Turkey Committee of the Ontario Poultry Processors’ Association v Ontario Turkey Producers’ Marketing Board, 1997 ONAFRAAT 25

Agriculture, Food and Rural Affairs Appeal Tribunal 1 Stone Road West

Tribunal d’appel de l’agriculture, de l’alimentation et des affaires rurales 1 Stone Road West

Guelph, (Ontario) N1G 4Y2 Tel: (519) 826-3433, Fax: (519) 826-4232 Email: AFRAAT@ontario.ca

Guelph (Ontario) N1G 4Y2 Tél.: (519) 826-3433, Téléc.: (519) 826-4232 Email: AFRAAT@ontario.ca

Turkey Committee of the Ontario Poultry Processors’ Association v Ontario Turkey Producers’ Marketing Board

Turkey Committee of the Ontario Poultry Processors’ Association v OTPMB 1997 ONAFRAAT 25

Ministry of Agriculture, Food and Rural Affairs Act

June 17, 1997

DATE OF DECISION:

June 27, 1997

1997-25

1997 ONAFRAAT 25

Turkey Committee of the Ontario Poultry Processors’ Association v Ontario Turkey Producers’ Marketing Board

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

An Appeal to the Farm Products Appeal Tribunal by the Turkey Committee of the Ontario Poultry Processors’ Association (the Committee), Suite 310, 250 The Esplanade, Toronto, Ontario from the price levels determined for broiler, hen and tom turkeys by the Ontario Turkey Producers’ Marketing Board (the Board) by Pricing Order #275. The Committee is requesting relief from Pricing Order #275 which raises the live price of broiler turkeys 0.0 cents/kg, hen turkeys by 1.0 cent/kg and tom turkeys by 2.0 cents/kg, effective Monday, June 2, 1997 at 12:01 a.m.. The Committee requests a reduction of 2.0 cents/kg for broiler turkeys and 3.0 cents/kg for hen and tom turkeys, effective Monday, June 2, 1997 at 12:01 a.m.; and a further reduction of 2.0 cents/kg for broiler and hen turkeys, and 1.0 cent/kg for tom turkeys, effective Monday, July 7, 1997 at 12:01 a.m.; and a further reduction of 2.0 cents/kg for broiler and hen turkeys, and 1.0 cent/kg for tom turkeys, effective Monday, August 4, 1997 at 12:01 a.m.

Before:

Mr. James Rickard, Chair; Dr. Denis O’Connor, Vice Chair; Mr. John Lammers, Member; Mr. Sarsfield O’Connor, Member.

Appearances:

Mr. Robert Shapiro, on behalf of the appellant, the Turkey Committee of the Ontario Poultry Processors' Association.

Mr. Geoffrey Spurr, counsel to the respondent, the Ontario Turkey Producers’ Marketing Board.

Mr. Art Roder, on behalf of the respondent, the Ontario Turkey Producers' Marketing Board.

DECISION OF THE TRIBUNAL

This appeal was heard in Guelph, Ontario on June 17, 1997. The Turkey Committee of the Ontario Poultry Processors' Association (the Committee), appealed to the Farm Products Appeal Tribunal (the Tribunal) from the price levels determined for broiler, hen and tom turkeys by the Ontario Turkey Producers’ Marketing Board (the Board) by Pricing Order #275. The Committee is requesting relief from Pricing Order #275 which raises the live price of broiler turkeys 0.0 cents/kg, hen turkeys by 1.0 cent/kg and tom turkeys by 2.0 cents/kg, effective Monday, June 2, 1997 at 12:01 a.m.. The Committee requests a reduction of 2.0 cents/kg for broiler turkeys and 3.0 cents/kg for hen and tom turkeys, effective Monday, June 2, 1997 at 12:01 a.m.; and a further reduction of 2.0 cents/kg for broiler and hen turkeys, and 1.0 cent/kg for tom turkeys, effective Monday, July 7, 1997 at 12:01 a.m.; and a further reduction of 2.0 cents/kg for broiler and hen turkeys, and 1.0 cent/kg for tom turkeys, effective Monday, August 4, 1997 at 12:01 a.m.

The Background

The Board regulates the production of turkey in Ontario according to a quota system. The Committee acts as an advisory body to the Board on pricing and other marketing matters. Through a national association, the Canadian Poultry and Egg Processors’ Council (CPEPC), the Committee members also advise the national producer agency, the Canadian Turkey Marketing Agency (CTMA), regarding the total Canadian level of turkey production. This advice is provided to the CTMA through membership in a committee of the CTMA called the Turkey Market Advisory Committee (TMAC). It is the mandate of this committee to recommend what it considers to be an appropriate production allocation for the quota year. The CTMA then sets an allocation that is agreed upon by its directors. Once the CTMA has set the national level of production, a share of the total is allocated to each province based upon a formula. The Board then allocates this production to Ontario producers by size category.

Mr. Robert Shapiro, on behalf of the Committee, stated that the Committee represents all of the major turkey processors in Ontario. He briefly reviewed the pricing process undertaken in the Ontario turkey industry for the information of the Tribunal. The process involves a review of market price levels, producer costs, levels of supply and the projected effect of supply factors on future market conditions. Other factors which may influence market conditions are also considered, such as price and supply of competing meats. After a discussion with the Board, the Committee makes a pricing recommendation. The Board makes a decision on the live price of turkeys. If the Committee is unhappy with the Board's decision, it may appeal to the Tribunal.

During 1996 the Board and the Committee priced turkeys using a formula pricing system that adjusted the live price of turkey in response to the price of feed. The pricing agreement expired on April 30, 1997. This agreement is described in the Tribunal’s May 28th, 1997 decision on the Committee’s last pricing appeal.

At the price setting meeting on May 29, 1997, the Board declared no change in the live price of broilers, 1.0 ¢/kg increase in the live price of hens, and 2.0¢/kg increase in the live price of toms, effective Monday, June 2, 1997, 12:01 a.m., under Pricing Order No. 275. The Committee appealed this decision to the Tribunal, and is seeking the following live price reductions from the above Pricing Order:

June 2nd, 1997

July 7th, 1997

August 4th, 1997

Broilers

2.0 cents/kg

Hens

3.0 cents /kg

2.0 cents/kg

Toms

3.0 cents/kg

1.0 cent/kg

The Issue

The issue before the Tribunal is to determine what the live price for turkey should be effective on the above dates.

The Evidence and the Findings

Mr. Shaprio clarified that the Committee’s request is a staged request effective the first Monday on each month. He said the Committee is looking for the above noted decreases net, that is, if the Board raises the price on July 6 the Committee wants that price reduced and then reduced again by the amounts indicated.

Mr. Shapiro told the Tribunal that since the last appeal, little has changed. The parties now have one more month of storage stocks information and wholesale averages. He said that the Processors believe that the Tribunal did not give sufficient weight to the relative welfare of the parties at the last appeal in its decision not to provide the live price reduction requested.

Mr. Shapiro told the Tribunal that the Live Price Agreement in effect from May 1, 1996 to April 30, 1997 maintained producer margins over this period while creating immense losses in the processing sector. While the protection of producer margins in the volatile feed grains market and reduced stress in pricing activities were the benefits intended and achieved, the losses to processors were certainly not intended, and could have not been predicted. These were the result of the record high live prices, combined with reduced selling prices created by burdensome storage stocks, retail price resistance, and changes in retail purchasing practices. He said that since the beginning of 1996 meat costs have gone up by 30 cents.

Mr. Shapiro argued that while the processors did recommend, through their participation on various CTMA committees, the production levels allocated by the CTMA in 1995 and 1996 and the processors do take some responsibility for the level of production allocated in each of these years, the producers, as the decision maker in terms of supply setting, must also take some responsibility. He said that the fact that storage stock levels became a problem in late 1995 and throughout 1996 and 1997 must be seen as a joint responsibility of producers and processors.

Mr. Shapiro said that during 1996, retailers changed their purchasing practices and began to buy turkey on the basis of "just-in -time inventory control". This was a result partially of an animal terrorism event which took place in western Canada in October 1996, and partially due to the increasing storage stocks. Retailers were being opportunistic. They predicted the stocks would increase giving them better leverage at the end of the year and so did not buy. As a consequence, processors were faced with the choice of selling turkey at below meat cost or storing it in the hope of a better market.

Mr. Shapiro told the Tribunal that, for the 1997/98 quota year, the CTMA reduced the quota allocation from 128 to 122 million kilograms, in an attempt to correct burdensome storage stock levels. In addition, a change to the export credit policy was implemented by the CTMA to further reduce production by approximately 2.0 million kilograms. Export credit is a national policy that allows exporters to re-grow exported product based on guidelines set by the agency. The CPEPC appealed this decision at the Farm Products Marketing Council (the Council). The Council does not have the authority to replace the CTMA’s decision. It has the authority to send it back to the CTMA for reconsideration and that is what the Council did. The CTMA again set the allocation at 122 million kilograms rejecting the processors and other downstream sectors recommendation for a production level of 118 million kilograms, with an additional 2.0 million kilograms reduction through changes to the export credit program.

Mr. Shapiro argued that the CTMA allocation for 1997/98 is too high. He said it is processors who are being asked to sell this production, to carry the inventories at a cost of 5 cents per kilo per month - average 30 cents per kilo for turkey in storage - and to pay further price increases by the Board.

Mr. Shapiro provided information indicating that processor margins have decreased approximately 50 cents per kilogram over the period 1994 to 1997 while producer margins calculated as the difference between live price and the cost of feed + poult has decreased approximately 4 cents per kilogram. Mr. Shapiro argued that the “pain” is not being shared equitable between the parties in the industry.

Mr. Shapiro told the Tribunal that at the previous hearing the Board argued that approximately 40 producers would be shipping in each of the two months following the appeal, and that these producers would receive approximately $390,000 less per month for their turkey production, if the Tribunal granted the processors’ appeal. He said that, if this is an issue to the Board, it has the authority under the Farm Products Marketing Act and regulations to pool the proceeds from the sale of live turkeys and thus can equalize returns among producers. He argued that the Board has not used this authority but it is a solution to this problem and solely within the Board’s mandate to implement.

Mr. Shapiro said that turkey storage stocks have increased since the last appeal to 23.2 million kilograms and are expected to reach 36.4 million kilograms on August 1, 1997. He said that the processors lost $4 million in 1996 and the storage stocks are higher than 1996 levels and have been rising since 1994. He agreed that the disappearance has increased since the last appeal however he argued that this is due to processors selling turkey at price levels often below meat cost, in an attempt to lower inventory levels before the Thanksgiving sales. He said this does not support a price increase at this time.

Mr. Shapiro said that the total Ontario broiler and hen slaughter projections for June and July reflect an increase of 182,000 kgs, and Ontario tom projections for June, July and August reflect a reduction of 671,000 kgs. For Canada, the CTMA projects a reduction of 853,000 kgs for broilers and hens, and 424,000 kgs for toms over the same period. He argued that these reductions in supply were not large enough to assist in the storage stock situation.

Mr. Shapiro told the Tribunal that, while it is true that reduced margins are traditionally found in the first eight months of each quota year, due to the nature of the turkey industry, this year, the reduced margins are extraordinary. He said that while the processor margins are reduced, producer margins, measured in cents per kilogram after feed and poults, which account for two thirds of the cost of producing turkey are positive. He agreed that producers have had lower returns than in previous years

According to Mr. Shapiro, projections are for lower feed grain costs in 1997/98 than the previous year.

Mr. Shapiro argued that none of the indicators pointed to a price increase at this time and that, in light of the losses of the processors over 1996 and 1997, the Tribunal ought to grant the appeal and order the price reductions requested.

Mr. Art Roder, turkey producer and Chair of the Board, spoke on behalf of the Board. Mr. Roder said that it is the Board’s position that Pricing Order No. 275 represents a justifiable increase in live prices reflective of the increase in feed costs as well as the positive direction that the Board believes the market indicators are taking. He said the Board has exercised its authority under the Farm Products Marketing Act in a responsible and reasonable fashion.

Mr. Roder explained that there is no term on a Board pricing order. Over the years, with the exception of 1996 with the pricing formula, pricing meetings are called at the will of the Board. At this time, Pricing Order No. 275 is in effect until the Board calls another meeting and none has been called.

Mr. Roder reiterated the points made by the Board at the appeal on May 15, 1997 saying that the Board believes these points are still valid:

The global quota has been reduced by 6,000,000 kilograms of eviscerated turkey (global quota set at 122,000,000 from 128,000,000 the previous year).
The Ontario quota allocation has been correspondingly reduced by 2,818,804 kilograms of eviscerated turkey or 5.75%.
Expected export activity and changes to the export policy will result in a volume reduction for Canada of approximately 1,827,198 kilograms of eviscerated turkey and a corresponding reduction for Ontario of 1,317,214 kilograms of eviscerated turkey.
The Board has significantly compromised its opening price position in an effort to obtain consensus between the two sides. Processors have made no such efforts.
Whether graduated or implemented as a single decrease, the Committee's total proposed price decrease is without precedent.
A portion of the turkey that processors are seeking to purchase for this unacceptable price decrease will be marketed by them in the third period of the year when wholesale prices are at their highest.
The live price payable to producers has been eroded and has not kept pace with increasing costs. In fact, producers have also been experiencing losses and are concerned about their ability to continue production. Producers are expressing grave concern about what is happening in the industry and feel that the industry is not healthy. Producers feel the Board cannot reduce live prices as the situation is getting worse month by month.
The increase in storage stocks is attributed predominantly to hen turkeys. However, processors refused to limit re-grow credits to tom turkeys only and therefore have more responsibility for the amount of meat in storage.
The processor wholesale price on fresh product returns much higher margins for processors. Furthermore, no information is provided regarding returns on further processed product and recapture of the "value" that is "added".

Mr. Roder told the Tribunal that the Board believes there is no historical trend to live prices. Prices are simply the result of a decision of the Board based on market indicators, then negotiated with the Committee and sometimes directed by the Tribunal. He reminded the Tribunal that in 1996 in all categories the price increased during the time of formula pricing.

Mr. Roder argued that not only do live prices not decrease traditionally at this time of year but they also do not increase traditionally during the last four months of the year when wholesale prices are always higher than the June to August period. He said that, in executing its pricing function, the Board consistently takes all market indicators into consideration.

He said that the Board is spending 40% to 45 % of its budget on advertising to promote the sale of turkey. Several meetings were held between the processors and Board staff and a decision was made to change the directions of Board marketing efforts from the retail sector to food services.

Mr. Roder said that there is projected to be a reduction in turkeys coming to market of 338,214 eviscerated kilograms compared to last year. Again, a positive indicator for turkey pricing.

Mr. Roder provided information showing that less than ¼ of the kilograms of turkey processed go into storage. He said that this definitely does not represent a majority of the meat produced going into storage and incurring the storage costs claimed by the processors.

Mr. Roder urged the Tribunal to consider the context: wholesale prices beginning to climb; storage stocks declining; production projected to be significantly lower as a result of a reduced quota and amended export policy. He said that live price reductions of any kind at this time are unacceptable.

Mr. Roder argued that the following points are indicators of a price increase at this time:

The producer’s cost of production is continuing to reflect the higher feed costs and will for at least another 17 weeks.
The industry is moving into a period of historically higher wholesale prices.
Storage stocks are declining and projected to be below last year's level on August 1st by 2.0 million kgs.
Disappearance has increased 20.6% for the month of April and 4.0% for the quota year 1996/97.
Projected slaughter figures are showing a reduction of turkey coming to market for June and July of 338,214 kgs.
Projected monetary losses to producers resulting from processors price proposal for June, July and August 1997 is simply unacceptable.
The majority of turkeys produced at this time of year do not go into inventory until Thanksgiving.
Feed prices are volatile.
The Board has exercised its authority under the Farm Products Marketing Act in a responsible and reasonable fashion.

The Tribunal examined the evidence and submissions. The Tribunal notes that both parties feel the industry is in trouble from high stocks, low live prices and low wholesale prices. In the opinion of the Tribunal, both parties are working to solve the problem; the producers by reducing production and the processors by reducing storage stocks as best they can. Both parties agree that the unusually high feed costs in 1996 were a major contributor to the problem. The resulting pricing formula in 1996, while appropriate at the time, resulted in distortions that both parties now have to deal with.

In the opinion of the Tribunal, present storage stocks are too high and cause a burden that must be addressed by both parties. The error in the storage stock figure that was confirmed during the hearing is not considered by the Tribunal to be a weighty factor in the Tribunal arriving at its decision.

The Committee appeared to be promoting to the Tribunal the concept of price pooling to the producers to offset the impact of price changes during a production cycle. The Board indicated that this proposal has not been made by the processors to the Board. If the parties think pooling is a viable option for assisting in relieving the pricing tension between them, they should explore this as part of the pricing negotiations. The Tribunal is not the forum to bring a new concept that has not been aired between the parties prior to the hearing.

The Tribunal agrees that the market indicators are beginning to show positive signs but the Tribunal feels it is too early to define a trend. The Tribunal accepts the evidence that the processors are suffering losses and, in the opinion of the Tribunal, need some price relief at the present time. Therefore, the Tribunal decided to partially grant the appeal and reduce the price of all categories of turkey for the period June 2 through July 7, 1997.

Decision and Reasons

After careful consideration of the evidence filed and the submissions made, the Tribunal decided to direct the Board to issue a new Pricing Order replacing Pricing Order No. 275. This new order is to set the price of broilers down 2.0 cents; hens down 2.0 cents and toms down 2.0 cents from the prices established in Pricing Order No. 275. Further, the Tribunal directs that this Pricing Order is to remain in effect until at least 12:01 a.m., Monday, July 7, 1997.

The reasons for this decision are:

The Tribunal accepts that the processors are suffering reduced margins at this time of the year.
While the indicators are beginning to point to a strengthening of the market, in the opinion of the Tribunal, the market has not improved sufficiently to support a live price increase at this time.

Order of the Tribunal

The Tribunal orders the Ontario Turkey Producers’ Marketing Board to issue a new Pricing Order replacing Pricing Order No. 275. This new order is to set the price of broilers down 2.0 cents; hens down 2.0 cents and toms down 2.0 cents from the prices established in Pricing Order No. 275. Further, the Tribunal directs that this Pricing Order is to remain in effect until at least 12:01 a.m., Monday, July 7, 1997

Dated at Guelph, Ontario this 27th day of June, 1997.