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:
Mosterd v Ontario Broiler Hatching Egg and Chick Commission
Mosterd v OBHECC 2001 ONAFRAAT 28
STATUTE:
Ministry of Agriculture, Food and Rural Affairs Act
HEARING:
May 24, 2001
DATE OF DECISION:
June 6, 2001
2001-28
NEUTRAL CITATION:
2001 ONAFRAAT 28
Mosterd v Ontario Broiler Hatching Egg and Chick Commission
IN THE MATTER OF THE FARM PRODUCTS MARKETING ACT AND SECTION 16 OF THE MINISTRY OF AGRICULTURE, FOOD AND RURAL AFFAIRS ACT.
AND IN THE MATTER OF: An Appeal to the Agriculture, Food and Rural Affairs Appeal Tribunal by Ed Mosterd, Shakespeare, ON of a decision of the Ontario Broiler Hatching Egg and Chick Commission (OBHECC) to cutback allocation and lay period for his 2000 and 2001 BPC year flocks; and of a policy of OBHECC which allegedly results in inequities due to differences in the performance of different breeds of chickens.
Before: Denis O’ Connor, Vice Chair; Ralph Huckle, Member; Tom Callaghan, Member
Appearances: Ed Mosterd, appellant Paul Trudell, counsel to the respondent, OBHECC Ralph Harris, Data Coordinator, OBHECC Reg Cliche, Horizon Chicks Cor Kapteyn, hatching egg producer
DECISION OF THE TRIBUNAL
This appeal was heard in Guelph, Ontario on Thursday, May 24, 2001. The appellant had appealed a decision of the OBHECC to reduce his production potential in the 2000 and 2001 breeder placement cycle (BPC) years. At the onset of the hearing, Mr. Mosterd informed the Tribunal that the cutbacks for the 2000 BPC year had been reversed by OBHECC and were no longer an issue. Also under appeal was an OBHECC policy by which it averaged the hatching egg production of all breeds of chickens used in Ontario, in determining the amount of chicks that each producer could place.
The Background
Section 16 (2) of the Ministry of Agriculture, Food and Rural Affairs Act is as follows:
16(2) Subject to subsections (4) and (5), if a person is aggrieved by an order, direction, policy, decision or regulation made under the Farm Products Marketing Act by a local board or under the Milk Act by a marketing board, that person may appeal to the Tribunal by filing with the Tribunal and sending to the local board or marketing board written notice of the appeal.
Subsections 4 and 5 outline conditions under which the Tribunal may refuse to hear an appeal and a provision that the marketing board may first hear the matter under appeal.
The Issues
The issues before the Tribunal are:
Should the cutback to Mr. Mosterd’s allocation and lay period for the 2001 BPC year be adjusted?
Should OBHECC be ordered to change its policy whereby it uses average hatching egg production of all breeds to determine the number of chicks to be placed by each producer?
The Evidence and the Findings
Ed Mosterd Evidence
Mr. Mosterd explained that he was a broiler hatching egg producer and that his concern was that OBHECC policies created inequities between hatching egg producers using different breeds of chickens. He said he had calculated that an average size producer with Ross Breeder hens would earn $93,632 more net income per annum than average size producers with other breeds.
Mr. Mosterd pointed out that:
There are major production differences between breeds.
His contracting hatchery determines which breed is placed in his barn.
OBHECC has been aware of breed differences for some time but has not acted on them and did not consider them when it cut back the production of all producers.
The National Agency allots a total number of eggs to the Ontario marketplace; OBHECC converts these to birds, without taking into account breed differences.
He owns hatching egg quota, not bird quota.
He will have a Cobb bird in BPC 2001 and that will reduce his earning potential by $75,000 relative to an average Ross producer.
With no change, his returns will be unacceptable for another two years.
Mr. Mosterd said he had been in contact with OBHECC about this issue since September 2000. He explained that OBHECC had agreed to introduce a breed indexing system for the year 2002. However, he said that his preference was for a historic breed index system as this would address many inequities evident in the 1999, 2000 and 2001 BPC years. He explained that OBHECC had rejected that option. Mr. Mosterd said he was pleased the situation would be resolved for the 2002 BPC year and beyond, but he was still prevented from marketing his fair share of hatching eggs in 1999, 2000 and 2001. He submitted that OBHECC had come up with a political solution, but that it was not necessarily a fair solution. He submitted that producers like himself who had received no Ross birds in the past three years were in the minority.
Mr. Mosterd told the Tribunal that the Producers’ Association Allocation Committee had recommended that something be done for the 2001 BPC year. He said the Producers’ Association had been aware of breed differences as early as 1997 and that OBHECC was aware of them as early as 1998.
Mr. Mosterd asked that the Tribunal order OBHECC to rescind the cutbacks to his 2001 allocation, and asked that he be allowed to produce the hatching egg market share which the OBHECC denied him in the 2000 and 2001 BPC years.
In response to questions, Mr. Mosterd indicated:
He was a member of OBHECC from 1997 to March 2000.
He was appealing on his own behalf and not representing the Producers’ Association.
There are 82 Ontario hatching egg producers, of which approximately 31% use the Cobb bird.
He did not have documentation to support his net income figures.
He brought his concern to OBHECC informally in September 2000, then followed up with a letter in October 2000. He received a reply from Roger Bennett, General Manager, OBHECC, in November 2000.
It was evident that the Cobb breed had lower productivity since late 1996 or early 1997.
Differences in breed performance were not masked by disease problems faced by the industry in 1998-99. The disease problems highlighted breed differences as one breed was more susceptible to leukosis.
Full breed performance data for 1999 was available by fall 2000 or slightly earlier.
He was not losing money in the hatching egg business as he was above the industry average in 1999 and had a profitable year. He did not know how he would fare in the 2000 and 2001 BPC years. He was only 45 weeks into his 2000 BPC year.
He agreed that a number of factors besides breed determine production and that these include producer management and hatchery flock management. These variations were captured in breed averages, as the production of several producers’ flocks were averaged.
He had personally been at both the top and the bottom of producer rankings.
He agreed that OBHECC had spent a fair amount of time and effort in resolving the breed disparity issue between November 2000 and April 2001.
He attended two ‘kitchen meetings’ where this issue was discussed. His biggest battle was to establish that there was a problem in the first place.
In legal terms, OBHECC owns quota, but he holds hatching egg marketing share (HEMS).
The National Agency allots to Ontario hatching egg market share, not bird market share. He owns the right to produce a share of those eggs. OBHECC divides the provincial share of national hatching eggs by the average egg production of all breeds to allot the number of chicks that may be placed.
He started producing hatching eggs in 1993 with 10,400 HEMS, but sold that operation which had grown to approximately 18,000 HEMS in 2000. Later in 2000 he bought a smaller operation with approximately 10,600 HEMS.
His hatchery tells him what breed is being placed in his barn. He did not take issue with that practice, as he understood he needs to fill the market requirements and he understood the Cobb bird works well in processing plants due to its heavy breast meat production.
He had developed three options which would provide a more equitable system – breed indexing, allocating hatching egg quota, rather than chick quota, and a historical breed indexing system. OBHECC ultimately decided to use breed indexing starting in the 2002 BPC year.
There had been no producer meetings since OBHECC adopted the breed indexing plan via Policy Direction #44.
As the 2000 cutback was cancelled, producers will not have to kill their flocks seven days early and this will result in a financial gain.
Ralph Harris Evidence
Mr. Harris stated that he had been employed by OBHECC for over ten years, that his position was Data Coordinator, and that he administered the quota system. He explained that OBHECC had used a bird-based production allocation system since 1989 and that it had previously used an allocation system based on square footage. He said the bird-based system was acceptable to both producers and hatcheries.
Mr. Harris said that there had always been some disparity in production between breeds. He recalled the issue being raised when the Cobb breed was introduced in the 1998 BPC, but said it was not thought to be a problem at the time. Mr. Harris said that high flock mortality due to an industry wide leukosis problem in 1998-99 masked the differences in productivity between breeds, but that by Fall 2000 it was apparent that there was a significant difference between the Ross breed and the Cobb breed. He said that management practices, disease, and seasonality also affected hen productivity.
Mr. Harris told the Tribunal that it was not the mandate of OBHECC to equalize margins between producers. He said the OBHECC had to maintain a quota-based marketing system and meet the target demand within a national system. He said the Commission tried to be fair while fulfilling that mandate. However, he explained that OBHECC allocates HEMS in yearly blocks, and that there was a long lead time between the allocation decision and the final determination of market needs. He said that this meant that adjustments were often needed and noted that the timing of these adjustments occasionally distorted equity.
Mr. Harris told the Tribunal that OBHECC responded to Mr. Mosterd’s concern by:
Deciding to investigate the issue to see if changes could be made for the 2002 BPC year.
Meeeting with Mr. Mosterd to hear his two recommended solutions.
Deciding to further analyze the issues as a committee-of-the whole and deciding to look at the possibility of implementing changes for the 2001 BPC year.
Providing staff to help Mr. Mosterd analyze his calculations.
Developing a breed indexing system which could be applied to a bird-based allocation system.
Consulting with producer and hatchery associations on the issue.
Sending staff to meet with their Quebec counterparts to see how an egg-based allocation system worked.
Reviewing three systems to take breed differences into account and ultimately adopting a breed indexing system, effective the 2002 BPC year.
Considering but rejecting a historical breed indexing system suggested by Mr. Mosterd in March 2001.
Mr. Harris explained that OBHECC’s Policy Direction #44 was developed to address the breed variation issue. He said it worked by allowing producers with lower productivity breeds with an allowance to place extra chicks when the flock was set. He said adjustments could also be made at the end of the flock life if necessary. He said he had heard from producers on the new policy direction but had not encountered any formal opposition to it. Mr. Harris said that he had initially thought the historical breed indexing system had merit, but when he ran some numbers he found that it caused more distortion.
With regard to Mr. Mosterd’s 2000 BPC flock, Mr. Harris said the flock had lower than normal mortality and was running slightly above the Cobb average on eggs per hen housed. He said if the flock’s production to date was extrapolated to the end of the BPC year, Mr. Mosterd would produce his market share.
In response to questions, Mr. Harris indicated:
The Mosterd flock was one of the last to be placed in BPC 2000.
He could have forecast data on breed productivity in Spring 1999.
To determine HEMS, he calculates the number of eggs historically produced by hens to determine the number of chicks to place.
He started to collect breed data when the Cobb breed was introduced, he had compiled historic data in 1997.
Given the choice, he would probably elect to place the breed with the highest productivity which is the Ross breed, at the present time.
No eggs had been set for the 2001 BPC year when Mr. Mosterd first brought forward his concern about breed disparities and OBHECC could have introduced an egg market share system at that time.
Only a few flocks were impacted by salmonella in the late 1990s and the production numbers of these flocks were not included in the productivity figures published reports.
The mortality of the Hubbard breed of chicken was increased by leukosis more than was seen in other breeds. All breeds were affected by the disease. A genetic defect was responsible for the outbreak of this disease, but management practices could reduce losses.
There was a clear difference in breed performance in the 1999 BPC year.
Mr. Mosterd’s estimates of the differences in returns between producers growing different breeds were reasonable figures. OBHECC staff did not bring this financial information to the attention of the OBHECC board, but he believed the board would know about these differences.
OBHECC does not publish breed performance data in its year end statistical reports. Historically it did not want to publish these numbers as it wanted to maintain the confidentiality of data provided by primary growers, and as their contract does not allow producers to pick their breeds.
OBHECC consulted with its legal counsel before releasing information to Mr. Mosterd as the information he requested was not usually released, and as the appeal was underway.
There were producers with a variety of management styles growing each breed.
There were differences in productivity due to hatchery management.
There is a trend toward using two breeds, the Ross breed and the Cobb breed. There are still some Hubbard birds grown.
Mr. Mosterd’s 1999 BPC year flock produced 15% higher than the average for his breed, which was the Cobb breed, but his production was not quite as high as the average production for the Ross breed.
OBHECC does not take breed into account in calculating cost-of-production.
OBHECC allocates HEMS 16-18 months ahead of market needs and the initial allocation is usually adjusted due to market changes.
Adjustments can occur anytime in the BPC year. If the impact of a cutback is disproportional on a few producers they may be compensated by OBHECC, using producer-generated funds. There is no compensation paid when some flocks are extended due to a market shortage.
By 2002 changes to the national allocation system will have been completely phased in. Imports have a 17.43% market share.
2001 BPC breeder booking numbers would be given by May 30, 2000, but some hatcheries may try to book earlier to ensure they receive the breeds they require. Earlier placed flocks have a shorter lead time.
OBHECC ensures that each producer has a contract. A provision of the contract is that the hatchery picks the breed.
Producers absorbed disease losses in 1998-99. There is no insurance coverage for disease losses.
The breed indexing policy was designed such that shifts in the initial indexing which occur over the course of a BPC year are reflected in adjustments made at the end of the flock life.
The formula has a built in adjustment factor to account for changes in breed productivity and the introduction of new breeds. Global productivity factors and egg demand are to be calculated quarterly.
A typical chicken breed will remain in use for 4-5 years before it is replaced.
OBHECC did not change its allocation policy before producers started to place the 2001 BPC flocks as the only system that could have been introduced on short notice was an egg-based system. That was seen to be less flexible with fewer incentives than the current system. OBHECC did not believe producers would accept that system. Also, the Commission wanted time to study the issue more thoroughly.
Both management and breed have an impact on hen productivity.
Reg Cliche Evidence
Mr. Cliche told the Tribunal he was the General Manager of Horizon Poultry and had held that position for two years. He said he was a member of the OBHECC board, appointed by the Hatchery Association, and that he was in his second term. He indicated he had been on the board when the breed disparity issue was discussed.
Mr. Cliche said that Horizon historically operates with 100% domestic eggs and he manages its business accordingly. He explained that Horizon Poultry was the most dependent on Ross eggs. He explained that, had OBHECC implemented the breed indexing policy for the 2001 BPC year, his company would not receive enough eggs from the domestic market and would not be able to import enough hatching eggs, having sold half of their import quota early in 2000. He said this would put his hatchery at a competitive disadvantage.
Mr. Cliche said that when the question of an inequity due to the disparity in productivity between breeds was raised there was little pressure from producers to resolve it and that this gave OBHECC confidence that it had time to study options before implementing a policy change.
In response to questions, Mr. Cliche indicated:
His hatchery placed approximately 150,000 birds/year, predominantly the Ross breed.
Introducing breed indexing for the 2000 and 2001 BPC years would hurt his bottom line.
The hatchery had import quota but sold it, and it would be difficult to replace it due to cost and availability.
His hatchery orders its breeder stock as soon as the allocation figure is known, 16-18 months ahead of placements, as the Cobb and Ross are popular breeds. He has preliminary discussions with suppliers before the allocation number is known.
Horizon has the highest percentage of Ross birds in the province.
Cor Kapteyn Evidence
Mr. Kapteyn said he had been a hatching egg producer for over twenty years and that he was a member of the OBHECC board for approximately eight years. He said his last term ended in March 2001. He told the Tribunal he grows half Cobb birds and half Ross birds, but will be growing solely Cobb birds in 2002.
Mr. Kapteyn said that breed indexing issues had not been brought to OBHECC for formal action before late fall 2000 but that it was something that OBHECC had been monitoring for potential future action. He said that the breed productivity data may have been skewed due to disease problems in the late 1990’s.
Mr. Kapteyn said he felt that the process OBHECC used to deal with this issue was appropriate. He explained there was a fluid discussion back and forth between OBHECC and the Producers’ Association on the breed indexing issue. He said there were special kitchen meetings held with producers and that the topic had also been discussed at regularly scheduled meetings in the fall of 2000. He said it was not a controversial issue but was a major concern with some producers, depending on what breed they were using. He said all producers understood that changes were required. He said he thought there was reasonable agreement with what was decided, but that it did not have the unanimous support of producers. He noted that there had been no formal objection to the new policy by the Producers’ Association.
Mr. Kapteyn said he had been able to produce his market share with the Cobb bird, as he had achieved higher than average production in recently placed flocks. He agreed with earlier testimony that a number of factors affect productivity. He said there was a range of 40 chicks per hen between the top producer and the lowest productivity flock. Mr. Kapteyn said he had seen fluctuation between breeds over the past twenty years and he expected this pattern would continue. He said he thought the new policy would help producers using any breed produce their market share. He said he was comfortable with the decision to implement the policy effective the 2002 BPC year. He said he would be concerned with changing the rules halfway through the 2001 BPC year. He pointed out this may benefit some individuals but would cause hardship to others.
In response to questions, Mr. Kapteyn said:
OBHECC knew there were productivity differences between breeds before Mr. Mosterd wrote his first letter to the Commission.
The new policy was discussed with producers at the 2001 annual meeting. He could not say with certainty as to whether it was a formal agenda item.
There was clearly a difference in performance of different breeds in the 1999 BPC year, even taking into account that management and other factors affected performance.
He could not say if these breed differences would continue to be reflected in the 2000, 2001 and 2002 BPC years. He understood the Cobb breed was improving.
He agreed that on average there is a difference in productivity between Ross breed and Non-Ross breed growers.
OBHECC had access to the 1999 BPC year breed productivity data when the decision to cutback the 2001 flocks was made.
He did not recall that OBHECC considered any other options than breed indexing, historic breed indexing and egg-based allocation.
He owns hatching egg market share quota.
He expected he would be growing the Cobb breed for the next few years. It has been a profitable breed in his operation.
Producers were paid on the basis of saleable chicks produced.
The new breed indexing policy will level the playing field somewhat. He did not think it would have any impact on chick quality.
There was no single time in the flock life that consistently produced the greatest losses.
Inventory is taken when hens start to lay, at 26 weeks of age.
He thought that part of the reason that the Ross breed was doing better than the others was the strong flock management by Horizon Poultry, the main user of Ross chickens.
Summations
Mr. Mosterd reiterated his key points:
That he held hatching egg market share, not chick market share and that OBHECC had confirmed this in the course of the hearing.
That he cannot choose his breed.
That the national supply management system allocates hatching egg share but that OBHECC allocates chick quota; and that by so doing it takes on the responsibility for ensuring fairness.
That there was a clear disparity in performance between breeds.
That OBHECC knew of these breed differences well before the 1999 BPC year.
That it was not too late for OBHECC to deal with the issue in time for the 2001 BPC year allocation when he first raised the issue with the Commission.
Mr. Mosterd also said he was concerned that the breed indexing system would be too complex and expensive to administer. He pointed out that if OBHECC had followed its own regulations as to the definition of quota, he would not have needed to appeal. He also told the Tribunal that he was not alone in his concerns, as they were shared by the producer association and as other producers had helped him prepare for the hearing. He said he knew of one producer who was selling out as the industry was no longer profitable. Mr. Mosterd asked that the Tribunal order OBHECC to rescind its quota cut to his 2001 BPC year flock, and he asked that he be allowed to produce his potential hatching egg market share for BPC 2000 and BPC 2001.
Mr. Trudell submitted in summation that:
OBHECC could not have implemented a breed indexing policy for the 2001 BPC year in the fall of 2000 as it did not have the productivity data early enough to properly study the issue, and as Ontario producers would not accept an egg-based allocation system.
The lack of formal opposition to the new policy from the Producers’ Association indicated that the implementation schedule was acceptable to producers. Mr. Mosterd was the only Cobb breed producer who opted to appeal.
Mr. Mosterd did not raise the issue when he was on the OBHECC board and this was further evidence that the breed disparities were not evident until Fall 2000.
OBHECC had dealt with this problem responsibly in undertaking appropriate studies and soliciting feedback from both sectors of the industry.
It was well entrenched in the industry that HEMS was issued as chicks, not eggs and that the quota system was based on average productivity.
The evidence suggested that Mr. Mosterd was profitable, that he met his market share in the 1999 BPC year. The 2000 BPC year cutbacks had been reversed. The fluidity of the marketing system may lead to changes in the 2001 BPC year.
The evidence suggested that Horizon Chicks would be financially harmed if the policy were to be introduced in the 2001 BPC year.
The mandate of OBHECC is to fulfil its obligation to maintain a smooth running industry, not to guarantees profits to each industry participant.
Mr. Trudell asked that the Tribunal not interfere in a decision made by OBHECC for its constituents as a whole, to the benefit of a few producers of the Cobb breed.
Findings
The Tribunal finds that Mr. Mosterd was not treated any differently than any other hatching egg producer who was assigned the Cobb breed of chicken.
The Tribunal finds that there is clearly a disparity in the productivity of different breeds of chicken, and that, while there were indications of variation between breeds for some time, the full extent of that disparity did not become evident to OBHECC or to hatching egg producers until Fall 2000. It is clear to the Tribunal that Mr. Mosterd played a key role in spurring OBHECC to address the issue. The Tribunal finds that, once advised of the problem, OBHECC acted to develop a fairer method of determining its allocations to producers.
The Tribunal accepts Mr. Mosterd’s argument that OBHECC is obligated to allocate the hatching egg marketing quota assigned to Ontario by the national agency in a fair manner. But, the Tribunal does not believe that OBHECC’s practice of converting hatching egg allocation into chick-equivalents is inherently unfair, notwithstanding the disparity in performance between breeds in the 1999 BPC year. The evidence suggests that hatching egg producers for the most part accept this methodology, that Mr. Mosterd re-entered the hatching egg industry knowing this was the allocation methodology used, and that the chick-based system results in a more market responsive industry than does the egg-based allocation system used in Quebec.
The Tribunal finds that the new breed indexing policy – OBHECC Policy Direction #44 – will address the problem of disparate productivity between breeds in the 2002 BPC year and beyond. In considering whether the policy should be made retroactive, the Tribunal considered the practicality of changing the allocation policy part way through the BPC year and the probable economic impact on Mr. Mosterd, other hatching egg producers, and Horizon Chicks. The Tribunal finds no evidence of economic hardship which would persuade it to order that the policy be made retroactive. The Tribunal notes that Mr. Mosterd is able to at least partially mitigate the impact of the breed productivity disparity through his management practices. This was evident in his testimony that his 1999 BPC year flock was more productive than comparable flocks placed that year. The Tribunal finds there is nothing unique about Mr. Mosterd’s situation which would cause it to order a reversal of the 2001 BPC year cutbacks on his flock.
Decision and Reasons
After carefully considering the evidence presented and the submissions made, the Tribunal decided to deny the appeal of Ed Mosterd.
The reasons for this decision are:
The Tribunal found no gross inequities in the allocation system used by OBHECC. The discrepancy in breed performance and profitability is being addressed by Policy Direction #44. OBHECC addressed this issue expeditiously.
Mr. Mosterd was aware of the allocation methodology used by OBHECC and was aware that he would not be able to select the breed of chicken he grew, when he re-entered the industry in 2000. There was no evidence that delaying the implementation of the new breed indexing policy to the 2002 BPC year would result in economic hardship.
Dated in Guelph, Ontario on this the 6th day of June, 2001.