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:
H. A. Staff Ltd. v Ontario Grape Growers’ Marketing Board
H. A. Staff Ltd. v OGGMB 1998 ONAFRAAT 29
STATUTE:
Ministry of Agriculture, Food and Rural Affairs Act
HEARING:
July 23, 1998
August 5, 1998
1998-29
NEUTRAL CITATION:
1998 ONAFRAAT 29
H. A. Staff Ltd. v Ontario Grape Growers’ Marketing Board
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 H. A. Staff Limited, from a decision of the Ontario Grape Growers’ Marketing Board, denying his proposal to bring Board fees to a single percentage point of gross for Classes 1 to 3 grapes.
Before:
Jim Rickard, Chair; Denis O’Connor, Vice-Chair; Andrew Wright, Vice-Chair; Anna Andres, Member; Andy Koopal, Member.
Appearances:
Howard Staff, on behalf of the appellant, H. A. Staff Limited.
Geoff Spurr, on behalf of the respondent, the Ontario Grape Growers’ Marketing Board.
DECISION OF THE TRIBUNAL
This appeal was heard in Guelph, Ontario on July 23, 1998. H. A. Staff Limited (Staff) appealed to the Farm Products Appeal Tribunal (the Tribunal) from a decision of the Ontario Grape Growers’ Marketing Board (the Board), denying his proposal to bring Board fees to a single percentage point of gross for Classes 1 to 3 grapes (Labrusca). At the beginning of the hearing, with the consent of the parties, the notice of hearing was amended to read “denying his proposal to bring Board fees to a single percentage point of gross for all classes of grapes”.
The Background
The Ontario Grape Growers’ Marketing Board mandate is to negotiate terms and conditions of sale for grapes sold to licensed processors.
Originally grapes for processing sold as one class and attracted one fee per ton to cover the expenses incurred in the operation of the Board. As time progressed, a second class was established and then others until ultimately the Board arrived at ten classes of grapes for pricing based on the end use of the product. Board fees continued at one rate per ton for all classes. In some years the income from classes ranged from $300 per ton to over $1000 per ton yet the Board fees remained the same dollar figure per ton. After a number of growers complained, the Board reviewed the fee structure and implemented a new system of a flat rate of $7.00 per tonne delivered plus a percentage of the sale value of the grapes marketed. This fee structure has existed since at least 1992. For example, the fee for 1997 was $7 per tonne plus 0.7% times the 1996 price.
Mr. Staff appealed to the Board requesting the flat rate be eliminated and the Board fees be calculated on a straight percentage of the market value of grapes marketed. The Board considered this request at a hearing on February 9, 1998 and, after considering the evidence denied the request and confirmed the $7 per tonne plus a percent of market value as the most reasonable basis of calculating Board fees. Staff appealed this decision to the Tribunal.
The Issue
The issue before the Tribunal is whether Board fees should be calculated as a common percentage point of the market value of the crop for all classes of grapes, and if so, what that percentage should be for the 1998 crop year.
The Evidence and the Findings
Mr. Howard Staff told the Tribunal that he is the president of H. A. Staff Limited. He has been a Director on the Board for 18 years and a Committeeman for 31 years. He said his family has been growing grapes in the Niagara Peninsula for more than 100 years. At first only Labrusca grapes were grown in the Peninsula but as time passed more varieties were planted until now there are ten different classes of grapes. Concords were used for juice, port and sherry but now Concords are only used for juice. Since grapes are sold in a North American market, Ontario juice grapes are essentially priced to follow the New York crop, while the wine grapes are priced by the California market.
Mr. Staff told the Tribunal that:
In a normal year he grows between 600 and 700 tonnes of Concord grapes.
He remembered when the Board licensing fees increased from $0.50 per ton to $0.75 per ton and eventually to $10 per tonne in 1991. In 1991 Concord grapes sold for $240 per tonne while the higher classes of wine grapes sold for more than $1000 per tonne yet everyone paid the same $10 per tonne licensing fee.
He began advocating calculation of Board fees using a single percentage of the gross value of the crop in the late 1980’s. His position shows in the Board’s minutes in 1990 or 1991.
In 1991 Concord grape growers received the least amount per class for their grapes and paid 4% of the gross income for Board license fees. The higher priced varieties paid as low as 0.5% of the gross income as Board fees. That year Concord growers paid 35% of the Board budget. The Board does not keep detailed records of its activities and could not show the Concord growers that this amount of money was spent by the Board on managing this class of grapes.
In 1991, the Board set up a committee to study the problem of license fees. A number of options were considered.
The fee structure adopted was $7 per tonne plus a percentage of the market value of grapes sold. This meant that all producers pay a fixed amount per tonne plus a variable amount depending on the gross value of the grapes produced.
For 1997, Concord growers are paying just under 3% of gross income as license fees while, by comparison, Chardonnay growers are paying 1.2% of gross income. The license fees for these two classes of grapes are coming together and approaching the same percentage point of gross as license fees but at the present rate it will be a number of years before the percentages are equal. Mr Staff wants to accelerate the rate of convergence.
The rest of agriculture is calculated on a percentage of gross for fees and grapes should be as well. If grapes were calculated on a percentage basis for license fees it would be about 1.5% for all classes of grapes. In his case, this would mean a reduction in Board fees for his Concord crop of about $2300. Because many growers produce a mixture of varieties the change to a single percentage of gross value of the grapes may not result in any difference in the total Board fees paid by these growers.
The notations in the Board’s minutes indicate approximately 80% of its time is spent on wine grapes. Wine grapes should be paying 80% of the cost of the Board, if the Board spends 80% of its time on wine.
In response to questions from the panel Mr. Staff said that:
The price paid for grapes is determined by outside factors i.e. the California price index for wine, and the New York State published figures for grapes for processing. This means that the cost of production is not a large factor for determination of the price of Ontario grapes for producers.
Wine grapes yield 3.5 tonnes per acre with some varieties yielding up to 5 to 6 tonnes per acre. Concords yield an average of 3.5 tonnes per acre.
There are currently about 250 growers of Concord grapes in Ontario but this is changing rapidly with the number of growers decreasing and the acreage per grower going up.
Concord grapes can be grown in Washington State but they have a different taste. Welches grape juice sets the standard in taste and if that standard is to be maintained grapes from Ontario and New York are needed.
He has support of other Concord growers but does not have them in the hearing room or letters of support to give to the Tribunal. Concord growers have accompanied him when he made presentations to the Board.
45 to 55 Niagara/Concord grape growers now market part of their crop through a cooperative in New York. This provides an additional outlet for Ontario grapes.
In his opinion the Board spends 80% of its time on wine issues and 20% on grape issues.
Mr. Jim Rainforth, Secretary Manager of the Board, told the Tribunal he has worked for the Board since 1977. The Board shares a building and staff with the Ontario Tender Fruit Producers’ Marketing Board. There are six full time and three part time staff working for the two Boards. They do not keep detailed records of how time is spent. The agreement is that the share of the cost paid by each board is based on a rolling five year average of the gross farm gate value of tender fruit and grapes. It works out to roughly a 50:50 sharing of costs. This year it is 52% tender fruit and 48% grapes. Included in the staff is an assistant secretary for the Grape Board and an assistant secretary for the Tender Fruit Board and the rest of the staff respond to the needs of the commodities depending on time and circumstances.
Historically, the Board fees were a flat rate per tonne. In 1989 the fees were raised to $10.50 per tonne to accumulate funds in anticipation of a need to spend more during the free trade negotiations to protect the interests of Ontario grape growers. The fees stayed at that level for three years. The negotiations were completed without as much being spent as forecast.
In 1992, the Board looked at the fee structure and considered its options. The first option of “Do Nothing” was rejected because the fee structure was creating a surplus of funds. The second option of a “percentage-by-variety” was rejected as too radical a change for the higher priced grapes. A third option called a “compromise position” consisted of a base figure for all varieties plus a percentage of the value of each tonne of grapes. This is the option that was adopted by the Board after considerable discussion, including discussion with the Committeemen and the growers at the annual meeting. At the same time, it was decided that the fees should be set to be revenue negative to reduce Board reserves until reserves met the Board requirements. The fee was set at $7 per tonne plus 0.3% of the market value. In 1994, the percentage was raised to 0.6% and later to 0.7% but the $7 remained the same.
Mr. Rainforth said that the $7 was the estimated cost of meeting the basic services the Board provides to all growers. He said that about 50% of the cost of the Board is discretionary spending and 50% is spent on basic services. The discretionary is spent 30% on wine varieties and 20% on juice varieties, in his opinion. He emphasized that no detailed records are kept to support these figures.
He said that his recollection of what occurred in setting the formula for the fee structure was that the Board had reached a compromise position. Board fees are approved annually by the incumbent Board.
According to Mr. Rainforth, in 1995, the Board established a committee to review the fee structure. That committee recommended no change in the fee structure formula.
Mr. Rainforth pointed out that under the fee structure the Board fees for higher value grapes have changed significantly. When the amount of the variable percentage is increased, the highest priced grapes pay more. He said that Concord grapes paid fees of $10.50 in 1989, and $9.50 per tonne in 1997. At the same time, the highest value grapes paid $17.75 per tonne in 1997 as opposed to $10.50 in 1989.
Mr. Rainforth told the Tribunal that the Board reviewed the fee formula at the hearing for Staff. He said the Board’s understanding was that in years when the fees were to be reduced the reduction would come from the flat rate and when the revenue was to be increased, the increase would come from raising the variable percentage. This has been the case since 1992 but each Board is able to change this as the fee schedule is fixed by the Board on an annual basis.
Mr. Rainforth told the Tribunal that the Board has facilitated the sale of Ontario juice grapes in New York since 1991. This includes negotiations on container sizes for delivery, necessary exemptions to Board policy on pricing and like matters. The Board also does the paper work necessary the get these grapes across the US border. Some exported grapes are used for wine production and these grapes are subject to the terms and conditions of payment negotiated by the Board. These services are provided by the Board specifically for Concord and Niagara variety grape growers who export.
For the domestic market, Mr. Rainforth said that the Board negotiates price and terms and conditions of payment for domestic markets. As well, the Board seeks alternative markets and has been successful in maintaining marketing pressure and a local processor has continued operating after a threatened closure.
Mr. Rainforth said that many vinifera grapes are grown by processors. These processors object to paying Board fees on the grapes they grow and market to themselves. He predicted this group would exert pressure on the Board to be exempted from fees if there is a significant increase in the fees charged on this production.
Mr. Rainforth reviewed the 1997 annual report showing that just less than 20% of the Board’s fee income was generated from growers of Concord grapes. This is close to the 80:20 split Mr. Staff indicated as being appropriate.
Mr. John Neufeld, licensed grape processor, grape grower and Chair of the Board of Directors of the Board, told the Tribunal that he has been a grape grower since 1972. Mr. Neufeld said that when the industry is facing crisis it does not matter if it is wine or juice grapes, the industry pulls together as a unit. He said the Ontario industry is small compared to New York and minuscule compared to California or Washington. Therefore, it is important to have a strong unified voice. He said he was concerned that changes in the fee structure not cause a wedge that divides the industry. He said in his view all of the growers produce grapes for processing and that is what the Board works at. He said that the Board goes where a problem exists and works on it without concern for whether the end product is wine or juice. He said there is no perfect system for calculating Board fees, but the Board did establish a committee including producers of juice grapes and wine grapes, to study fees in 1995. That committee recommended no changes in the fee structure.
Mr. Neufeld told the Tribunal that, in his experience, the cost of production has nothing to do with the selling price. The selling price is similar to California price but the terms and conditions of selling make a difference. To get good terms and conditions the industry needs a strong unified voice.
The Tribunal examined the evidence and made the following findings:
In the opinion of the Tribunal, the principle of spreading the generic costs of operating the Board across the total tonnage produced is acceptable.
The Tribunal accepts the statement of the Board that a flat fee to cover generic costs of operating the Board plus a percentage of the crop value is a reasonable approach to calculating Board fees.
While the $7 per tonne is an arbitrary number and not substantiated in detail, it has been accepted by most growers as a reasonable number to collect the generic cost of running the Board. The Tribunal examined the figures presented at the hearing and in the Board’s annual reports and, while the Tribunal could not calculate a precise figure, it is satisfied that $7 per tonne is reasonable, and since it has been accepted by the growers the Tribunal ought not to interfere without good cause. The Tribunal encourages the Board to continue to examine its costs to ensure that the $7 figure remains appropriate and to change it if necessary.
The establishment of fees is a mandate of the Board. In the opinion of the Tribunal, the Board has operated within its mandate, openly discussed the fee schedule with growers and arrived at a formula that has been accepted by the majority of the growers.
Mr. Staff argued that the Board spends only 20% of its time on issues of concern to the Labrusca growers. The Board fees paid by Labrusca growers in 1997 were just under 20% of the cost of operating the Board. While there is a perception of inequity in the formula for calculating Board fees, it appears to the Tribunal that the end result is close to where it should be.
The Tribunal notes that other growers have not raised the issue of using a common percentage across all classes as the method of calculating Board fees.
As the industry shifts to the higher-valued grapes, the fees collected for Labrusca and wine grapes are approaching a single percentage point of the value of the crop.
Decision and Reasons
After careful consideration of the evidence presented and the submissions made, the Tribunal decided to deny the appeal for the following reasons:
The Tribunal was not convinced that the present method of calculating Board fees produces an end result that is unfair to any one group of grape growers.
The Tribunal was not provided with proof from the minutes of the Board that a significant number of producers were in favour of changing the present method of calculating Board fees to a percentage of the value of the crop.
Dated at Guelph, Ontario this 5th day of August,1998.