NGFA Newsletter

Volume 50, Number 26, December 29, 1998

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Contents

STB Advises Congress of Impasse on Rail Competitive Access Issues

STB Eliminates Product, Geographic Competition in Maximum Rate Cases

EPA Issues Notice Proposing Stringent Controls on Phosphine Fumigation

Turning the Page to 1999

USDA Proposes Karnal Bunt Compensation for 1997-98

FDA Accepts Citizen Petition Urging Changes in Medicated Feed CGMPs

FDA Plans to Launch Pilot Program on Feed Mill Self-Inspections

Federal Appeals Court Rejects Challenge to NGFA Arbitration System

STB Advises Congress of Impasse on Rail Competitive Access Issues

…Says Matter `More Appropriately Resolved by Congress'...

In a year-end letter, the Surface Transportation Board has advised Congress that discussions between rail carriers and rail users on competitive access issues have "reached an impasse" that can be resolved only through legislation.

"The differences between railroads and shippers on the (STB's) competitive access rules are fundamental, and they raise basic policy issues -- concerning the appropriate role of competition, differential pricing and how railroads earn revenues and structure their services -- that are more appropriately resolved by Congress than by an administrative agency," wrote STB Chairman Linda J. Morgan. "Moreover, the so-called `bottleneck' (rate) cases, which involve issues related to competitive access, are still being reviewed in court.

"For those reasons, although the (STB) has moved aggressively to adopt…new rules…to open up access during times of poor service, the (STB) does not plan to initiate administrative action to otherwise revisit the competitive access rules at this time," Morgan wrote.

The Dec. 21 letter, which reviewed the STB's actions on rail-related matters in 1998, was sent to Sens. John McCain, R-Ariz., chairman of the Senate Commerce Committee, and Kay Bailey Hutchison, R-Texas, chairman of the Senate Commerce Committee's Subcommittee on Surface Transportation and Merchant Marine. The statements contained in the STB chairman's letter could influence the amendments considered as part of legislation to reauthorize the STB that is scheduled to be considered by Congress in 1999.

Competitive access refers to the ability of shippers to obtain service from railroads that do not reach their facilities over the objections of the incumbent carrier that does. The STB had directed railroads and shippers to "attempt to find common ground" as part of a rulemaking [STB Ex Parte No. 575] issued on April 17.

"After extensive meetings, the parties reached an impasse," Morgan said. "The principal areas of concern involved the definition of terminal areas; the scope of reciprocal switching; appropriate compensation to an incumbent carrier; and, perhaps most fundamentally, whether access to other carriers ought to be required only when an incumbent carrier has acted in some sort of an anticompetitive way, or whether it ought to be provided whenever additional competition is determined to be in the public interest."

Morgan's letter cited the complexities of so-called "open access" for rail service, and indicated there is uncertainty over how the rail system would look under such a structure.

"Certain shippers assume that the replacement of differential pricing by purely competitive pricing would reduce the rates paid by shippers, and that added competition would result in increased infrastructure investment," wrote Morgan in a footnote of the letter to Congress. "The railroads, by contrast, argue that because their traffic base would shrink, the rates paid by those shippers that would continue to receive service would actually increase, even as overall revenues received by railroads would decline, because the overall traffic base from which costs could be recovered would be reduced. Additionally,…carriers could be expected to seek to maintain an adequate rate of return by cutting their costs, which could include shedding unprofitable lines and reducing new investment in infrastructure.

"Thus, while certain shipper representatives believe that an open access system would ensure better service, concern has been raised that, unless smaller railroads were able to fill in service gaps that could be created, open access could produce a smaller rail system that would serve fewer shippers, and a different mix of customers, than are served today, with different types and levels of, and perhaps more selectively provided, service."

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STB Eliminates Product, Geographic Competition in Maximum Rate Cases

The Surface Transportation Board, in a Dec. 10 decision, eliminated product and geographic competition as tests to determine the presence of rail market dominance in maximum rate cases.

Federal law permits rail users to challenge the reasonableness of a rail rate if it exceeds 180 percent of a carrier's revenue-to-variable cost. But before the rate can be challenged, the rail user also is required to demonstrate that the carrier has "market dominance" over the traffic to which the rate applies. Market dominance is defined by law to mean the absence of effective competition from other rail carriers or modes of transportation for which the rate applies.

Prior to its Dec. 10 decision, the STB (and the Interstate Commerce Commission before it) applied four tests in assessing whether a carrier had "market dominance": 1) whether the same commodity can be transported between the same points effectively by other railroads (intramodal competition); 2) whether the same commodity can be shipped between the same points effectively by other transportation modes (intermodal competition); 3) whether the complaining shipper can avoid using the defendant railroad by shipping or receiving a substitute product (product competition); and 4) whether the shipper can obtain the same product from a different source or ship the same product to a different destination (geographic competition).

In its rulemaking [STB Ex Parte No. 627], the STB eliminated the product and geographic competition tests. The agency said that the inclusion of product and geographic competition in its determination of market dominance had a "chilling effect…on the filing of valid rate complaints by captive shippers and on the resolution of rate complaints in a timely manner" which it said "far outweighed the limited impact" that removal of such factors would have on rail carriers. "Negating this chilling effect will further level the playing field between railroads and shippers," the STB said in its decision. "…[W]e expect the primary result of our action…, giving shippers real access to relief, will be to encourage more private-sector resolutions of disputes between captive shippers and the railroads serving them."

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50 Years of Newsletters

This edition of the NGFA Newsletter marks the culmination of 50 years of weekly and biweekly newsletters sent to NGFA members to keep them informed about the wide range of issues important to operating commercial grain, feed, processing and grain-related businesses. While information technology has changed dramatically over the past half century, the NGFA's commitment to give its members a competitive advantage in the marketplace by providing timely, accurate and relevant information to meet business needs remains steadfast. As the new millennium approaches, we look forward to bringing you another 50 years of regular newsletters.

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EPA Issues Notice Proposing Stringent Controls on Phosphine Fumigation

…Comments Due by March 23; Two `Stakeholder' Meetings Planned for May and June…

The Environmental Protection Agency on Dec. 23 issued a notice proposing to impose stringent new controls on the use of phosphine as a fumigant.

The notice is the first step in a reregistration process for the two active ingredients -- aluminum and magnesium phosphide -- that produce phosphine gas. EPA is soliciting comments by March 23 on its reregistration proposals. The agency also said it would conduct at least two national "stakeholder" meetings -- scheduled for Kansas City, Mo., and Sacramento, Calif., in May and June -- to unveil its final planned restrictions on the use of phosphine. Once EPA determines its final risk-mitigation measures for the chemicals, registrants would be required to implement the changes within eight months, it said.

"Given the high toxicity of aluminum and magnesium phosphide and potential risks posed to applicators, and occupational and residential bystanders…, the agency has developed a number of mitigation measures which it proposes…to reduce the risks," EPA said in its notice. "However, since aluminum and magnesium phosphide have significant benefits and there are few, if any viable alternatives, one of which is methyl bromide, the agency believes that it is important that a broad stakeholder process be conducted to discuss these measures and/or to develop other workable mitigation measures that adequately protect occupational and residential bystanders." The agency also said it would consult with the U.S. Department of Agriculture's Phosphine Task Force when making a final determination on risk-mitigation measures that will be required to maintain the registration of aluminum and magnesium phosphide.

Proposed Restrictions: As reported in the Oct. 8 NGFA Newsletter, EPA's notice proposes to:

• reduce the exposure standard for phosphine gas to 0.03 parts per million (p.p.m.), one-tenth the current permissible exposure standard of 0.3 p.p.m. established by the Occupational Safety and Health Administration for general industry, which includes grain, feed and processing facilities. EPA said it was aware that there is no instrument currently available that can measure this minute level of gas, and that it would accept a 0.05 p.p.m. detection limit as the standard "until new technology becomes available at which time the 0.03 p.p.m. standard would be required."

• prohibit fumigation and aeration within 500 feet of residential areas.

• establish a 500-foot "buffer zone" and restricted area around all structures fumigated with phosphine in all areas, including non-residential areas. Prior to allowing entry into the buffer area, EPA proposes to require that monitoring be conducted to ensure the concentration of phosphine in the atmosphere is less than 0.03 p.p.m.

• require placarding around the perimeter of the 500-foot restricted zone.

• require notification of local residents and adjoining commercial and industrial sites that are within 750 feet of the fumigated structure.

• require notification of local emergency response authorities (such as fire and police departments) and on-site workers at least 24 hours prior to fumigation.

• prohibit aeration of fumigated railcars, vehicles or containers while in transit. Fumigated structures, vehicles and containers also would be required to be placarded or be accompanied by other documentation warning that the concentration of phosphine be measured by a certified applicator or other trained person before the area is entered.

• require stringent monitoring for phosphine gas when unloading "or otherwise disturbing" a commodity that has been fumigated. EPA proposes to require that, where feasible, monitoring be done at the top, middle and bottom of the commodity/storage facility.

• require additional monitoring of areas around fumigated structures.
  

• require seal/leak testing for structures prior to fumigation. Records of such tests would be required to be maintained by the certified applicator.

• require fumigation-specific training for certified applicators.

The EPA proposal also would:

• require two persons to be present before entering a fumigated structure, one of whom would be required to be a certified applicator and the other be trained in the use of monitoring equipment to test for the presence of phosphine gas.
  

• require registrants to provide annual reports on any incidents associated with fumigation with phosphine gas.

• require that all persons involved in the fumigation or aeration activities be certified or that certified applicators supervising the activity be located with 50 feet of the operation with a clear sight-line to the person(s) performing the fumigation. [Note: the 50-foot requirement is new.]

• require that all persons involved in fumigation or aeration wear respiratory protection during such operations unless monitoring shows that concentrations of phosphine gas are at or below the established standard (0.03 p.p.m. or 0.05 p.p.m.).

Submitting Comments: Several NGFA committees will be involved in formulating the association's extensive comments to EPA on this major issue. In addition, NGFA members that wish to comment directly to EPA by March 23 may do so by sending three copies of their statements to: Public Information and Records Integrity Branch; Information Resources and Services Division (7502C); Office of Pesticide Programs; EPA; 401 M St., S.W.; Washington, D.C., 20460. Statements should reference Docket Control Number OPP-34159.

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Turning the Page to 1999

The past year has been one of unique experiences and benchmark accomplishments for the National Grain and Feed Association and its members.

In many ways, events and actions initiated in 1998 may portend what lies ahead for 1999. The NGFA began the year looking at legislative strategies to address many pending rail issues. But by August, the NGFA had signed an historic agreement with railroads to arbitrate and mediate a wide range of disputes, many of which previously had been part of our legislative agenda. Because the NGFA is committed to serving members, it arbitrates disputes if only one of the companies involved is a member (and both companies voluntarily agree to arbitrate after the dispute occurs). But the rail arbitration agreement provides only NGFA member firms with the beneficial right to "compel" arbitration.

Other industries and groups pursuing rail legislative solutions were unsuccessful in 1998. But the rail legislative agenda already is heating up for 1999. While granting the request of shipper organizations to eliminate the complicated tests of product and geographic competition in rail rate cases, the Surface Transportation Board (STB) also signaled to Congress that it would go no further in addressing rail competitive access issues. The STB needs to be reauthorized by Congress in 1999 to continue to exist. Will 1999 be another defining moment for rail legislation?

Rail arbitration wasn't the only unique agreement signed by the NGFA in 1998. The NGFA and Pet Food Institute (PFI), following approval by boards of directors of both organizations, signed a formal strategic alliance to provide more effective representation of feed interests before federal and state governments. PFI is an outstanding organization with professional, dedicated people who have expertise useful to NGFA members. Likewise, the NGFA has some strengths that will contribute to the services PFI is able to offer to its members. This marks the second organization with which the NGFA has partnered. In 1997, the Grain Elevator and Processing Society (GEAPS) and NGFA joined hands in several committee functions and in combining resources for industry-wide educational programs. Through such carefully selected "win-win" partnerships, the NGFA will provide members with enhanced, cost-effective services in the coming years.

In 1998, the NGFA continued to provide members with access to the highest quality of educational programming. At the March convention, Monsanto President Hendrik Verfaille painted a picture of biotechnology and its meaning for the grain-based handling and foods business in the next decade. Then, at December's Country Elevator Council and Feed Industry Council meetings, Bill Wyffel of Wyffel's Hybrids described current market developments in specialty grains; Dick Reasons of Optimum Quality Grains offered his perspective of how biotech will shape grain acquisition; and Ron Olson of General Mills presented his company's current thinking and strategies toward specialty grains and marketing systems. At the same meeting, Paul Pantano, a commodity law expert, presented a detailed review of current legal cases and Commodity Futures Trading Commission's (CFTC) actions that are redefining the legal risks and the "acceptable" structure of cash grain contracts. He also offered valuable suggestions on how companies can respond by refining contracts to manage legal risk. NGFA meetings in 1998 provided the right tools you need to strategically plan and avoid problems through informed management.

The past year also brought some disappointments and monumental challenges. The CFTC issued an interim final rule on agricultural trade options that proved to be a non-starter. The rule contained excessive regulations and the marketplace responded by avoiding the program. Thus far, no companies have enrolled to offer agricultural trade options. However, this concept may get another chance. Some CFTC commissioners now are discussing how to revamp the rule to attract some interest. But the biggest challenge confronting the CFTC in 1999 is not to develop a reasonable trade option rule, but surviving in its present form. Through its rulemaking activities on over-the-counter instruments and in other areas, the CFTC has taken a more aggressive pro-regulatory stance that is not setting well with the business community or even its sister federal agencies. Going into 1999, support for the CFTC is at its lowest level since it became an independent agency in the mid-1970s -- a dangerous position for an agency only authorized by Congress to operate until Oct. 1, 2000.

Unquestionably, the NGFA's biggest challenge this past year was to keep its internationally recognized Arbitration System moving forward under an avalanche of cases. Driven mostly, but not exclusively, by disputes involving cash contracts in the 1996-97 marketing year, a record number of arbitration cases were both filed and completed. Given that the NGFA depends upon knowledgeable volunteers from member companies to serve as arbitrators, NGFA member companies and staff have done remarkably well to keep up with the volume. I thank each and every one of you who has served as an arbitrator on one or more cases. Without your commitment, the system would not survive nor have the broad industry recognition and support it enjoys.

Not only has the Arbitration System stood up well under a heavy volume of cases, it has withstood a wave of challenges in the courts and elsewhere. The courts largely have upheld the NGFA system as a fair and recognized forum for dispute resolution, enforceable under the Federal Arbitration Act. Just this month, the U.S. Court of Appeals for the Sixth Circuit issued yet another strong reaffirmation of NGFA arbitration as an effective and balanced mechanism for dispute resolution. While we anticipate additional courts will examine the NGFA Arbitration System in 1999 as part of contractual dispute litigation, court decisions rendered thus far have been a strong testament to the fundamental fairness and integrity with which the system has always operated.

The NGFA's biggest challenge for 1999? With the legislative year set to start with a Senate impeachment trial for a sitting U.S. president, it would be an understatement to say that we confront an unpredictable environment. Add to that record low hog prices, relatively low grain prices and a trade picture that does not look exceptionally promising in the near term, the stage is set for ________________________.

I'll let you fill in the blank, because just about anything seems possible. Congress may get locked up again in a partisan quagmire. Conversely, after the Senate dispenses justice with the president, Congress may be so fed up with partisan quarreling that it could move in lock-step to pass significant legislation. Secretary of Agriculture Dan Glickman is talking about strengthening the "safety net" for agriculture. Our biggest challenge in 1999 may well be to provide sound advice to government on how it can be more helpful to agriculture without subsidizing certain business activities and investments over others (which invariably results in surpluses, imbalances and inefficiencies) and how to avoid programs that ultimately impede the responsiveness of U.S. markets and industry to aggressively pursue new growth opportunities when they occur.

Can government be skillful enough to provide helpful agricultural programs without strings attached? A challenge indeed!

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Tech Talk by Thomas C. O'Connor Director of Technical Services

USDA Proposes Karnal Bunt Compensation for 1997-98

The U.S. Department of Agriculture has issued a proposal for providing compensation for growers, grain handlers, flour millers and others who incurred losses and expenses resulting from Karnal bunt infestation during the 1997-98 crop season.

The proposal, published in the Dec. 17 Federal Register, would provide compensation to growers, grain handlers and seed companies for the loss in value of their 1997-98 crop wheat. Eligibility for compensation would depend upon whether the wheat was tested by USDA's Animal and Plant Health Inspection Service (APHIS).

Compensation would be limited to:

• 60 cents per bushel in previously regulated areas; and

• the difference between the contract price (if sold under contract) or estimated market price for the respective class of wheat, minus the actual price received, in areas that became regulated for Karnal bunt after the 1997-98 crop was planted. Compensation could not exceed $1.80 per bushel.

Grain handlers would be eligible for compensation if they were required to decontaminate storage facilities. Compensation would be limited to a one-time payment representing up to 50 percent of the direct cost of the decontamination, not to exceed $20,000.

In addition, as occurred in previous years, grain handlers who participated in USDA's national Karnal bunt survey would be eligible for compensation for the loss in value if the wheat tested positive for Karnal bunt. Compensation would be provided under the same formula that applies to grain handlers in newly regulated areas, with a cap of $1.80 per bushel. As previously the case, the secretary of agriculture would be required to have declared an "extraordinary emergency" in the state in which the grain storage facility was located for the owner to be eligible for compensation.

In addition, flour millers would be eligible for compensation at a rate of $35 per short ton if they heat-treated millfeed processed from wheat that tested positive for Karnal bunt.

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GIPSA Increases Fees

The U.S. Department of Agriculture's Grain Inspection, Packers and Stockyards Administration on Dec. 23 issued a final rule increasing official inspection and weighing fees, effective Feb. 1. Hourly rates and certain unit inspection rates were increased by 3.6 percent. In addition, an average 1.2 percent increase was imposed on the tonnage inspection fee. GIPSA maintained that the increase was necessary to recover a projected 3.6 percent cost-of-living salary increase for federal employees.

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Feed Facts

by Randall C. Gordon

Vice President, Communications/Government Relations

FDA Accepts Citizen Petition Urging Changes in Medicated Feed CGMPs

…Changes Expected to be Proposed in Summer of 1999…

The Food and Drug Administration has notified the NGFA that it plans to propose changes in the current good manufacturing practices (CGMPs) that apply to medicated feed manufacturing establishments sometime next summer.

The proposed rulemaking comes on the heels of the agency's acceptance of a citizen petition filed July 21 by the NGFA, the Association of American Feed Control Officials (the professional organization of state and federal feed regulatory officials) and the American Feed Industry Association recommending that FDA undertake the most sweeping changes in the regulation of feed manufacturing establishments in nearly two decades.

In a Dec. 10 letter to NGFA President Kendell W. Keith, FDA said it had reviewed the citizen petition and "agree(s) that it has considerable merit." Wrote FDA Deputy Commissioner for Policy William B. Schultz: "…FDA is partially granting your request in so far as the agency believes it would be appropriate to publish a notice of proposed rulemaking relating to the revision (of the CGMPs for medicated feed establishments)."

The citizen petition filed by the NGFA and other groups contained suggested revisions to the CGMPs that FDA is expected to use in formulating its proposed rule. The proposed changes to the CGMPs contained in the citizen petition were developed during the past two years by AAFCO's Medicated Feed Committee, with extensive participation by the NGFA.

CGMP Changes Proposed in Citizen Petition. Significantly, the citizen petition calls for creation of a single set of requirements that would apply to both licensed and non-licensed medicated feed establishments, including on-farm mixer/feeders. That would be a change from the current requirements, adopted by FDA in 1985, which created two sets of CGMPs -- one for licensed establishments and another "relaxed" set for non-licensed establishments.

Licensed establishments are those that use one or more Type A sources of Category II drugs to manufacture medicated feeds. These establishments are required to obtain a license from FDA as a drug establishment. Establishments not required to be licensed by FDA are those whose use of animal drugs is limited to Category I drugs (all types) and Types B and C sources of Category II drugs. Category II drugs are those that have a withdrawal time at the lowest usage level for one or more species of animals, or which are regulated on a zero-residue basis.

The recommended changes to the CGMPs contained in the citizen petition would delete outdated or unnecessary regulation and streamline and clarify remaining requirements deemed important to producing safe and wholesome medicated feed. Importantly, the proposed CGMPs contained in the citizen petition would apply to all manufacturers of medicated feeds, including on-farm mixer/feeders.

The most significant proposed changes contained in the citizen petition address:

Drug Inventory Records: Daily drug inventory records would be required only for medicated feed establishments using Type A medicated articles. Type A articles are essentially drug premixes intended solely for use in manufacturing another Type A medicated article or a Type B or Type C medicated feed.

Establishments handling Type B medicated feeds, which contain a substantial quantity of nutrients, would be required to develop "adequate procedures" to track the receipt and use of such feeds. Unlicensed on-farm mixer/feeders would be required to maintain written records of the receipt and use of all Type A medicated articles. For Type B medicated feeds, the proposed changes would apply to all medicated feed facilities (including unlicensed on-farm mixer/feeders) the existing requirements that apply to unlicensed facilities.

Assays: The current laboratory assay requirement that applies to medicated feeds manufactured by licensed facilities would be revised and refocused. The changes would clarify that one sample is to be submitted for assay for each one-third of the calendar year, provided feed containing the drug was manufactured during that four-month period. Most importantly, the proposal would allow a medicated feed manufactured from a Type A, fixed combination drug source to be considered within drug analytical specifications if one or more of the drugs in the combination were assayed and found to be within assay specifications. Unlicensed establishments would continue to be exempt from the assay requirement.

Equipment Clean-Out: All medicated feed manufacturing facilities, including on-farm mixer/feeders, would be required to have written clean-out procedures. Currently, only licensed facilities are required to have such procedures in writing.

Labeling: Requirements would be established for labeling bulk medicated feeds, including customer-formula feeds, that at the time of sale are bagged or packaged with variable weights for the convenience of the customer. This suggested change would ensure that complete labeling information accompanies the shipment to the user. The suggested changes also would require unlicensed on-farm mixer/feeders to establish an "appropriate means" to identify specific lots of medicated feed that are manufactured and stored.

Recordkeeping: The suggested changes would update terminology and remove unnecessary and extraneous regulation. For instance, the term "master record file" used in the current regulations would be replaced with the phrase "manufacturing procedures and production records." In addition, all medicated feed manufacturers, except for unlicensed on-farm mixer/feeders, would be required to have written manufacturing procedures and to maintain written production (batch) records. Production records would be required to include the product name; the date manufactured; a copy of the formula used; the name and quantity of each drug used; the scheduled batch run or quantity; documentation of each significant step in the production process; and a copy of the label. The requirement that personnel sign or initial production records also would be eliminated. Unlicensed on-farm mixer/feeders would be required to keep written production records that were adequate to identify specific batches of medicated feeds mixed or fed.

Complaint Files: The requirement that medicated feed establishments maintain complaint files for government inspection would be eliminated.

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FDA Plans to Launch Pilot Program on Feed Mill Self-Inspections

The Food and Drug Administration has informed the NGFA that it plans to launch a pilot program sometime during the second quarter of 1999 to test the concept of self-regulation of medicated feed manufacturing establishments.

During a Dec. 16 meeting with FDA and AAFCO representatives, the NGFA learned that the agency has received preliminary approval from its Office of Regulatory Affairs to proceed with a pilot program to evaluate the so-called "voluntary self-inspection program" (VSIP) -- strongly advocated by the NGFA -- that would enable feed mills with quality-assurance programs to generally be exempt from FDA biennial inspections.

VSIP -- What It Entails: To qualify for participation in VSIP, firms would be required to: 1) submit a written notice to FDA and their state feed control agency; 2) implement a written company- or industry-based quality- assurance program that meets or exceeds FDA's current good manufacturing practice (CGMP) requirements; and 3) have a "no action indicated" or "voluntary action indicated" inspection status within two yeas of the date of notification that the firm desires to participate. Establishments not having this inspection status -- or which had not undergone a CGMP inspection during the previous to years -- would be required to undergo a preapproval CGMP inspection. Any medicated feed establishment, including integrators and on-farm mixer/feeders, would be eligible to participate in VSIP.

Medicated feed establishments participating in VSIP would enter into a binding agreement with FDA under which they would be required to submit an annual "facility annual inspection report" on their self-inspection, and agree to notify the agency if they become aware that a product they manufacture poses an imminent hazard to human or animal health or safety. An establishment's VSIP status could be revoked if it violated the binding agreement with FDA or failed to have a quality-assurance program that meets or exceeds CGMP requirements. Establishments also could voluntarily withdraw from the program at any time by providing written notification.

The VSIP concept was developed through the AAFCO Medicated Feed Committee (newly renamed the "Feed Manufacturing Committee") during the past two years as part of a Model National Medicated Feed Program that also included the suggested revisions to the CGMPs referenced in the previous article.

Aspects of the Pilot Program: FDA officials anticipate that the pilot program would last for up to two years. The agency is exploring the concept of entering into a "partnership agreement" with the NGFA, AAFCO and other supporters of the VSIP concept. The agency currently is developing procedures it will use to determine which medicated feed establishments will be selected for the pilot program. Among the factors expected to be considered are: 1) type of facility (licensed or unlicensed); 2) geographic location; 3) annual tonnage of medicated feed manufactured; 4) number of species of livestock and poultry feed manufactured; and 5) number of animal drugs used.

FDA officials indicated that they would like the pilot program to include diverse mix of medicated feed establishments so that it provides a realistic test of the VSIP concept.

The NGFA's Feed Industry Committee will be providing input to FDA and AAFCO on the structure of the pilot program, as well as the criteria used to select medicated feed establishments for participation in the pilot program. NGFA-member companies that manufacture medicated feed that would be interested in volunteering to participate in the pilot program should contact Randy Gordon at the NGFA at (202) 289-0873.

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Federal Appeals Court Rejects Challenge to NGFA Arbitration System

The U.S. Court of Appeals for the Sixth Circuit on Dec. 17 rejected a challenge to the NGFA's Arbitration System mounted by Horton Farms Inc., the losing party in a court-ordered NGFA arbitration case.

Importantly, the three-judge appellate panel unanimously rejected Horton Farms' allegation that the NGFA is a "systematically biased tribunal" after reviewing the NGFA Arbitration Rules and procedures, the decision of the three arbitrators and the facts of the case. The court found that "in light of these facts there can be no reasonable impression that the NGFA Arbitration System itself is evidently partial." Further, the court stated: "We agree with the district court that Horton Farms has not presented evidence of evident partiality on the part of any individual arbitrator sufficient to withstand summary judgment. Thus, we conclude that the district court properly entered judgment against Horton Farms and confirmed the arbitration award."

The appellate court case arose from a dispute between The Andersons Inc., Maumee, Ohio, and Horton Farms Inc., Tekonsha, Mich., a corn producer, over performance of several hedge-to-arrive contracts. Each of the contracts provided for arbitration of disputes before the NGFA. Prior to proceeding with arbitration, The Andersons sought and was granted an order by a Michigan federal district court compelling Horton Farms to arbitrate before the NGFA.

After considering the case, the NGFA arbitrators awarded damages and attorney fees to The Andersons against Horton Farms. Subsequently, the Michigan federal district court confirmed the enforceability of the arbitration award. Horton Farms then appealed the district court ruling to the U.S. appellate court challenging the NGFA's Arbitration System. As a result, the NGFA filed an amicus curiae brief with the court outlining the long-standing fairness and integrity of its Arbitration System.

In addition to rejecting the challenge to the NGFA Arbitration System, the appellate court rejected Horton Farms' claims that the parties' contracts were illegal futures contracts governed by the Commodity Exchange Act (CEA), which would have made them subject to CFTC regulations. Instead, the court said that "[a]lthough they may allow more flexibility than in a traditional cash forward contract, we nonetheless hold that HTA contracts which contemplate actual physical delivery of a commodity are cash forward contracts and are therefore excluded from coverage by the CEA and CFTC regulations." Significantly, the three-judge panel also praised the "well-reasoned opinion" of In re Grain Land Cooperative [978 F.Supp. 1267 (D. Minn. 1997)] in reaching its decision. It should be noted that the Minnesota federal district court issuing the Grain Land opinion reached a completely different result than a CFTC administrative law judge viewing the same set of facts [See NGFA Newsletter, Nov. 19, 1998]. The administrative law judge's decision has been appealed to the five CFTC commissioners.

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