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Federal Register / Vol. 86, No. 90 / Wednesday, May 12, 2021 / Proposed Rules
proposal. AMS considered alternatives that would be both less stringent less costly and more stringent more costly.

The alternatives considered are shown in Table 6 and discussed below.

TABLE 6ALTERNATIVES CONSIDERED
Alternative
Description
A Allow Continual Transition

Allow any operation to transition nonorganic dairy animals into organic production over a 12-month period on a continual basis.
Remove all exceptions for transition of nonorganic animals.

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B Prohibit All Transitions

Alternative AAllow Continual Transition AMS considered amending the regulations to specify that any operation could transition dairy animals into organic production over a 12-month period on a continual basis. Under OFPA, a dairy animal from which milk or milk products will be sold or labeled as organically produced must be raised in accordance with OFPA for not less than the 12-month period immediately prior to the sale of such milk and milk products 7 U.S.C. 6509e2A.
AMS could presumably allow transition of any dairy animal into organic production, without further limitation, if the animal were managed organically for the 12-month period prior to the sale of milk as organic. In effect, this would mean that an operation could continually transition nonorganic dairy animals into organic production on an ongoing basis, as opposed to allowing an operation to transition animals into organic production once. In this scenario, organic dairy farms using heifer-raising operations following organic practices would now use heifer-raising operations that treat the young animals with antibiotics and other medications prohibited in organic livestock production and/or provide nonorganic feed until one year before they were expected to produce milk. Also, in the scenario, all purchased replacements would be transitioned heifers. Relatedly, operations wanting to assure consumers that they had raised organic heifers under organic conditions through their entire lives would have to do so under a separate certification program.
ARMS Data indicated that the average organic dairy operation kept 40.4 heifers or 39.3 percent of its herd for breeding and 36.6 heifers or 35.7 percent of its herd were kept for breeding and raised on the operation. The difference of these values, 3.6 percent, represents the likely proportion of organic heifers raised on outside heifer-raising operations as a share of the total herd. If all those animals become transitioned heifers, then an additional 9,711 animals i.e., 267,523 head 3.6 percent would be
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transitioned. AMS assumes that the price difference between organic last third of gestation and transitioned heifers accurately reflects the cost difference of $1,000 in raising heifers for milking under those two comparative production systems. In this case, the benefit of allowing for continuous transitioning of heifers is $9,711,000.
While the cost difference might suggest that organic farms would acquire an even larger share of heifer replacements through purchases rather than internally through breeding, AMS
feels this is unlikely owing to the asymmetric information problems associated with cattle sales. Asymmetric information problems arise because heifer sellers have more information than heifer buyers about the health, breeding, and temperament of their animals. This has the effect of reducing total transactions in the market Akerlof, 1970.34 35
The potential cost associated with the adoption of the continuous transition for all organic dairies could be illustrated by a deleterious effect on markups to products marketed under the organic label; although a markup reduction is not a cost, from the societywide perspective taken for purposes of Executive Order 12866 and OMB
Circular A4, it may be a sign of an increased incentivize for the costly establishment of credentials that are alternative to USDA organic certification. Table 1 shows that milk products marketed under the organic label earned an average markup of 47
percent over conventional products that total $1.8 billion in total value. A one percent fall in total markups would be associated with a $18 million reduction in organic premiums at the retail level.
Continual transition could achieve the regulatory objective of establishing a 34 George, Akerlof. 1970 The Market for Lemons:
Quality Uncertainty and the Market Mechanism. In:
The Quarterly Journal of Economics.
35 Such information asymmetries create a lemons problem where buyers assume that only the lowest quality heifers would be sold by dairy farms while the best are retained for internal on farm use. Dairies, in turn, sell only their lower quality heifers because the sales price is too low to justify bringing higher quality animals to market.

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consistent and uniform standard for all operations. The National Organic Standards Boards recommendations and stakeholder comments support AMS decision to not select this alternative, as comments indicate that at least some consumers expect organic milk be produced without the use of antibiotics and other substances prohibited under the USDA organic regulations and expect organic management of all animals on organic operations.
Alternative BProhibit All Transitions A second alternative AMS considered was to remove any allowance for dairy operations to transition animals to organic production, including new and nonorganic dairies seeking to convert to organic production. Under this option, all dairy animals would need to be managed organically from the last third of gestation for milk and dairy products to be sold, labeled, or represented as organic.
The costs of this alternative are threefold. First, producers would bear the increased annual costs of $1,462,500
described in Table 4 and under the onetime transition scenario where 50
percent of heifers are transitioning.
Because conventional organic dairy farms transitioning to organic would also need to purchase heifers and milking cows approximately equal to the size of their current operations, AMS believes that the price increase for organic heifers may significantly exceed a 50 percent price increase.
Second, this alternative would limit the ability of the industry to expand to meet growing demand and thereby create price instability within the market. In periods of stable demand, firm entry into the organic market is modest, reflecting factors such as population and income growth. In these stable periods under current rules, the cost of producing organic milk for established producers reflects both the higher cost of production in terms of feed costs, land requirements, and animal husbandry practices, and the higher cost of replacement heifers. In periods of industry growth i.e., high
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