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:

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

Turkey Committee of the Ontario Poultry Processors' Association v OTPMB [Appeal Order 292] 2001 ONAFRAAT 38

STATUTE:

Ministry of Agriculture, Food and Rural Affairs Act

HEARING:

June 21, 2001

DATE OF DECISION:

August 3, 2001

2001-38

NEUTRAL CITATION:

2001 ONAFRAAT 38

Turkey Committee of the Ontario Poultry Processors' Association v Ontario Turkey Producers' Marketing Board [Appeal Order 292]

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 Agriculture, Food and Rural Affairs Appeal Tribunal by the Turkey Committee of the Ontario Poultry Processors' Association, Suite 310, 250 The Esplanade, Toronto, Ontario from a decision of the Ontario Turkey Producers' Marketing Board dated June 4, 2001 wherein the Board set pricing Order 292 at an increase of $0.01 on the tom turkey category from Pricing Order 291. The Committee took the position that the price of toms should not change, and that the price of broilers and hens should be reduced by 2 cents/kg.

Before: Denis O'Connor, Vice Chair; Paul Gillen, Vice Chair; Ralph Huckle, Member.

Appearances:

Robert Shapiro, appellant

Larry Binning, in support of the appellant

Robin Horel, in support of the appellant

Colin Cruji, in support of the appellant

Paul Borg, in support of the appellant

Julien Den Tandt, for the respondent

Paul Vanderzanden, for the respondent

Ingrid DeVisser, for the respondent

Paul Leatherbarrow, for the respondent

DECISION OF THE TRIBUNAL

This appeal was heard in Guelph, Ontario on June 21, 2001. The Turkey Committee, Ontario Poultry Processors' Association (the Committee) appealed from a decision of the Ontario Turkey Producers' Marketing Board (the Board) regarding the prices of broiler, hen and tom turkeys. The Committee asked the Tribunal to order the Board to reduce the live price of broilers by 2.0 ¢/kg, hens by 2.0 ¢/kg, and toms by 1.0 ¢/kg, from Pricing Order No. 292.

Preliminary Matter

At the request of both parties, the Tribunal agreed to decide this appeal on a 'final offer selection' basis.

The Background

The Board is a local board authorized under the Farm Products Marketing Act to control and regulate the production and marketing of turkey in Ontario. There are 167 licensed turkey producers in Ontario who collectively produced over 65 million kilograms of turkey during the 2000-01 quota year. The Committee represents all major processors of turkey in Ontario; its members slaughter well over 95% of turkeys produced in Ontario. The Committee advises the Board on pricing and other marketing matters.

The last turkey live price appeal was held on December 12, 2000. At that time, the Board sought to increase the live price of all categories of turkey by 2.0 ¢/kg, and the Committee asked for no change in the price. The Tribunal found in favour of the Committee at that time. In January 2001, the parties subsequently agreed to increase the live prices of turkey. The price of broilers increased by 4 cents/kg, hens by 3 cents/kg and toms by 2 cents/kg, all effective FE 05 01 by way of Board Pricing Order 291. The live prices of turkey had remained relatively stable for two and one half years prior to this appeal.

The appeal was heard pursuant to Section 16(2) of the Ministry of Agriculture, Food and Rural Affairs Act. Section 16(2) states:

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.

The Issue

The issue before the Tribunal is:

Should the live prices of broilers and hens be reduced by 2.0 ¢/kg, and of toms be reduced by

1.0 ¢/kg from Pricing Order No. 292.

The Evidence and the Findings

Mr. Robert Shapiro on behalf of the Committee, stated that Ontario turkey producers continued to enjoy gross margins at, or close to, record levels. He said processor gross margins continued to be healthy but were significantly lower than the gross margins achieved over the same period the previous year.

Mr. Shapiro also submitted that:

• Heating costs for broilers and hens were significantly reduced for turkeys marketed in June 2001 and beyond due to the warmer season.

• Propane prices had fallen while natural gas prices had increased.

• Tom turkeys being marketed at the time of the Hearing had incurred higher heating costs as they had been placed in late January, prior to fuel cost reductions.

Mr. Shapiro told the Tribunal that information reported by the Canadian Turkey Marketing Agency (CTMA) indicated:

• Feed and poult costs had declined significantly for broilers and hens between JA 29 01 and MY 25 01, and increased slightly for toms in the same period.

• Broiler turkey production costs had fallen since January 2001, while hen and tom turkey production costs had increased.

Mr. Shapiro told the Tribunal that the Committee was not seeking a full reduction of the February 5, 2001 price increase for broilers and hens. He also indicated that processors were prepared to continue to pay the tom price set on February 5, 2001, but that the Committee objected to the tom turkey price increase sought by the Board.

With regard to the processing sector, Mr. Shapiro stated that:

• The Christmas 2000 selling prices for turkey were lower than the year before.

• Selling prices at Easter 2001 were lower than prices at Christmas and Easter in 2000.

• A lower volume of turkey products sold in the Easter 2001 period than the same period the year before, as Ontario processors faced aggressive competition from Quebec turkey processors and the pork sector.

• High turkey storage stocks caused significant concern to processors.

• All processors projected selling prices at Thanksgiving 2001 to be lower than prices attained at Thanksgiving 2000.

Mr. Shapiro said he felt that the Committee’s position was supportable based on reductions in heating costs and on market conditions. He said that the Committee did not believe the recent tom turkey price increase made by the Board was justified.

In response to questions, Mr. Shapiro acknowledged that the Board had a different estimate of heating costs, than the Committee, and that the Tribunal decision on the December 2000 appeal indicated that producers should be able to recover increased costs incurred as a result of rapid fuel price increases. Mr. Shapiro also indicated that:

• Producers would have lower heating costs in the summer months.

• Both processors and producers were faced with increased electricity costs. Data regarding electricity costs had not previously been raised at pricing appeals.

• High inventories of turkey were a problem in the Thanksgiving period in 2000.

• Approximately 40% of turkeys produced in Ontario are grown by processors or their affiliates.

• Both processors and producers had experienced increases in the cost of rendering, but he submitted that the processors faced much higher rendering costs. Approximately 20-25% of a turkey is rendered.

• He had no information on the cost of shavings or the cost of turkey handling and transportation.

• He did not believe producers were entitled to historic margins. The concept of relative welfare could only be applied where both parties agreed to appropriate benchmarks.

• The industry trend is toward more further processing of turkeys, and a decline in whole bird sales.

• The national allocation of turkey quota is reviewed formally once each year, and as needed.

Mr. Shapiro also provided clarification on some of the data presented in chart form. Turkey processors in attendance assisted Mr. Shapiro in answering questions. Mr. Paul Borg elaborated upon the impact of the Quebec processing sector on the market.

On behalf of the Board, Mr. Julien Den Tandt, stated the Committee had chosen to seek a

price reduction at a time when much of the turkey produced by producers while energy costs were exceptionally high had not yet been delivered to the processors. He also stated that the Board strongly disagreed with the position of the processors that energy cost increases were a thing of the past.

Mr. Den Tandt also explained that the Board believed the current, unusually high prices of pork and beef provided processors an opportunity for increasing the prices of turkey products. He said higher than normal farm gate prices for pork and beef should permit the turkey sector to raise its prices.

Mr. Den Tandt submitted the issue was how effectively individual processors and the processing industry as a whole marketed its product. He suggested that:

• Ontario processors set prices too high on product sold during the Easter period, allowing more reasonably priced product processed in Quebec to gain market share.

• The competitive meats (beef and pork) pricing issue was positive for turkey processors.

• Ontario chicken processors had recently agreed to an increase in the live price of chickens.

• The competitive turkey product entering the province from Quebec indicated Quebec processors had more reasonable margins.

• Producers cannot be held accountable for poor marketing decisions of processors.

Mr. Den Tandt said the Board was of the opinion that the production cost increases incurred due to higher energy costs had not been totally recovered. He said that the Board realized processors were also facing higher energy costs in their operations. As both parties were impacted, Mr. Den Tandt said the Board felt there should be no change to the pricing order. He submitted that the Board had given consideration to processors’ energy costs by not attempting to pass on producers’ total cost increase to processors earlier in the year.

Mr. Den Tandt suggested that the Committee was of the view that most turkey producers were using propane as a primary heating fuel, and that declining propane costs should reduce production costs. He told the Tribunal that the Board had conducted a survey and found that 75.68% of turkey production is grown in barns heated with natural gas, and 24.32% of production was grown in propane-heated buildings. He said that producers holding 90.39% of quota allocated had responded to the survey. Mr. Den Tandt said that, as natural gas prices had not declined, producers were still incurring high heating costs.

Mr. Den Tandt indicated that in 1997 and 1998, producer and processor margins tended to parallel each other, with some fluctuation between categories. He said that producer margins had shown a slight increase since 1997, but on average had been very consistent. He noted producer margins had dropped slightly in 2000. In contrast, Mr. Den Tandt submitted that processor margins had escalated dramatically and had roughly doubled since 1998.

In response to questions, Mr. Den Tandt and members of the Board indicated:

• Producers’ heating costs typically decrease by 25-30% in the summer months.

• The price of turkey should relate to the costs incurred throughout their production and it was important to consider placement dates.

• Total energy costs had increased significantly and were still high.

• The Board was concerned with marketing decisions of processors. The Board felt opportunities had been missed due to processors’ decisions with regard to exports.

• The energy source survey was conducted by Board fieldstaff, two weeks prior to the date of the Hearing.

• Quebec producers had increased the price of broilers and hens. The Quebec price was approximately 2% lower than the Ontario price, but the Quebec prices were for ungraded turkey, whereas the Ontario prices were for graded turkey.

• Quebec producers may have a lower margin than Ontario producers, but the Board understood that the Quebec prices were to be raised by 2 cents/kg.

• Quebec producers generally were members of processing cooperatives, so their production margins could not be directly compared to Ontario producers’ margins.

• The turkey market is largely a frozen market whereas the chicken market is largely fresh. There were different seasonal cycles of demand for the two meats.

• There had been no major improvements in fuel efficiency on farms in the past year. Energy costs were approximately 6.5-10% of the total cost of production of turkeys. Rendering costs were estimated at 8 cents/kg plus a $35 pick-up charge.

• Feed and poult costs combined represented approximately 75% of the cost of growing turkeys.

• Before the February 2001 price increase, the last price increase had been in May 2000.

Board representatives also clarified some of the information the Board had submitted in chart form.

Summations:

Mr. Shapiro told the Tribunal that the turkey processors’ view was that rising natural gas prices were offset by falling propane prices. He asked that the Tribunal favor the results of the CTMA survey on production practices, over the more recent OTPMB survey, as the CTMA study had been conducted by a disinterested third party. He submitted that producers’ heating costs would decrease in the summer months and that the turkey price should be dropped accordingly.

He asked that the Tribunal disregard the arguments made by the marketing board regarding a recent chicken price increase, as he submitted that the turkey market was very different than the chicken market. He said that while sales of fresh turkey were increasing, it was still largely a frozen turkey market.

Mr. Shapiro also submitted that there was no basis for marketing board statements which suggested that processors were poor marketers and that this led to increased product in storage. He reminded the Tribunal of Mr. Borg’s testimony that Quebec processors had been ‘dumping’ turkey in Ontario over Easter.

Mr. Shapiro submitted that the high storage stocks and the lower heating costs were justification for a decrease in the price of broilers and hens.

Mr. Den Tandt told the Tribunal that processors had clearly stated to the marketing board at its pricing meeting that the reason for their proposed price decreases was the recent drop in energy costs. He submitted that the Board had clearly shown that the fuel costs had not dropped as the processors had made an erroneous assumption on the proportions of production fueled by propane and natural gas. Further, he said that producers had not recovered the full cost of the fuel price increase, when prices were raised in January 2001. He also noted that producers’ hydro costs increase in the summer months. Mr. Den Tandt submitted that the Board evidence clearly indicated that processor margins had increased while producer margins were largely unchanged. Mr. Den Tandt said that the Tribunal had previously indicated that costs must work their way through the system and be considered when the product is marketed and he said that the product being marketed has incurred high energy costs.

Mr. Den Tandt explained that the Board was very concerned with increased imports of processed turkeys from Quebec, as this represented lost opportunities for Ontario producers. He told the Tribunal that the Quebec turkey price had always been slightly less than the Ontario turkey price. He submitted that poor decisions on the part of processors with regard to export credits and reporting of data to the marketing board were responsible for high storage stocks.

With regard to the chicken market, Mr. Den Tandt acknowledged that it was different than the turkey market but noted that the two products compete with each other and he said that there was a correlation between the markets.

Findings

The Tribunal finds that it is relevant to consider total energy costs in assessing the impact of changing fuel costs on the turkey industry. The Tribunal finds that substantial increased costs related to unusually high fuel price increases in 2000 had been incurred on tom turkeys marketed in the Spring and early Summer of 2001. The Tribunal finds the energy costs for broilers and hens has declined and will continue to decline over the summer months.

The Tribunal was quite concerned about the relatively high storage stocks of turkey. The Tribunal accepts that the summer months are a period of relatively low demand for turkey. While there was conflicting evidence as to the cause of the high stocks, the Tribunal is concerned that the consequences of not reducing the stocks will be negative returns to the industry.

The Tribunal encourages the parties to continue to measure relative welfare, but suggests that the parties did not provide sufficient information to enable it to determine the impact of changes in gross margin of both processors and producers. From the submissions made, it appears to the Tribunal that both producers and processors had acceptable margins at the time of the Hearing.

Decision and Reasons

1. After careful consideration of the evidence filed and the submissions made, the Tribunal decided to accept the Committee’s proposal on pricing.

The reasons for this decision are:

1. The Tribunal is concerned with the amount of turkey product in storage.

2. The prices accepted by the Tribunal will provide producers the opportunity to recover increased costs due to higher energy prices.

Order of the Tribunal

The Board is directed to rescind Pricing Order 292 and to set a new pricing order which:

1. Maintains the price of tom turkeys at the price set in Pricing Order 291.

2. Reduces the price of hen turkeys and broiler turkeys by 2 cents/kg from the prices set in Pricing Order 292.

Dated at Guelph, Ontario this 3rd day of August, 2001.