Niagara Country Fresh Poultry Inc. v Chicken Farmers of Ontario, 1998 ONAFRAAT 15

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:

Niagara Country Fresh Poultry Inc. v Chicken Farmers of Ontario

Niagara Country Fresh Poultry Inc. v CFO 1998 ONAFRAAT 15

STATUTE:

Ministry of Agriculture, Food and Rural Affairs Act

HEARING:

March 30, 1998

DATE OF DECISION:

April 16, 1998

1998-15

NEUTRAL CITATION:

1998 ONAFRAAT 15

Niagara Country Fresh Poultry Inc. 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 Niagara Country Fresh Poultry Inc. (Niagara) from the decision of the Chicken Farmers of Ontario, dated March 11, 1998, denying Niagara’s request for an allocation of supply for crop Quota Period A-20.

Before:

Jim Rickard, Chair; Armand Bechard, Member; Murray Cardiff, Member.

Appearances:

Kent E. Thomson, counsel to the appellant, Niagara Country Fresh Poultry Inc.

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

Herman Tursktra, counsel to the Association of Chicken Processors of Ontario.

Tom Graham, counsel to the Tribunal.

DECISION OF THE TRIBUNAL

This appeal was heard in Guelph, Ontario, on Monday, March 30, 1998. Niagara Country Fresh Poultry Inc. (Niagara) appealed to the Farm Products Appeal Tribunal (the Tribunal) from the decision of the Chicken Farmers of Ontario (the CFO), dated March 11, 1998, denying Niagara’s request for an allocation of supply of chicken for processing for crop Quota Period A-20.

The Tribunal scheduled two days for this hearing but four days of testimony were presented during the course of the hearing. The hearing commenced on March 30, 1998 and testimony was concluded on Thursday, April 9th. Because of the length of the hearing Mr. Bechard was unable to attend on April 9th and withdrew from the hearing panel. Consequently Mr. Rickard and Mr. Cardiff completed the hearing as the panel of the Tribunal relying on the Statutory Power Procedure Act Section 4.4.

The Background

The CFO regulates the production of chicken in Ontario under a quota system. Each quota period a total allotment of chicken for Ontario is set by the CFO in conjunction with the Chicken Farmers of Canada (CFC). In arriving at its position, the CFO consults with the Association of Ontario Chicken Processors (the AOCP) on the production requirements for Ontario. A portion of this allotment is then assigned to each licensed chicken producer according to the quota held by that producer. Producers are required to grow their allotment of chicken and market that allotment to an approved chicken processor. There are penalty provisions for producers who grow more chicken than they are allotted by the CFO. Producers are allowed to contract with the processor of their choice to sell their production. Over the years several systems have been implemented by the CFO to assist producers in marketing their production to processors in an orderly fashion.

The CFO passed Quota Policy No. 129-1996 effective May 31st, 1996. The effect of this policy is to establish a framework for assignment of the supply of live chicken to each processor. The relevant sections of Quota Policy No. 129 - 1996 are as follows:

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 kilograms., 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. 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.

Requests by new entrants have been in the order of 60,000 kilograms per quota period or less. The CFO referred these requests to the AOCP for a recommendation on the supply that should be provided. In each case, the CFO granted the supply recommended by the AOCP. The exception was a chicken producer who applied directly to the CFO for permission to process his own production and this request was granted by the CFO without a recommendation by the AOCP.

Niagara is a new entrant into the chicken processing industry. In November 1997, Niagara applied to the CFO for an assignment of supply starting in Quota Period A-19. Details of Niagara’s plan for its building and operation are outlined in the Tribunal’s decision on the issue of supply for Quota Period A-19 dated February 4, 1998. At that hearing the Tribunal heard that the Farm Products Marketing Commission (the Commission) had established a committee (the Committee) composed of members of the Commission, the CFO and the AOCP) to review the issue of the assignment of supply to processors. The Tribunal found that an allocation of 1.6 million kilograms in the first quota period of operation of a plant, in the opinion of the Tribunal, is too large an increase for the industry to absorb without disruption. The Tribunal also found that a new entrant policy should be developed by the committee and should consider issues such as:

1. a definition of what constitutes a new entrant

2. the maximum allocation to a new entrant in any quota period

3. minimum requirements, in place at the time of request, to be eligible for a supply allocation

4. a quota period for the allocation to start

5. a consistent growth pattern for graduated entry into the industry.

The Committee has met and is working toward a March 31, 1998 deadline for reporting to the Commission on its recommendations. In the meantime, Niagara has applied to the CFO for an assignment of supply for Quota Period A-20, the AOCP has recommended to the CFO that no supply be provided to Niagara for Quota Period A-20 and the CFO denied Niagara a supply of chicken to process in Quota Period A-20. It is this decision that Niagara has appealed to the Tribunal.

Preliminary Matters

At the beginning of the hearing the AOCP requested party status at the hearing. This application was opposed by the appellants and supported by the CFO. After hearing arguments as to the fairness of allowing the AOCP to participate in the hearing and bring evidence that was not before the CFO when it made the March 10 decision, the Tribunal decided to grant party status to the AOCP. In the opinion of the Tribunal, the AOCP has a significant interest in the subject matter of the hearing and the Tribunal wishes to have as comprehensive and complete information as possible placed before it at this hearing so that the most appropriate decision of the issue can be made.

At the request of the AOCP all witnesses at the hearing provided sworn testimony. The AOCP had a court reporter at the hearing to transcribe the evidence.

The Issue

The issue before the Tribunal is whether or not Niagara should have 1.6 million kilograms of chicken assigned to it for Quota Period A-20 or a lesser amount to be determined by the Tribunal.

The Evidence and the Findings

Mr. Frank Sheehan, MPP for Lincoln, told the Tribunal that he is familiar with the principals of Niagara. He said he is supportive of the Niagara application and it is in the public interest to have entrants that will bring new talent to the industry and provide more jobs in Ontario. He said he understands that further processors are importing truckloads of product into Ontario for processing. The statistics he has been shown indicate that Ontario is exceeding its base quota by 3.3% while other provinces are exceeding base by 8%. Mr. Sheehan explained that he favors more production for Ontario growers and processors. He said that he understands there is one million kilograms of product available to Ontario processors that is not being grown so granting a supply to Niagara from this unused allocation should cause no problems.

Lorne Nelson, Mayor of West Lincoln, explained to the Tribunal that his municipality is largely an agricultural area with a number of poultry farms. He said he knows the principals of Niagara to be upright, hard working citizens. He said the plant is located in the industrial park of West Lincoln. He said the plant is a cement block building, state of the art building, and the municipality would not allow it unless it met the requirements of all departments. He said the plant will be good for the municipality, creating 35 to 40 jobs. He said he is supportive of Niagara.

Theo Gintonis, Robert Beliak and Tom Gintonis were identified as the principals of Niagara. They told the Tribunal that the details of Niagara’s plans as outlined in the February 4th, 1998 decision of the Tribunal relative to Quota Period A-19, apply to the current appeal. Tom Gintonis told the Tribunal that as of Friday, April 3rd, 1998 the steel is up on the plant and the roof is being put on. He said the building is closed and within a week they will be moving equipment into the plant. He said that by first week of May the plant should be ready to process chicken. He said in the time from the January 23rd hearing until now there had been some changes to the layout of the plant and an extension of the size to accommodate requests made by Agriculture and Agrifood Canada for inspection purposes. Mr. Gintonis said the equipment will take three weeks for installation.

Mr. Beliak told the Tribunal that they had invested $1.4 million in the project. He said that they had calculated the production capacity of the plant based on 31 birds per minute line speed and a double shift working five days per week. Using these parameters the capacity of the plant is 3.15 million kilograms per quota period.

Mr. Beliak said that Mr. Kosis, Mr. Slot, Mr. Posthuma and Mr. Thompson from the CFO had toured the plant at Smithville and had seen the processing equipment to be installed in the plant. He said all the questions asked by these members of the CFO were answered. Mr. Beliak said that the only requirements the CFO told Niagara the plant had to meet in order to qualify for an allocation of supply were:

1. Proof of ownership.

2. A meat inspection license.

3. A letter of credit for the value of one weeks processing.

He said that Niagara had, or will, comply with these three requirements when an allocation is made. They need to know the amount of the allocation to get the letter of credit. He said that they had relied on the CFO judging the merits of their application as outlined in the quota policy. He said the CFO had not done this, in his opinion.

Mr. Beliak told the Tribunal that Niagara wanted to be fair and flexible. He said Niagara would take any amount that is deemed appropriate and get phased into the industry. Niagara does not want to cause a disruption of the industry.

Mr. Beliak said that, under the National Agreement, Ontario is entitled to grow by 5% in Quota Period A-20 and does not need permission from any other province to do that. The current growth is 3.3% so there is a gap of 1.7%, or 911,000 live kilograms that could be allotted in Ontario and stay within the agreement.

In response to questions from the panel Mr. Beliak said that one day per week of operation with one shift would require 300,000 kilograms allotted to the plant. He said he would like to operate three days per week and increase from that on a period by period basis.

Mr. Beliak offered three policy alternatives for dealing with new entrants to the processing industry. He suggested that:

1. A pool of allocation be set aside for every period for new entrants. This shows that the system is open.

2. The policy could specify that a new entrant could get a maximum of “X” kilograms bearing in mind the “X” has to be large enough for a new federal inspected plant to be viable.

3. Have an amount of kilograms assigned to processors and an open sign up for the rest, with something set aside for new entrants every period there is growth.

Mr. Beliak said that he has not participated at the Board of Directors meetings or the Committee meetings, but these are three options that he would offer to the industry.

Peter Tonin, an accountant employed by Niagara in late December 1997, told the Tribunal that he had modified the draft business plan that was presented to him by the principals of Niagara so the plan could be submitted to a financial institution to secure funding for this project. He said he based his work on the information that was presented to him, he did no verification of the materials. He did not do a risk analysis and other work that would normally flow from preparation of a business plan because he was not employed to carry out that type of analysis. He told the Tribunal that he began with the fixed costs of the Niagara plant and then calculated a throughput that is necessary for the plant to break even. He presented a chart to the Tribunal indicating a need for a supply of 400,000 kilograms in the first period of processing with increases each period to reach a total annual production of 4.42 million kilograms. In reaching his conclusions he said that he assumed a phased in basis of supply, 400,000 kilos in period one with increases over the quota periods for a year. Processing 4.42 million kilograms of chicken for the year, contributed to margin $1,067,000. This figure is the selling price minus the cost of bird and variable costs such as packaging, hauling, labour for processing, management ($30,458 salary for each of the principals). This contribution to margin has to cover the fixed costs of the plant. At 4.42 million kilograms per year the plant will break even. In his analysis he assume a selling price of $2.41 per kilogram, a live price of $1.33 per kilogram and 231,000 kilograms of turkey processed as well. He said that his analysis focused on one year and he did not perform a multi-year projection. Mr. Tonin did not tell the Tribunal what amortization period for the capital cost he used in his analysis.

Mr. John Slot, chicken producer and member of the Board of Directors of CFO, appeared under summons issued by Niagara. Mr. Slot told the Tribunal that he is a representative of the CFO on the allocation committee struck by the Commission. He said that after the Tribunal decision of February 4th, the CFO board decided to send representatives to the Niagara plant and he was one of the directors sent. He said he has some experience in processing and what he saw at Niagara was a typical processing plant. He said that after the visit to the plant the group made a verbal report to the Board on the state of the plant, but did not, as a committee, make a recommendation on the allocation of supply for Niagara.

Mr. Slot said that it was his understanding that to obtain an export allocation a plant had to have a domestic allocation as well. The Niagara request was complicated by the fact that it has requested 200,000 kilograms for export. This made it difficult for the Board to decide Niagara’s request. He said, in his opinion, an allocation of 1.6 million kilograms to Niagara would be irresponsible.

Mr. Slot said that he personally has concern about Ontario’s market share. He said the processors have provided data to the CFO showing Ontario’s market share deteriorating over time. He said if Ontario processors are not capable of increasing Ontario’s market share in a responsible way then, in his opinion, the CFO should. He said that Niagara’s plan would replace product from other provinces with Ontario product. This will increase Ontario’s production and market share.

Mr. Slot said that he is not concerned about an allocation to Niagara in Quota Period A-20 as there is 3.3% growth in A-20 and the allocation to Niagara could be on top of the 3.3%. He said the CFO has to be careful of the kilograms produced because it might cause market deterioration and reduction in the price. He said he has looked at inventory stocks and personally feels it would not be a concern to increase the Ontario allocation in Quota Period A-20.

Mr. Slot said he has a concern about the increase in production in the western provinces compared to Ontario. He said Ontario has the infrastructure and the population and the market so should grow its production.

Norman Pye told the Tribunal that he is a further processor of chicken. His plant is located in Paris, Ontario. He purchases product, de-bones it and sells it to other further processors. He told the Tribunal that he cannot get an adequate supply in Ontario so he is bringing in 75,000 to 90,000 kilograms per week from the west. He has to buy his products from a federally inspected plant because of the market he serves. The product is perishable so he has to move it while it is still saleable. He said his plant has grown from 8 employees to 55 and his volume has grown by a factor of six times in one year. He told the Tribunal that price is as important to him as delivery of the product.

Mr. Pye said he was at the Tribunal to say that the CFO is setting the allocation in Ontario too low. He said all the further processors are bringing in chicken from the west and the USA. He said why not give more production to the Ontario producers.

Kevin Thompson, Marketing Coordinator for the CFO, told the Tribunal that the current Quota policy came into effect May 1996. Prior to this policy the industry had a bottom up system in which effectively each processor put in a number indicating its requirement for live product and the sum total of the requirements of all processors was allotted to producers and grown, Under this system it was difficult to properly obtain the market requirements and divide it amongst the processors. The current policy was put in place to provide a framework for distribution of the total supply to processors. The policy provides accelerated growth for small processors, and other flexibility’s. It is a mechanism to distribute the supply among the processors in an orderly fashion.

Mr. Thompson said that, in formulating the quota policy, there was not a lot of discussion around new entrants. The main point was a recognition that new people come into the industry from time to time and there is a need for the policy to deal with new entrants. That is what Clause 14 in the policy is for. He said that the Niagara application is unusual in its size. There have been four or five new entrants considered and granted by the CFO since the policy was put into effect but each of these is in the order of 10,000 to 60,000 kilograms of product per quota period.

Mr. Thompson said that the CFO believes the Niagara application to be serious and that the applicants are committed to the industry. He said there are currently three applicants before the CFO asking for allocation and all three requests were denied in Quota Period A-20 because of the review of the allocation process currently underway. He said the merit of the application was not a factor in the decision, the CFO believes all three applications have merit.

Mr. Thompson told the Tribunal that there is risk of over supplying the market and affecting price if the Ontario allocation in Quota Period A-20 is increased to supply the applicants. He said this is a significant quantity to add on top and that is where the comment from the CFO that it would be irresponsible to grant the Niagara request came from. He said that even if the allotment was added on top just for just one period the next period deals with all market requirements so the increase will be divided among the other processors so each existing processor takes less allocation in the long term.

He said the CFO feels all processors should get an opportunity to participate and the CFO wants to be fair and equal to all processors both existing and new. He also said that the wholesale price is linked to producer price and the production volume is a major factor in negotiating price with the processors.

Mr. Thompson told the Tribunal that other provinces do not have a system like Ontario where you have to make an application to the Board for supply. He said Ontario processors contract with Quebec producers for product. He said processors probably can go to the marketing board of the other provinces and ask for supply. He said this was not a common practice because of the distances involved.

Mr. Thompson said the supply is determined based on consultation with people close to the industry. The CFO primarily relies on the AOCP for recommendations. Any time the CFO chooses to increase the AOCP number there is a risk of over supply of the market. If the wholesale price did fall in light of a CFO decision to increase supply, then it would be a factor in price negotiations.

Mr. Thompson said that when the CFO looks at increasing the market, it has to start with the premise that the market is full. It has to replace product from other provinces with the increase. It then has to consider how the other provinces will react. He said Quebec basis its supply on Ontario’s supply. It is all relative. He said there is an obligation on the CFO to satisfy the market and maintain price to farmers.

In response to questions Mr. Thompson said that Niagara could:

1. Buy import quota and import live chicken.

2. Purchase live or eviscerated product from other processors.

3. Purchase live chicken from out of province.

4. Purchase live chicken and export all its product.

Mr. Fred Lewis, chicken producer and member of the Board of Directors of the CFO, told the Tribunal that the decision of the CFO on the Niagara application was not an easy decision to make. The CFO tried to treat all processors the same way believing all should have an opportunity to get kilograms to slaughter. He said the CFO had three processors that were in the same position. The CFO made the decision not to grant any kilograms to Niagara, or the others. The main reason for the decision is that the policy was under review and the CFO wanted this review to take its course.

Charles Wienberg, told the Tribunal that he is the owner of Chai Kosher Poultry (Chai). He has been in the chicken industry for 27 years. He said he has Rabbis on staff and processes and further processes Cornish hens, chicken broilers, roasters, ducks and turkeys up to 40 pounds. For Quota Period A-09, Chai had an allocation of 550,000 kilograms while for Quota Period A-20 it has a supply of 605,000 kilograms.

Mr. Wienberg told the Tribunal that to process kosher products the plant must have Rabbis on site. It is not possible to process kosher and non-kosher in the same building. The only exception is a plant in Montreal that was grandfathered years ago when the supply of product could not keep up with the demand. He said Chai supplies the kosher market in Ontario and since it is a niche marketer the CFO quota policy allows its allocation to go up and down according to its peak demand. He told the Tribunal that the Quota Policy has improved the supply situation for Chai and he now gets the product he needs.

Mr. Wienberg told the Tribunal that Chai has not shorted the community with kosher products and Chai takes care of the community for its entire kosher requirements. His location in the City of Toronto means he can deliver two or three times per day to customers. The only problem is delivery of chicken wings and he is spending $50,000 for a machine from Denmark to increase the amount of wings he is allowed to keep. Damaged wings is a processing problem when dealing with the kosher market.

Mr. Anthony Tavares, President of Maple Leaf Poultry, told the Tribunal that four or five members of the AOCP do the vast majority of further processing in Ontario. He said Maple Leaf, Maple Lodge, Cuddy and Horizon do more than 75% of the further processing. He said this is a vibrant part of the industry buying cheap products, processing it and shipping it all across Canada. The majority of the further processing industry is located in Ontario so it is not new that product flows into Ontario from other provinces and countries to be further processed, this is how the industry has worked. Further processing products are sized or are particular products where there is not enough grown in Ontario to meet the market, for example wings. He said the AOCP wants to increase Ontario’s market share and has raised the issue with the CFO and the Commission, pointing out steady decline over the past few years. Something needs to be done but it is a complex issue requiring a complex strategy. Price is a factor in the solution. In 1994 the industry increased production, the price decreased and the industry was unable to sustain the level of the changes. The CFO is responsible for meeting the market demand but not exceeding it.

Mr. Tavares said that there is no doubt that the prairie provinces, particularly Manitoba, have had an aggressive campaign to change their previous export grain market into a protein market in hogs and chicken. He said the AOCP wanted changes in the Ontario policy to respond. Changes like an export policy that will allow re-grow of exported products and one on one contracting with producers. The CFO has not implemented these requests.

According to Mr. Tavares processing capacity is not the issue in reducing Ontario’s market share. He told the Tribunal that the industry is at 50% of capacity utilization. In 1994 the industry attempted to make better use of its processing capacity and grow Ontario’s market share. The results of that action was the driving factor in coming up with the current Quota Policy to balance supply and market demand. He said Maple Leaf processes 900,000 birds per week in two facilities. Last summer Maple Leaf closed the Dundas facility and laid off 80 people. This plant is a federally inspected plant that can run 6800 birds per hour. Its equipment is as modern as the equipment in Niagara and some if it is even newer. He told the Tribunal that in January this year Maple Leaf laid off the second shift at its Brampton plant. The Brampton Plant is a state of art plant and the only HACCP plant in the country at this time. It can process 8400 birds per hour but only runs 30 hours per week on one shift. He said that, in 1996 and 1997m Maple Leaf spent in excess of the cost of the entire Niagara plant on three pieces of equipment. He said the Prime plant is the most modern plant of its type in the country. It processes 600,000 birds per week using air chill technology. It could process 60,000 head per week more. Maple Leaf could process another 945,000 birds per week in its plants and is currently running 900,000 birds. Mr. Tavares pointed out that the fixed cost per kilogram is an important factor. He said increasing capacity usage to reduce the fixed cost per kilogram is essential for competitive advantage. He told the Tribunal that if capacity is a consideration in setting a supply figure, then Maple Leaf wants the same consideration as Niagara is given in that regard.

Mr. Tavares told the Tribunal that processors in the USA run two full shifts five to six days per week. Ontario has to expect this competition to come sooner than later. Processing capacity usage is a key component of the strategy to prepare for this competition. He said even if Ontario did everything else right - bring the production close to the plants, standardize the barns etc. but did not address processing capacity utilization, then Ontario would not be able to compete.

Mr. Tavares said that Maple Leaf had participated in the development of the Quota Policy to find a way to allocate growth in an orderly market. What was tried in 1994/95 did not work. Part of Maple Leaf’s sacrifice was to stay at the same levels of supply despite excellent growth in its branded initiatives and making investments in the processing plant. Maple Leaf spent five million dollars in the Prime plant alone to continue development of that brand. He said Maple Leaf expected at the end of Quota Period A-20 to be able to participate in the growth of the market and get the benefits of its investment. Maple Leaf could easily sell more product if it was available.

Mr. Tavares said that there is an impression that Niagara is going to lead the industry to HACCP. This is false. Maple Leaf has been a key player in getting the Canadian Inspection Agency to catch up to the HACCP initiative. The Brampton plant and a Quebec plant are pilot projects and Maple Leaf had to convince the inspectors to get on board with HACCP. The inspector have human issues since HACCP is science based not visual.

According to Mr. Tavares the new national agreement sets out a variety of things. There is a 5% national cap on growth that has been agreed to by all the producer boards. There is an 8% regional cap on growth. He said that the AOCP opposed signing the national agreement because it felt caps are not necessary and are counter productive and the more important factor is to supply the market.

Rob Shapiro, Manager of the AOCP, told the Tribunal that there have been new entrants into the processing industry since the Quota Policy was put into place in May, 1996. These new entrants have normally been in the range of 50,000 to 70,000 kilograms of product per period and it was decided that the industry could absorb these increases without disruption.

According to Mr. Shapiro, when the AOCP originally met with Niagara on October 28, 1997, it expressed to Niagara what was believed to be the current capacity utilization of the processing sector. Niagara was told about 50% of the capacity was being used.

Mr. Shapiro confirmed that since the western feed freight assistance program was removed the western provinces have began to believe they could compete in meats. They started with pork and are aggressive in poultry as well, especially Manitoba and Saskatchewan. In those provinces the provincial governments have told the boards to grow. The export policy in these provinces provides more product than has traditionally moved into Ontario where the further processing plants are located. He said to supply all the needs of the further processors from Ontario production, Ontario would have to increase its production by 25%. He said he is not surprised that Mr. Pye said he is short of Ontario production, that is the reality of the industry. Processors want more production in Ontario as long as it does not destroy prices. He said Ontario can only produce so much because the other provinces follow Ontario’s lead.

Mr. Shapiro told the Tribunal that Quebec takes a percentage of whatever production Ontario allots and prices according to Ontario’s price. He said there is an export program in Quebec, Manitoba, Alberta, British Columbia and Nova Scotia but none in Ontario. That explains why the growth numbers are large for those provinces. He explained that the industry exports the legs and sends the white meat to Ontario for further processing or into the commodity market.

Mr. Shaprio said the AOCP urged the CFO to lower the live price in Quota Period A-19 to send a message to the other provinces. In his opinion, the Ontario chicken producers are making a good margin and producers in the other provinces do not make the same margins. They would be squeezed by a lower price and more volume from Ontario. The CFO said it was not interested in battling at live price level. The issue of declining market share for Ontario was referred to the Visioning Committee struck by the Commission.

Prior to the present supply setting agreement there was an unlimited bottom up system where each processor asked for their desired allotment. The AOCP took the sum total of all requests to the CFO. The CFO accepted or refused the volume. Many times the CFO said the volume was too high to maintain reasonable prices and AOCP was sent back to re-negotiated appropriate volume levels company by company. This was a difficult process. During this period there was a large surge in production and the market deteriorated significantly. The AOCP approached the CFO indicating that the system was not working and suggested that a new allocation of live supply should be developed. It took six months to negotiate the current supply setting agreement. This brought discipline to the processing sector and stability to the industry. Ontario is the only province using this method of matching supply and demand and managing the allocation of supply to processors.

Mr. Shapiro said that the provincial and regional growth cap in the new national agreement is irrelevant, what is important is the size of the market. He said Niagara is telling the Tribunal that there is 911,000 kilograms for Ontario under the cap and that could be allotted to Niagara without disruption of the industry. Mr. Shapiro emphasized that the production allotted in Quota Period A-20 is what the industry believes is the proper amount to meet the market demand without excessive over-production. He said this the major consideration not a fictitious cap.

Mr. Shapiro explained to the Tribunal the five ways that the quota policy allows a plant to start up:

1. Purchase an existing plant with an allocation.

Maple Lodge purchased Abattoir Plantagenet, with a 350,000 kilogram allotment. Maple Lodge increased the company supply by this amount. Grand River Poultry purchased Watts Poultry and enhanced its company supply by the 1.9 million kilogram supply of Watts.

2. Purchase import quota.

55 to 60 million kilograms of product must enter Canada under existing trade rules. A large portion of the import quota is held by companies that sell it, transfer, lease, etc. and companies that want more supply, buy that right to import. There is an open market for the quota and typically it trades for about $1 per kilogram.

3. Purchase live and eviscerated product outside of Ontario.

Live product moves into Ontario from Quebec and Manitoba. While this is not an ideal way to source product it can provide access to more production for Ontario processors, primarily from Quebec. A plant could also purchase eviscerated product from other processors. Many processors bring in loads of product from other processors to supply their customers. In a market with a controlled live supply, many processors do not have enough product for their customers.

4. Apply to the Special Request Panel for a supply.

The Special Request Panel will receive applications from anyone. The panel’s primary criteria is that the project will not be to the detriment of the domestic market, If it is not, the panel can recommend a supply up to 1 million kilograms.

5. Apply to the CFO for an allocation of supply.

While some processors have gone directly to the CFO for an allocation of supply the AOCP has been consulted by the CFO before a decision is made in all instances but one. That instance was a producer who wanted to processes his own production and the CFO granted that request without consultation with the AOCP. Since the amount was small, the AOCP did not appeal but registered its concerns by filing a letter of opposition with the CFO.

Mr. Shapiro pointed out that the average growth for the past few quota periods in the Ontario market is 1.8 million kilograms in a quota period. He said Niagara is asking for 1.6 million kilograms. One could say give them the growth from one period, but when the pie is limited, balanced and matched across the country, giving to Niagara takes from the supply of the other processors. In the end, whether the Niagara supply is put on top of the market demand or taken out of the supply of the other processors, it amounts to the same thing.

Mr. Shapiro told the Tribunal that plant capacity is not a criteria for allotment of supply and never has been. Capacity expands and contracts and has nothing to do with market requirements. Supply management, has created over capacity in the processing industry. This is the result of a government policy decision, not sound business decisions. He argued that the lower the capacity utilization the less efficient the industry is. He said if capacity is a criterion of allotment of supply, and if every processor was judged under that criteria, Ontario would double its production to 100 million kilograms of chicken and that makes no sense in this industry.

Mr. Shapiro said that while it appears that Ontario is only getting a 3% increase in production in Quota Period A-20 the reality is the increase is 6.1% over the same period a year ago. He said that the basis of comparison was changed and that is why the figure seems so low.

A panel representing the large processors (more than 1.9 million kilograms of live chicken per quota period) testified before the Tribunal. The companies represented were Maple Lodge (Mr. Roger Giguere), Horizon Poultry Products (Mr. Douglas McCullogh), Port Colborne Poultry (Mr. Jack Vanderlaan) and Grandriver Poultry (Mr. Robert Sutor). All of the representative told the Tribunal they had been involved in the poultry business for a number of years. All indicated that their companies are on HACCP (Maple Lodge) or would be on HACCP in the near future and told the Tribunal that all federally inspected plants must be HACCP approved by the end of 1999.

The panel members told the Tribunal that they are familiar with the type of equipment that Niagara has purchased. The equipment is standard in the industry and has been around for 15 years or more. The panel saw no advantages to the equipment. They said one piece of equipment, the ozone spray, is not approved for use in Canada.

The representative of Grandriver told the Tribunal that it bought the Watts Poultry Inc. (Watts) processing plant and mothballed it. With the increased allocation of 1.9 million kilograms from Watts, the Grandriver plant at Paris is now running at 60% of capacity.

The representative of Port Colborne told the Tribunal that the company realized it had to decrease fixed costs per kilogram of output and so had purchased equipment from Europe that will allow it to run at 140 birds per minute in the near future. He said the plant runs on a 32 hour shift per week now, not even one full shift. He said the company could easily double its output without any additional investments.

The representative from Horizon told the Tribunal that the company had purchased an old Campbell’s processing plant in St. Mary’s and renovated it. This plant is now running at 40% capacity.

The panel told the Tribunal that the large processors had participated in the supply setting quota policy to bring stability to the industry and order to the marketplace. The quota policy required the large processors to wait while the small processors received disproportionate growth as the industry grew. It is now time for all processors to grow with the industry as the policy sets out. They said if new entrants take all the market growth they will loose market share and they are not prepared for that to happen. They said that to stay in the industry they have to be competitive. They expect sometime that the borders will loose the tariff protection and the Ontario plants cannot be competitive with less than 50% capacity use. They argued that under today’s system with supply management and open ended processing, the industry cannot entertain new entrants and let them take the supply the existing plants need to make them efficient and allow them to meet the future.

A panel of the small processors representing Sergeant Farms (Bob Sergeant) and Riverview Poultry (John Georgeakakis) testified before the Tribunal. Mr. Georgeakakis told the Tribunal that when he bought the Riverview plant in 1994 it was processing 1.1 million kilograms. This was the start of the bottom up approach to supply setting and he could get whatever allocation of supply he requested. His production is now at 1.4 million kilograms which he processes on one 21 hour shift. He said he would be happy to have one full shift of production.

Mr. Georgeakakis told the Tribunal that he purchased a plant with a capacity of 3 million kilos but the “bottom up” approach to supply resulted in surplus product in the market and something had to be done. He said the key to the quota policy was the discipline factor for the processors.

Mr. Sergeant said that his plant processed 753,000 kilograms and is working at 40% of capacity. Mr. Sergeant told the Tribunal that his company came into the industry about the same time as Mr. Georgeakakis purchased Riverview and there was a need to restore order in the market. In his opinion, the quota policy has done this.

The panel said, if the quota policy fails, then the industry still needs a system to make the restricted supply work. Mr. Georgeakakis said the processors “played who had the biggest banker” in 1994 and that was not in the best interests of the processors or the producers.

The panel said that the provincially inspected plants will also have to be HACCP approved so HACCP is not a consideration in the allocation of supply.

Mr. Kevin Grier, an employee of the George Morris Center, told the Tribunal that he had been engaged by the AOCP to prepare a report on the chicken processing industry. He said that according to his analysis of historical data, when the chicken supply increases the price decreases. When Ontario increases its production the rest of Canada increases its production a equivalent amount. He told the Tribunal that he had conducted a survey of six processing companies and obtained data on the variable cost of operating a plant such as labor and the indirect costs, such as administration and overhead. He said he got information such as number of chickens per day or per year, number of shifts operating, hours per shift, wages, number of workers per hour and overheads like power, utilities, waste management, building depreciation etc. He told the Tribunal that the information came from company accountants or the owner. He did not see any company books nor was the information verified or audited by an independent body. Mr. Grier told the Tribunal that according to his analysis, the processing industry is operating at a loss and adding more capacity will only increase the problem.

In response to questions from the panel Mr. Thompson told the Tribunal that:

• Niagara can source chicken from Quebec and Manitoba without allocation of supply from CFO, process the chicken and sell it in Ontario.

• If Niagara is exporting all of its production as whole birds or whole bird equivalents the chicken will be grown in Ontario because export does not count in Ontario’s national allocation.

• Niagara can source live chickens in the USA and export the processed product.

In response to questions from the Tribunal Mr. Shapiro told the Tribunal that:

• Not much volume of live chicken is imported and the main use of imports has been for eviscerated product.

• Niagara can buy import quota and import product to sell in Ontario.

• No import permit is required to bring product in to re-export anywhere outside of Canada.

• The main markets for export are Russia, Cuba and China etc.

The Tribunal examined the evidence and made the following findings:

1. The new entrant policy, Clause 14 of Quota Policy No.126-96, says that a new entrant makes an application to the CFO and the applications will be reviewed case by case. The practice of the CFO has been that every application until now has received an allocation albeit in the order of 50,000 kilograms per quota period.

2. The Niagara application was before the CFO prior to the January 8, 1998 establishment of the allocation committee and freeze on new applicants under the new entrant clause.

3. The Tribunal in deciding the application for supply in Quota Period A-19 said that the capacity of the plant should be known before a supply was allocated. In making this statement for quota Period A-19 the Tribunal was concerned that the plant would in fact be operable not that it could process “X” chickens at “Y” line speed for “Z:” hours per day. It was undisputed that the plant will be ready to process for Quota Period A-20 (June 1998).

4. The Tribunal accepts that capacity should not be a criteria for allocation of supply.

5. The industry is struggling to accommodate new applicants that have the capability of processing as much product per quota period as Niagara wishes to process.

6. There is a problem with a controlled supply of raw product to an industry that has a far greater capacity than is needed to process the available raw product.

7. There is an industry committee (four members from CFO and four members from AOCP) chaired by the Commission, reviewing the allocation process at the present time.

8. The direction from the Commission in its January 9, 1998 letter to the CFO and AOCP were “As of January 8th, 1998 the Commission directs CFO to not allocate chicken to new applicants. Regarding applications currently before the CFO, these should be dealt with in a manner taking into account that the policy review is being undertaken.”

9. The evidence indicted that Ontario’s share of the national market is decreasing and the western provinces have an aggressive campaign to increase production.

10. In the opinion of the Tribunal, Niagara had to know there was no assurance that it would get a supply of chicken and that the industry was operating at about 50% of capacity, and there was no evidence that Niagara had been promised an allocation of supply by the CFO yet Niagara went ahead and built its processing facility.

11. In the opinion of the Tribunal, the AOCP and CFO have worked well together under Quota Policy No.129-96 to bring order to determination of the supply and the distribution of that supply to the processors in the province of Ontario.

12. In the opinion of the Tribunal, there should be an allotment to Niagara for Quota Period A-20.

Decision and Reasons

After careful consideration of the evidence provided and submissions made, the Tribunal directs the CFO to:

1. Allot 100,000 kilograms of live chicken to Niagara for Quota Period A-20 for use in the domestic market. This 100,000 kilograms to be added onto the 55,406,000 kilograms of production previously established for Quota Period A-20.

2. Allot 200,000 kilograms of live chicken to Niagara for Quota Period A-20 for use in the export market.

The reasons for this decision are:

1. Niagara asked the CFO for an assignment of supply before the freeze on new applicants and therefore should be considered under Quota Policy No.129-96.

2. There is a history of the CFO granting all applications for supply to new entrants prior to the application of Niagara as a new entrant and this may have lead Niagara to expect that their supply requirements would be granted.

Dated at Guelph, Ontario, this 16th day April, 1998.