Country Of Origin Labeling Testimony Jun 26, 2003 Testimony of Deborah White Associate General Counsel, Regulatory Affairs Food Marketing Institute Before The Committee On Agriculture United States House Of Representatives Hearing on Country of Origin Labeling Good morning, Mr. Chairman and Members of the Committee. My name is Deborah White. I am Associate General Counsel, Regulatory Affairs, of the Food Marketing Institute. Thank you for including FMI in this important hearing on the implications of Section 10816 of the 2002 Farm Bill. We believe that many of the inevitable and far-reaching consequences of this relatively brief provision were never intended by Congress. This hearing represents an important step toward understanding the law and its full ramifications, many of which stem from the actions that retailers will be forced to take to comply with Section 10816. We may disagree with the law’s premise and foresee its negative consequences, but there’s a law on the books and American grocery stores must take those steps necessary to ensure that they will be able to offer food to consumers in compliance with the law on September 30, 2004. In order for retailers to achieve compliance, however, growers, cattlemen, packers and distributors of covered commodities will have to change the way they do business. The law will prohibit retailers from partnering with suppliers who are unwilling to make those changes. FMI represents 2300 food retail and wholesale companies with 26,000 individual retail locations and $340 billion in annual sales. Our membership includes small, single store operators, as well as the largest food retailers in the country. As such, our membership has a unique understanding of consumers' expectations regarding their retail food purchases and we know that, first and foremost, consumers expect their local grocery stores to deliver high quality, reasonably-priced food products from all over the world, every single day, regardless of weather, seasonality, or regulatory constraints. Today, retailers voluntarily engage in a wide variety of state and country of origin labeling programs, programs that work well for producers, retailers and consumers alike. Section 10816 is different, though. The market drivers built into this brief amendment to the Agricultural Marketing Act are powerful and will have a profound impact on the dynamics of the entire food production and distribution system, especially on smaller, less competitive producers. First and foremost, the law places the responsibility for informing consumers of the country of origin of the covered commodity on the retailer -- the one link in the distribution chain that has no firsthand knowledge of or control over this information. Under the much more thoroughly debated and carefully crafted Nutrition Labeling and Education Act, the manufacturer is responsible for identifying the relevant information about the food and placing it on the label; the retailer sells the fully labeled finished food product. The same is true for other country of origin labeling laws. The manufacturer or the importer of record is responsible for the labeling because only they know the facts about the product. Section 10816 stands this traditional, common sense approach to labeling on its head. Further, retailers are subject to federal and state enforcement and penalties of up to $10,000 per willful violation for failing to meet their legal responsibilities. Second, the law covers an extremely wide range of products – beef, pork, lamb, fresh and frozen seafood, fresh and frozen fruits and vegetables, and peanuts – and necessitates information on the entire life cycle of each and every one, and, in the case of seafood, the food’s method of production. None of this information is self-evident to the retailer. A retailer can't look at a hand of bananas and know whether it is properly labeled "Product of Guatemala" or whether it's actually from Honduras. A retailer cannot look at a fillet of salmon and know which flag flew on the vessel that caught it or whether it was actually raised on a farm in Asia. A retailer can't look at a chub of hamburger and know whether one of the cows from whence it came ever sojourned in Mexico or Canada. The only way that retailers can fulfill their obligations to consumers under this law is to ensure to the greatest extent possible that they receive accurate information from their suppliers. Toward this end, our members are beginning to execute broad and far-reaching changes in their supplier relationships. Although the programs vary, most retailers are requiring their suppliers to do the following: 1. Sticker or label each individual food item with the required country of origin information. In the case of demonstrated impossibility, suppliers are asked to provide labels or signs that can be added at store level. 2. Sign contracts to indemnify retailers and ensure that suppliers are keeping verifiable audit trails. In some cases, such as in the produce industry, parties that have done business on a handshake basis for decades will need to enter written contracts. 3. Undergo third party audits. If retailers will be liable for the accuracy of the information that their suppliers provide to them, retailers have no choice but to require their suppliers to provide them with objective, third party documentation that the information is trustworthy. This model is not without precedent. The Organic Food Production Act requires third party certification for organic production claims, which are also marketing claims A typical grocery store easily sells a thousand different covered commodities, comprised of hundreds of thousands of individual food items, received from thousands of suppliers several times each week over the course of the year. The law forces retailers to put this type of system in place to control the large amount of information attendant to this volume of supply. And it will force retailers to make difficult marketplace choices to minimize their liability and maximize their compliance with the law. Retailers will source covered commodities only from those who can afford the systems to document country of origin to the extent required by the law. Smaller suppliers -- including growers and ranchers –will have a difficult time affording the costs imposed by the law and, thus, competing with their larger economic rivals. In contrast, vertically integrated producers are virtually ready to comply now. So, despite the fact that Section 10816 was intended to assist small, independent producers, the law is actually a strong driver toward concentration and vertical integration. Retailers will limit the countries from which they source product, sometimes to the detriment of US producers. For example, at least one significant member has concluded that the domestic salmon industry cannot supply a sufficient amount of fish all year long to meet their consumers' demands, but that other countries, such as Canada, Norway or Chile, can. Rather than dealing with the costs and liability associated with carrying supply from multiple countries of origin, they intend to contract with suppliers from a single country that can satisfy their needs. Retailers will reduce or eliminate US products sourced during the "shoulder" seasons. For example, retailers source grapes from both North and South America, depending on the season. Traditionally, retailers will purchase the early US crop even if it’s not enough to fill their needs. After September 30, 2004, retailers expect to delay purchasing US products until the crops are fully in. Participation in state of origin promotional programs will be limited. USDA advises that, because of international trade obligations, state of origin designations (e.g., Florida citrus, Idaho potato) will not be sufficient to satisfy the federal law. Therefore, a statement of United States origin will be necessary for those products that meet the new federal standard. State labeling may no longer fit on existing labels or signs. In short, we believe that Section 10816 is fundamentally flawed. Mandatory country of origin labeling, particularly as defined by Section 10816, will inevitably result in less consumer choice and higher production costs that far outweigh any potential benefit to consumers and producers. [End of oral testimony] Addendum to Testimony of Deborah R. White Food Marketing Institute: The Enforcement Provisions of Section 10816 Perhaps one of the most interesting aspects of the law, though, is the way the enforcement provisions operate. As I've gotten to know this law better I've come to realize that the enforcement provisions against producers are actually more stringent than those against retailers. If we are going to be honest about this, this law was designed to protect and promote American producers -- we believe it is flawed in part because of this premise -- but even if we start from the assumption that domestic protectionism is a worthwhile goal, the law is inherently inconsistent. Here's what I mean. Section 283, Enforcement, is divided into three paragraphs. Paragraphs (b) and (c) are the penalty provisions that apply to retailers. Collectively, these provisions essentially state that, if USDA believes that a retailer has violated Section 282 – which requires the retailer to inform the consumer of the country of origin of the covered commodity – USDA must notify the retailer of the potential violation and give the retailer 30 days to remediate. If, at the end of the 30 days, USDA concludes that the retailer willfully violated the statute, then the retailer is subject to penalties of up to $10,000. The penalties Congress imposed against anyone else who violates the statute – including farmers, ranchers, growers, and packers -- are actually more substantial than the penalties against retailers. These penalties are identified in paragraph (a) of Section 283, which simply states as follows: "Except as provided in subsections (b) and (c), Section 253 shall apply to a violation of the subtitle." Section 253 of the Agricultural Marketing Act of 1946 is codified at 7 U.S.C. Section 1636b and states: "Any packer or other person that violates this subchapter [which includes Subtitle D] may be assessed a civil penalty by the Secretary of not more than $10,000 for each violation. Each day during which a violation continues shall be considered a separate violation." Two important things to note. First, retailers are subject to penalties under Subtitle D if and only if USDA concludes that they willfully violated the statute – USDA must essentially prove that retailers intentionally violated or knowingly disregarded the statute. In contrast, the supplier liability provision does not include a mens rea element. That is, a supplier can be liable for penalties under the statute simply for making a mistake; it doesn’t matter what they were thinking. Second, the penalties against non-retailers are cumulative – that is, each day that a violation continues is subject to an additional penalty. The law does not impose accumulating penalties against retailers – only against their suppliers. The law, as written, holds suppliers to a much higher standard than retailers.