access in countries that remain fully or partially closed to U.S. beef
and beef products to the extent that the final rule persuades foreign
governments that more U.S. beef products are safe to import. Although
we are unable to quantify the effects of this final rule on removing
restrictions to foreign markets, the benefits are potentially large
because the economy as a whole loses an annual surplus equal to about
$58 million from the remaining restrictions.
    This final rule that prohibits the use of these materials in animal
food or feed would impose four types of costs: Disposal costs, the
opportunity cost of the MBM and tallow not produced, direct costs of
new equipment and re-allocated labor, and feed substitution costs.
Total compliance costs of the final rule are estimated to range from
about $64.4 to $80.9 million per year annualized over 10 years assuming
a 7-percent discount rate; at a 3-percent discount rate, total
compliance costs are estimated at $64.0 to $80.5 million per year.
    Compliance costs include those imposed by the rule's prohibition on
the use of certain tissues from cattle 30 months of age or older
slaughtered for human food and cattle 30 months of age and older not
inspected and passed for human consumption in any animal feed as well
as the cost to substitute other feed ingredients for those foregone
from further processing of CMPAF. First, we discuss the brain and
spinal cord ban as direct costs to the affected firms (including
disposal costs, where applicable) and the social cost of the ban on the
raw materials used in feed product inputs. Then, we discuss the feed
substitution costs. Table 1 of this document shows a summary of these
costs.
    The ban on the use of certain cattle materials in all animal feed
from cattle 30 months of age and older slaughtered for human
consumption and cattle 30 months of age and older not inspected and
passed for human consumption would require renderers that process
either materials from cattle 30 months of age and older slaughtered for
human consumption or cattle not inspected and passed for human
consumption 30 months of age and older to separate the CMPAF from the
remaining offal. Renderers may require slaughter facilities to separate
such materials as a condition of collection. We estimate the one-time
capital costs of such a requirement for slaughterers at about $2.1
million (Table 1, line 2) (or $299,000 annualized at 7 percent over 10
years and $246,000 annualized at 3 percent over 10 years). We estimate
that the annual cost of the additional labor to separate this CMPAF
from other cattle offal at about $972,000 (Table 1, line 3) (including
maintenance on new equipment). Although compliance costs of these
activities will be borne initially by slaughterers, a portion of the
costs are likely to be passed along to cattle producers and consumers.
For renderers, average annualized capital investment and labor costs
for CMPAF separation and segregation are estimated at about $7.0
million (Table 1, lines 9 and 10).
    Our analysis does not project a specific disposal route for CMPAF
due to the variability of State and municipal laws for disposal of
organic wastes. As it did for the proposed rule, our analysis of the
final rule estimates a $12 per 100 lbs (hundredweight (cwt)) of CMPAF
disposal cost (including any transportation costs) from slaughter and
rendering establishments. We estimate annual disposal costs for CMPAF
from independent renderers at about $11.3 million (Table 1, line 11)
and from slaughterers at about $3.4 million (Table 1, line 23). We
expect that the disposal costs for slaughter CMPAF are immediately
passed on to animal producers as lower prices for animals delivered to
slaughter. Additional disposal costs to animal producers for other
animals that would no longer be rendered as a result of this rule will
range from $24.7 million to $35.7 (Table 1, line 22) million annually.
We estimate the social cost of the loss of MBM sales to range from $0.8
to $1.0 (Table 1, lines 4 and 14) million and the social cost from lost
tallow sales to range from $0.7 to $0.8 million (Table 1, lines 5 and
15). These costs include the lost value from CMPAF from cattle 30
months of age and older slaughtered for human consumption, cattle not
inspected and passed for human consumption 30 months of age and older,
as well as calves, cattle under 30 months not inspected and passed for
human consumption and other species that would no longer be rendered as
a result of this rule. We judge the social cost of the loss of hide
value resulting from this rule to range from $9.2 million to $13.7
million (Table 1, line 12) annually. The estimated cost of both
creating and executing procedures for the aging of animals at greater
or less than 30 months of age is $2.4 million (Table 1, lines 6 and 13)
annually. To the extent some slaughter establishments already have
aging procedures in place to comply with FSIS' SRM rule, this amount
may be an overestimate.
    The final rule, as in the proposed rule, requires that tallow
derived from certain CMPAF contain no more than 0.15 percent insoluble
impurities. Even though the estimate of CMPAF is much larger in the
final rule, because the amount handled directly by independent
renderers would remain relatively small, we concluded that it would not
be economical for renderers or tallow manufacturers to further process
into tallow the brains and spinal cords from all cattle that have their
brains and spinal cords removed while complying with the additional
equipment separation and tallow testing and purification requirements.
We therefore did not include any additional cost for this provision.

                                     Table 1.--Total Costs ($ Millions) \1\
----------------------------------------------------------------------------------------------------------------
                                                                                Annualized
             Line                           Cost item              One-time cost   Annual costs      costs \2\
----------------------------------------------------------------------------------------------------------------
1.............................  Slaughter Facilities............  ..............  ..............  ..............
2.............................  Capital investments.............           $2.1   ..............           $0.30
3.............................  Labor...........................  ..............           $0.97            0.97
4.............................  Social cost of lost MBM.........  ..............            0.04            0.04
5.............................  Social cost of lost tallow......  ..............            0.03            0.03
6.............................  Creating/Performing cattle aging  ..............            1.10            1.10
                                 procedures.
7.............................  Subtotal--Slaughter Facilities..            2.1             2.14            2.44
8.............................  Renderer Facilities.............  ..............  ..............  ..............

9.............................  Capital investments.............           20.25            3.04            5.92
10............................  Labor...........................  ..............            1.09            1.09
11............................  Disposal of CMPAF from cattle >   ..............           11.30           11.30
                                 30 months.
12............................  Value of cattle hides...........  ..............      9.16-13.69      9.16-13.69
13............................  Creating/Performing cattle aging  ..............            1.28            1.28
                                 procedures.
14............................  Social cost of lost MBM.........  ..............       0.80-0.98       0.80-0.98
15............................  Social cost of lost tallow......  ..............       0.64-0.78       0.64-0.78
16............................  Plant modification for tallow     ..............  ..............  ..............
                                 purification.
17............................  Slaughter and renderer marking    ..............       0.02-0.06       0.02-0.06
                                 of CMPAF.
18............................  Slaughter and renderer                      0.30            0.21            0.27
                                 recordkeeping/labeling.
19............................  Subtotal--Renderer Facilities...           20.55     28.20-33.09     31.14-36.04
20............................  Animal Producer.................  ..............  ..............  ..............
21............................  Disposal of cattle > 30 months    ..............     24.70-35.70     24.70-35.70
                                 not inspected and passed, all
                                 other animals.
22............................  Disposal of slaughter cattle      ..............            3.38            3.38
                                 CMPAF.
23............................  Feed substitution...............  ..............       2.92-3.51       2.92-3.51
                               ---------------------------------------------------------------------------------
24............................   Subtotal--Animal Producers.....  ..............      31.0-42.59      31.0-42.59
                               =================================================================================
25............................   Final Rule Total Costs.........           22.65     61.34-77.82     64.58-81.06
----------------------------------------------------------------------------------------------------------------
\1\ Totals may not sum due to rounding.
\2\ Annualized cost equal to annual cost plus one-time costs at 7 percent over 10 years. Using a 3-percent rate,
  annualized costs equal $63.99-$80.48 million.

B. Cost Effectiveness of Final Rule and Alternatives

    Compared with the final rule, we do not offer any alternative that
would impose greatly lower costs. The only feasible lower-cost
alternative that would reduce the risk of cross contamination would be
to require separate facilities or equipment to produce ruminant and
non-ruminant feed.
Alternative 1--Dedicated Facilities and Equipment
    This alternative would strengthen FDA's 1997 feed rule by
preventing cross contamination of feed ingredients for ruminants with
mammalian proteins currently prohibited from ruminant feed. To prevent
cross contamination, this alternative would require dedicated equipment
in those facilities producing or handling feed or feed ingredients for
ruminants and mammalian proteins currently prohibited from ruminant
feed. In the analysis of the alternatives to the proposed rule, ERG
estimated that only independent renderers and feed mills would incur
compliance costs for this dedicated facilities or equipment (70 FR
58593). It should be noted, however, that this requirement for
dedicated facilities and equipment differs from the dedicated equipment
requirement of the SRM ban (Alternative 3 in this document). Since the
dedicated facilities and equipment option is analyzed here as a
separate alternative (i.e. not as part of the SRM ban), the tonnage of
rendered ruminants would not be reduced (without the SRM ban), and the
resulting transportation costs would be larger than had the SRM ban
been included as part of this alternative.
    To dedicate facilities, independent renderers would invest about $8
million in one-time costs and feed mills would invest about $43.2
million in one-time costs. Annualized over 10 years at 7 percent,
capital investment for dedicated facilities would equal about $7.3
million, or about $1.1 million for independent renderers and about $6.2
million for feed mills. ERG forecast that this alternative would have
little effect on MBM production, but would force firms to spend more to
transport MBM because they could no longer backhaul ruminant feed in
trucks used to transport feed containing mammalian proteins currently
prohibited in ruminant feed (70 FR 58593 to 58594). In the analysis for
the proposed rule, ERG estimated that dedicated equipment would
increase transportation costs by $8 million to $16 million for
renderers and $14.2 million to $28.4 million for feed mills (70 FR
58594). Accounting for ERG's revised fuel costs (Ref. 16), the
estimated costs for dedicated transportation equipment range from $14.6
million to $29.3 million annually for renderers and from $22.5 million
to $45.0 million annually for feed mills. The total estimated
annualized compliance costs of this alternative range from $44.4
million to $81.6 million.
    This alternative addresses the problem of animal feed being cross-
contaminated with prohibited mammalian protein in firms that
manufacture animal feeds and also handle prohibited mammalian protein
by requiring such firms to have dedicated facilities or equipment for
animal feeds. The compliance costs of this alternative are similar to
the costs of the final rule. In contrast to the final rule, however,
this alternative would allow CMPAF with the highest BSE infectivity to
remain in the animal feed supply, allowing potential exposure to BSE
infectivity when cattle consume feed intended for other species through
cross-contamination or misfeeding. We conclude, therefore, that the
final rule more effectively reduces the risk from cross-contamination
and misfeeding than this alternative to require dedicated facilities or
equipment. Given the general similarity in compliance costs, we
therefore judge this alternative to be less cost-effective than the
final rule.
Alternative 2--The Proposed Rule
    The proposed rule would require that the brain and spinal cord from
all cattle 30 months of age or older slaughtered for human consumption,
and from all cattle not inspected and passed for human consumption of
any age to be defined as CMPAF. The main difference between the
proposed rule and the final rule is that the proposed rule would also
define as CMPAF the brain and spinal cord of cattle under 30 months of
age that were not inspected and passed for human consumption. Compared
with the final rule, this alternative produces more tissue for disposal
by deadstock renderers, increasing the compliance costs for independent
renderers.

However, these costs would be offset somewhat because, under the
proposed rule, deadstock renderers would not need to determine the age
of the animal. The annualized compliance costs for independent
renderers would range from $34.9 million to $41.5 million. Similar to
the final rule, livestock producers would likely pay higher prices for
feed substitutes and on-farm disposal of deadstock. Annualized
compliance costs for livestock producers would range from $36.4 million
to $51.9 million. Slaughterers would incur about $2.5 million in
annualized costs. Table 2 of this document shows that, in total, the
estimated annualized compliance costs for this alternative range from
$73.8 million to $95.9 million and exceed the annualized compliance
costs of the final rule.
    Although this regulatory action would prohibit more material from
animal feed than would the final rule, it would only add the brain and
spinal cord of cattle not inspected and passed for human consumption
under 30 months of age to the list of prohibited cattle material.
Scientific evidence indicates that the probability that the brain and
spinal cord from cattle under 30 months of age contains BSE infectivity
is extremely low (Ref. 18). Consequently, this alternative is less
cost-effective than the final rule because it cost $9.2 to $14.8
million more without a commensurate reduction of risk.

                       Table 2.--Summary of the Compliance Costs of the Proposed Rule \1\
----------------------------------------------------------------------------------------------------------------
                                                     Annual costs ($ million)         Annualized costs \2\ ($
                                  One-time costs --------------------------------            million)
            Cost item               ($ million)                                  -------------------------------
                                                   Low estimate    High estimate   Low estimate    High estimate
----------------------------------------------------------------------------------------------------------------
Capital investments.............            26.2  ..............  ..............             3.7             3.7
Labor...........................  ..............             8.4             8.4             8.4             8.4
Loss of net revenue.............  ..............            12.8            19.4            12.8            19.4
Disposal costs..................  ..............            44.9            59.9            44.9            59.9
Marking.........................  ..............             0.0             0.1             0.0             0.1
Recordkeeping/Labeling..........             0.2             0.1             0.1             0.1             0.1
Feed substitution...............  ..............             3.8             4.4             3.8             4.4
                                 -------------------------------------------------------------------------------
    Total costs.................            26.3            70.0            92.1            73.8            95.9
----------------------------------------------------------------------------------------------------------------
\1\ Numbers may not sum due to rounding.
\2\ Costs are annualized over 10 years at 7 percent.

Alternative 3--The SRM Ban
    The third alternative we considered would prohibit the use of the
full list of specified risk material (SRM) from animal feed and require
the use of dedicated equipment by renderers. The scope of this
alternative is similar to Canada's 2006 enhanced feed rule and is the
most restrictive regulatory action we considered.\1\ This alternative
expands the list of prohibited material and would substantially
increase the amount of prohibited material generated by regulatory
action. It also requires that renderers have dedicated equipment used
to process or transport protein prohibited from being fed to ruminants
and to process or transport protein not prohibited from being fed to
ruminants.
---------------------------------------------------------------------------

    \1\ The enhanced Canadian feed ban exempts feed mills from the
requirement for dedicated equipment. Although ERG included feed
mills in its analysis of the SRM ban, we have excluded these costs
from our analysis.
---------------------------------------------------------------------------

    In practice, some tissues that are not defined as SRM would be
difficult to separate and are treated as SRM. Canada made a similar
distinction in its enhanced feed rule. Thus, in addition to the
material prohibited in the final rule, this alternative would prohibit
from all animal feed: The skull, eyes, trigeminal ganglia, vertebral
column (excluding the vertebrae of the tail, the transverse processes
of the thoracic and lumbar vertebrae, and the wings of the sacrum), and
dorsal root ganglia of cattle 30 months of age and older, and the
tonsils and distal ileum of all cattle.
    As shown in Table 3 of this document, the estimated annualized
costs of this alternative range from $332.0 million to $344.7 million.
Slaughterers would incur annualized costs of about $19.5 million in
lost revenues and increased labor and capital costs. Independent
renderers would incur from $42.9 million to $55.6 million in annualized
costs of lost revenues and increased labor and capital costs. Animal
producers would incur about $12.7 million annually in feed substitution
costs. Disposal costs for animals that would no longer be rendered as a
result of the SRM ban and the disposal costs for slaughter SRM would
account for the majority of the estimated annualized costs and equal
about $257 million. Because most slaughterers can immediately pass
disposal costs back to cattle producers by adjusting the prices they
pay for slaughter animals, cattle producers would likely incur the
entire cost of SRM disposal in the short run. ERG estimated that over
time, markets would adjust to the impacts of an SRM ban and about 50
percent of the total incremental costs of this alternative would be
passed on to consumers as higher beef prices, 38 percent of the total
incremental costs would be passed back to cattle producers as lower
cattle prices and 12 percent of the total incremental costs would be
incurred by processors.
    Although this option would increase the material removed from
animal feed when compared with the first alternative, the incremental
reduction in the potential risk would not be commensurate with the
costs as shown in Table 3 of this document. Thus, this regulatory
alternative would be much less cost-effective than either the final
rule or the proposed rule.

                                Table 3.--Compliance Costs of a Full SRM Ban \1\
----------------------------------------------------------------------------------------------------------------
                                                     Annual costs  ($ million)       Annualized costs \2\  ($
                                  One-time costs --------------------------------            million)
            Cost item               ($ million)                                  -------------------------------
                                                   Low estimate    High estimate   Low estimate    High estimate
----------------------------------------------------------------------------------------------------------------
Capital investments.............            37.8  ..............  ..............             5.4             5.4
Labor...........................  ..............            12.7            12.7            12.7            12.7
Loss of net revenue.............  ..............            35.8            35.8            35.8            35.8
Transportation..................  ..............             7.9            20.5             7.9            20.5
Disposal costs..................  ..............           257.0           257.0           257.0           257.0
Marking.........................  ..............             0.6             0.6             0.6             0.6
Recordkeeping/Labeling..........             0.2             0.1             0.1             0.1             0.1
Feed substitution...............  ..............            12.7            12.7            12.7            12.7
                                 -------------------------------------------------------------------------------
    Total compliance costs......            38.0           326.6           339.3           332.0          344.7
----------------------------------------------------------------------------------------------------------------
\1\ Numbers may not sum due to rounding.
\2\ Costs are annualized over 10 years at 7 percent.

Summary of Regulatory Alternatives
    Table 4 of this document shows the annualized and incremental costs
of each regulatory alternative considered. The safeguards put in place
by the 1997 ruminant feed rule have substantially reduced the potential
risk that tissues infected with the agent that causes BSE could get
into ruminant feed. The final rule further reduces the possible risk of
cross contamination of ruminant feed with prohibited material. As
explained previously, we have determined that the final rule is the
most cost-effective action for reducing the potential risk that animal
feed or feed ingredients intended for ruminants could contain the agent
that causes BSE.

                                     Table 4.--Costs of Alternative Policies
----------------------------------------------------------------------------------------------------------------
                                                    Annualized costs \1\  ($       Incremental annualized costs
                                                            million)             (from previous alternative)  ($
                  Alternative                  ---------------------------------             million)
                                                                                --------------------------------
                                                  Low estimate    High estimate   Low estimate    High estimate
----------------------------------------------------------------------------------------------------------------
Separate facilities and equipment for                      44.4            81.6
 renderers and feed mills.....................
Final rule....................................             64.6            81.1            20.2            (0.5)
Proposed rule.................................             73.8            95.9             9.2            14.8
Full SRM ban; separate facilities and                     332             344.7           258.2          248.8
 equipment for renderers......................
----------------------------------------------------------------------------------------------------------------
\1\ Costs are annualized over 10 years at 7 percent.

C. Need for Regulation

    Executive Order 12866 directs agencies to assess the need for any
significant regulatory action and to provide an explanation of how the
regulation will meet that need. Comments on the October 2005 proposed
rule did not address the accuracy of the theoretical argument FDA put
forth in the preamble to the October 2005 proposed rule related to
private incentives and market failure (70 FR 58570 at 58587).
Therefore, FDA retains this argument here in the final rule. In this
instance, FDA concludes that private incentive systems for both
suppliers and purchasers in markets for cattle, rendering, and ruminant
feed may inadequately address the risk of BSE. This market failure is a
result of inadequate information being available to buyers of
potentially infective animal feed. Because of the risk of cross
contamination during feed production and the risk of inadvertently
feeding non-ruminant feed to ruminants on an integrated farm, buyers of
ruminant and non-ruminant feed would likely value a decrease in risk of
BSE transmission if the market were able to provide it. Buyers,
however, have little information about the BSE infectivity of feed
because the costs to them of ascertaining infectivity are very high and
higher than the costs to the feed producers. As a result, buyers may
unknowingly buy feed contaminated with BSE because of the presence of
CMPAF.
    The potential market failures created by the continued use of
materials that this final rule would eliminate are the same as
described in the 1997 ruminant feed rule. If feed purchasers could
easily identify the risk of the infective agent associated with
products from specific suppliers, they could more easily reduce these
risks by refusing to buy feed products derived from ruminants known to
have consumed processed CMPAF. Feed purchasers, however, are unlikely
to obtain the information they need due to the long incubation period
for BSE, which could lead to a suboptimal level of risk prevention by
purchasers during the incubation period. Moreover, ruminant producers
have no way of knowing whether a particular batch of feed or feed
ingredients intended for ruminants is free of potentially infective
proteins due to the possibility of CMPAF being introduced through
cross-contamination with feed or feed ingredients intended for non-
ruminants.

D. Benefits

    FDA received few comments on the proposed rule that focused on the
benefits section. One comment stated that the proposal was unnecessary
because it addressed only a very small risk. FDA agrees that the risk
is low but reiterates, as in the proposed rule, that by requiring
removal of the highest risk cattle-derived materials from use in any
animal feed, the final rule further reduces BSE risks not already
addressed by the 1997 feed ban.
    The purpose of the final rule is to further strengthen existing
safeguards against BSE in the United States. Reduced risk of BSE among
cattle also reduces human risk of vCJD, which is believed to be caused
by consumption

of beef products contaminated with the BSE agent. The final rule also
increases the potential for exports by reducing foreign governments'
concerns about the safety of U.S. beef. In this section, we first
address the reductions in the risk of BSE to cattle in the United
States and the corresponding protection of human health from the major
provisions of the proposal. We then summarize the available evidence
about the likely effect of this final rule on U.S. exports of beef and
other livestock products.
1. Risk Reduction
    FDA estimates that banning CMPAF from use in any animal feed would
effectively remove about 90 percent of any remaining potential
infectivity from possible spread through the feed system. To derive
this estimate of the risk reduction from the ban on CMPAF, we assume
that the number of new BSE cases is proportional to the amount of all
infectious material included in feed. Given this assumption, we
estimate the percentage reduction in the risk of new BSE cases as the
percentage reduction in infectious material. A 1999 report by the
Scientific Steering Committee of the European Union suggests that the
brain and spinal cord constitute 89.7 percent of the total infective
load in a case of BSE. This rule would prohibit use in all animal feed
of these tissues from all cattle 30 months of age or older. Brain and
spinal cord taken from cattle under 30 months of age would not be
defined as CMPAF, however, because the probability is extremely low
that tissues from cattle of this age would contain BSE infectivity.
Thus, banning CMPAF from animal feed would effectively remove about 90
percent of total infectivity from animal feed. The absolute level of
animal health risk reduced by this rule would depend on the number of
infected animals in the United States and the extent to which cattle
are exposed to infected material.
    The potential human exposure to infectious materials from consuming
beef is already small, because USDA and FDA prohibit the use of certain
cattle materials, including SRMs, from human food. The 2005 Harvard
Risk Assessment that USDA's Food Safety and Inspection Service made
available to the public in July 2006 estimates that interim measures
implemented by FSIS on January 12, 2004, and finalized on July 13,
2007, reduce potential human exposure to BSE infectivity by 99.6
percent (see 69 FR 1862 and 72 FR 38700).
    Assessing the public health implications from estimates of the
human exposure to the BSE agent is difficult because there is no
agreed-upon relationship between human exposure to cattle
ID50s (ID50 is the amount of infective material
that would result in a case of BSE in 50 percent of the cattle that
consumed it) and vCJD cases. During the 1980s and 1990s, in the absence
of preventive control measures, millions of ID50s may have
been available for consumption by residents of the United Kingdom,
because each cow with clinical symptoms of BSE contains an average of
about 7,800 ID50s. While the United Kingdom totaled over
183,000 cases of BSE (Ref. 19) through January 21, 2007, the cumulative
number of definitive or probable vCJD cases identified in the United
Kingdom as of February 2007 was 165 (Ref. 20). Thus, the experience of
the United Kingdom suggests that the BSE agent is many times less
infective in humans than in cattle.
2. Increased Export Potential
    A second major category of benefits largely accrues to U.S. cattle
producers and reflects the potential for increased exports of U.S. beef
and beef products to countries that have acted to curtail exports since
the discovery of the infected cow in Washington State in December 2003.
USDA assessed this category of benefits in the FSIS SRM interim final
rule that it issued in January 2004. In its assessment, USDA concluded
that ``the 2004 beef export demand forecast has been reduced by 90
percent'' (Ref. 21). Foreign trade data shows that from 2003 to 2004,
the quantity of beef, veal, and beef variety meat exported by the
United States decreased by about 75 percent, whereas the value of these
exports declined by about 80 percent (Ref. 22). According to USDA data,
total U.S. exports of beef, veal, and variety meats amounted to $3.9
billion in sales in 2003, and exports of live cattle resulted in an
additional $63 million. USDA reports that the value of total beef and
veal exports for 2006 amounted to $2 billion. In 2006 prices, the
decline in export value comes to $2.2 billion (= ($3.85 billion * 1.09
[price adjustment]) - $2 billion). The quantity exported fell from
1,274,110 metric tons in 2003 to 653,205 metric tons in 2006. Some
export markets disappeared almost overnight: Exports of U.S. beef to
Japan fell from 375,452 metric tons in 2003 to 517 metric tons in 2004;
exports to South Korea fell from 246,595 metric tons in 2003 to 144
metric tons in 2004. Exports have increased since 2006 but remain below
2003 levels.
    Numerous foreign governments have cited perceived weaknesses in the
1997 feed ban as a justification for not fully opening their markets to
U.S. beef and beef products. The preventive measures contained in this
final rule may increase the likelihood that foreign governments ease
some restrictions on imports of U.S. beef products and cattle.
    We cannot estimate the trade benefits of this final rule. We can
estimate the net effect on social surplus of the continuing
restrictions on beef exports, as well as the potential gain from
removing those restrictions. To do so, we use a standard economic model
of the effects of export restrictions on consumer and producer surplus.
The closing of export markets, all else being the same, leads to a fall
in exports and a rise in domestic consumption as more beef is sold on
the domestic market (Ref. 23). The forced sale to U.S. consumers
increases consumer surplus and decreases producer surplus. Over time,
the quantity produced in the domestic economy falls as well, as
producers respond to the restrictions. If the trade restrictions on
U.S. beef are removed, beef exports will increase, domestic consumption
will decrease, and domestic production will increase. Once all
adjustments are made to the withdrawal of the restrictions, we estimate
the gain in social surplus to be about $105 million per year, with a
range of $80 million to $120 million.
    We estimate the effects of the export restrictions using changes in
beef prices and exports. Price changes in the U.S. market, however, are
dominated by seasonal and trend effects, fluctuations in feed costs,
and a host of other factors. These complications make it difficult to
use actual beef price changes to estimate the effect of diminished
exports on price. As an alternative to direct estimates of price
changes, we impute the price effect by estimating the decline in
domestic price needed to clear the market if beef intended for export
is instead sold on the domestic market. Again, we do not estimate the
actual change in price but the imputed contribution of the increased
quantity of beef on average price. Our imputed price change draws on
the price elasticity of demand for beef, which is the percentage change
in the quantity of beef demanded divided by the percentage change in
price. The estimates in the literature show the mean price elasticity
of demand for beef is about -1.086, although the variance of the
estimates is high (Ref. 24).
    To estimate the continued effect of the export restrictions and the
potential gains from their removal, we assume that in their absence,
the proportion of U.S. production exported would return to the 2003
level, 9.6 percent (Ref. 25). In 2006, the shortfall in beef exports
compared with 2003 accounted for

about 5.2 (= 0.096 - 0.044) percent of 2003 beef production (Ref. 25).
If we assume that the price elasticity of U.S. beef supply is about
0.5, removing the trade restriction would lead to responses on the
supply about one-half as large as on the demand side, so domestic
consumption would decline by 3.7 percent (= 0.035/(1 - 0.044 - 0.017)).
With a price elasticity of -1.086 and a 3.7 percent decline in quantity
demanded, we estimate the imputed price effect to be a rise of about
3.4 percent (= 3.7 percent/1.086).
    The rise in social surplus can be approximated using the rise in
price and the average value of exports in 2003 and 2006. We estimate
this gain to be about $105 million (= \1/2\ * ($4.2 billion + $2.0
billion) * 3.4 percent). This social surplus represents the continuing
annual loss from the restrictions and the annual gain from their
removal.
    The estimated gain in social surplus is highly sensitive to the
assumptions made about the responses of domestic beef consumers and
producers to the removal of export restrictions. Our base estimate of
the gain in social surplus assumes that in the long-run, the changes in
consumption are about twice as large as the change in production (the
price elasticity of supply is about half as large as the price
elasticity of demand in absolute value). If increased U.S. beef
production accounts for one-half of the response to the removal of
trade restrictions (the price elasticity of supply is about the same as
the price elasticity of demand in absolute value), the gain in social
surplus is about $80 million per year. By contrast, if reduced
consumption of beef in the United States accounts for three-fourths of
the response to the removal of trade restrictions (the price elasticity
of supply is about one-third the price elasticity of demand in absolute
value), the gain in social surplus is about $120 million per year.
    The estimates we present here are all based on a simplified model
of the effects of trade restrictions. The estimates represent the gains
from removing all remaining restrictions on beef exports, which will
increase the world demand for U.S. beef. The estimates do not represent
the gains from this final rule. The gains from this final rule would be
estimated based on any relaxation of trade restrictions resulting from
the rule. If other public and private policies reduce trade
restrictions, then the potential gains from this rule would be
correspondingly reduced. New safety events, such as more BSE cases,
would also reduce the potential effects of this final rule on trade. We
also expect that as time passes, the effects measured here will
dissipate to be dominated by other changes in the world and domestic
markets for beef. The social surplus estimated here would only be the
short-term benefit of this final rule if publication of this rule leads
directly to the return of U.S. beef to its status in world markets
before the discovery of the infected cow in Washington State in
December 2003, assuming that no other policies or events intervene.

E. Costs

    FDA has examined the numerous public comments that addressed the
analysis of impacts section published with the proposed rule.
Furthermore, FDA contracted with ERG to update the analysis it prepared
for the proposed rule, taking into account the comments and data
provided during the public comment period, as well as any other new or
amended provisions that FDA made to the final rule. This section
summarizes the ERG report on the final rule, responds to comments on
the costs of the proposed rule, and describes the composition, size,
and scale of economic activity for the various affected industry
sectors that would be impacted by the final rule.
    The feasible regulatory alternatives to the final rule include the
following: (1) Separate facilities and equipment for renderers and feed
mills; (2) the proposed rule, which would prohibit the use of brain and
spinal cord from cattle 30 months of age and older slaughtered for
human consumption as well as from all cattle not inspected and passed
for human consumption from animal feed; and (3) a full SRM ban in
animal feed and separate facilities and equipment for renderers. The
ERG report also includes estimates of impacts on small entities in the
sectors that are impacted to a significant degree to fulfill
requirements of a regulatory flexibility analysis.
    In the development of its final report on the brain and spinal cord
prohibition, ERG reviewed the public comments to the rule that
concerned the economic impacts of the proposed rule, focusing closely
on the data and analysis included in a report prepared for and
submitted by the National Renderers Association. ERG utilized the
services of industry consultants and other contractors for their
technical expertise, including contracting with an agricultural
engineering firm to generate capital cost estimates for independent
rendering operations. Additionally, ERG prepared and administered a
small survey to independent renderers with additional questions about
their operations, including logistics of animal pick-up services, days
of operation, decomposition of deadstock, and their ability to comply
with the rule.
1. Public Comments on Costs
    One of the most comprehensive comments to the proposed rule was
prepared by Informa Economics for the National Renderers Association
entitled ``Economic Impacts of Proposed Changes to Livestock Feed
Regulations'' (Ref. 26). It concluded that the economic impact on
renderers would far exceed the impacts that FDA estimated in the
proposed rule, resulting in a significant economic burden of $127.7
million annually in direct economic impacts. Many of the individual
comments or criticisms of our analysis of the proposed rule contained
in the Informa report reflected other public comments from other
individuals, companies, associations, and State governments. We have
assembled similar comments together and will address them throughout
the summary of the latest ERG analysis.
    Approximately $113 million of the $127.7 million (about 88 percent)
of the direct costs in the 2005 Informa report represent the estimated
deadstock collection fees that would be paid by livestock producers for
picking up those deadstock that would still be rendered under the
proposed rule. The Informa analysis assumes that the average individual
pick-up fees that would be charged across the four cattle categories
represent the costs that renderers would incur to remove the CMPAF from
cattle not inspected and passed for human consumption, as well as costs
to handle, process, and dispose of the material. The assumption,
however, leads to an estimate of costs that represents not the expected
marginal fee increases from the proposed rule, but rather the total
pick-up fee that the animal producer would pay. Using only the marginal
pick-up fee per cwt that would be imposed by this rule reduces the
total cost from $112.7 million to $62.9 million. The remainder of the
original $112.7 million in fees ($49.8 million) represents costs that
are currently incurred by the animal producers and are therefore not
compliance costs of this rule. Further, the other 12 percent of the
total direct costs represent the market value of the tallow and MBM
that would be foregone due to this rule. Accounting for only the social
costs of these lost revenues, estimated at the renderer's net income
rate of 5.65 percent (use of net income as social cost is explained
later in this document), reduces the $15.7 million to only about $0.89
million, a reduction of about $14.81 million.

    This adjustment in estimated pick-up fee and MBM and tallow social
cost losses reduces Informa's total direct costs to about $63.1
million. This figure is actually below our final rule estimate of $64
million to $81 million, which includes a cost reduction from the
exemption from the definition of CMPAF for cattle under 30 months not
inspected and passed for human consumption. If, however, we were to
include the upper end of the range of marginal fee increases from the
Informa report (Informa's $112.7 million cost represents only the lower
bound of the data it presented), the range of the total direct costs
from the Informa report (after accounting for the changes mentioned
previously) would be $63.1 million to $113.53 million.
    The Informa report also concludes that additional indirect costs
for slaughter facilities to handle and dispose of CMPAF (which is not
calculated separately in the report) and capital investments made by
renderers to handle, process and dispose of CMPAF would likely result
in a total cost exceeding $150 million annually. We agree that
slaughtering facilities will incur additional capital costs, and ERG
has increased its estimate from $676,000 in the proposal to about $1.27
million annually in the final rule. The capital investments for
renderers that are detailed in the Informa report (amounting to an
annualized total of $11.3 million) are based on an assumption that 26
renderers would actually install additional equipment to render the
CMPAF for disposal, which is 50 percent of the number that replied that
they might consider installing such equipment. Those 26 rendering
operations in question, however, would also have been included in the
survey's question on the expected increase in pick-up fees. The
increase in pick-up fees, therefore, would account for these additional
capital costs if they were indeed anticipated. The previously mentioned
modifications to Informa's calculations result in a significantly lower
total cost for the final rule. Additionally, we disagree with Informa's
conclusion that, due to State and local prohibitions against its
disposal in landfills, there is a high likelihood that all CMPAF would
need to be rendered prior to disposal, although we agree that there is
some uncertainty about the disposal methods that will be used
throughout the United States.
    Various other comments focused on the general subject of increased
costs to slaughterers and other meat processors for disposal of
byproducts, the reduction in the value of the slaughtered animals, and
the reduction in the profitability of renderers. Although almost none
of these comments contained additional data to support these
conclusions, ERG performed additional analyses of the relevant
industries that largely support the main concerns expressed in these
comments.
    Other comments stated that increased costs would be passed on to
farmers. We agree that some compliance costs will be immediately passed
on to farmers; ERG therefore concluded that animal producers would
incur $28.1 million to $39.1 million in annual costs for alternative
disposal of CMPAF from cattle slaughtered for human consumption and
cattle not inspected and passed for human consumption (Table 1, lines
21 and 22). Other comments requested that we offer other economic
incentives or remuneration in order to compensate renderers for
converting operations to alternative disposal methods or for the cost
of disposal, as has occurred in Europe. We did not consider subsidies
as a policy option because FDA does not have this authority.
Furthermore, the use of subsidies would not change the total social
costs of the final rule, but rather transfer the costs to others.
Likewise, the social cost does not change, as one comment suggested, if
the number of cattle available for USDA's BSE testing program decreases
because the renderer refuses to waive pick-up fees. In this case, the
social cost is transferred to the general public.
    We also received some comments that made claims about costs to
individual States, such as the claim that the proposed rule would
impose $10 million in costs on California dairy farmers, feedlots, and
beef cattle producers. While we cannot verify this estimate without
additional data necessary to support such claims, we agree that the
costs of this final rule will be proportionally heavier in states with
large populations of affected cattle.
    One comment stated that removal of brain and spinal cord would
reduce processing ability by 40 percent to 50 percent, without
providing supporting information. Another comment stated that FDA
should focus on removal of SRMs from 4D and antemortem condemned
animals greater than 30 months, the cost of which would be from $64
million to $76 million, according to some industry estimates that were
not disclosed. Without supporting information, we cannot respond
directly to these comments. The ERG report, however, takes into account
a number of public comments and changed many of its assumptions due to
these public comments.
    In general, this final rule, which prohibits certain cattle-derived
risk materials from all animal food or feed, would impose four types of
costs: Disposal costs, lost revenue measuring the value of the MBM and
tallow not produced, direct costs of new equipment and re-allocated
labor, and feed substitution costs.
2. Disposal Costs
    For the proposed rule, ERG identified and discussed five options
for disposal of CMPAF. These included landfilling of the CMPAF without
rendering, rendering for disposal, disposal through alkaline hydrolysis
digesters, incineration, and composting. The analysis concluded that
landfilling would likely be one of the methods used to dispose of
CMPAF, and that rendering for disposal would be unlikely due to the
relatively small amount of CMPAF. The disposal cost estimate of the
proposal was set at $12/cwt, based on discussions with industry members
and ERG's other report on alternative regulatory options, including a
full SRM prohibition. ERG concluded that the per cwt disposal cost
would be higher than the full SRM prohibition disposal cost due to the
lower volume of CMPAF for the brain and spinal cord prohibition as well
as the uncertainty in disposal methods and unfamiliarity with some of
the disposal methods in the industry. At this $12/cwt rate, disposal
costs of the proposed rule for CMPAF from slaughter and render
facilities were estimated at $7.72 million.
    ERG also calculated the disposal costs of cattle not inspected and
passed for human consumption that would no longer be rendered as a
result of the proposed rule. This ban was expected to result in an
increase in the number of on-farm disposals. For its analysis of the
proposed rule, ERG estimated that 17 percent of cattle not inspected
and passed for human consumption were currently rendered. In addition,
ERG had predicted that an additional 0.6 percent of all cattle not
inspected and passed for human consumption (or 3.5 percent of all
cattle not inspected and passed for human consumption that are
currently rendered) would no longer be rendered due to the proposed
rule. These animals were estimated to result in an increase in capital
and labor costs for on-farm burial of about $1.02 million.
    We received numerous public comments concerning the estimates on
the rendering of cattle not inspected and passed for human consumption.
Some were more specific than others, but the prevailing theme was that
we had

significantly underestimated the number of cattle not inspected for
human consumption that are currently rendered. In particular, the
Informa report questioned the accuracy of the estimate that only 17
percent of cattle not inspected and passed for human consumption are
currently rendered. In fact, FDA had included in the proposal a
discussion of the uncertainty of its own estimate along with Informa's
previous estimate of this number at about 42 percent, and also
incorporated this 42-percent estimate as the high end of the range of
cost estimates for the proposal, where appropriate. Accepting Informa's
2004 estimate that 42 percent of cattle not inspected and passed for
human consumption were rendered, we modified the proposal's disposal
cost estimate for CMPAF from cattle slaughtered for human consumption
and cattle not inspected and passed for human consumption that would
continue to be rendered, from $7.72 million to a range of $7.72 million
to $9.97 million. Similarly, we modified the proposal's disposal cost
estimate for cattle not inspected and passed for human consumption that
would no longer be rendered as a result of the proposed rule from $1.02
million to a range of $1.02 million to $2.5 million.
    In its analysis of the final rule, the ERG report uses the Informa
survey data of renderers (conducted for its November 2005 report) and
USDA data, which show that about 45 percent of cattle not inspected and
passed for human consumption are currently rendered. We therefore base
our cost estimates for the final rule solely on the 45 percent figure,
and do not include those based on the former range of 17 percent to 42
percent.
    We also received many comments concerning the ERG estimate that
about 26,000 cattle not inspected and passed for human consumption (or
0.6 percent of all cattle not inspected and passed for human
consumption) would no longer be rendered as a result of the rule.
Informa's 2005 results showed that renderers replied that, in total,
about 67 percent of cattle not inspected and passed for human
consumption that are currently rendered would no longer be rendered due
to the proposed rule. That is, 45 percent times 67 percent = 30 percent
of all cattle not inspected and passed for human consumption due to
either renderer refusal to accept the animal or the producer's refusal
to pay a higher pick-up fee, would no longer be rendered. The final ERG
report, relying on estimates it received from deadstock renderers and
estimated price elasticities of deadstock to renderers, projects that
pick-up charge increases would range from 25 percent to 50 percent for
all cattle under 30 months and 100 percent to 150 percent for cattle 30
months of age or older. We note that one comment stated that California
renderers would increase their pick-up fees by 50 percent. These higher
pick-up fees, coupled with expected closures of rendering plants
handling about 10 percent of these cattle, support ERG's revised
estimate that 29.4 percent to 44.8 percent of currently rendered cattle
not inspected and passed for human consumption will no longer be
rendered as a result of this rule. We accept this estimate as well and
include it in this analysis. The Informa estimate of 67 percent may
overstate the probability of an animal no longer being rendered because
some of the carcasses that one renderer says will no longer be picked
up by his company may still be picked up by another renderer. As a
result of this and other changes in the final report, we estimate that
the total amount of CMPAF would range from 610 million to 733 million
lbs, a significant increase from the 64 million lbs estimated in the
proposed rule.
    Due to many public comments that FDA underestimated disposal costs
in the proposed rule, ERG re-analyzed its methodology and assumptions
concerning disposal in its report for the final rule. It reviewed
various disposal technologies and a range of estimated costs for each
based on literature compiled by researchers at Kansas State University,
National Agricultural Biosecurity Center Consortium. The Kansas State
University report presents a most likely representative estimate of
costs, although it was derived from a graphic figure in the source
document and thus contains some uncertainty. It also identified another
disposal method that ERG had not considered in the proposed rule,
namely that cattle would be left to decompose in the field or range
without any additional treatment of the carcass. Some comments
reflected the overall conclusions of the Kansas State University
report, stating that incineration and composting are currently
prohibitively expensive or complicated. One comment stated that burying
CMPAF could be very expensive if a minimum of 4 hours rent for a
backhoe is required, giving further support to the conclusion that when
possible, these cattle would likely be left to decompose in the field.
Several other comments questioned the availability of landfills for
disposal of CMPAF. Another comment asked that we consult cost data in
the 2004 publication on carcass disposal technologies by the National
Agricultural Biosecurity Center Consortium. Table 7 in that publication
shows disposal costs per ton for various carcass disposal methods. For
both burial and landfilling, it presents cost estimates that are below
the estimates ERG uses in its analysis of this final rule (Ref. 27).
    Although many other comments questioned what they perceived to be
low total disposal costs published in the proposed rule, the 2005
Informa survey reported an average disposal cost estimate of $11.51/cwt
among those firms that indicated they would accept the CMPAF.
Additionally, the Kansas State study reported 7 disposal options
greater than $12/cwt and 4 options lower than $12/cwt. Accordingly, ERG
has retained the overall average of $12/cwt disposal cost for CMPAF
(from brain and spinal cord removal) from independent rendering
operations for the final rule. Some comments questioned the economic
feasibility of using dedicated trucks to transport CMPAF to disposal or
for further processing. We have in fact included these costs in our
totals because in its analyses of disposal costs, ERG included the
transportation costs in the $12 per cwt estimate. Further, the Informa
survey of renderers (reporting that renderers expect disposal costs
would average $11.51 per cwt.) based its questions on CMPAF as defined
by the proposed rule, which would require separate transportation
trucks or compartments. Based on this $12/cwt rate, we estimate that
CMPAF disposal costs of the final rule for slaughter facilities will be
$3.4 million (Table 1, line 22).
    Disposal costs for CMPAF removed at independent renderers are
estimated using the same $12/cwt estimate used in the proposal (we
explained the $12/cwt figure and public comments in detail earlier in
the document). The Informa report and many other comments remarked that
much more than just the brain and spinal cord would need to be removed
from those cattle not inspected and passed for human consumption that
were not too decomposed to undergo separation. Furthermore, comments
stated that a significant number of them would be too decomposed to
separate the brain and spinal cord. For both the proposed and final
rule, ERG judged that from 1.3 lbs to 53.0 lbs of CMPAF would be
removed from cattle 30 months of age or older, but for the final rule
it also included an allowance for the number of cattle 30 months of age
or older not inspected and passed for human consumption that are picked
up but that are too decomposed to undergo tissue separation. The
Informa claim

that 54 percent of these animals being too decomposed to undergo tissue
separation added significant weight to the volume of CMPAF that would
be prohibited. Based on the aggregate weight of CMPAF removed, ERG
estimated disposal costs at $11.3 million for the CMPAF that is removed
by independent renderers and for the cattle not inspected and passed
for human consumption that are picked up by renderers but are too
decomposed to undergo tissue separation.
    For the disposal of the additional cattle not inspected and passed
for human consumption that are no longer picked up for rendering, ERG
adjusted the $12/cwt disposal cost for those carcasses that are likely
to be buried on the farm. For on-farm burial, the most likely
representative cost listed in the Kansas State University report was
$6/cwt. ERG increased this to an estimated $8/cwt to account for those
farms where burial is less economical or less viable due to the absence
of available land. The cattle carcasses were then distributed among the
following four types: Calves, feedlot, cattle 30 months of age or
older, and cattle under 30 months. For its disposal cost calculations,
ERG used only the incremental social cost, which is the difference
between the disposal method and the existing charge for renderer pick-
up cost (per cwt) as developed in the Informa report. For cattle 30
months of age or older not inspected and passed for human consumption,
ERG calculated the incremental cost per cwt at $4.65 ($8.00/cwt minus
the current $3.35/cwt); for cattle under 30 months ERG calculated the
incremental cost at $5.49 ($8.00/cwt minus the current $2.51/cwt). For
feedlot cattle, whose full disposal cost remains at $12/cwt because it
is unlikely they would be buried at the producer site, ERG calculated
the incremental cost at $10.24/cwt ($12.00/cwt minus the current $1.76/
cwt). For calves, ERG assumed current pick-up charges to increase by
$4.00/cwt, noting that their current reported pick-up fee exceeds $12/
cwt. As a result, we estimate total disposal costs for the additional
cattle not inspected and passed for human consumption to range from
$22.0 million to $33.0 million annually.
    To account for the additional tonnage of non-cattle species that
died at the animal producer establishment and would no longer be
rendered as a result of this rule as suggested by some comments, ERG
added an additional 10 percent of the cost of the midpoint in the range
of total disposal costs for the combined calves, feedlot, cattle 30
months of age or older, and cattle under 30 months ($2.7 million)
(Table 1, line 21 adds $2.7 million to the disposal cost range of $22.0
to $33.0 million). We acknowledge additional uncertainty in this 10-
percent estimate as we lack the data to present a more robust estimate.
In sum, we find that the total disposal costs for slaughter
establishments ($3.4 million), renderers ($11.3 million), cattle not
inspected and passed for human consumption that would no longer be
picked up by renderers ($22.0 million to $33.0 million), and other non-
cattle species ($2.7 million) will range from $39.4 million to $50.4
million.
3. Lost Value of CMPAF and Hides
    For the proposed rule, ERG had calculated that the 64 million lbs.
of CMPAF from both slaughter operations and from those cattle not
inspected and passed for human consumption that would no longer be
rendered would have yielded about 10,800 lbs. of MBM and 4,400 lbs. of
tallow. Using historical byproduct prices, ERG had estimated the value
of the MBM and tallow at $1.0 million and $0.8 million. Accepting the
2004 Informa estimate of a larger number of cattle currently rendered,
we had included in the proposed rule an upper estimate of lost revenues
of MBM at $1.7 million and tallow at $1.2 million.
    The final rule differs from the proposed rule in that it exempts
certain cattle-derived risk materials (brain and spinal cord from
cattle under 30 months not inspected and passed for human consumption)
from the definition of CMPAF. The final rule continues to prohibit the
use of CMPAF in all animal feeds to prevent BSE.
    Both ERG's 2004 report (relied upon for our analysis of the
proposed rule) and the Informa report included the foregone revenues
from MBM and tallow that would have been produced from the CMPAF as
costs of the rule. This approach, however, overstates the true social
cost of the rule because it includes value added from the use of
capital and labor at rendering facilities that would not be used if the
CMPAF goes to disposal without further rendering. A better estimate of
social cost would include only the lost value attributable to the now-
prohibited raw materials, or the difference in total cost between final
products made with MBM or tallow from the CMPAF and the total cost of
final products made with alternative raw materials. A more accurate
estimate of the social cost of the rule would be the net income that
would otherwise have been generated from the processing of CMPAF into
MBM and tallow. For the final rule, ERG has estimated renderer average
net income for both MBM and tallow at 5.65 percent of their foregone
sales, based on 2002 Census of Manufacturers data. Marginal net income
may be more appropriate because it takes into account the existence of
fixed costs. The lack of detailed revenue and cost data for those
independent renderers affected by the rule, however, prevents us from
estimating the cost functions necessary for a measure of marginal net
income. The significance of the difference between marginal and average
net income is not likely to be large in this case, since the supplies
of raw materials are highly elastic and the amount affected is a small
fraction of all ingredients. Industry data show that 18 percent of
cattle 30 months of age or older are slaughtered for human consumption,
thus requiring CMPAF removal. Consequently, ERG estimated the CMPAF
removed at slaughterhouses to be about 28 million lbs. Using industry
data on byproduct yields as well as historical averages prices for MBM
and tallow of $180/ton and $360/ton, ERG estimated the value of this
foregone MBM at $0.6 million and tallow at $0.5 million. Using a 5.65
percent net income rate, ERG estimated the social cost of the foregone
MBM and tallow from slaughtered cattle at $64,000 per year (Table 1,
lines 4 and 5).
    Additionally, ERG estimated the value of the MBM and tallow
foregone from the carcasses of the cattle not inspected and passed for
human consumption that would no longer be collected by renderers as a
result of this rule (and would likely be disposed of on the farm or
elsewhere). This reduction in rendering would include those cattle not
rendered due to the reduced quantity demanded for rendering services of
cattle not inspected and passed for human consumption caused by the
substantial expected increase in pick-up charges. In addition, fewer
cattle will be rendered due to a number of rendering plant closures.
Using various price elasticities of demand, ERG's calculations forecast
a 29.4 percent to 44.8 percent reduction in the number of cattle not
inspected and passed for human consumption that are picked up for
rendering. Using industry averages of animal weights for cattle of
different ages, ERG calculated the total weight of animals that would
no longer be picked up for rendering at 489 million lbs to 719 million
lbs. Applying the yield rates of MBM and tallow for whole carcasses (25
percent for MBM, 10 percent for tallow) results in MBM revenue losses
ranging from $11.0 million to $16.2 million, and tallow

revenue losses from $8.8 million to $12.9 million. Additional MBM and
tallow revenue losses are estimated at $3.1 million and $2.5 million,
respectively, for animals that were picked up by the renderer but were
too decomposed to undergo tissue separation. Based on a 5.65 percent
annual net income rate for both MBM and tallow, the resulting net
income losses would range from $1.4 million to $1.8 million (Table 1,
lines 14 and 15). Adding these losses to the net income loss from CMPAF
derived from slaughterhouses results in total net income losses of $1.5
million to $1.8 million annually.
    ERG also calculated the social cost of the hides that would be lost
due to an increase in the number of cattle not inspected and passed for
human consumption that would no longer be rendered as a result of this
rule. The same assumptions and calculations that form the basis for the
29.4-percent to 44.8-percent increase in cattle not inspected and
passed for human consumption that would no longer be rendered as a
result of this rule apply to loss of cattle hide value as well. ERG has
taken the reduction in each of the four individual cattle categories
(the total reduction ranges from 29.4 percent to 44.8 percent over all
calves, feedlot, cattle 30 months of age or older, and cattle under 30
months), and applied the average market value of the hide for each to
estimate the total hide value lost due to this rule at $9.16 million to
$13.69 million. In this case, ERG concludes that the social cost would
include almost the entire market value of the hide because the only
value added to the process is a very small amount of labor required for
hide removal. Because this value was not calculated and subtracted from
the average market values, the previously mentioned total may slightly
overestimate the social costs.
4. Direct Costs
    In the proposed rule we reported five categories of direct costs,
including: (1) Capital and labor costs for slaughtering and rendering,
(2) the tallow restriction, (3) MS beef restriction, (4) marking costs,
and (5) labeling and recordkeeping costs. For the final rule, we
address these same costs as well as the cost of (6) creating procedures
for training on, and actual administration of, the age determination
process for cattle.
    a. Capital and labor costs for slaughtering and rendering. This
final rule will result in cattle slaughter operations that separate
CMPAF and arrange for its disposal separate from other cattle offal.
FSIS' regulations at 9 CFR 310.22 prohibit SRMs for use as human food
but do not prohibit these materials from being rendered into MBM and
tallow for use in feed for non-ruminant animals. Under this final rule,
CMPAF from slaughterhouses (which are a small subset by volume of SRMs)
could not be used in any animal feeds. Therefore, slaughterers would
need to use separate offal lines for offal of non-prohibited material-
origin and offal of CMPAF-origin.
    For the proposed rule, we relied on the previous ERG report to
project that slaughterers would incur annualized capital and labor
costs that totaled $676,000 ($597,000 in annual labor costs plus
$555,000 in capital costs annualized at 7 percent over 10 years). These
costs included the additional offal bins that all slaughterers were
expected to require, the modified procedures and processes for the
larger slaughterers, and additional labor to segregate the CMPAF.
Comments on the proposed rule did not offer specific costs for
slaughterers but generally maintained that slaughterers would be
affected.
    For the final rule, ERG revised its estimated number of USDA-
inspected plants upward to 1,545 from 689, but revised the estimated
number of cattle having CMPAF removed at slaughterers down from 100
percent to about 18 percent due to the change in approach whereby only
cattle 30 months of age or older would have CMPAF removed at slaughter.
ERG estimated the resulting one-time capital expenditures of the final
rule at $2.10 million (or $299,000 annualized at 7 percent over 10
years). With the addition of maintenance costs of about $315,000 and
labor costs of $656,000, ERG estimated the total annualized slaughter
costs for capital and labor at about $1.27 million (Table 1, lines 2
and 3), representing a small increase from the proposed rule.
    In the proposed rule, we concluded that renderers would also incur
additional capital and labor costs to handle CMPAF segregation from
cattle not inspected and passed for human consumption. ERG projected
equipment purchases and installation at a one-time cost of $3.1 million
(or $442,000 at 7 percent over 10 years), as well as additional labor
costs of $1.4 million annually. We used this cost as the low end of the
range of costs, and used a figure 2.46 times greater as the upper end
based on the 2004 Informa assertion that 42 percent of cattle not
inspected and passed for human consumption were currently rendered,
compared with ERG's previous finding of this number at 17 percent. The
proposed rule's estimate for both renderer capital and labor costs was
$1.9 million to $4.6 million annually. Numerous public comments
addressed the capital and labor costs to renderers. In general, the
comments stated that FDA greatly underestimated the cost to renderers
of removing brain and spinal cord from cattle not inspected and passed
for human consumption.
    For the final rule, ERG reassessed the conclusions in its analysis
of the proposed rule using the information provided in the 2005 Informa
Economics report and presents final rule estimates that are
substantially larger. ERG now estimates that there are 70 deadstock
renderers, including 25 very small renderers that were likely not
included in the Informa survey's result of 45 deadstock renderers. The
estimated number is, however, a decrease from the proposed rule's
estimate of 141 independent renderers because it is now accepted that
deadstock renderers are a small subset of independent renderers, and
non-deadstock renderers would not incur these additional capital and
labor costs.
    ERG contracted with an engineering firm to estimate the renovation
of deadstock rendering facilities in order to remove CMPAF. The
engineering firm created a detailed capital cost estimate for a
deadstock renderer handling 150 animals per day at about $600,000. ERG
used this estimate as well as results of its discussions with other
deadstock renderers to produce capital cost estimates across the range
of deadstock renderers by size. The capital costs on a per plant basis
have increased substantially for this final rule, most notably to
account for the planning and construction of a separate structure for
the removal of CMPAF. Whereas ERG had estimated one-time costs for
capital improvements for renderers at $3.1 million for the proposed
rule (or $442,000 annualized at 7 percent over 10 years), it estimated
if all renderers initiated such renovations, the one-time costs for
capital improvements for the final rule would be $32.2 million (or $4.6
million annualized at 7 percent over 10 years). The engineering
estimates did not include a specific cost for construction permits, as
one comment suggested would be needed, but the cost of construction
permits would likely amount to a small part of the separate contingency
costs that were included at $54,000 per rendering facility.
    ERG also increased its estimate of deadstock renderer labor costs
on a per plant basis, due to further discussions with rendering
facility managers. Whereas ERG estimated the additional

labor required for the proposed rule to range from 0.04 to 2.21
employees, it estimated the range for the final rule at 0.17 to 8.00
employees. Due to the estimated reduction in the number of rendering
plants that would undertake such renovations and additional hiring, ERG
concluded that total labor costs would only increase by $1.4 million to
$1.7 million. ERG also found that an additional maintenance cost
estimated at 15 percent of aggregate capital costs would add another
$4.8 million annually. Several comments on the proposed rule mentioned
efficiency losses for renderers due to slower line speeds. We agree
with the comment that this may be a possibility and have included
additional labor costs, which would tend to offset those efficiency
losses.
    Public comments and industry discussions with ERG indicate that
many facilities would not undertake the capital improvements and
additional labor necessary to renovate facilities and change their
operating procedures. In its analysis of the final rule, ERG adjusted
the total costs to account for the number of deadstock renderers that
would not undergo these renovations, assuming that the expected decline
in the percentage of renderers would equal the percentage reduction in
material sent to rendering. To do this, ERG relied on renderers'
predictions (through direct discussions with renderers as well as in
public comments) that they would require very large increases in pick-
up fees. Some predicted that the pick-up fees would more than double.
As a result, ERG estimated that the increase in fees would range from
100 percent to 150 percent for cattle 30 months of age or older, and 25
percent to 50 percent for all other cattle. Using estimated price
elasticities ranging from 0.25 for feedlot cattle to 0.6 for calves
(Informa also suggests an inelastic demand for rendering services by
many livestock producers), ERG calculated the total reduction in raw
material going to rendering at 29.4 percent to 44.8 percent, including
an additional 10 percent reduction for facilities that abandon
deadstock rendering. The 29.4 percent reduction in raw material going
to rendering represent a decrease of 549,000 from the current total
number of 1,870,000 cattle rendered (549,000/1,870,000 = 29.4 percent).
This decrease is the combined decrease in numbers of calves, feedlot
cattle, cattle 30 months or older, and cattle under 30 months. The
number of calves going to rendering will decrease by 216,000, or 25
percent from the current number, 865,000 calves (865,000 times 25
percent = 216,000). The 25 percent decrease includes a 15 percent
decrease due to increased pick-up fees (0.6 elasticity times 25 percent
increased pick-up fees) plus a 10 percent further reduction in non-
cattle rendering due to plant closures. The number of feedlot cattle
going to rendering will decrease by 27,000, or 6.3 percent from the
current number, 424,000 feedlot cattle (424,000 times 6.3 percent =
27,000). The 6.3 percent is the result of a 0.25 elasticity times a 25
percent increase in pick-up fees. The number of cattle 30 months of age
or older going to rendering will decrease by 281,000, or 60 percent
from the current number, 469,000 cattle 30 months of age or older
(469,000 times 60 percent = 281,000). The 60 percent decrease includes
a 50 percent decrease due to increased pick-up fees (0.5 elasticity
times 100 percent increased pick-up fees) plus a 10 percent further
reduction in non-cattle rendering due to plant closures. The number of
cattle under 30 months of age going to rendering will decrease by
25,000, or 22.5 percent from the current number, 111,000 cattle under
30 months of age (111,000 times 22.5 percent = 25,000). The 22.5
percent decrease includes a 12.5 percent decrease due to increased
pick-up fees (0.5 elasticity times 25 percent increased pick-up fees)
plus a 10 percent further reduction in non-cattle rendering due to
plant closures.
    The total reduction in cattle equals 29.4 percent of the currently
rendered number of cattle (549,000/1,870,000 = 29.4 percent). The upper
end of the range (44.8 percent) was calculated by the same method using
the upper end range of factors. Using the midpoint of this 29.4-percent
to 44.8-percent range, ERG predicted that about 37.1 percent of the
renderers will not undergo these necessary capital renovations, thereby
reducing the $32.2 million one-time cost to $20.25 million and the
$11.2 million in annualized capital, maintenance, and labor costs to
$7.0 million (Table 1, lines 9 and 10). Additionally, the number of
cattle 30 months of age or older going to rendering would be reduced by
60 percent to 85 percent, thereby reducing the disposal costs to $11.3
million. Without the adjustment for these two factors, the annualized
capital, operating, maintenance, and disposal costs for deadstock
operators would be estimated at $52.4 million, not $18.4 million.
    b. Tallow restriction. The final rule would prohibit entirely the
use of tallow derived from BSE-positive cattle and prohibit the use of
certain other CMPAF-derived tallow unless it contains less than 0.15
percent insoluble impurities, as did the proposed rule. For the
proposed rule, we concluded that it would not be economical for
renderers or tallow manufacturers to further process the separated
brains and spinal cords and other tissues from those cattle undergoing
tissue separation into tallow while complying with the additional
equipment separation and tallow testing and purification requirements.
We therefore did not include any additional cost for this provision. We
received one comment that stated that the capital investment for
dedicated equipment to be used to produce tallow (that would then need
to meet the purity requirements) would be substantial. We agree with
this comment. The final rule contains an estimate of a much larger
volume of CMPAF than the original estimate for the proposed rule.
However, the amount of CMPAF that is handled directly by renderers is
still a relatively small amount (because most is either on-farm
disposal or other disposal of cattle not inspected and passed for human
consumption), which would still not be economical to further process,
due to the same equipment separation and tallow testing/purification
requirements in this final rule. We have, therefore, not included
additional costs for this provision. This analysis previously accounted
for the net income lost on the value of this tallow and MBM.
    c. MS beef restriction. In the proposed rule, we predicted that
there would not be any costs for the provision that would prohibit the
use of MS beef in animal feeds if the brain and spinal cord of cattle
30 months of age or older or the brain and spinal cord of all cattle
not inspected and passed for human consumption has not been previously
removed from the cattle material used to make MS beef. ERG's previous
analysis concluded that the brain and spinal cord are already removed
from the carcasses of dead cattle at the ``4D'' plants (independent
renderers that collect dead and downer cattle and process the carcasses
for red meat to be used for pet food manufacturers, zoos, and other
animal feeding operations) that process them.
    The ERG report maintains that all or almost all 4D plants already
remove the brain and spinal cord. To the extent that a small percentage
of 4D plants might not remove these materials, we agree that there
could be some additional compliance costs to this final rule but
believe them to be small due to the small number of establishments. As
such, we have slightly revised our previous conclusion that there would
not be additional compliance costs as a

result of the MS beef provision of the final rule.
    d. Marking costs. The final rule, like the proposed rule, would
require that renderers that handle CMPAF or products containing CMPAF
mark this material or product so that it can be identified by visual
inspection. For the proposed rule, ERG used various assumptions to
characterize the cost of adding marker dyes to this material. It
concluded with an estimate ranging from $1,700 to $13,000 annually for
total industry compliance. Public comments on the proposed rule did not
address the marking cost estimate.
    For the final rule, ERG used the same assumptions to calculate its
estimate of marking costs, resulting in the same marking ranging from
$0.11 to $0.78 per ton of CMPAF. In this case, though, ERG included as
an upper bound estimate of marking costs the tonnage of MBM and tallow
from cattle not inspected and passed for human consumption that would
not be rendered for non-ruminant feed as a result of this rule. In
effect, ERG has allowed for the possibility that the additional cattle
that would not be rendered for feed as a result of this rule would be
rendered for disposal instead. Taking this possibility into account
provides for a worst-case scenario for marking costs. We now estimate
the final rule marking costs to range from $18,000 to $64,000 annually,
a relatively large increase from those of the proposal but a very small
part of total compliance costs.
    e. Labeling, recordkeeping, certification, and access costs. The
proposed rule would require that renderers that handle CMPAF or
products that contain CMPAF ensure that the CMPAF are not used in
animal feed. The proposed requirements included labeling for products
with CMPAF that states ``Do not feed to animals,'' the establishment
and maintenance of records sufficient to track CMPAF to ensure the
materials are not introduced into animal feed, and making such records
available to FDA. ERG judged that the proposed labeling requirements
would impose only modest compliance costs since the labeling
requirements (applying primarily to bulk shipments) could be
incorporated into current labeling practices. ERG estimated total
industry costs at about $62,000 annually (one-time costs of $101,000
annualized at 7 percent over 10 years plus annual costs of $48,000). We
did not receive any substantive public comments concerning the labeling
and recordkeeping costs.
    For the final rule, ERG increased the hours needed for label
design, production, and review, but did not revise hourly estimates for
recordkeeping modification and review. In total, we estimate this
labeling and recordkeeping provision to cost industry about $90,000
annually (a $165,000 one-time cost annualized at 7 percent over 10
years plus $67,000 in annual costs). Additionally, the final rule has
been revised to clarify that a renderer's records must either include
(1) certification or other documentation from the supplier that
material supplied to the renderer does not include CMPAF, provided that
it includes a description of the segregation procedures used,
documentation that the supplier confirms that its segregation
procedures are in place prior to supplying any cattle material to the
renderer, and records of the renderer's periodic review of the
suppliers' certification or other documentation; or (2) documentation
of another method, acceptable to FDA, such as third party
certification, for verifying that suppliers have effectively excluded
CMPAF.
    Based on the levels of effort estimated for the 2007 dietary
supplement cGMP final rule (72 FR 34752) requiring certification of
procedures, FDA projects that the initial certification or other
documentation of the suppliers' procedures will require a 20-hour
effort by a management level employee of an independent renderer. The
Bureau of Labor Statistics (BLS) provides data on employee costs for
management occupations classified within the North American Industrial
Classification System (NAICS) code 311600--the animal slaughtering and
processing industry (BLS data on individual occupations within NAICS
code 311613--rendering and meat product processing, is not available).
We have adjusted the BLS wage data, including a 40 percent increase for
benefits and adjusting for inflation in employment costs. FDA estimates
the initial certification or other documentation of suppliers to an
independent renderer to cost about $1,030 (annualized at $250 per year
over 10 years at a 7 percent discount rate). FDA estimates that the
periodic review of the certification or other documentation to take 8
hours annually, resulting in a $412 annual cost. FDA expects daily
recordkeeping to amount to 5 minutes per day for an administrative
support employee. Using the BLS data, this recordkeeping cost is
estimated at about $460 annually. Total annualized certification or
other documentation costs per independent renderer establishment are
estimated at about $1,125.
    FDA projects that the initial certification or other documentation
of the internal system of a packer/renderer will require 6 hours for a
management level employee. An additional 3 hours is expected to be
expended each year for periodic review of the internal certification or
other documentation. Packer/renderers will also be expected to incur
recordkeeping costs estimated at about 5 minutes per day. Using the
same BLS wage data as above, FDA projects annualized certification or
other documentation costs per packer/renderer establishment to be about
$690. The total annualized costs of the new recordkeeping costs
associated with the certification or other documentation of suppliers
(slaughterers) for the estimated 125 independent renderers and 50
packer/renderers handling CMPAF is estimated at about $175,000.
    f. Animal age determination. The final rule does not include in the
definition of CMPAF cattle not inspected and passed for human
consumption under 30 months of age. FDA originally included these
cattle in the definition of CMPAF because of European surveillance data
suggesting that cattle not inspected and passed for human consumption
pose a higher risk for BSE, and due to concerns that processes were
currently not established in the rendering industry for verifying the
age of such cattle through inspection. However, FDA received comments
on the feasibility of aging such cattle and on the relatively low risk
reduction achieved by excluding such cattle. FDA considered these
comments, surveillance data indicating the current risk of BSE to U.S.
cattle is very low, the strong feed protection provided by the existing
ruminant feed rule, and the added secondary level of protection
provided by the other provisions of this final rule. Based on these
factors, FDA concluded that it was not necessary to include in the
definition of CMPAF cattle not inspected and passed for human
consumption that are under 30 months of age.
    The ERG report concludes that, in the absence of a national cattle
identification system, deadstock renderers will need to make the
judgments regarding age on an animal-by-animal basis. Compliance costs
for such a system would include administrative costs for the creation
of procedures for employees to judge the age of animals, and training
costs for educating employees on these procedures, as well as annual
labor costs for the employees that administer the age determination
process.
    ERG assumed that the cost of procedure development, normally a

one-time cost, would likely be revised annually as the industry moves
toward a national cattle identification system. Additionally, ERG
estimates that annual training times for non-clerical workers will be 4
hours for deadstock renderers and 2 hours for non-deadstock independent
renderers. In addition, 1 hour per year of supervisor time for employee
training will be required for deadstock renderers and 0.5 hour for non-
deadstock independent renderers. The total estimated costs to renderers
of annual procedure development and updating and annual employee
training will amount to about $491,000. For large slaughterers that
also perform their own rendering, ERG estimated the costs of procedure
development and employee training for slaughter animal age
identification at $1.10 million annually. To the extent some
slaughterers already have aging procedures in place to comply with
FSIS' SRM rule, this may be an overestimate.
    For the age determinations, ERG judged that the rendering truck
drivers would make the actual age determinations at the animal producer
site by reviewing the paperwork or using the dentition method. ERG
judged that this procedure would not add to the total time an employee
spends at each pick-up site. It therefore did not include additional
compliance costs for the rendering truck driver. Review of these
determinations and paperwork would be made at the rendering facility by
supervisory personnel. ERG estimated total annual labor costs for the
in-plant reviews of the age determination at about $790,000. Total
annual costs for renderer age determination efforts are estimated at
$1.28 million ($491,000 plus $790,000).
5. Feed Substitution Costs
    For the proposed rule, we included in the compliance costs the
incremental cost for the feed ingredients that would be needed to
replace the MBM in non-ruminant animal feeds. Animal feed producers
would be expected to substitute more costly protein sources for the MBM
that was previously manufactured from CMPAF. In the analysis of the
1997 final rule prohibiting the use of mammalian proteins (with
exceptions) from use in ruminant feeds, we calculated the cost to
substitute MBM in a typical cattle ration. Assuming a $20 per ton price
difference between MBM and a substitute feed ingredient, in this case
soybean meal, we estimated that the reformulated cattle ration would
cost an additional $31.76 per ton (including other ingredients).
However, the prices of MBM and equivalent substitutes vary constantly
based on weather, global markets, slaughter rates, and other factors.
We have no other information on the types of rations or feed
formulations that will be affected by this final rule. Consequently, we
accept the cattle ration example as a conservative estimate of the
long-term cost of feed substitution.
    Accordingly, for the October 2005 proposed rule, we inflated the
unit cost from $31.76 per ton to $38.33 per ton to account for
inflation through 2005 and determined the tonnage of MBM that would no
longer be processed from the CMPAF. Multiplying this total, 15.6
million lbs, by $38.33 per ton resulted in about $300,000 in feed
substitution costs for the proposed rule. Accounting for the high end
of the range of animals currently rendered (as noted in the 2004
Informa report) led to an upper end cost of about $450,000.
    We received one comment that the removal of ruminant proteins from
non-ruminant feed may increase the price of other protein sources, but
it did not address the method used to account for feed substitution
costs. We received many comments concerning the total amount of cattle
byproducts that would no longer be made available for further
processing for use in non-ruminant feeds. As noted previously in the
section on disposal costs, ERG concluded that a much larger amount of
cattle byproducts would no longer be available for this use. In total,
the ERG calculations imply that the amount of MBM foregone from
slaughterer and renderer CMPAF, as well as MBM that could have been
produced from cattle not inspected and passed for human consumption
that will no longer be rendered due to this rule, will range from
76,100 tons to 91,500 tons; a significant increase from the 7,800 tons
estimated for the proposed rule. Based on the incremental feed
substitution cost of $38.33 per ton of MBM, we estimate that long-term
total feed substitution costs for the final rule will range from $2.92
million to $3.51 million annually.

F. Government Costs

    For the proposed rule, we concluded that there may be an increase
in Federal fund expenditures for inspection activities, but did not
expect it to be significant. The total number of establishments
inspected was not expected to change substantially, as all
establishments that would be inspected for compliance under Sec.
589.2001 are already subject to Sec.  589.2000 or other Federal rules.
The additional materials that would be included as CMPAF may result in
an increase in the number of inspections or the length of time
necessary to inspect an establishment. We did not estimate the
additional costs that would be required because we judged that the
additional resources would not be substantial. ERG judged that no new
rendering facilities would be constructed or dedicated to rendering for
disposal due to the proposed rule, and thus our inspection activities
would not noticeably increase.
Country Designation
    The final rule contains a provision that was not included in the
proposed rule. This provision exempts CMPAF from designated countries
from the prohibition on its use in animal feed. A foreign country
seeking this designation will submit a written request to FDA that
includes (1) information about the country's BSE case history, (2) risk
factors, (3) measures to prevent the introduction and transmission of
BSE, and (4) any other information relevant to determine how cattle
materials from the country will be defined under 21 CFR 589.2001(b)(1).
FDA will respond to a country's request in writing and may specify
certain conditions when granting a request. Country designations will
be subject to future review by FDA and can be revoked if a review shows
that BSE-related restrictions are necessary.
    a. Number of countries affected. Although we do not know how many
countries will submit a request to FDA for a designation under Sec.
589.2001(f), we can use information from OIE and USDA to estimate the
number of requests that might be submitted to the Center for Veterinary
Medicine. According to the requirements of the OIE Terrestrial Animal
Health Code (16th edition 2007), OIE officially recognizes five
countries as having a ``negligible BSE risk,'' including Australia,
Argentina, New Zealand, Singapore, and Uruguay. In addition, OIE
recognizes Iceland and Paraguay as ``provisionally free'' from BSE.
According to OIE recommendations, SRM removal is not a condition for
importing fresh meat or meat products from a negligible risk country.
Allowing animal feeds or animal feed ingredients containing CMPAF to be
imported from designated countries is consistent with the lack of any
restrictions on SRMs from negligible risk countries in the OIE
guidelines.
    In addition to the countries recognized by OIE, a country exporting
a large quantity of cattle products into the United States may submit a
request for country designation to FDA. Table 1 presents data from
USDA's Foreign Agricultural Service showing countries

that exported cattle products to the United States in 2006. Comparing
the seven countries officially recognized by OIE as having a negligible
BSE risk or being provisionally free of BSE and the countries listed in
Table 5, approximately nine countries might submit a request. Because
we are uncertain about the actual number of requests, for this analysis
we estimate that 10 countries could submit a request to FDA to be
exempted from CMPAF restrictions applicable to animal feed. Our
estimate is not intended to suggest that all of these countries would
qualify for a designation under Sec.  589.2001(f).

      Table 5.--Bovine Product Imports to the United States (2006)
------------------------------------------------------------------------
                                                           Percentage of
                                                             imported
                    Exporting country                         bovine
                                                             products
------------------------------------------------------------------------
Canada..................................................              31
Australia...............................................              28
New Zealand.............................................              17
Uruguay.................................................               9
Brazil..................................................               7
Argentina...............................................               2
Nicaragua...............................................               2
Mexico..................................................               1
Costa Rica..............................................               1
Other Countries.........................................              2
------------------------------------------------------------------------
Source: USDA, Foreign Agricultural Service, HS 6-Digit Imports. Report
  for bovine product codes generated January 28, 2008 at http://
  www.fas.usda.gov/ustrdscripts/USReport.exe.

    b. Cost of designation provision. We make certain assumptions
concerning the effort to prepare and submit a request for country
designation in preparation of these costs estimates. Because a country
that submits a request to be designated as exempt from certain BSE-
related restrictions for animal feed may also petition USDA for
exclusion from USDA's BSE-related requirements, we assume that a
country wishing to submit a request to FDA to be designated as exempt
from CMPAF restrictions has already completed a risk assessment and put
risk management strategies into place. Whether these risk assessment
and mitigation strategies are sufficient for a country to be so
designated by FDA will be determined on a case-by-case basis. Moreover,
we assume a request would include other technical information on the
country's BSE status, a detailed outline of risk mitigation strategies,
and information on the country's cattle-derived products that are
exported to the United States. We assume that a foreign government
employee earning the wage equivalent of a GS-14 step 1 would spend
about 80 hours to collect and prepare this information for each country
submitting a request for country designation at an estimated cost of
$5,395.20 (80 hours x $67.44 per hour including overhead). The request
will also be reviewed by government managers before being submitted to
the FDA. Assuming it takes a foreign government executive 40 hours to
review the request, at a wage equivalent to a GS-15 step 3, it would
cost approximately $3,384.80 (40 hours x $84.62 per hour including
overhead) to review the request. Thus, the total cost to each country
to prepare and submit a request to FDA to be considered for this
designation would be about $8,780. Once the request is received by FDA,
we estimate that it will take approximately 80 hours to review each
request, at a cost of approximately $3,700 (80 hours x $45.65 per hour
for an employee rated as a GS-13 step 7). Thus, as shown in Table 6,
the total cost of an initial request is approximately $12,480. The
estimated annual total for 10 requests would be $124,800, with FDA
incurring about 29 percent of these costs and foreign governments
incurring the remaining 71 percent.

         Table 6.--Total Cost of the Initial Request and Review
------------------------------------------------------------------------

------------------------------------------------------------------------
Collect information, Prepare and Submit the Request to            $8,780
 FDA....................................................
FDA Review per Request..................................           3,700
Cost per Country........................................          12,480
                                                         ---------------
    Total Cost for 10 Countries.........................         124,800
------------------------------------------------------------------------

    Countries that successfully request to be designated as exempt from
CMPAF restrictions applicable to animal feed will be subject to annual
review by FDA to ensure that their designation remains appropriate. As
part of this process, FDA may ask designated countries to confirm that
both their BSE status and the information submitted by them in support
of their original application remain unchanged. FDA may revoke a
country's designation if FDA determines that it is no longer
appropriate.
    FDA has not yet determined the method by which the agency will
conduct these annual reviews. One possible method would be for FDA to
send a letter to designated countries asking whether there has been a
change in their status or circumstances relative to their BSE history,
surveillance, import activities, or other relevant criteria, and then
compare any changed information with the information in the original
submission. The OIE requires that countries whose BSE status has been
officially recognized ``should annually confirm during the month of
November whether their status and the criteria by which their status
was recognized have remained unchanged.'' In some cases, the FDA
reviewer might rely on this information, if available, in conducting a
future review of the country's designation.
    For this analysis, we assume it will take FDA and the designated
country about one-third the time and effort as the original request for
country designation. Thus, if the total cost to submit the request and
have it reviewed by FDA was $12,480, the annual review of the country
designation by FDA and the submitting country will cost about $4,200
(see Table 7).

         Table 7.--Cost of Annual Review of Country Designation
------------------------------------------------------------------------

------------------------------------------------------------------------
Submission of Additional Information by the Designated            $3,000
 Country................................................
FDA Review of Information...............................           1,200
Cost per Designated Country.............................           4,200
                                                         ---------------
    Total Cost for Review (10 Countries)................          42,000
------------------------------------------------------------------------

    It is likely that those countries that currently export to the
United States a significant amount of cattle-derived material that
contains CMPAF will be most interested in submitting a request for
country designation. It is also possible that new markets for cattle-
derived products containing CMPAF could develop, providing an incentive
for other countries to submit a request to FDA to be designated as
exempt from CMPAF restrictions in animal feed. For this analysis, we do
not attempt to forecast either new markets for cattle-derived products
containing CMPAF or the frequency and costs of future requests for
country designations.

G. Sensitivity Analysis

    For the proposed rule, we presented alternative ranges of costs
that could be expected due to the uncertainty in certain cost factors.
Specifically, we showed that total compliance costs would increase
substantially (from a range of $14 million to $24 million to a range of
$20 million to $36 million) if the number of cattle not inspected and
passed for human consumption that would no longer be rendered as a
result of this rule (or 3.4 percent of all cattle not inspected and
passed for human consumption) increased to about 11.6 percent of all
cattle not inspected and passed for human consumption. This increase
would be due to the much greater weight of the entire cattle carcass
that would be disposed of compared with the weight of CMPAF from an

average cow slaughtered for human consumption or cow not inspected and
passed for human consumption that had its CMPAF separated at the
deadstock rendering facility.
    Public comments on the method used by both ERG and FDA have
previously been presented. The common perception in comments,
summarized here again, is that the analysis of the proposed rule
considerably underestimated the number of cattle not inspected and
passed for human consumption that would no longer be rendered. We have
also previously shown that additional data, public comments, and
discussion with industry and association members have led to an updated
analysis that presents a significantly greater number of those animals
that would no longer be rendered due to this final rule. The
sensitivity analysis included in the ERG report on the final rule
attempts to identify the most influential factors of the analysis, and
the range of costs associated with varying the key assumptions. ERG
finds the disposal cost rate for CMPAF to be particularly influential
because it represents a large fraction of total costs. Specifically,
its analysis shows that a 33-percent increase or decrease in the
disposal cost per cwt of CMPAF results in a respective $18.1 million
increase or decrease in the lower bound of total costs and a $23.7
million increase or decrease in the upper bound of total costs. The
price of MBM and tallow does not have much effect on total costs.
Similarly, the level of renderer capital costs do not appear to be
significant because the amortization over 10 years results in a small
annual cost compared to disposal costs. The elasticity estimates appear
to have a more significant effect on total costs. A reduction in price
elasticity of 50 percent from the low estimate for each ruminant
category would reduce the lower bound of total compliance costs by
about 22 percent, while an increase in elasticity by 50 percent from
the high estimate for each ruminant category would result in a 15
percent increase in the upper bound of total compliance costs.

H. Final Regulatory Flexibility Analysis

    The Regulatory Flexibility Act requires an agency to prepare a
regulatory flexibility analysis if a rule is expected to have a
significant impact on a substantial number of small entities. The
discussion in this section of the final rule, as well as data and
analysis contained in this rule's regulatory impact analysis, and
section three of the ERG report, constitutes our final regulatory
impact analysis in compliance with section 604 of the Regulatory
Flexibility Act.
    The Regulatory Flexibility Act requires that we present a succinct
statement of a rule's objectives. As stated previously in this analysis
and unchanged from the proposed rule, the intent of this rule is to
strengthen the safeguards designed to prevent the spread of BSE in U.S.
cattle, as well as to reduce further any risk posed to humans from the
agent that causes BSE.
    Other requirements of the Regulatory Flexibility Act are a
description of the small entities that would be impacted by the final
rule, an estimate of the number of small entities to which the rule
would apply, a description of the projected reporting, recordkeeping
(see Section VI. Paperwork Reduction Act of 1995) and other compliance
costs of the rule and the reason why any other significant alternatives
considered by the agency were rejected.
    The ERG analysis concentrates on the effects of the rule on small
renderers and small slaughterers, and to a lesser extent on small dairy
farms. Slaughterers are classified in the North American Industrial
Classification System (NAICS) under code 311611--Animal (Except
Poultry) Slaughtering, and renderers are classified under NAICS code
311613--Rendering and Meat Byproduct Processing (see Table 8). The
Small Business Administration (SBA) classifies both slaughterers and
renderers with less than 500 employees as small businesses.

          Table 8.--Total and Number of Affected Establishments, by Size in Slaughtering and Rendering
----------------------------------------------------------------------------------------------------------------
                                         NAICS 311611  (slaughterers and          NAICS 311613  (rendering)
                                                   renderers)              -------------------------------------
                                     --------------------------------------
                                                          Estimated number                       Establishments
        Employment size group                                of cattle       Total number of      affected by
                                       Total number of      slaughtering    establishments in      principal
                                        establishments     establishments      2002 census         deadstock
                                                                \a\                             restrictions \b\
----------------------------------------------------------------------------------------------------------------
1 to 4..............................              1,132              1,132                 30                  0
5 to 9..............................                229                229                 25                  0
10 to 19............................                131                124                 41                 25
20 to 49............................                134                  7                 72                 22
50 to 99............................                 64                 14                 46                 19
100 to 249..........................                 66                  6                 13                  3
250 to 499..........................                 40                 13                  4                  1
500 to 999..........................                 20                  7                  0                  0
More than 1,000.....................                 53                 13                  0                  0
                                     ---------------------------------------------------------------------------
    Total...........................              1,869              1,545                231                 70
----------------------------------------------------------------------------------------------------------------
\a\ Cattle slaughterer distribution derived from federal and state slaughterer establishment count in USDA/NASS
  (2006). Establishments arrayed across size classes assuming that slaughter rates coincide with employment
  sizes. State slaughterers were assumed to be small and were added to the small size categories to match but
  not exceed the Census count of establishments. The distribution should be considered approximate.
\b\ The employment size class of deadstock renderers was estimated by ERG and should be considered to be
  approximate.
Source: ERG Report, Table 3-1, Page 3-2.

    The number of cattle slaughtering and rendering establishments
expected to be impacted by the CMPAF ban is 1,545 and 231,
respectively. The majority of the impacts on renderers are expected to
be incurred by the 70 deadstock renderers. Using both Census and USDA
data, ERG distributed the slaughtering establishments across the size
classes of establishments using the same proportions as those presented
in the total number of establishments. This distribution shows that
almost 99 percent of slaughtering establishments would qualify as small
businesses.

    According to SBA data, over 97 percent of all slaughtering firms
would be considered small businesses, which would take into account
multi-establishment firms. The SBA data also reports that 83 percent of
all rendering firms would be considered small businesses. ERG concluded
that it is likely that all 70 deadstock renderers have less than 500
employees and thus are considered small businesses. In summary, the
number of affected small businesses in both sectors would be
substantial.
    As in its analysis of the proposed rule, ERG used its Small
Business Impact Model (SBIM) to predict net income and closure impacts
on both slaughtering and rendering firms (Appendix A of the ERG report
contains a technical explanation of the SBIM). The model, which assumes
a partial cost pass-through of costs for slaughterers (animal producers
would incur the disposal costs), predicts modest impacts on cattle
slaughtering due to the small minority of cattle slaughtered for human
consumption that are 30 months of age or older. The model predicts
costs for the small slaughterers to range from under $100 for the
smallest establishments slaughtering less than 1,000 animals per year
to about $7,100 per establishment for those slaughtering 300,000 to
500,000 cattle annually. Compliance costs as a percent of net income
would range from less than 0.1 percent to 2.1 percent for the small
slaughter businesses. For all slaughterers, regardless of size, costs
are expected to be significantly below 1 percent of revenues.
    Costs for the deadstock renderers were estimated through the SBIM
with two separate scenarios: One in which disposal costs are included
and one in which they are not included. Disposal costs are not included
under one scenario to reflect the likelihood that increased pick-up
charges to animal producers will mostly offset the additional disposal
costs. In this case, compliance costs for the smallest establishment
ranged from an estimate of $97,000 to $122,000 ($153,000 to $180,000
including disposal costs). Compliance costs for the larger
establishments ranged from $2.01 million to $2.57 million ($3.23
million to $3.79 million including disposal costs). Compliance costs as
a percent of net income ranged from 41 percent to 81 percent across all
deadstock renderer sizes (from 65 percent to 100 percent including
disposal costs). The total number of rendering establishments expected
to close (assuming only disposal costs are transferred to animal
producers), using a net income assumption of 5.65 percent, ranged from
12 to 16 facilities. If these disposal costs are not transferred, the
model forecasts 23 to 28 closures. Although all renderers contacted by
ERG that were contemplating investing in capital to remove brain and
spinal cord expected to charge substantially more in pick-up fees to
recover these costs, some rendering plant closures are likely to result
from this rule (Ref. 16, Section 3.3).
    Small farms will incur compliance costs for the disposal of those
animals that are no longer rendered due to either the increase in
renderer pick-up fees or the termination of deadstock rendering
services. ERG prepared a baseline enterprise dairy budget to
demonstrate the relative size of the impacts of the final rule on a
small (120-cow) dairy farm with about $300,000 in revenues. The SBA
defines small dairy and beef cattle producers as those with revenues
under $750,000, and USDA data shows the average dairy farm has about
110 dairy cows (Ref. 28). The expected incremental compliance costs
(from the ERG model) for disposal of the annual number of dead dairy
cows and calves (assumed to be disposed of off-site at $12/cwt and $4/
cwt, respectively) on an operation of this size is about $700, using
the individual disposal rates for over 30-month cattle and calves.
Compliance costs of an operation of this size are estimated at 0.25
percent of revenues and 2.63 percent of net income.
    The effect of the annual feed substitution costs on small non-
ruminant animal operations is also expected to be minimal. The $2.9 to
$3.5 million in additional costs would not be significant when spread
over the thousands of non-ruminant animal producers that currently use
ruminant protein in animal feeds.
    The Regulatory Flexibility Act requires agencies to analyze
regulatory alternatives that would minimize any significant impact of a
rule on small entities. For an analysis of the regulatory alternatives
to this final rule, see section IV.B of this document.

V. The Small Business Regulatory Enforcement Fairness Act of 1996
(SBREFA)

    SBREFA (Pub. L. 104-121) defines a major rule for the purpose of
congressional review as having caused or being likely to cause one or
more of the following: An annual effect on the economy of $100 million
or more; a major increase in costs or prices; significant adverse
effects on competition, employment, productivity, or innovation; or
significant adverse effects on the ability of U.S.-based enterprises to
compete with foreign-based enterprises in domestic or export markets.
In accordance with SBREFA, OMB has determined that this final rule is a
major rule for the purpose of congressional review.

VI. Paperwork Reduction Act of 1995

    This final rule contains information collection provisions that
were submitted to OMB for review under the Paperwork Reduction Act of
1995 (the PRA) (44 U.S.C. 3501-3520).
    The title, description, and the respondent description of the
information collection provisions are shown below with an estimate of
the annual recordkeeping burden. Included in the estimate is the time
for reviewing instructions, searching existing data sources, gathering
and maintaining the data needed, and completing and reviewing each
collection of information.
    Title: Substances Prohibited From Use in Animal Food or Feed
    Description: This final rule (Sec.  589.2001) prohibits the use of
certain cattle origin materials in the food or feed of all animals.
These materials include the following: (1) The entire carcass of BSE-
positive cattle; (2) the brains and spinal cords from cattle 30 months
of age and older; (3) the entire carcass of cattle not inspected and
passed for human consumption that are 30 months of age or older from
which the brains and spinal cords were not effectively removed or
otherwise effectively excluded from animal feed; (4) mechanically
separated beef that is derived from cattle materials prohibited by the
rule; and (5) tallow that is derived from BSE-positive cattle and
tallow that is derived from certain other materials prohibited by the
rule unless such tallow contains no more than 0.15 percent insoluble
impurities. These measures will further strengthen existing safeguards
designed to help prevent the spread of BSE in U.S. cattle. FDA has
revised the final rule to include a statement of this purpose (Sec.
589.2001(1)).
    As discussed in section I of this document, FDA has revised the
final rule to include a statement of purpose for the rule,
specifically, to prohibit the use of certain cattle origin materials in
the food or feed of all animals to help prevent the spread of BSE in
U.S. cattle. The final rule was also revised to require renderers to
establish and maintain written procedures on aging animals to ensure
that such animals are less than 30 months old if they are to be
rendered for use in animal feed without brain and spinal cord removal.

Further, in response to concerns about ensuring effective removal of
brain and spinal cord from animals 30 months of age or older, FDA has
revised the final rule to require the establishment and maintenance of
written procedures for ensuring that brain and spinal cord are
effectively removed or effectively excluded from animal feed. As
discussed in section I of this document, FDA has determined that it is
the responsibility of the renderer to ensure that materials rendered
for use in animal feed do not contain CMPAF. Therefore, the agency has
explained in the final rule that a renderer's records must either
include certification or other documentation from the supplier that
material supplied to the renderer does not include CMPAF, or
documentation of another method, acceptable to FDA, such as third-party
certification, for verifying that suppliers have effectively excluded
CMPAF. Also, FDA is adding a provision to this rule so that it may
designate a country as not subject to the CMPAF requirements of this
rule (Sec.  589.2001(b)(1)(vi)). A country seeking such a designation
must submit a written request and include information about the
country's BSE case history, risk factors, measures to prevent the
introduction and transmission of BSE, and any other information
relevant to determining whether the country should be subject to the
requirements regarding CMPAF as discussed in greater detail in section
I of this document. These are new collection of information
requirements that have been added to the previous burden estimate set
forth in the proposed rule.
    FDA believes that it has maximized the practical utility of this
collection of information by not prohibiting certain cattle materials
in animal food or feed, as long as the agency can be assured, through
the establishment of written procedures, that brain and spinal cord
were effectively removed or effectively excluded from animal feed or
that the material was from cattle less than 30 months of age. FDA
believes it has minimized the burden to the rendering industry by not
specifying the procedures to be followed so as to provide the latitude
to establish procedures that can most efficiently be incorporated into
rendering operations.
    Description of Recordkeeping for Respondents: Rendering facilities,
medicated feed manufacturers and distributors, livestock feeders.

                                                     Table 9.--Estimated Annual Recordkeeping Burden
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                              Annual
                     21 CFR section                          Number of     frequency per   Total annual      Hours per      Total hours    Operation and
                                                           recordkeepers   recordkeeper       records      recordkeeper                    maint. costs
--------------------------------------------------------------------------------------------------------------------------------------------------------
589.2001(c)(2)(vi) and (c)(3)(i)........................             175               1             175              20           3,500         $59,500
589.2001(c)(2)(ii)......................................              50               1              50              20           1,000          17,000
589.2001(c)(3)(i)(A)....................................             175               1             175              26           4,550          80,580
                                                         -----------------------------------------------------------------------------------------------
    Total...............................................  ..............  ..............  ..............  ..............           9,050         157,080
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The estimated recordkeeping burden is derived from agency resources
and discussions with affected industry. As discussed in the Paperwork
Reduction Act section of the October 2005 proposed rule (70 FR 58570 at
58598), the recordkeeping requirement in Sec.  589.2001(c)(2)(vi) will
apply to the limited number of renderers that will handle CMPAF. FDA
estimates that no more than 50 of the approximately 175 (based on
current data) total independent rendering firms will be involved in the
handling of this material. Although the agency may consider the
distribution records needed to comply with this regulation ``usual and
customary'' and thus not subject to the PRA, FDA believes there will be
a burden associated with setting up a system to ensure such records are
sufficient to address the recordkeeping requirement. Likewise, although
FDA may consider the records necessary to comply with Sec.
589.2001(c)(3)(i) as ``usual and customary'' and not subject to PRA
burden accounting, FDA is including a burden estimate to cover
establishment of a system to ensure that existing receipt,
manufacturing, and certification records adequately address this
requirement. FDA estimates that the recordkeeping burden associated
with Sec.  589.2001(c)(3)(i) would apply to the balance of the
rendering firms not handling CMPAF. FDA solicited public comment on the
estimated recordkeeping burden associated with Sec.  589.2001(b)(2)(iv)
(Sec.  589.2001(c)(2)(vi) in the final rule) and Sec.
589.2001(b)(3)(i) (Sec.  589.2001(c)(3)(i) in the final rule) of the
proposed rule, but no comments were received. It was estimated that the
operation and maintenance cost per renderer for complying with the