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Title: Living with regulations -- know the cost
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Title: Living with regulations -- know the cost
Physical Description: Book
Creator: Roka, Fritz M.
Publisher: Food and Resource Economics Department, Florida Cooperative Extension Service, University of Florida
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Subject: University of Florida.   ( lcsh )
Spatial Coverage: North America -- United States of America -- Florida
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Table of Contents
    Copyright
        Copyright
    Intent of regulation
        Page 1
    Economic nature of regulations
        Page 2 (MULTIPLE)
    Translating program specifics to cost accounts
        Page 3 (MULTIPLE)
    Challenge #3: every grower is unique
        Page 4 (MULTIPLE)
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HISTORIC NOTE


The publications in this collection do
not reflect current scientific knowledge
or recommendations. These texts
represent the historic publishing
record of the Institute for Food and
Agricultural Sciences and should be
used only to trace the historic work of
the Institute and its staff. Current IFAS
research may be found on the
Electronic Data Information Source
(EDIS)

site maintained by the Florida
Cooperative Extension Service.






Copyright 2005, Board of Trustees, University
of Florida








UNIVERSITY OF

FLORIDA


Cooperative E\tension Service
Institute of Food and Agricultural Sciences



Living with Regulations -- Know the Cost1

Fritz M. Roka and Ginger M. Allen2


Agricultural producers in Florida operate in a highly
regulated environment. Rules and regulations have been
promulgated from at least five State agencies and 11
Federal agencies to address a variety of concerns
including food safety, environmental quality, and
welfare of farm workers. Regulatory compliance costs
are often significant. Some growers have estimated that
as much as 20 percent of their total operating budgets
are consumed by activities that relate solely to regulatory
compliance. As startling as such a statistic may be, it is
not very useful in any public dialogue addressing
whether a particular regulation should be continued,
modified, or dropped. Rather, regulations need to be
argued on their individual merit. Therefore, compliance
costs must be delineated by individual regulatory
programs.

This article has two objectives -- 1) outline the
nature of regulatory costs, and 2) argue for an
accounting system that allocates the appropriate cost of
compliance to individual regulatory programs. Knowing
compliance costs by regulatory program not only allows
a producer to absorb more efficiently these costs, but
offers a concrete basis to discuss the merits of individual
programs with individuals who argue for their
continuation. As a case study, the Worker Protection
Standards (WPS) will be examined.


Intent of Regulation

Human nature and the competitive forces of a free
market economy compel individuals to place their
personal interests ahead of others, including interests
within their industry. Consequently, there may be
occasions when the actions of individuals are
detrimental to the collective well-being of the larger
society. Regulations have been deemed necessary when
moral arguments fail to convince enough people that
particular individual behavior causes adverse
consequences. By definition, regulations place
constraints on the activities of individuals or firms.

Some regulations are readily accepted because they
have a favorable impact on the economic well-being of
an industry. For example, the Florida orange juice
concentrate industry has imposed stricter juice quality
standards than those mandated by federal authorities.
For the most part, Florida citrus producers have agreed
that the higher standards provide a competitive edge
over other production regions in California, Texas, and
Brazil.

The regulations that draw the most rancor from
producers are those that impose costs without any direct
benefit to individual producers. Usually, these
regulations are responding to pleas for social justice.
The regulatory intent is to balance perceived inequities
among groups of people. Sometimes, the imbalance is
physical. For example, pollution from factory


1. This document is FRE 176, one of a series of the Food and Resource Economics Department, Southwest Florida Research and Education Center, Florida
Cooperative Extension Service, Institute of Food and Agricultural Sciences, University of Florida. Printing date: May 1997. Please visit the FAIRS Website
at http://hammock.ifas.ufl.edu.
2. Fritz M. Roka is assistant professor, Food and Resource Economics Department, Southwest Florida REC-Immokalee; and Ginger M. Allen is research
associate, Southwest Florida REC-Immokalee; Cooperative Extension Service, Institute of Food and Agricultural Sciences, University of Florida, Gainesville,
32611.

The Institute of Food and Agricultural Sciences is an equal opportunity/affirmative action employer authorized to provide research,
educational information and other services only to individuals and institutions that function without regard to race, color, sex, age, handicap,
or national origin. For information on obtaining other extension publications, contact your county Cooperative Extension Service office.
Florida Cooperative Extension Service / Institute of Food and Agricultural Sciences / University of Florida / Christine Taylor Stephens, Dean


FRE 176







Living with Regulations -- Know the Cost


discharges adversely affect the aesthetic, and perhaps
financial, well-being of people downwind or
downstream from the offending factory. Other times,
the inequity is based on limited information. Worker
Protection Standards (WPS) are examples of regulations
that were designed in part to limit workers' occupational
exposure to pesticides by insuring that appropriate
information is conveyed to those workers who handle
pesticides.

Economic Nature of Regulations

"Command-and-Control" has been used to describe
many of the regulations imposed on agricultural
producers. These types of regulations command
producers to achieve specific outcomes, and further
control how producers shall attain those outcomes.
WPS is a command and control regulation. It
commands that all farm workers be informed of
reasonable safety precautions to avoid pesticide
exposure. It controls producers by specifically requiring
them to formally train workers with a certified trainer,
report field applications of pesticides on a central
posting board, and further inform workers of pesticide
applications through either field signs or by oral
warnings.

Adoption of command and control regulations, such
as WPS, imposes fixed costs on the farming operation.
The appropriate government agency has the force of law
to insist that farms comply with the regulatory program.
Therefore, if a farmer chooses to remain in business, he
or she will make the long-term decision to spend the
necessary resources to fulfill the regulatory
requirements. The up-front, yes-no compliance decision
makes regulatory costs similar to other fixed costs such
as insurance premiums, mortgage payments, and
equipment depreciation schedules. These costs do not
depend on production levels, instead, they are blended
into the accounting category of "overhead."

Overhead expenses present farm managers with
financial accounting challenges. Unlike variable costs
such as seed, fertilizer, and farm labor, which depend
directly on production levels, overhead costs do not
fluctuate with production. Overhead costs are spread
throughout the entire production process, making the
management of per unit costs more difficult to track.
Ultimately, profitability depends upon the unit cost
being lower than the unit product price. Knowing the
compliance cost of a specific regulatory program could
help direct a manager toward minimizing those costs


and/or point out viable alternatives to administer more
efficiently the program.

Managing, or even tracking, regulatory compliance
costs becomes more complex as the number of
regulatory programs increase. As compliance costs of
individual programs are merged with general overhead
expenses, they lose their program identity. The
compliance cost of any single standard or law may not
be overwhelming, but when combined with the other
federal, state, district and county regulations, the
overhead cost management problem can become
substantial and burdensome.
Using the WPS program as an example, a method of
accounting for regulatory compliance costs is outlined
below. The first step is to understand the intent and
specific requirements of the program. From a complete
narrative description, one can begin to quantify the
appropriate costs.

Worker Protection Standards -- an
Example

Specifics of the Program.

Three objectives drive WPS -- 1) eliminate or
reduce farm worker exposure to pesticides; 2) mitigate
exposures that occur; and 3) inform employees about
the hazards of pesticides.

Pesticide exposures to workers and handlers are
reduced or eliminated by requiring proper application
techniques and restricting farm workers from areas of
recent pesticide application. Handlers must wear
personal protective equipment (PPE) as specified on the
pesticide labels. PPE also is required for any person
entering a treated area before the end of the restricted-
entry interval (REI). Employers must provide PPE and
insure its correct use.

REIs limit access to pesticide treated areas. REIs
range from four hours to 48 hours, depending on a
chemical's toxicity category. Most products require 12
hours before workers can reenter a field without PPE.
Notification of applications is done either orally or with
a posted warning sign at the field. Only chemicals
designated as "Danger I" require both field signs and
oral warnings. For all other chemicals, growers can
choose to use either field signs or oral warnings.

Decontamination sites to mitigate exposures are
required to be within one-quarter mile of any worker.


August 1997


Page 2







Living with Regulations -- Know the Cost


These sites must provide an ample supply of water
during and after chemical exposure. Emergency
assistance facility information must be posted at a
central location, along with available transportation to
the facility. If an accident occurs, the medical staff must
be provided with any information about the pesticide
used.

Employees are to be informed about pesticide safety
hazards with formal training that is administered by a
certified trainer. Pesticide safety posters must be
displayed at central locations along with listings of
pesticide applications and appropriate REIs for up to 30
days. Access to labeling information is required for
handlers before the products are used.

Translating Program Specifics to Cost
Accounts

Based on the specific regulations, four cost
categories can be identified -- training, posting, safety,
and administration. The specific name of a cost
category is arbitrary. Creating categories facilitates cost
allocation. The goal is to allocate all costs without
double-counting, overstating, or understating.

Training costs include instructor certification, the
trainer's salary, and the value of workers' time spent in
training. Material purchases include videos, flip-charts,
hand-out pamphlets, and if used, training verification
cards. Also, video equipment and office facilities used
for training should be assigned to the training category.

Posting costs include the construction and
maintenance of a central information board and field
warning signs. In addition, posting costs should include
the labor required to update the central board and field
signs, and the time required to issue the oral warnings.

Safety costs include the cost of constructing and
stocking of decontamination sites. Safety costs also
include PPE (personal protective equipment) and any
added disposal costs of used PPE.

Administrative costs include the salaries of
compliance officers, office staff, and farm managers
adjusted by the percentage of their time spent
maintaining the WPS program. Record keeping duties
may represent the most significant administrative cost.
In addition, out-of-pocket travel costs incurred by
compliance officers and managers to attend classes and
workshops to keep abreast of program changes should
be included in program administrative costs.


Outlining the type of compliance costs is an
academic exercise. However, when one starts working
with a grower to develop compliance costs for a
particular regulation, some hard realities become
evident. Three challenges are outlined below.

Challenge #1: A fair accounting includes only
the "incremental" costs

Growers should be careful not to overstate
compliance costs. Simply because a regulation requires
a firm to change in its overall operation, does not mean
that the total cost of management changes should be
charged for compliance. A cost accounting should only
include incremental costs; that is, those costs solely
attributable to implementing and maintaining the
regulatory program. For instance, a new employee
spends 50% of her time with WPS training, and spends
the other 50% of her time in the greenhouse
transplanting tomato seedlings. WPS compliance costs
should only include 50% of the new employee's salary.
Another way to look at incremental costs is to determine
what costs would disappear if the regulatory program
disappeared.

Challenge #2: Overlapping programs

Inevitably, as the number of regulatory programs
increase, the amount of overlap among multiple
regulations will likely increase. For example, the OSHA
Hazard Communication Standard of 1987, the USDA
1990 Farm Bill, and the 1983 EPA Pesticide Label Law
overlap with WPS. The OSHA standard initiated a
written communication program with an
information/training program for employees exposed to
hazardous chemicals. The 1987 OSHA standards issued
field sanitation rules requiring that drinking water, hand
washing, eye flush water, and toilet facilities be
available for workers. The 1990 U.S.D.A. Farm Bill
required certified applicators to maintain records for two
years on the use of restricted pesticides. The use of
personal protective equipment by chemical handlers had
already been required under 1983 EPA pesticide
labeling laws.

When faced with multiple, overlapping regulations,
it is in the grower's interest to plan a compliance
strategy that satisfies multiple regulatory objectives. For
instance, a grower develops a safety program that
includes worker training (satisfying WPS rules) and
provides PPE to those workers who apply pesticides
(satisfying EPA label rules). Cost information gathered
from a grower should reflect the entire safety program


August 1997


Page 3







Living with Regulations -- Know the Cost


with itemized detail so that cost components can be
allocated to their respective programs.

Challenge #3: Every grower is unique

Quantifying compliance costs of one regulation
implies combining information from several growers.
Even though growers will be held to similar performance
standards, their ingenuity will lead them to devise a
number of alternative management strategies. For
instance, one grower may choose to create a safety
department with special staff. Another grower may
incorporate training tasks into the daily routines of farm
managers. Also, what a grower does may be influenced
by the size of the overall operation. Larger farms will
tend to hire people who can specialize on regulatory
issues. When interviewing growers as to their regulatory
compliance costs, a description of how a grower
complies must accompany the stated costs. This
description of the farming operation is important
because some cost differences may be related to the size,
scope and location of the operation.

Concluding Comments

EPA estimated that the first year incremental costs
for WPS compliance for the vegetable, fruit, and nut
growers would be $440/farm. Work in the University of
Florida's Food and Resource Economics Department
and at the Southwest Florida Research and Education
Center is underway to document compliance costs for
the WPS program. Personal interviews are being held
with farm managers or with individuals responsible for
implementing the WPS program. The interviews are
following a case-study approach where the manager is
asked for cost data and a description of WPS
implementation. Interviews have begun with vegetable
producers and will continue with citrus growers. This
study should be completed by the end of 1997.


August 1997


Page 4




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