Korman et al. v Farm Products Marketing Commission, 1997 ONAFRAAT 22

Agriculture, Food and Rural Affairs Appeal Tribunal 1 Stone Road West Guelph, (Ontario) N1G 4Y2 Tel: (519) 826-3433, Fax: (519) 826-4232 Email: AFRAAT@ontario.ca

Tribunal d’appel de l’agriculture, de l’alimentation et des affaires rurales 1 Stone Road West Guelph (Ontario) N1G 4Y2 Tél.: (519) 826-3433, Téléc.: (519) 826-4232 Email: AFRAAT@ontario.ca

AGRICULTURE, FOOD AND RURAL AFFAIRS APPEAL TRIBUNAL

APPEAL: Korman et al. v Farm Products Marketing Commission

Korman et al. v FPMC 1997 ONAFRAAT 22

STATUTE: Ministry of Agriculture, Food and Rural Affairs Act

HEARING: May 26, 1997

DATE OF DECISION: June 17, 1997

1997-22

NEUTRAL CITATION: 1997 ONAFRAAT 22

Korman et al. v Farm Products Marketing Commission

IN THE MATTER OF: THE FARM PRODUCTS MARKETING ACT AND SECTION 16 OF THE MINISTRY OF AGRICULTURE AND FOOD ACT.

AND IN THE MATTER OF: An Appeal to the Farm Products Appeal Tribunal by Mr. Michael Korman and Anneliese and Arthur Broomhead from the April 11, 1997 decision of the Farm Products Marketing Commission denying their request to re-examine the policy related to the distribution of fluid milk products in Northern Ontario.

Before: Mr. Jim Rickard, Chair; Mrs. Nancy McGill, Alternate-Chair; Dr. Denis O’Connor, Vice-Chair; Mrs. Moira Connell, Member; Mrs. Karen Ratcliffe, Member.

Appearances: Mr. Michael Korman, appellant. Mrs. Susan Korman, appellant. Mr. William Ivey on behalf of the appellants, Arthur and Anneliese Broomhead. Mr. Jim Wheeler, Chair of the Farm Products Marketing Commission. Ms. Dagny Ingolfsrud, counsel to the Farm Products Marketing Commission. Mr. Tom Graham, counsel to the Tribunal.

DECISION OF THE TRIBUNAL

This appeal was heard in Guelph, Ontario on May 26,1997. The Farm Products Appeal Tribunal (the Tribunal) heard extensive evidence on the appellants’ request that the Tribunal find that the Farm Products Marketing Commission (the Commission) should re-examine the Commission’s decision to amend the Northern Ontario Fluid Milk Distribution Policy (the Policy) effective June 1, 1997. Both parties requested an early decision on this appeal as the date for implementation of the first phase of the new policy was June 1, 1997. Therefore, the Tribunal issued a summary decision in the matter under date of May 28th, 1997. This document is the full decision and reasons of the Tribunal.

The Background

Under the Policy, a person must be licensed under the Milk Act to distribute fluid milk. Processed milk by-products such as cheese and ice cream can be distributed without a specific distribution licence. Northern Ontario is divided into distribution areas and fluid milk distributors have to be licensed in each area. In two of the areas there is only one licensed fluid milk distributor, Algoma Dairy of Chapleau and Englehart Dairy respectively. While these two distributors could distribute other products along with fluid milk products if they properly equip their delivery trucks, they have chosen not to do so.

The Commission has the authority to set policy and make regulations under Sections 3 and 19 of the Milk Act. The Commission exercised this authority to replace the Policy. The first phase of the policy change, elimination of distribution areas within Northern Ontario, took effect on June 1, 1997. The second phase of the policy change, allowing fluid milk processed in Southern Ontario to be distributed in Northern Ontario, is to take effect on August 1, 1998.

A brief chronology of the events leading up to the appeal is as follows:

• July 1993. The Commission established an industry-government committee to review fluid milk distributor licensing regulations and policy.

• April 1994. The Commission received 24 recommendations from the industry-government committee. It decided to circulate these recommendations to industry stakeholders and solicit written submissions on the recommendations.

• February/March 1995. The Commission made several policy and regulatory changes based on its review of fluid milk distributor licensing policies and regulations. New policy guidelines and supporting documentation were widely circulated.

• January 1996. The Commission considered options for reducing the number of distribution areas in Ontario and introducing competitive factors in areas served by only one distributor. The Commission decided to merge the four Northern Ontario distribution areas into one area; allow any type of fluid milk product processed in Southern Ontario to be distributed in the North through licensed distributors; and, facilitate the licensing of additional distributors to service Northern Ontario.

• February/March 1996. The Commission solicited stakeholder input on the timing and implementation of policy changes related to the distribution of fluid milk products in Northern Ontario. Written submissions were requested and received.

• May 1996. The Commission circulated new policy guidelines for the licensing of fluid milk distributors in Ontario. The new guidelines included a schedule for phasing in policy changes related to the distribution of fluid milk in Northern Ontario.

• April 2, 1997. The Commission considered a request of Mr. Michael Korman, supported by Mr. Arthur Broomhead, that the Commission hold an emergency hearing to consider setting aside its recent policy decisions and regulations related to fluid milk distribution. The Commission decided not to grant this request and both Mr. Korman and Mr. Broomhead appealed to the Tribunal.

The Issue

There are two issues before the Tribunal:

l. Should the Commission be directed to delay implementation of the changes in the Policy and conduct public hearings in Northern Ontario on the matter?

2. Should the Policy be modified to allow Algoma Dairy of Chapleau to access milk processed in Southern Ontario for distribution in Northern Ontario on June 1, 1997 rather than waiting until August 1, 1998?

The Evidence and the Findings

Mr. William Ivey, spoke on behalf of Algoma Dairy of Chapleau (Algoma) and the appellants Arthur and Anneliese Broomhead. Mr. Ivey told the Tribunal that there is an aspect to the implementation of the Policy change that has not been recognized and dealt with. He said that he was bringing this new issue to the Tribunal's attention and that he proposes a simple solution. He warned that if this issue is not resolved, it will have disastrous consequences to Algoma.

Mr. Ivey told the Tribunal that Algoma is a family-owned dairy business established on July 1, 1921 by the Broomhead family. Originally, Algoma sold milk produced by the Broomhead family. Then, in 1939, the Government required pasteurization of all milk. The Broomheads were milking 30 holsteins at that time so they decided to build a processing plant at 30 Birch Street, Chapleau. At that time the population of Chapleau was about 2,900 and it is now about 2,200. By 1986, the market changed to demanding a complete range of products and package sizes. Algoma could not provide this variety with such a small market and sales volume and so, with the sanction and consent of the Dairy Branch of OMAF, Algoma ceased processing in 1986 and moved to a non-processor-distributor license. Mr. Ivey said that, in effect, Algoma contracted its processing requirements to Eplett Dairy of Timmins, now Beatrice. Mr. Ivey said that, under the rules at that time, this was the only way Algoma could provide its customers with a full range of products at the lowest possible price. The depot of Algoma is at the same location today as the processing plant that was built in 1936. He said that for 76 years Algoma has maintained a tradition of service to its customers and community in a remote and isolated area. In 1995, the non-processor-distributor license was phased out and replaced by a non-shop-keeper distributor license. Mr. Ivey said that Algoma's position is that it still has the same obligations and duties and same rights as it had when it was a processor of milk. He said that Algoma is a dairy business not an agent for Beatrice. Algoma merely contracts out its processing to Beatrice at the present time but that is the only relationship between the two dairies. Mr. Ivey said that the elimination of the distribution areas on June 1, 1997, without allowing Algoma to source milk processed in the south, effectively puts Algoma out of business because it cannot obtain product to distribute. He said that this fact is the cause of the current problem.

Mr. Ivey said that Algoma does not disagree with the pending changes to the Policy. He said that Algoma recognizes the general desirability of the changes and that removing impediments to trade and opening the area to competition is inevitable. Mr. Ivey said that recently, through Mr. Broomhead's ongoing business relationship with the suppliers and dairies in Northern Ontario, Mr. Broomhead has just now understood the implications of the timing of the policy changes and he believes the problem was not recognized or understood by the industry or the Commission when the policy decision was made. Mr. Ivey said that, as of June 1, 1997, when the distribution areas in Northern Ontario are merged, Algoma's processor becomes its competitor. He said that, in 1986 when Algoma stopped processing, it could not expand its business because of being locked in to a defined distribution area. The other dairies could not distribute in Algoma's area so Algoma had something to negotiate with - increased volume. He said that the current policy leaves Algoma without a supply of milk and nothing to negotiate with. He pointed out that Algoma will be forced out of business not by market forces or competition but by government edict. Mr. Ivey argued that the effect of the policy change is discriminatory because it affects Algoma in a way that the other dairies are not affected.

Mr. Ivey told the Tribunal that Algoma may be doomed by the march of business. It may be too small to survive and if it is, then so be it. He said Algoma is asking for a chance to try to compete for the business. Therefore, Algoma is asking the Tribunal to give it permission to access milk from anywhere in the province as of June l, 1997. He said this may be impractical but Algoma would have some negotiating leverage and may be able to form a new alliance.

Ms. Dagny Ingolfsrud, counsel to the Commission, argued that this request had not been made to the Commission and therefore the Commission has not considered this specific request or its impact on other industry stakeholders. Ms. Ingolfsrud argued that this request is not properly before the Tribunal and therefore the Tribunal should not consider it and should confine its decision to the issue of whether the Commission should delay implementation of the Policy and conduct hearings. Ms. Ingolfsrud said that the Commission was not prepared to waive its right of a hearing on this issue. She argued that Mr. Ivey is requesting a change in the Policy that will confer a certain benefit on Algoma and not other distributors. She pointed out that there has not been an opportunity for anyone to prepare to address this request.

Mr. Michael Korman spoke to the Tribunal on behalf of Englehart Dairy Limited (Englehart). Mr. Korman said that he is asking the Tribunal to stay the decision of the Commission to open the distribution zones on June 1, 1997. He is also asking the Tribunal to recognize procedural problems in the way the Commission determined the policy is to be implemented. He said there are inconsistencies in the Policy in that there is a two tier implementation time frame that affects Englehart differently than the other dairies in Northern Ontario.

He said that he wants the Commission to keep the distribution area boundaries until at least 1998 and further until there is inter-provincial free trade. Mr. Korman told the Tribunal that no supplier has shown a willingness to supply Englehart after June 1, 1997. He said that the Commission members have shown a clear bias in favour of corporate dairies when it modified the Policy. He also argued that the Commission did not allow input from Northern processors or former processors, in the implementation of the Policy, just the timing of implementation.

Mr. Korman said that the effect of the policy is to change from one type of monopoly to another. He pointed out that the food retailers in Northern Ontario are dominated by the National Grocer Chain which has a contract with Neilson Dairy. Neilson will merely replace the northern processors after August 1, 1998.

Mr. Korman argued that the Commission had not conducted any consultations on this policy change. He said that the industry committee had reviewed the policy and made recommendations that would maintain the distribution areas and then the Commission changed the policy without further industry input. He said that the two stage implementation eliminates his dairy but allows the processing dairies another year before they face competition from the south and asked when the Commission gave these dairies preferential treatment.

Mr. Korman argued that the issue is not one of choice of product but price and price is in the control of the retailer not the distributor. He said that, on average, Englehart delivers to the Valu-Mart 540 four litre bags of milk at a cost of $5.25 per bag. The retailer sells this for $4.99, a price the retailer sets. On the 114,000 litre annual volume, the retailer looses $7,436.00 per year, on average. However, on the other product sizes delivered, the retailer makes $28,080.00 on the 62,400 litre volume netting $24,000.00 in profit from all fluid milk sales. Mr. Korman argued that changing suppliers will not affect the retail price unless the retailer chooses to do so.

Mrs. Susan Korman told the Tribunal that not all dairy products across the north are higher priced than the south. She pointed out that price is subject to population with the south having 9,000,000 people and the north having 750,000 people. Therefore, the south should have a better price. The production cost in the south is spread over the larger revenue base.

Mrs. Korman argued that milk is not the only monopoly in the north. She said that there is only one hydro company, one gas company and one phone company in Englehart. She also said that most communities have only one grocery store. While the Valu-Mart stores are independently owned, they are supplied by the National Grocer Chain which in turn is supplied by Weston who owns Neilson Dairy and that is where the milk will come from once the policy changes are in full effect.

Mrs. Korman asked the Tribunal to change the policy back to what it was and leave the north south border as is with the distribution areas left intact.

Mr. Mike Farquar, of Farquar Dairies, spoke as a witness in support of Englehart. He told the Tribunal that, when the policy was first announced, he thought it would be an opportunity to expand. However, he has contacted the grocery chains in the north and has come to the realization that the milk supply will come from the chain's supplier and the northern dairies will not have a market for their product. He said he supports the position of Englehart.

Mr. Jim Wheeler, Chair of the Commission, spoke on behalf of the Commission. Mr. Wheeler told the Tribunal that the Commission was fully aware of the implications of the change in the Policy on the appellants when the decision was made. Mr. Wheeler said that, in his opinion, the Commission had conducted extensive consultations on the Policy and that the appeals should be denied.

Mr. Wheeler said that in 1993, the Commission struck an industry committee to develop a common understanding of the Policy. The committee consisted of:

Doug Gendron, vice chair of the Commission; Diane Pochailo, northern processor; Susan Gillespie, commission staff; Tom Kane, Ontario Dairy Council; Ezra Gunther, southern processor; Bob Rattan, southern processor; Ken Hume, southern processor; Michael Korman, northern processor; Mike Farquhar, northern processor; Jeff Banks, southern processor; Dave Robertson, independent dairy; Dace Dexton, wholesale distributor (did not participate); Richard Bird, OMAFRA and Peter Gould, DFO.

Mr. Wheeler said that the Committee made 24 recommendations on licensing of distributors and the Policy. The Commission considered these recommendations and issued a decision document dated February 8, 1995. This document received wide circulation in the industry. This document sets out:

• the 24 recommendations provided by the Committee plus six alternate recommendations provided by industry stakeholders;

• the Commission's response to each of the recommendations;

• the Commission's reasoning for its response.

The Commission also gave some indications of the future direction that the Commission anticipated the industry taking. There were no specific timing or implementation comments in the document.

For example the Commission said:

"Recommendation #1 The committee recommends that the Ministry continue to exercise regulatory control over the fluid milk distribution network.

ACTION TAKEN: FPMC accepted this recommendation. FPMC believes the Ministry should continue to exercise regulatory control over fluid milk distribution for the foreseeable future but that regulations should be simplified and reduced over time.

Recommendation #4 The committee recommends that the Farm Products Marketing Commission (FPMC) continue to maintain a separate policy for Northern Ontario. Further, the committee recommends that the FPMC policy which limits fluid milk products processed in Southern Ontario from being distributed in Northern Ontario be maintained, but the committee recommends an amendment to the policy which would allow certain products which would not otherwise be available in the North to be distributed.

ACTION TAKEN: FPMC accepted this recommendation. However, it is recognized that in the long term as interprovincial barriers come down the Northern Ontario - Southern Ontario barrier will not be viable. Industry stakeholders must realize that this protection will not continue indefinitely.

REASONS: The Commission believes that protected distribution areas in Northern Ontario are not viable in the long run due to changes in national and international policy. This policy will help maintain the orderly marketing of milk through the evoluntionary process to more open distribution in Northern Ontario.

The Commission believes consumers in Northern Ontario should have access to a choice of fluid milk products wherever feasible." (bold print face added by the Tribunal)

Mr. Wheeler agreed that there had been no hearings on this issue but consultation had taken place with the industry and once the decision had been made to change the Policy, the Commission consulted the industry on timing and implementation issues. Mr. Wheeler pointed out that both Algoma and Englehart had made submissions to the Commission during that consultation.

Mr. Wheeler argued that no new information was presented at the April meeting between the Commission and the appellants that warranted a reexamination of the Policy. He said that the Commission's decision is based on the government policy to reduce internal trade barriers, reduce government interference with business, etc. He said that he has not heard any new information at this hearing that he could present to the Commission to convince the Commissioners to change their position on the issue.

Mr. Wheeler agreed with Ms. Ingolfsrud that the matter of Algoma sourcing milk from Southern Ontario had not been considered by the Commission and therefore should not be before the Tribunal at this time.

In the opinion of the Tribunal, the Commission did consult the industry starting in 1993 and the decision document did indicate the need to change the Policy to remove the northern distribution boundaries and the north-south distribution boundary at some time.

When the decision to make the change was announced, the Commission then sought input from the stakeholders on the timing and the implementation. When the Commission asked for input on timing and implementation, they received many comments on the substance of the policy change. Both appellants submitted information to the Commission during this process. The Commission included comments from people who felt the Policy was wrong and would result in economic dislocation and financial loss. The Tribunal concludes that the Commission had the necessary information on the anticipated impact on the appellants prior to making its decision.

The Tribunal notes that Mr. Korman sat on the industry committee that produced the 24 recommendations. On March 3, 1995, the Commission informed the industry that it intended to reduce the number of distribution areas and introduce competitive facts in licensed distribution areas which are currently served by only one fluid milk distributor. On February 9, 1996, the Commission informed the industry that it intended to merge the distribution areas in the north, facilitate licensing of new distributors in the north and allow the movement of milk processed in Southern Ontario to Northern Ontario. On May 29, 1996, the Commission informed the industry that it intended to make these changes in two stages with the Northern distribution boundaries being eliminated on June 1, 1997 and allowing the flow of fluid milk processed in Southern Ontario on August 1, 1998. In the opinion of the Tribunal, Mr. Korman was kept informed of the process being followed by the Commission and had an opportunity to have his issues considered as that process unfolded.

The foundation of Mr. Korman's appeal was that he is a dairy but he wants the distribution areas left intact until at least August 1, 1998, and preferably until the industry is deregulated as a result of trade decisions.

The appellants agreed and accepted the reasons for the policy changes in as much as competition, national and inter-provincial trade are concerned. Mr. Korman argued that since the trade barriers are not being eliminated now, the Commission should wait until at least August 1, 1998 before any changes are made and then should wait until trade decisions force the change. He also said that when the decision is made, it should be effective for the entire industry at one time rather than be implemented in stages. Mr. Korman claimed he is being discriminated against because he can no longer obtain a supply of milk after June 1, 1997 under the proposed policy. As of June 1, his supplier becomes his competitor. Mr. Korman suggested that any change should be tied to deregulation of the industry and the timing of this proposal is inappropriate.

The evidence before the Tribunal is that Mr. Korman is not the holder of a license to operate a processing plant and therefore is not a processor. Since 1995, Mr. Korman has held a non-shopkeeper distributor license. In the opinion of the Tribunal, the phase-in approach for this policy change is appropriate as the processors need more time to develop business plans and alliances than a distributor because of the complexities of the processing and distribution business as opposed to a distribution business.

The Tribunal is satisfied that the Commission:

• Consulted the industry prior to making its decisions.
• Had information on the anticipated impact the change in policy would have on the northern dairy industry and had regard for that information in making its decision.
• Provided adequate notification to Englehart and others in the industry of its decisions to stage the implementation of the policy change to allow time for the affected business to adjust to the new system.

Mr. William Ivey, speaking on behalf of Mr. And Mrs. Broomhead, told the Tribunal that Algoma Dairy of Chapleau supported the change in the Policy but requested the opportunity to source milk from Southern Ontario on June 1, 1997 rather than waiting until August 1, 1998.

Mr. Wheeler told the Tribunal that this issue has not been considered by the Commission and therefore this question is not properly before the Tribunal. Mr. Wheeler said he would not waive the Commission's opportunity to conduct a hearing on this request. Therefore, the Tribunal does not have jurisdiction to address this issue. Mr. Broomhead will have to make his request to the Commission.

Decision and Reasons

After careful consideration of the evidence presented and submissions made, the Tribunal decided to deny the appeals for the following reasons:

l. Englehart Dairy Ltd. is not a processing dairy but it is a distributor and has had the same time to adjust its business as other distributors.

2. In the opinion of the Tribunal, no significant new evidence was presented that was not known by the Commission at the time the policy change was made.

3. The Commission, after adequate consultation, decided that a two year phase in time was realistic to allow the industry to adjust.

Dated at Guelph, Ontario this 17th, day of June, 1997.