  
                    UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
                            -  -  - WASHINGTON D.C., 20460
                                        -  - 
                                           
                                                                  
                                                   OFFICE OFCHEMICAL SAFETY AND 
                                                       POLLUTION PREVENTION
                                                                 
                                                                 

MEMORANDUM

SUBJECT:	Response to Comments on the Economic Minor Use Draft Pesticide Registration Notice

FROM:	Andrew Reighart, Economist
	Derek Berwald, Economist
	TJ Wyatt, Economist
	Economic Analysis Branch
		Biological and Economic Analysis Division (7503P)

THRU:	Tim Kiely, Chief
		Economic Analysis Branch 	
	Biological and Economic Analysis Division (7503P)

TO: 	EPA Docket: EPA-HQ-OPP-2015-0814


Introduction

The United States Environmental Protection Agency (EPA) announced the availability of and sought public comment on a draft Pesticide Registration Notice (PR Notice) entitled "Determination of Minor Use under Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA), section 2(ll)" EPA Docket: EPA-HQ-OPP-2015-0814. PR Notices are issued by the Office of Pesticide Programs (OPP) to inform pesticide registrants and other interested persons about important policies, procedures, and registration-related decisions, and in most cases serve to provide guidance to pesticide registrants and OPP personnel. This PR Notice replaces PR Notice 97-2 and provides guidance to the registrant as to how the EPA determines a "minor use," a classification the EPA employs to identify and encourage the registration of pesticides for beneficial uses that might otherwise not be addressed because of low market incentives. EPA published the draft PR Notice on June 6, 2016 (81 FR 38704), and requested comments on the guidance for how EPA will evaluate a petition for minor use.  This document responds to those comments.

FIFRA defines a minor use of a pesticide as either: (1) a use on a crop grown on 300,000 acres or less in the United States or (2) a use that lacks sufficient economic incentive to seek or maintain a registration but has private or social value. This PR Notice provides guidance to the registrant concerning the method EPA will use to determine if a use site is a "minor use" as defined by FIFRA 2(ll)(1) and 2(ll)(2). In particular, the PR Notice describes the method for determining if the use "does not provide sufficient economic incentive." To date, EPA's interpretation of economic minor use in section 2(ll)(2) has been shaped by guidance provided in PR Notice 97-2. However, EPA has determined that the approach outlined in PR Notice 97-2 lacked consideration of critical factors for determining whether a use should be a minor use under FIFRA section 2(ll)(2).

This PR Notice clarifies that the United States Department of Agriculture's (USDA) most recent  Census of Agriculture is the appropriate source for data on acreage in the United States to establish a minor use under the acreage definition in FIFRA section 2(ll)(1). This PR Notice also describes the revised approach to evaluate "sufficient economic incentive" that explicitly considers (1) the difference in time between incurring costs of generating data for registration and obtaining revenue from product sales, (2) the multiple years over which revenue is generated, and (3) the costs of producing and distributing the product. This PR Notice also provides suggestions about the data that can be used to conduct the analysis. Finally, this PR Notice explains how qualitative information may be used to inform the quantitative analysis and interpret the results. 

EPA is responding to comments received in EPA Docket EPA-HQ-OPP-2015-0814. Comments were submitted by CropLife America, Responsible Industry for a Sound Environment, Bayer CropScience, the USA Dry Pea & Lentil Council, the Minor Crop Famer Alliance, the USDA's Office of Pest Management Policy, and one anonymous submitter. 

The Agency appreciates the comments that were submitted to the docket on the draft revision of the Economic Minor Use PR Notice. Most comments were broadly supportive of the endeavor to improve upon PR Notice 97-2. These comments supported the new process to qualify for minor use registration under FIFRA as more appropriate and simple by clarifying and updating economic definitions and treating registration of a pesticide as an investment. These comments have specific suggestions that can, for the most part, be organized into three broad topics around which the Agency will structure its response. Certain other comments which fall outside these three topic categories will also be addressed.

The economic minor use designation plays an important role in protecting communities from specific pest threats and thus the cooperation between federal agencies, pesticide registrants, and crop consultants and advisors is critical to reforming the guidance to make it more user-friendly for registrants.


Comment Summaries and EPA Responses

Comment Category 1: 300,000-acre limit

 Comment Summary:
         When in the growing season is crop cultivation acreage determined?
         
         EPA Response:
         The acreage planted to a crop may not be the same as the acreage harvested. EPA intends to use acreage harvested published in the USDA Census of Agriculture as the measure of acres to determine whether a crop is below the 300,000-acre threshold. This may tend to reduce the acreage estimate, but harvested area reflects crop production better than planted area, which may not be reported for all crops. For perennial crops, bearing acreage is the most appropriate measure.
   

 Comment Summary:
         Given that the USDA Census of Agriculture is undertaken only every five years, and there is a delay between the census and its release to the public, the Agency should consider other sources of acreage information so as to address these timing limitations.

         EPA Response:
         While the Agency appreciates the suggestion to consider other sources of agricultural information to address the timing limitations of the Census, as explained in the PR Notice, EPA will continue to rely solely on the USDA Census of Agriculture given that: (1) it is the most accurate source of acreage information; (2) non-census years are surveys that may not have the same coverage as the census; (3) EPA consulted with USDA and determined that the Census of Agriculture was the appropriate source of data.  

 Comment Summary:
      Raise the 300,000-acre limit upwards.
      
         EPA Response:
         The 300,000-acre criterion cannot be raised upwards because it is specifically stated in FIFRA Section 2(ll). 
      
 Comment Summary:
         Could the 300,000-acre limit refer to portions of a crop, such as areas affected by specific pests, diseases, or weed problems as opposed to the total crop area?
         
         EPA Response:
         No, using portions of a crop to determine whether the acreage threshold is satisfied is not appropriate under the FIFRA definition in 2(ll)(1).
      
 Comment Summary:
         Commenters also suggested that EPA clarify what part of the Census of Agriculture will be used for the acreage determination, since several tables report crop area.
         
         EPA Response:
         EPA will use data reported in the Census of Agriculture for determining the crop acreage. EPA can not specify the tables from the Census of Agriculture that will be used, because over time table numbers and table titles change.  
           

Comment Category 2: EPA's Test Cost Calculation and Assumptions

 Comment Summary: 
           EPA has information that will be used as estimates of the costs of required data, and should make its database on test costs be made publicly available. 

           EPA Response: 
           EPA will make the test cost estimates available. 
      
 Comment Summary:
           The EPA should acknowledge that test costs can vary widely and that the EPA's own cost estimates are provided only for simplicity's sake. 
      
     EPA Response:
           EPA does acknowledge that tests costs can vary from its own estimates, and clarifies that in the final PR Notice. The cost estimates are provided for simplicity of analysis's sake, and consistency across applicants. EPA will consider information provided by applicants on a case-by-case basis, and will update estimates of test costs over time. 

 Comment Summary:
           Other comments received in this category sought to determine how often EPA's cost estimates were updated.
      
     EPA Response:
           At present, the baseline test costs are only updated as needed, usually for an EPA rulemaking or a revision to an Information Collection Request. These are usually updated by adjusting existing cost estimates for inflation. 
      
 Comment Summary:
           Some registrants desired the ability to submit test cost information on a voluntary basis so that EPA could take these data points into account beyond its own estimated averages. 
      
      EPA Response: 
           EPA will consider other factors qualitatively to refine and interpret quantitative estimates such as other registration costs, co-occurring investments, market structure, time horizon, test costs, etc. on a case-by-case basis. These could include test costs. If the information provided is of sufficient quality, EPA may use submitted test costs for revising these estimates.  
      
          


Comment Category 3: Investment Paradigm

 Comment Summary:
      Clarification needed on how the benefit cost ratio (BCR), the internal rate of return (IRR), and net present value (NPV) would be used in the economic minor use designation given the draft's discussion of all three concepts. 
      
      EPA Response:
      EPA intends to use all three measures when considering whether there is insufficient economic incentive to pursue a pesticide registration. Each of the measures provides insight into the investment problem facing the firm. The NPV and the BCR should be in agreement about whether an investment is potentially profitable, but they present the information in different ways: the NPV shows the result in dollars, while the benefit cost ratio has a natural scaling that compares the size of the investment with the potential return. EPA does not intend to use a rigid NPV > 0 or BCR > 1 as a standard of profitability, because firms might require a higher threshold in individual cases. Although the IRR can sometimes be problematic, particularly in cases with cash flows show large variations, it is still a useful measure because it presents the investment in terms of a percentage return, that can be compared to the cost of capital or alternative investments.  It also does not require the ex-ante assumption of a specific discount rates, which may vary among registrants.
      
      
 Comment Summary:
      What is the basis for the EPA's cost assumptions that production costs are 60-85% of a company's gross revenue? The commenter further suggested using the annual reports for pesticide companies to look at costs as a share of total revenue.  
      
      EPA Response:
      Rather than ask applicants and registrants to submit data on production costs, EPA is proposing that all cases be evaluated using values for costs that range from 60 to 85 percent of gross revenue (or the net revenue from the sales of a chemical are 15 to 40 percent of gross). Qualitative information can be used to characterize which end of the range is likely. Using the bounded and fixed cost assumption makes the process simpler for registrants, and doesn't require possibly confidential cost data. In addition, using the same range for all applicants treats them equally, neither rewarding them for low cost production and distribution, which would tend to increase the NPV or BCR or high costs. 
      
      EPA did spot check the annual reports of a few pesticide registrants, and cost of goods sold as a share of gross revenue was within the range proposed. However, this financial information was reported for the parent firm, and may reflect other industries besides pesticide production or even chemical production. Moreover, the average for a company may not reflect the net revenue expected from a particular product sold for a particular use.
      
 Comment Summary:
Commenters suggested an alternative way to calculate the BCR, in which the present value of annual recurring costs, like the cost of production are used in the denominator of the BCR:

BCRalt= t=1TPt·qtC0+t=1T(cqt+γ)

      Where Pt is the price of the pesticide per unit, qt is the quantity sold, c(qt) is the cost of manufacturing and distributing the pesticide and depends on the quantity sold, and γt are other costs that do not depend on the amount sold such as the registration maintenance fee, legal fees, and advertising costs, and C0 is the initial cash investment (registration costs).  The commenter described this as more accurately reflecting the actual investment and cost streams faced by registrants.
      
      Alternatively, the commenter suggested EPA abandon consideration of BCR entirely.  
      
      EPA Response:
      EPA disagrees with the commenters suggestions. The suggested alternative definition is not the standard definition for a benefit cost ratio, and breaks the relationship between the NPV and BCR. The definition in the PR Notice is appropriate for evaluating the question of whether a firm has insufficient economic incentive to register a pesticide. The costs the commenter suggests using in the numerator are more appropriately part of the net revenue stream, rather than initial investment costs. This is clarified in the final PR Notice.
      
 Comment Summary:
      A commenter pointed out that the costs of registration do not necessarily occur only during the first year of the investment.   
      
      EPA Response:
      EPA agrees with the commenter, that the initial costs of registration may occur over multiple years, and in many cases can continue after a conditional registration is granted.  If there were several years of registration costs prior to significant revenue generation, this would tend to lower the NPV, relative to assuming all costs are borne in the first year, after which revenues begin.  This is a qualitative factor that applicants could provide to help EPA make a determination.  	

 Comment Summary:
      Commenters pointed out that the range of cost estimates could be a determining factor of whether the NPV criterion for a minor use is satisfied.
      
      EPA Response:
      EPA agrees that the NPV criterion could be satisfied at one end of the range but not the other. However, qualitative information can be used to characterize which end of the range is likely. For example, if the potential minor use accounts for a large proportion of total sales of an active ingredient relative to existing uses, the marginal cost of production is likely to be near the higher percentage of revenue because it represents a larger movement along the marginal cost curve. Qualitative considerations include aspects that increase the unit production cost, c(qt), such as particularly costly raw materials, or that affect fixed costs, γ, for example, the development of a new distribution channel associated with the potential minor use.  
      
      
 Comment Summary:
      Was the modeled 7% discount rate featured in example models found within the draft simply used as an example, as opposed to formal guidance directing registrants to adopt this standard in its investment modeling?
      
      EPA Response:
      EPA does not intend to give registrants direction about what discount they should use for modeling. The Office of Management and Budget specifies that EPA use 3% and 7% discount rates in analyses, where the 7% is intended to reflect a private sector discount rate. To be consistent across applications, EPA intends to use the 7% discount rate for estimating NPV and BCR for determination whether a new use qualifies as an economic minor use, but EPA does not intend to specify a discount rate for registrants to apply for their own use.
      
      
 Comment Summary:
      Will EPA use the standalone project analysis benchmark for assessing investment?
      
      EPA Response:
      Yes, EPA intends to treat investment decisions as stand-alone projects, but recognizes that some costs may be shared across different products or use sites, and should not be double-counted for the purpose of analysis. 

Comment Category 4: Other Comments

 Comment Summary:
Are non-agricultural products covered by the PR Notice and this revision?  

      EPA Response:
Yes, non-agricultural products are included.   

 Comment Summary:
Registrants should be able to include `basic data,' such as R&D, crop safety, and efficacy data as costs of registration.   

      EPA Response:
      The cost of registering a particular use includes the data that are required for the registration of that use. Thus, if `basic data' are supporting multiple uses, a registrant cannot count the data generation costs multiple times. Only the additional data needed for the new minor use registration will be used. Costs such as R&D, crop safety, and efficacy data are not specifically registration costs, so they are not included in the calculation of registration costs.  
      
 Comment Summary:
Costs of registration may still outweigh the benefits and thus the EPA should offer further incentives beyond registration as a minor use.
      
      EPA Response:
      That request is beyond the action taken here. 

 Comment Summary:
	Include `label development' costs in the return calculations.
      
      EPA Response:
      Label development costs that are specifically associated with the registration of a new minor use would be relevant.   

 Comment Summary:
      Firms should not have exclusive use of data, which will reduce transparency and reduce EPA's ability to track poisons in the environment.  
      
      EPA Response:
      FIFRA creates exclusive use rights for the data used for registration, and that cannot be changed through this PR Notice.   

 Comment Summary:
      EPA should extend minor use incentives to all specialty crops, as defined by USDA.  
      
      EPA Response:
      FIFRA specifies incentives to be applied to minor uses, and not all specialty crops as defined by USDA are minor uses. All crops, however, may apply for status as a minor use, and will be evaluated as described in this PR Notice.  
      
 Comment Summary:
The entire PR Notice 97-2 should be republished.  To reduce or avoid the potential for confusion among registrants, the entire PR Notice 97-2 should be updated at this time to clarify which portions are still in effect.
  
      EPA Response:
      This final PR Notice supersedes PR Notice 97-2.  PR Notice 97-2 will be archived and no longer be relevant 
      
 Comment Summary:
A commenter wanted the PR Notice to specifically mention additional reasons a registrant may wish to pursue a minor use designation beyond qualifying for additional years of exclusive use of data under FIFRA §3(c)(1)(F)(ii).

      EPA Response:
      The final PR Notice includes an acknowledgment of "Obtaining an exemption from or partial waiver of the PRIA fee for the minor use under FIFRA §33(b)(7)(D)."  Although the PR Notice lists some reasons that registrants might want to pursue a minor use registration, this is not intended as an exhaustive list. 
      
      
