Original Notice.

     Exempt from preproposal statement of inquiry under RCW 34.05.310(4).

     Title of Rule: Chapter 16-532 WAC, rules under which the hop marketing order is established.

     Purpose: The proposal would implement an additional assessment on hops and grant the Hop Commission authority to conduct a set-aside program by providing that the commission may enter into contracts, at its discretion, and pay hop producers to set aside or remove from production existing planted hop acreage during the 2002 production season. The proposal also includes provisions on entering into contracts with hop growers.

     Statutory Authority for Adoption: Chapter 15.65 RCW.

     Statute Being Implemented: RCW 15.65.030, 15.65.040 [(2)](d) and (f), 15.65.050.

     Summary: Hop growers have petitioned the Washington State Department of Agriculture to amend the hop marketing order to add an additional assessment for one year in the amount of $.05 per net pound of hops ($10 per affected unit). The additional funds would be utilized only for the purpose of compensating growers who contract with the commission to set aside existing hop acreage.

     Growers have also petitioned the Washington State Department of Agriculture to grant the commission authority to enter into contracts, at its discretion, and pay hop producers to set aside or remove from production existing planted hop acreage during the 2002 season.

     Reasons Supporting Proposal: Under RCW 15.65.050 through 15.65.120, the director of agriculture is required to hold a hearing to determine whether amendment of the hop marketing order would effectuate the declared policies and purposes of the statute and marketing order. At the hearing, the department will request testimony on the following issues:

     1. Does the proposed amendment to chapter 16-532 WAC, the hop marketing order, further the policies in the statute, chapter 15.65 RCW which include providing methods and means for maintaining present markets and restoring and maintaining adequate purchasing power for hop growers in this state? Is the amendment needed to fulfill these policies for the state's hop industry? Explain why the amendment is or is not needed.

     2. Does the proposed amendment accomplish the purposes and objects [objectives] of the marketing order which include promoting the general welfare of the state, enabling producers of hops to help themselves establish orderly, fair, sound, efficient, unhampered marketing and standardization of hops, and regulating unfair trade practices within the hop industry?

     3. Can the purposes and objectives of the amendment be accomplished independently without amending the marketing order?

     Based on the testimony taken at the hearing and written comments received by the department in response to this notice and the notice issued pursuant to chapter 15.65 RCW, the director will make findings and issue a recommended decision and a final decision. The final decision may result in a referendum on the amendment proposal pursuant to RCW 15.65.160 or a decision to deny the proposal in its entirety under RCW 15.65.120. If the proposal is denied in its entirety, the director will take no further action and a referendum will not be held.

     Name of Agency Personnel Responsible for Drafting and Implementation: Deborah Anderson, P.O. Box 42560, Olympia, WA 98504-2560, (360) 902-2043; and Enforcement: William E. Brookreson, P.O. Box 42560, Olympia, WA 98504-2560, (360) 902-1800.

     Name of Proponent: Names of proponents are contained in petitions filed with the director of Washington State Department of Agriculture and are available for public inspection, private.

     Rule is not necessitated by federal law, federal or state court decision.

     Explanation of Rule, its Purpose, and Anticipated Effects: The current assessment on hops is $2.50 per affected unit. The adoption of this proposal would levy an additional special assessment on hop growers during the production year 2002 only of $10 per affected unit for the purpose of funding a set-aside program to compensate growers who contract with the commission to set aside existing hop acreage from production. The proposal also would clarify under the marketing order that the Hop Commission may to [also] enter into contracts, at its discretion, and pay hop producers to set aside or remove from production existing planted hop acreage during the 2002 production season. Funds collected from the additional assessment would be used to assist the hop producers, who have entered into contracts to set aside production, in covering fixed costs for water, taxes, and minimal cultural activities during 2002.

     The American hop industry needs to produce 73% of the alpha hop acreage produced in 2001 to bring the annual supply of hops in line with the demand for this year. Improved utilization at the brewery and processor level has resulted in the need for fewer hops to satisfy demand. In additional, new technologies and the development of more efficient varieties at the grower level have resulted in the conversion of acreage to the new varieties and the need for fewer acres. Also, from 1966 until 1985, a federal marketing order regulated the amount of hops that could be sold by growers bringing production more in line with anticipated demand. Since the dissolution of the last federal marketing order, wide swings in acreage and price have plagued the hop industry. Hop producers in the industry are working with USDA Agricultural Marketing Service to create a new federal marketing order for hops in order to bring stability to the industry. However, this process will take approximately two years. As an interim measure, it is the intent of Washington hop producers to idle 6,500 acres in a set-aside program for the 2002 production year.

     Proposal Changes the Following Existing Rules: [No information supplied by agency.]

     A small business economic impact statement has been prepared under chapter 19.85 RCW.

     Background: The hop industry has been plagued by overproduction, low prices, international competition, lowering hop usage by breweries, increasing input costs, as well as new competition from the raising of new varieties. During the period 1966 until 1985 the amount of hops that could be sold by growers was regulated by a federal marketing order. This order annually adjusted the percentage of a grower's total base he could sell. Since the dissolution of the federal marketing order, wide swings in acreage and price have plagued the hop industry. According to the Washington State Hop Commission resulting poor prices and lack of profitability have caused a 65% reduction in grower numbers in over seventeen years. There are now fewer than eighty families farming hops in the United States.

     The hop industry is seeking strategies that will enable it to manage production responsibly to ensure the survival of its growers. A set-aside program is being proposed as a temporary measure. Hop producers are also proposing to work with USDA Agricultural Marketing Service to create a new federal marketing order for hops in order to bring stability to the industry. However, this process will take approximately two years.

     According to the hop industry, the industry needs to produce 73% of the alpha hop acreage produced in 2001 to bring the annual supply of hops in line with the demand for this year.

     Compliance Requirements: Under the provisions of the existing marketing order, hop producers pay an annual assessment of $2.50 per affected unit¹. The proposed amendment will place a special assessment of $10 per affected unit on hops for the production year 2002 in addition to the annual assessment already levied. Normally, the handler² at the first point of sale collects the assessment. The existing method of collection will be used to collect the special assessment. The producer would incur no additional equipment, supply, labor or increased administrative costs.

     To determine the impact of the assessment increase of $10 per affected unit on hop producers, the department looked at the cost per $100 of gross sales for each hop producer. Based on 2001 hop production information³ and the average price per unit for hops⁴. The average increased cost for all producers was determined to be .0273% or $2.73 per $100 of gross sales. Using information published on the web by the Hop Growers Association for year 2000⁵, the average cost of production per acre for hops is $4,046. Of sixty-four producers who produced hops in 2001, only ten producers exceeded $4,000 in gross sales per acre. Those businesses included both small and large operations, ranging from a low of seventy-five acres of production to a high of 1,725 acres of production. The remaining fifty-four producers sold their hops for less than the average cost of production. Therefore by comparing the cost of production per acre ($4,046) to the hop producer's 2001 gross sales per acre, it is the department's determination that the cost per $100 of gross sales of .0273% or $2.73 would be more than minor.

     As the cost per $100 of gross sales of $2.73 is the same for each producer of hops, there is no disproportionate impact on small business.

     Revenues: As an interim measure to bring stability to hop production, it is the intent of those in the United States hop industry to idle 6,500 acres in a set-aside program for the 2002 production year, 6,000 of which would be set aside by Washington state hop producers.

     The hop industry has historically relied on multiple year contracts with merchants to provide price stability through difficult times, however, brewers have moved away from the long-term contracts in favor of purchasing lower-priced hops on the "spot" market, transferring the risk to the grower. Many growers must now sell their hops on a year-by-year basis. This will likely continue until excess hop inventories are eliminated, annual supply more closely matches annual demand and brewers benefit financially by contracting forward again.

     Hops are a perennial crop requiring substantial production inputs. Hops require a specialized trellis system and harvesting equipment not suitable for any other crop. At a roughly estimated cost of $500 per acre, the removal of trellis and roots from 10,000 acres of hops would cost $5 million. With few alternative crops and high fixed costs associated with hop production, growers are unable to leave the hop industry without incurring a substantial loss. The alternative has been a gradual erosion of farm equity brought about by poor prices and the inability to reinvest in equipment. This has led to chronic overproduction and the accumulation of large inventories of unsold hops.

     To further compound the problem, the hop industry has had no exit strategy to eliminate a substantial percentage of this excess acreage from production and there is no structure in place to identify and remove less efficient or excess acreage. The hop industry enters 2002 with approximately 50% of the alpha production contracted, the lowest percentage in history. After several years of losses, the banking industry is largely unwilling to finance acreage that is not contracted and is losing confidence that hop growers can manage production in a way that will provide profitability necessary to repay loans.

     Mitigation of Costs: Although there is no guarantee that the price for hops will improve, small businesses would benefit if adoption of this rule amendment results in a higher sales price per acre for hops. The purpose of the set-aside program is to provide an interim measure to bring the production of hops in line with demand while the industry works to establish a federal marketing order. Based on the information provided above, many hop producers did not recoup their production costs in 2001. In order to bring stability to hop production, the industry has estimated that 6,500 U.S. acres must be set aside. Both the director and the Hop Commission pursued the option of federal funding for the interim set-aside program. Although legislative representatives are supportive of this effort, funding was not available at this point in time. To fund the set-aside program, industry has estimated that two million dollars is needed for 2002. In order to have funds available for this production year, the special assessment must be in effect for the 2002 harvest, which normally begins in August.

     If the special assessment is adopted, the Hop Commission will use the funds to enter into contracts, at its discretion, and pay hop producers approximately $300 per acre to set aside or remove from production existing planted hop acreage during the 2002 production season. This would assist the producers to set aside production by covering fixed costs for water, taxes, and minimal cultural activities during 2002. Funds could also be spent by the producers to remove acreage from production. Without implementation of a strategy, it is believed that the same issues will continue to plague the industry, and the long-term viability of the hop industry in the state of Washington is at risk.

     The department has analyzed the proposed mitigation measures in RCW 19.85.030(2) as follows:

     (a)     This proposed rule amendment would impose a one-year assessment but does not add substantive regulatory requirements.

     (b)     Participation in a set-aside contract is voluntary. As noted above, because handlers will collect the additional assessment and participation in a set-aside contract with the commission is voluntary, no additional record-keeping or reporting requirements are imposed by this proposed rule amendment.

     (c)     This proposed rule amendment does not require inspections or change compliance penalties.

     (d)     Because all of the special assessment must be collected in the 2002 season in order to fund the voluntary set-aside contracts with the board, it is not feasible to delay the timetable for collection of the special assessment.

     Involvement of Those Impacted in the Rule Development: The hop marketing order is established under the authority or chapter 15.65 RCW. The department has received a petition from hop producers requesting the amendment of the marketing order. Under the provisions of chapter 15.65 RCW, the director is required to hold a public hearing to determine if amending the hop marketing order would effectuate the declared policies and purposes of the statute and marketing order. A process is established whereby the director issues a recommended decision and final decision based on testimony and comments submitted to the director. Should the director's final decision be to adopt the petitioner's proposal, a referendum will be conducted where all affected hop producers will have the opportunity to vote in favor of or against the rule change. The producers must assent to the proposal under criteria established in statute before the proposal can be adopted.

¹ "Affected unit" means two hundred pounds net of hops, or the amount of lupulin, extract or oil produced from two hundred pounds net of hops. WAC 16-532-010(15).

² Handler means any person who acts as principal or agent or otherwise in processing, selling, marketing, or distributing hops not produced by him. WAC 16-532-010(7).

³ Production information provided by the Washington Hop Commission.

⁴ Based on season average 2001 crop price of $1.83 per pound according to USDA, Agricultural Statistics.

⁵ There are nine varieties of hops each with varying costs of production, yields and price per pound. An average of the nine varieties was used.

     A copy of the statement may be obtained by writing to Deborah Anderson, Commodity Commission Coordinator, Washington State Department of Agriculture, P.O. Box 42560, Olympia, WA 98504-2560, phone (360) 902-1806, fax (360) 902-2092.

     RCW 34.05.328 does not apply to this rule adoption. The Washington State Department of Agriculture is not a named agency.

     Hearing Location: Yakima Masonic Center, 2nd Floor, 504 North Naches Avenue, Yakima, WA 98901, on April 9, 2002, at 10:00 a.m.

     Assistance for Persons with Disabilities: Contact Laurie Crose by April 2, 2002, TDD (360) 902-1996, or (360) 902-1976.

     Submit Written Comments to: Deborah Anderson, Washington State Department of Agriculture, P.O. Box 42560, Olympia, WA 98504-2560, fax (360) 902-2092, by April 9, 2002, 5:00 p.m.

     Date of Intended Adoption: July 1, 2002.

March 6, 2002

William E. Brookreson

Acting Director

     (2) Board membership.

     (a) The board shall consist of ten members. Nine members shall be affected producers elected as provided in this section. The director shall appoint one member of the board who is neither an affected producer nor a handler to represent the department and the public.

     (b) For the purpose of nomination and election of producer members of the board, the affected area shall be the entire state of Washington.

     (3) Board membership qualifications.

     The affected producer members of the board shall be practical producers of hops and shall be citizens and residents of the state of Washington, over the age of twenty-five years, each of whom is and has been actually engaged in producing hops within the state of Washington for a period of five years and has during that time derived a substantial portion of his income therefrom.

     (4) Term of office.

     (a) The term of office for members of the board shall be three years and one-third of the membership as nearly as possible shall be elected each year.

     (b) Membership positions on the board shall be designated numerically; affected producers shall have positions one through nine and the member appointed by the director position ten.

     (c) The term of office for the initial board members shall be as follows:

Positions one, two, three and ten - until June 30, 1967

Positions four, five and six - until June 30, 1966

Positions seven, eight and nine - until June 30, 1965

     (d) Terms of office for the board members serving at the time of the 1992 amendment of this section shall be as follows:

Positions one, two, three and ten - until December 31, 1994

Positions four, five and six - until December 31, 1993

Positions seven, eight and nine - until December 31, 1992

     (5) Nomination and election of board members. Each year the director shall call for a nomination meeting. Such meeting shall be held at least thirty days in advance of the date set by the director for the election of board members. Notice of every such meeting shall be published in a newspaper of general circulation within the major production area not less than ten days in advance of the date of such meeting and in addition, written notice of every such meeting shall be given to all affected producers according to the list maintained by the director pursuant to RCW 15.65.200 of the act. Nonreceipt of notice by any interested person shall not invalidate the proceedings at such nomination meeting. Any qualified affected producer may be nominated orally for membership on the board at such nomination meetings. Nominations may also be made within five days after any such meetings by written petition filed with the director signed by not less than five affected producers. At the inception of this order nominations may be made at the issuance hearing.

     (6) Election of board members.

     (a) Members of the board shall be elected by secret mail ballot within the month of November under the supervision of the director. Affected producer members of the board shall be elected by a majority of the votes cast by the affected producers. Each affected producer shall be entitled to one vote.

     (b) If a nominee does not receive a majority of the votes on the first ballot a run-off election shall be held by mail in a similar manner between the two candidates for such position receiving the largest number of votes.

     (c) Notice of every election for board membership shall be published in a newspaper of general circulation within the major production area not less than ten days in advance of the date of such election. Not less than ten days prior to every election for board membership, the director shall mail a ballot of the candidates to each affected producer entitled to vote whose name appears upon the list of such affected producers maintained by the director in accordance with RCW 15.65.200. Any other affected producer entitled to vote may obtain a ballot by application to the director upon establishing his qualifications. Nonreceipt of a ballot by any affected producer shall not invalidate the election of any board member.

     (7) Vacancies prior to election. In the event of a vacancy on the board, the remaining members shall select a qualified person to fill the unexpired term.

     (8) Quorum. A majority of the members shall constitute a quorum for the transaction of all business and the carrying out of all duties of the board.

     (9) Board compensation. No member of the board shall receive any salary or other compensation, but each member shall be reimbursed for actual subsistence and traveling expenses incurred through attendance at meetings or other board activities: Provided, That such expenses shall be authorized by resolution by unanimous approval of the board at a regular meeting.

     (10) Powers and duties of the board. The board shall have the following powers and duties:

     (a) To administer, enforce and control the provisions of this order as the designee of the director.

     (b) To elect a chairman and such other officers as the board deems advisable.

     (c) To employ and discharge at its discretion such personnel, including attorneys engaged in the private practice of law subject to the approval and supervision of the attorney general, as the board determines are necessary and proper to carry out the purpose of the order and effectuate the declared policies of the act.

     (d) To pay only from moneys collected as assessments or advances thereon the costs arising in connection with the formulation, issuance, administration and enforcement of the order. Such expenses and costs may be paid by check, draft or voucher in such form and in such manner and upon the signature of the person as the board may prescribe.

     (e) To reimburse any applicant who has deposited money with the director in order to defray the costs of formulating the order.

     (f) To establish a "hop board marketing revolving fund" and such fund to be deposited in a bank or banks or financial institution or institutions, approved for the deposit of state funds, in which all money received by the board except as the amount of petty cash for each day's needs, not to exceed one hundred dollars, shall be deposited each day or as often during the day as advisable.

     (g) To keep or cause to be kept in accordance with accepted standards of good accounting practice, accurate records of all assessments, paid outs, moneys and other financial transactions made and done pursuant to this order. Such records, books and accounts shall be audited at least annually subject to procedures and methods lawfully prescribed by the state auditor. Such books and accounts shall be closed as of the last day of each fiscal year of the state of Washington. A copy of such audit shall be delivered within thirty days after the completion thereof to the governor, the director, the state auditor and the board.

     (h) To require a bond of all board members and employees of the board in a position of trust in the amount the board shall deem necessary. The premium for such bond or bonds shall be paid by the board from assessments collected. Such bond shall not be necessary if any such board member or employee is covered by any blanket bond covering officials or employees of the state of Washington.

     (i) To prepare a budget or budgets covering anticipated income and expenses to be incurred in carrying out the provisions of the order during each fiscal year.

     (j) To establish by resolution, a headquarters which shall continue as such unless and until so changed by the board. All records, books and minutes of board meetings shall be kept at such headquarters.

     (k) To adopt rules and regulations of a technical or administrative nature, subject to the provisions of chapter 34.05 RCW (Administrative Procedure Act).

     (l) To carry out the provisions of RCW 15.65.510 covering the obtaining of information necessary to effectuate the provisions of the order and the act, along with the necessary authority and procedure for obtaining such information.

     (m) To bring actions or proceedings upon joining the director as a party for specific performance, restraint, injunction or mandatory injunction against any person who violates or refuses to perform the obligations or duties imposed upon him by the act or order.

     (n) To confer with and cooperate with the legally constituted authorities of other states and of the United States for the purpose of obtaining uniformity in the administration of federal and state marketing regulations, licenses, agreements or orders.

     (o) To implement a set-aside program for the 2002 crop year, which shall include, but not be limited to, the authority to enter into contracts with and pay individual producers of hops to set-aside or remove from production existing planted hop acreage.

     (p) To carry out any other grant of authority or duty provided designees and not specifically set forth in this section.

     (11) Procedures for board.

     (a) The board shall hold regular meetings, at least quarterly, with the time and date thereof to be fixed by resolution of the board.

     (b) The board shall hold an annual meeting, at which time an annual report will be presented. The proposed budget shall be presented for discussion at the meeting. Notice of the annual meeting shall be given by the board at least ten days prior to the meeting by written notice to each producer and by regular wire news services and radio-television press.

     (c) The board shall establish by resolution, the time, place and manner of calling special meetings of the board with reasonable notice to the members: Provided, That the notice of any special meeting may be waived by a waiver thereof by each member of the board.

[Statutory Authority: RCW 15.65.050. 99-10-095, § 16-532-020, filed 5/5/99, effective 6/5/99. Statutory Authority: Chapter 15.65 RCW. 92-09-068, § 16-532-020, filed 4/14/92, effective 5/15/92; 88-24-028 (Order 1992), § 16-532-020, filed 12/2/88; Marketing Order Article II, §§ A through K, filed 7/1/64.]

     Reviser's note: RCW 34.05.395 requires the use of underlining and deletion marks to indicate amendments to existing rules. The rule published above varies from its predecessor in certain respects not indicated by the use of these markings.
NEW SECTION
WAC 16-532-025   Set-aside program.   The set-aside program for the 2002 crop year authorized in WAC 16-532-020 (10)(o) shall be funded with the special assessments collected under WAC 16-532-040 (1)(b). The set-aside program shall be administered by the Board as follows:

     (1) The Board shall enter into contracts with and pay individual growers to refrain from growing hops in the minimum amount of 6,000, but not to exceed a total of 6,500, existing planted acreage.

     (2) Contracts with growers shall be let on a first come-first served basis as determined by the date of receipt of the written commitment of the grower sent to the United States Department of Agriculture - National Agricultural Statistical Service in response to the solicitation issued by the Board in April 2002 until commitments are received totaling 6,500 acres.

     (3) Payment shall be made under the contract on a per acreage basis. The contracts shall provide for payment to the grower of a per acre sum equal to the total amount of the funds collected under WAC 16-532-040 (1)(b), together with interest earned on the funds collected, if any, less the reasonable cost of administration incurred by the Board, divided by the total acreage committed under subsection (2) of this section.

[]

     (a) The annual assessment on all varieties of hops shall be two dollars and fifty cents per affected unit.

     (b) In addition to the annual assessment specified in (1)(a), a special assessment on all varieties of hops of ten dollars per affected unit shall be imposed on hops produced in the 2002 crop year. The purpose of the special assessment is to fund the set-aside program authorized in WAC 16-532-020 (10)(o).

     (((b)))(c) For the purpose of collecting assessments the board may:

     (i) Require handlers to collect producer assessments from producers whose production they handle, and remit the same to the board; or

     (ii) Require the person subject to the assessment to give adequate assurance or security for its payment; or

     (iii) Require the person subject to the assessment to remit assessments for any hops which are processed prior to the first sale; or

     (iv) Require the person subject to the assessment to remit an inventory report for any hops which are not processed or sold prior to December 31 of the year in which they are produced.

     (c) (d) Subsequent to the first sale or processing, no affected units shall be transported, carried, shipped, sold, marketed, or otherwise handled or disposed of until every due and payable assessment herein provided for has been paid and the receipt issued. The foregoing shall include all affected units shipped or sold, both inside and outside the state.

     (2) Collections. Any moneys collected or received by the board pursuant to the provisions of the order during or with respect to any season or year may be refunded on a pro rata basis at the close of such season or year or at the close of such longer period as the board determines to be reasonably adapted to effectuate the declared policies of this act and the purposes of such marketing agreement or order, to all persons from whom such moneys were collected or received or may be carried over into and used with respect to the next succeeding season, year or period whenever the board finds that the same will tend to effectuate such policies and purposes.

     (3) Penalties. Any due and payable assessment herein levied in such specified amount as may be determined by the board pursuant to the provisions of the act and the order, shall constitute a personal debt of every person so assessed or who otherwise owes the same, and the same shall be due and payable to the board when payment is called for by it. In the event any person fails to pay the board the full amount of such assessment or such other sum on or before the date due, the board may, and is hereby authorized to add to such unpaid assessment or sum an amount not exceeding ten percent of the same to defray the cost of enforcing the collecting of the same. In the event of failure of such person or persons to pay any such due and payable assessment or other such sum, the board may bring a civil action against such person or persons in a state court of competent jurisdiction for the collection thereof, together with the above specified ten percent thereon, and such action shall be tried and judgment rendered as in any other cause of action for debt due and payable.

[Statutory Authority: RCW 15.65.050. 97-17-096, § 16-532-040, filed 8/20/97, effective 9/20/97; 95-17-118 (Order 5077), § 16-532-040, filed 8/23/95, effective 9/23/95. Statutory Authority: Chapter 15.65 RCW. 91-15-019 (Order 2090), § 16-532-040, filed 7/10/91, effective 8/10/91. Statutory Authority: RCW 15.65.170. 87-10-059 (Order 1927), § 16-532-040, filed 5/6/87, effective 6/8/87. Statutory Authority: Chapter 15.65 RCW. 83-16-041 (Order 1800), § 16-532-040, filed 7/29/83; 80-05-090 (Order 1686), § 16-532-040, filed 5/1/80; 79-01-045 (Order 1593), § 16-532-040, filed 12/21/78; Order 1332, § 16-532-040, filed 1/17/74; Marketing Order Article IV, §§ A through C, filed 7/1/64.]

     Reviser's note: RCW 34.05.395 requires the use of underlining and deletion marks to indicate amendments to existing rules. The rule published above varies from its predecessor in certain respects not indicated by the use of these markings.

     Reviser's note: The typographical error in the above section occurred in the copy filed by the agency and appears in the Register pursuant to the requirements of RCW 34.08.040.

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