Association of Ontario Chicken Processors v. Chicken Farmers of Ontario, 1997 ONAFRAAT 26

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

AGRICULTURE, FOOD AND RURAL AFFAIRS APPEAL TRIBUNAL

APPEAL:

Association of Ontario Chicken Processors v Chicken Farmers of Ontario

Association of Ontario Chicken Processors v CFO 1997 ONAFRAAT 26

STATUTE:

Ministry of Agriculture, Food and Rural Affairs Act

HEARING:

June 19, 1997

DATE OF DECISION:

July 4, 1997

1997-26

NEUTRAL CITATION:

1997 ONAFRAAT 26

Association of Ontario Chicken Processors v Chicken Farmers of Ontario

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 the Association of Ontario Chicken Processors (AOCP) from the decision of the Chicken Farmers of Ontario (CFO) to allocate one million kilograms of chicken in excess of the volume recommended by the AOCP for Quota Period A-15 (August 31 - October 25, 1997) under CFO Quota Policy No. 129-96 and 130-96.

Before:

Mr. Jim Rickard, Chair; Dr. Denis O’Connor, Vice-Chair; Mrs. Moira Connell, Member; Mr. John Lammers, Member.

Appearances:

Mr. Robert Shapiro, on behalf of the Association of Ontario Chicken Processors, appellant

Mr. Geoff Spurr, counsel to the respondent, the Chicken Farmers of Ontario.

Mr. Jeff McHaffie, on behalf of Cuddy Food Products.

DECISION OF THE TRIBUNAL

This appeal was heard in Guelph, Ontario on June 19, 1997. The AOCP appealed to the Farm Products Appeal Tribunal (the Tribunal) from the decision of the CFO to allocate one million kilograms of chicken in excess of the volume recommended by the AOCP for Quota Period A-15 (August 31 - October 25, 1997) under CFO Quota Policy No. 129-96 and 130-96.

The Background

The pertinent sections of CFO’s Quota Policy No.129 - 1996 as amended by Quota Policy No. 130 - 1996 is as follows:

1. In fixing and allotting crop quotas to producers, the Board will continue to fix and allot in respect of a particular processor, as specified on the Form 101, up to the maximum quantity of chicken to which that processor is eligible to purchase or acquire from producers through the Board in accordance with this Policy.

2. This Policy applies to all crop quota allotments made for Board quota periods A-09 through A-16 or any extension thereof.

3. For the purposes of this Policy,

a) a “smaller processor” is one with live supply requirements as agreed to by the Board of less than 1.6 million kgs. of chicken for a quota period.

b) a “larger processor” is one with live supply requirements as agreed to by the Board of 1.6 million kgs. or more of chicken for a quota period.

c) “supply” refers to the quantity of chicken authorized by crop quotas to be marketed by producers through the Board to a specific processor in accordance with Form 101’s.

d) “total supply” means the quantity of chicken required to satisfy the marketing requirements of all processors under a crop quota period as determined by the Board.

4. The Board shall determine and set out as Appendix A to this Policy the maximum quantity of chicken each smaller processor identified thereon is authorized to purchase or acquire from producers through the Board for the quota period specified. In determining the quantities for each small processor as set out in Appendix A, the Board shall take into consideration any recommendations with respect thereto by the AOCP.

5. The quantities of chicken specified on Appendix A are maximums and any smaller processor may request less than the maximum in any quota period.

6. Prior to each quota period, the Board will request from the AOCP a recommended target total supply level to be expressed as a percentage increase or decrease of the total supply level for the same weeks of the previous year (the “Growth Target”). The Board having taken into consideration the AOCP’s recommendation, if any, shall determine the Growth Target for each quota period. Subject to paragraph 7, each larger processor shall be entitled to a supply for each quota period equal to its requested supply target for the same weeks in the previous year (the “Base Level”) adjusted by the Growth Target. Notwithstanding the foregoing, (i) Cuddy Foods will not be required to reduce its supply level in any quota period below 6.1 million kgs., except with its agreement, (ii) Grand River will determine its supply level for each quota period using its requested supply target for quota period A-08 as its Base Level, (iii) Where J.M. Watts Poultry Limited had no request for a quota period, its supply during that quota period shall be its Base Level.

7. Notwithstanding paragraph 6, each larger processor shall be entitled to increase its supply level for a quota period over its Base Level by an additional 50% of the Growth Target or, in the case of a decrease in the Growth Target by only 66.66% of the targeted decrease.

8. Each processor shall communicate to the AOCP its requested supply level for each quota period as determined in accordance with paragraph 5, 6 and 7 herein and the AOCP shall incorporate all such requests in any AOCP recommendation to the Board regarding individual processor supply and total supply for any quota period. The Board shall determine the individual processor supply and total supply levels for each quota period and in so doing shall take into consideration any recommendation by the AOCP. The Board shall further have regard to any special request made to it by AOCP as a result of AOCP’s operation of a special request program for period A-09 to A-16 by which the larger processors will be eligible to apply for an additional quantity of chicken from a pool of a maximum of one (1) million kgs., if required. Any such special requests will be separately identified as part of an AOCP recommendation to the Board regarding the individual processor supply and total supply for the period in question.

9. If the supply requirements of the larger processors fall below their supply in period A-08, in any period from A-09 through A-16, then the smaller processors will receive from the Board a supply for that period only equal to their supply in the previous period. The total supply will be calculated excluding any special requests granted. The Base Level target period of A-16 will be extended to A-17 or beyond if this occurs more than one time. The new target period is referred to as the “extension period”.

10. The Board recognizes that King Capon, Lee’s Poultry and Chai Kosher Poultry are suppliers to niche markets with supply requirements which vary outside the broad based market patterns of the industry.

11. The Board will permit each larger processor from Periods A-09 through A-16 to bank its growth equal to the target percentage in each period, but such banking of growth must be used within four quota periods of the banking, and only one quota period bank can be used at a time.

12. At the beginning of quota period A-17 or the extension period both larger processors and smaller processors will receive a new base equal to their supply in A-16 or the extension period as determined by the Board in accordance with the above.

13. Growth or reduction of supply by a processor of 10,000 kgs. or less will not be subject to any percentage change in the supply of that processor for quota period A-17 or the extension period and beyond.

14. Applications of new entrants for supply of chicken to be purchased from producers through the Board shall be made in writing to the Board which will determine on a case by case basis whether the application should be granted.

15. The Board requires that all processors slaughter the quantity of chicken forming their supply requirement for the crop quota period.

16. The Board will not recognize any purported assignment or transfer of any supply requirements of a processor determined under this Policy except in the case of excess supply as required by section 3 of Regulation No. 1367 - 1996.

17. This Quota Policy shall remain in effect for quota periods A-09 through A-16 or any extension period and is supplemental to Quota Policy No. 128 - 1996. At period A-17 or the completion of any extension period, the Board will extend the policy for a further period of three years.

18. The Board will give not less than twenty (20) weeks notice to AOCP of its intention to terminate this Quota Policy prior to the time specified in section 17 and AOCP may give the Board not less than twenty (20) weeks notice that it wishes the Board to terminate this Quota Policy.

On May 21, 1997, the AOCP recommended a production level for Ontario, and a supply by processing companies, for Quota Period A-15 (August 31 - October 25, 1997) in the amount of 50.3 million kilograms. On May 28, 1997, the CFO heard a presentation by Cuddy Food Products (Cuddy) regarding its supply amount recommended by the AOCP. Cuddy requested that it be allotted an additional 1.0 million kilograms of chicken for period A-15. The CFO granted Cuddy’s request and advised the AOCP of its decision.

The AOCP appealed this decision of the CFO to the Tribunal.

The Issue

The issue before the Tribunal is to determine the total chicken supply for Ontario and the appropriateness of the additional one million kilograms of chicken awarded to Cuddy for Quota Period A-15?

The Evidence and the Findings

Mr. Robert Shapiro, speaking on behalf of the AOCP, told the Tribunal that, over the years, there have been several methods of arriving at Ontario’s allotment of chicken production. The “unrestricted bottoms up” approach that began in 1994 resulted in production levels that caused difficulty for both the producers and the processors. He said that, in early 1996, processors commenced a series of meetings in an attempt to find agreement among AOCP members which would provide flexibility in individual company growth, while at the same time establishing a reasonable provincial production level. After a number of meetings, the Board adopted the AOCP supply setting proposal, commencing in Quota Period A-08, with the enactment of Quota Policy No.129 - 96 and amended by Quota Policy No.130 - 96. This agreement was deemed by both the Board and processors to be suitable at this time in the evolution of Ontario supply management.

Under the agreement and Quota Policy, processors meet approximately five months in advance of each quota period, to review supply, market and competitive factors projected for the quota period in question. A total production level is negotiated and individual processor allocations are then derived from this volume through the calculations set forth in the Quota Policy. If the volume to be established is greater or less than the province’s allocation in the same weeks of the previous year, then larger processors will increase or decrease their production allocation accordingly. Smaller processors will increase their production allocation at a negotiated rate of growth, or will remain at the same level as in the previous period.

Mr. Shapiro said that in order to reach consensus on the supply setting proposal, there had to be compromises and concessions made. One compromise was that Cuddy would not go below 6.1 million kilograms.

A number of components in the Quota Policy provide flexible growth, i.e. provision for niche marketers, banking of growth provisions, permitted additional growth of 50% over the growth target, 10,000 kilogram supply sleeve, and the Special Request Policy with a pool of 1.0 million kilograms. There is also provision for new entrants to apply in writing to the CFO and the CFO will determine on a case by case basis if the application will be granted. Since the beginning of the program, there have been three or four new entrants granted a supply by the Board. These entrants have gone through the AOCP first.

Mr. Shapiro said that under Section 8 of the Quota Policy each processor communicates to the AOCP for each quota period and the AOCP incorporates all such requests into the AOCP recommendation to the CFO. The CFO determines the Ontario supply level and the individual processor’s supply and takes into consideration the recommendation of the AOCP. He said the CFO also had further regard to any special request made from the special request panel (the panel) of the AOCP to which the larger processors can apply for consideration of a special allotment from a pool of a maximum of one million kilograms. Any such special request is included in the AOCP recommendation to the CFO.

He said that the panel is composed of retired industry executives familiar with the industry. The AOCP is supportive of the panel, the panel process and the panel decisions. The panel has the authority to deny all requests, to grant requests to a total of 1.0 million kilograms, or to grant a request totally of no more than one million kilograms. The overriding principle guiding the panel is that there is an onus on the applicant to prove its case, and that any resulting supply recommended by the panel must not have a negative impact on the Ontario market. Since Quota Period A-12, the entire one million kilograms in the special pool has been allocated to processors by the panel.

Mr. Shapiro told the Tribunal that Cuddy convinced the panel that Cuddy should be allotted half of their request, or 500,000 kilograms for Quota Period A-15. He said that the panel could have awarded Cuddy the full million and they chose not to.

Mr. Shapiro acknowledged that the CFO has the authority to set the level of supply for Ontario and establish individual company supply levels. He argued that the CFO must take into consideration the recommendations of the AOCP in this regard. He said that an additional one million kilograms added to the A-15 allocation not only will add market-place risk pressure on Ontario processors but also this increase will be reflected across Canada, since other provinces follow Ontario’s production lead. He said that when Ontario sets a volume, Quebec grows 46% of that amount because it is a national market. This means the impact on the market will be reflected across Canada. The CFO’s decision to reject the AOCP recommended production level for A-15 is a dangerous precedent according to Mr. Shapiro.

He argued that the CFO decision favors one processor over another and has pitted AOCP members against each other. Under the Quota Policy, the volume established by this increase in allotment would allow smaller processors to bump their production but the CFO has said that this allocation is outside the supply setting agreement and therefore does not affect the allotment to the smaller processors. The smaller processors have advised the CFO that its decision regarding Cuddy will have a direct and negative impact on the smaller processors’ markets.

Mr. Shapiro told the Tribunal that no processor in Ontario is at capacity and all would like to increase their supply but the market will not permit this. He argued that allowing a processor to apply directly to the CFO for more supply is a flawed process as there is no meaningful opposition to the application. The application is confidential and no other processor can respond. He said that Cuddy must be subject to the same constraints as the others if the system is to continue. He told the Tribunal that there is no question that Cuddy will find sufficient supply of product in the Canadian market to supply its customers even if it loses the one million kilograms under this appeal.

John Georgakakos, a producer and co-owner of the Riverview Poultry processing plant, said that he felt the decision made by the CFO could jeopardize the supply setting agreement. He said that the agreement, while not a panacea, is the best solution to maintain stability to both producers and processors. He said the Quota Policy has a formula to accommodate growth for small processors. This decision will have an impact on that growth since it does not follow the formula and the smaller processors are locked out of this growth in the industry. He said that the request by Cuddy for one million kilograms will affect the market since Cuddy requires white meat and so will affect the market for wings. He said his plant is presently operating at 35% capacity and would be more competitive if it could use more capacity. He said that trading is done amongst processors and so Cuddy will be able to supply its needs from other processors without this additional allocation.

Mr. John Lauer, President of Horizon Poultry (Horizon), told the Tribunal that in late April Horizon requested 705,000 kgs. through the panel process. The panel denied the request and, in the heat of the moment, he wrote to the CFO indicating that he disagreed in how the panel viewed new growth and new products. However, when he reviewed the principles the panel follows, it became obvious that there was insufficient definition of new growth and products. He said the purpose of the letter to the CFO was to stimulate action in the AOCP. He said he had full intentions of going back to the AOCP to work out the problems.

Mr. Tony Tavares, President of Maple Leaf Poultry, told the Tribunal that the current agreement was negotiated with great difficulty. He said it achieved a balance between the conflicting objectives of achieving orderly marketing and allowing differential growth rates between companies. He said that there is an aggressive growth of the industry. He argued that the agreement sets production at the edge of what the market will bear pointing out that total growth is greater than under the old system despite record high costs for feed and live price of chicken. He said that producers have shown concern over growth rates and that the Chicken Farmers of Canada have undertaken an evaluation of the production and allocation system to establish safeguards to prevent production levels that would depress markets. They have agreed to production limits over the next four periods to correct the current over supply. He said that the CFO decision is contradictory to this action of the Chicken Farmers of Canada. He argued that the decision of the CFO is arbitrary and cannot take into consideration the market. He said all consumption is interrelated so any addition displaces products from somewhere else.

Mr. Jeff McHaffie spoke on behalf of Cuddy. Mr. McHaffie told the Tribunal that Cuddy is a unique primary processor of chicken in Ontario in that all of its slaughter (95% +) is utilized in its further-processing plants. All of its products that are manufactured from live chicken are sold on a cost-plus formula or on long-term fixed price contracts. He said that Cuddy does not affect the Ontario wholesale market since Cuddy’s products go into a very defined market segment within the food service sector.

Mr. McHaffie said that by Quota Period A-12, Cuddy recognized that it would require additional volumes of live chicken in order to meet its market demands. Cuddy applied to the panel and was awarded 50% of the available pool each time. For Quota Period A-15, Cuddy requested 2.5 million kilograms from the panel to meet the anticipated demand for its products. The panel granted 500,000 kilograms and Cuddy applied directly to the CFO for additional supply. Mr. McHaffie told the Tribunal that he has a market for this additional supply in that one of Cuddy’s customers is introducing a new chicken product. This product has been test marketed and the panel has accepted the evidence of Cuddy that additional product is needed. He filed with the Tribunal a note to the CFO from the panel from its decision in Quota Period A-11 which states:

“Given the magnitude of the Cuddy request, the panel was somewhat hesitant to impinge on recommendations already approved for Quota Period A-11. The panel wondered if in fact such a request could be fairly treated within the mandate of the Special Request Panel, given the rationale which established the 1 million kilogram pool.

It is the opinion of the panel that such a major project is worthy of consideration outside the Special Request program. Nevertheless, given the guidelines of the day, the panel believes it has no other alternative but to deal with the request as detailed in the body of the panel’s response to the Cuddy Foods request.

The panel believes that the above opinions form an integral part of the response to the Cuddy request. Therefore, it recommends that Cuddy Foods and the Ontario Chicken Board receive these supplementary comments in addition to the official response to their request.”

Mr. McHaffie told the Tribunal that he has purchased import credits from other processors in order to meet Cuddy’s needs for deboned meat. He said he has difficulty in obtaining products from other processors that meet the specifications of his client. He told the Tribunal that even with this allocation of an extra 1.0 million kilograms, he will still have to purchase product from other primary processors of chicken.

Mr. McHaffie told the Tribunal that the meat from this extra allocation would not affect the Ontario Commodity market. He said that he needed all of the meat for Cuddy’s customers. He pointed out that he is a net purchaser of wings. He also said that Cuddy is the major seller of drumsticks and therefore did not want to depress the market for drumsticks. He indicated that it is his intention to sell the drumsticks in the export market.

He said he felt that the system rewards those processors who can attract customers that pay an appropriate amount for the product and pay the producer a fair amount. He urged the Tribunal to grant Cuddy the 1.0 million kilograms of live product.

Kevin Thompson, Marketing Coordinator for the CFO, told the Tribunal that the Quota Policy provides a framework for how the live chicken supply is divided among the processors. He said the policy has flexibility to address the problem of individual processors and the market. It allows the AOCP to focus on market requirements without worrying about market share issues. He said the result has been good for the industry and the CFO does not want to abandon the current system.

Mr. Thompson said that, while the Cuddy decision is the largest variation from the Quota Policy, it is not the only one. He said that Ungerman/Thompson, a small processor, was unable to get the supply it needed through the AOCP and approached the CFO directly. The CFO conducted a hearing, received the comments from the AOCP, and the CFO then made a decision for two quota periods that satisfied Ungerman/Thompson. Since then that company has achieved its requirements through the AOCP process.

Mr. Thompson also said that William Aantjes, is a producer who has a processing plant. Mr. Aantjes requested that his plant receive a supply equal to his production quota on the basis that he intended to market his own product directly. The CFO notified the AOCP of the request and then granted this request.

Mr. Thompson also said that the CFO has had issues with other processors not meeting the requirements regarding the letter of credit. The letter of credit is related to the supply a plant is entitled to under the policy. Some processors have not met the letter of credit so the CFO has revised the supply figure. He said that when Abattoir Plantagenet was purchased by Maple Lodge, the CFO had canceled the supply of live chicken in the previous Quota Period. When Maple Lodge informed the CFO that it had purchased the Plantagenet plant and requested the supply be reinstated, the CFO rejected the request because it was not based on market requirements but on the fact that Plantagenet had previously had a supply of live chicken. The CFO then received a recommendation from the AOCP indicating that the Maple Lodge request for supply to Plantagenet was based on market needs for Quota Period A-15 so the CFO allotted 305,000 kilograms of chicken to Maple Lodge even though this was in excess of the AOCP recommended production for Quota Period A-15.

Mr. Thompson said that when the CFO received the Cuddy request for a specific supply of 7.6 million kilograms for Quota Period A-15 and beyond, it was obviously a serious request and the CFO felt obligated to deal with this request. The CFO knew the process Cuddy went through before writing the CFO. The CFO requested that Cuddy meet the CFO to discuss the situation. The CFO did not invite the AOCP to the meeting. At the meeting, the CFO heard Cuddy’s presentation which was detailed with a large amount of documentation from both Cuddy and its customer. The CFO was convinced that the request for supply for a new market was significant and that the chicken was needed. He said that the CFO considered the effect that increasing the supply would have on the wholesale market and was satisfied that the request would have no impact. The CFO also considered the effect on other processors and the Quota Policy. He said that the Quota Policy is important to the CFO and it has no desire to see the agreement fall apart and no desire to see processors coming to the CFO to ask for a supply of chicken. Having considered all of these factors, the CFO granted the request for Quota Period A-15 only. The CFO then advised the AOCP of its decision and also indicated that it was not opening the door to processors to avoid going to the panel for consideration. Mr. Thompson said that Cuddy would have to go back to the panel if it wanted to increase its supply for Quota Period A-16.

Mr. Mike Scheuring, a chicken producer and vice-chair of the Board of the CFO, told the Tribunal that he was at the hearing and participated in the decision for the Cuddy request. He said that Cuddy came to the CFO with a thorough presentation. The CFO carefully considered all the information and he was convinced after the presentation that the extra volume Cuddy requested would not replace a like product with another like product and therefore the request should be granted. He said that he sees this decision as one of a few exemptions to the CFO’s Quota Policy but this is a unique situation that warrants special consideration. He said he believes that if Cuddy does not get a local supply, then the product will not come out of Ontario and the CFO prefers to grow it here. He said that hopefully the AOCP can find a way to accommodate this type of request without them having to come to the CFO. He said if the request was not granted and Cuddy had to use supplementary imports for its supply, the CFO would be justifiably criticized. He said he believes that this product is needed for a steady market rather than a temporary requirement. He said that his personal opinion is that when Cuddy has to apply for such a large increase in allotment, there must be a shortage of product in Ontario.

The Tribunal examined the evidence and reviewed the submissions of the parties, and noted the following points:

• The CFO was satisfied the request was legitimate and not going to replace a like product.

• The CFO is within its authority to make this decision.

• The special request system is fully used and has been since Quota Period A-12.

• From the producer’s point of view, it is better to supply the demand with Ontario chicken rather than requiring a processor to get supplemental imports.

• The AOCP can address the stress on the supply situation in its July recommendations to the CFO.

• In the instance of Ungerman/Thompson and Aantjes, the CFO notified the AOCP of its intention to conduct a hearing on the supply issue yet it failed to do so for Cuddy, the largest of the exemptions granted by the CFO.

• Industry struggled and worked out the supply setting system that both parties agreed was a benefit to the industry.

• All parties agreed that the special request panel members were experts in the chicken industry and well respected for their decisions.

• The current Quota Policy has no appeal mechanism from a decision of the special request panel.

• The Chicken Farmers of Canada, with the cooperation of the CFO, have agreed to a percentage cap on total production in Ontario. There is some question as to whether this decision of the CFO puts them at or above this production cap.

• Cuddy requested from the panel 2.5 million kilograms of chicken and got 500,000 kilograms. Cuddy then went to the CFO and asked for an additional one million kilograms and was granted one million. The Tribunal was left to speculate where the other one million kilograms originally requested will be obtained by Cuddy.

In the opinion of the Tribunal, the exemption process of the CFO should be improved and made more transparent to the parties so if there is an opportunity to come to the CFO rather than the special request panel, the process is known to the industry.

In the opinion of the Tribunal, the CFO made a responsible decision in providing additional supply to Cuddy rather than requiring this product to be obtained through imports but there is some concern as to the effect on the total allotment in Ontario.

Decision and Reasons

After carefully considering the evidence submitted and the submissions made, the Tribunal decided to amend the CFO’s decision by reducing the additional allotment to Cuddy from 1.0 million kilograms of chicken in Quota Period A-15 to 600,000 kilograms of chicken.

The reasons for this decision are:

1. The Tribunal is concerned about the storage stock level and believes that the majority of the Cuddy requirements can be obtained within the Canadian system but is concerned that there may be a short fall toward the end of the quota period when import quota may not be available to Cuddy.

2. In the opinion of the Tribunal, there is merit in the Cuddy presentation and the CFO’s decision to acknowledge Cuddy’s need for additional product which warrants Cuddy being granted a portion of its request. The Tribunal reduced the increase because of the concerns expressed by the other processors about the possible effects on the market.

Dated at Guelph, Ontario this 4th day of July, 1997.