 Credit for marketing promotion activities, including paid 
advertising.
984.547 [Reserved]

Subpart D--Research and Development Requirements


Sec.  984.546  Credit for marketing promotion activities, including 
paid advertising.

    (a) Timeliness of reimbursement claim and credit-back rate. For a 
handler to receive credit-back for his or her own marketing promotional 
activities pursuant to Sec.  984.46, the Board shall determine that 
such expenditures meet the applicable requirements of this section. 
Credit-back may be granted in the form of reimbursement for all 
creditable expenditures paid within the applicable marketing year 
subject to the effective credit-back rate; Provided, that such 
creditable expenditures are documented to the satisfaction of the Board 
within 15 days after the end of that marketing year. Credit may be 
granted for a handler's creditable expenditures in an amount not to 
exceed that handler's pro-rata share of the credit-back fund. No more 
than 70 cents ($0.70) shall be credited back to a handler for every 
dollar spent on qualified activities.
    (b) Assessment payments. The handler assessment is due as defined 
in Sec.  984.69. A handler shall be current on all assessment payments 
prior to receiving credit-back for creditable expenditures.
    (c) Handler eligibility for reimbursement. The Board shall grant 
credit-back for qualified activities only to the handler who performed 
such activities and who filed a claim for credit-back in accordance 
with this section.
    (d) Applicability to marketing year. Credit-back shall be granted 
only for creditable expenditures for qualified activities that are 
conducted and completed during the marketing year for which credit-back 
is requested.

[[Page 47317]]

    (e) Qualified activities. The following requirements shall apply to 
all creditable expenditures resulting from qualified activities:
    (1) Credit-back granted by the Board shall be that which is 
appropriate when compared to accepted professional practices and rates 
for the type of activity conducted. In the case of claims for credit-
back activities not covered by specific and established criteria, the 
Board shall grant the claim if it is consistent with practices and 
rates for similar activities.
    (2) The clear and evident purpose of each qualified activity shall 
be to promote the sale, consumption or use of California walnuts.
    (3) No credit-back will be given for any activity that targets the 
farming or grower trade.
    (4) Credit-back will not be allowed in any case for travel 
expenses, or for any promotional activities that result in price 
discounting.
    (5) Credit-back shall be granted for those qualified activities 
specified (e)(5)(i) through (iv) of this section:
    (i) Credit-back shall be granted for paid media directed to end-
users, trade or industrial users, and for money spent on paid 
advertising space or time, including, but not limited to, newspapers, 
magazines, radio, television, online, transit and outdoor media, and 
including the standard agency commission costs not to exceed 15 percent 
of gross.
    (ii) Credit-back shall be granted for market promotion other than 
paid advertising, for the following activities:
    (A) Marketing research (except pre-testing and test-marketing of 
paid advertising);
    (B) Trade and consumer product public relations (provided that no 
credit-back shall be given for related fees charged by an advertising 
or public relations agency);
    (C) Sales Promotion (in-store demonstrations, production of 
promotional materials, sales and marketing presentation kits, etc., 
excluding couponing);
    (D) Trade shows (booth rental, services, and promotional 
materials).
    (iii) For any qualified activity involving a handler promoting 
branded products, a handler selling multiple complementary products, 
including other nuts, with such activity including the handler's name 
or brand, or joint participation by a handler and a manufacturer or 
seller of a complementary product(s), the amount allowed for credit-
back shall reflect that portion of the activity represented by walnuts. 
If the product is owned or distributed by the handler, in order to 
receive any amount of credit-back, the product must list the ownership 
or distributorship on the package and display the handler's name and 
the handler's brand. The words ``California Walnuts'' must be included 
on the primary, face label. Such activities must also meet the 
requirements of paragraphs (e)(1) through (5) of this section.
    (iv) If the handler is engaged in marketing promotion activities 
pursuant to a contract with the Foreign Agricultural Service (FAS), 
USDA, and/or the California Department of Food and Agriculture (CDFA), 
unless the Board is administering the foreign marketing program, such 
activities shall not be eligible for credit-back unless the handler 
certifies that he or she was not and will not be reimbursed by either 
FAS or CDFA for the amount claimed for credit-back, and has on record 
with the Board all claims for reimbursement made to FAS and/or the 
CDFA. Foreign market expenses paid by third parties as part of a 
handler's contract with FAS or CDFA shall not be eligible for credit-
back.
    (6) Credit-back Reimbursement claims. A handler must file claims 
with the Board to obtain credit-back for creditable expenditures, as 
follows:
    (i) All claims submitted to the Board for any qualified activity 
must include:
    (A) A description of the activity and when and where it was 
conducted;
    (B) Copies of all invoices from suppliers or agencies;
    (C) Copies of all canceled checks or other proof of payment issued 
by the handler in payment of these invoices; and
    (D) An actual sample, picture or other physical evidence of the 
qualified activity.
    (ii) Handlers may receive reimbursement of their paid assessments 
up to their pro-rata share of available dollars to be based on their 
percentage of the prior marketing year crop total. In all instances, 
handlers must remit the assessment to the Board when billed, and 
reimbursement will be issued to the extent of proven, qualified 
activities.
    (iii) Checks from the Board in payment of approved credit-back 
claims will be mailed to handlers within 30 days of receipt of eligible 
claims.
    (iv) Final claims for the marketing year pertaining to such 
qualified activities must be submitted with all required elements 
within 15 days after the close of the Board's marketing year.
    (f) Appeals. If a determination is made by the Board staff that a 
particular marketing promotional activity is not eligible for credit-
back because it does not meet the criteria specified in this section, 
the affected handler may request the Executive Committee review the 
Board staff's decision. If the affected handler disagrees with the 
decision of the Executive Committee, the handler may request that the 
Board review the Executive Committee's decision. If the handler 
disagrees with the decision of the Board, the handler, through the 
Board, may request that the Secretary review the Board's decision. 
Handlers have the right to request anonymity in the review of their 
appeal. The Secretary maintains the right to review any decisions made 
by the aforementioned bodies at his or her discretion.


Sec.  984.547  [Reserved]

Bruce Summers,
Administrator, Agricultural Marketing Service.
[FR Doc. 2020-15135 Filed 8-4-20; 8:45 am]
BILLING CODE P