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 290] 2001 ONAFRAAT 2
STATUTE:
Ministry of Agriculture, Food and Rural Affairs Act
HEARING:
December 12, 2000
January 5, 2001
2001-02
NEUTRAL CITATION:
Turkey Committee of the Ontario Poultry Processors' Association v Ontario Turkey Producers' Marketing Board [Appeal Order 290]
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 made on November 22, 2000, wherein the Board set pricing Order 290 at an increase of $0.02 on all categories from Pricing Order 289.
Before: Jim Rickard, Chair; Denis O’Connor, Vice Chair; Anna Andres, Member; Ralph Huckle, Member
Appearances:
By conference call Robert Shapiro, appellant. Paul Borg, in support of the appellant. Robin Horel, in support of the appellant. Larry Binning, in support of the appellant. JoAnn Crane, respondent. Paul Vanderzanden, respondent. Geoffrey Spurr, counsel to the respondent.
DECISION OF THE TRIBUNAL
This appeal was heard in Guelph, Ontario on December 12, 2000. The Turkey Committee of the Ontario Poultry Processors’ Association (the Committee) appealed a decision of the Ontario Turkey Producers’ Marketing Board (the Board) to increase the live price of all categories of turkey by 2.0 cents per kilogram, effective November 27, 2000, through Pricing Order 290. The Committee asked that the prices in Pricing Order 289 remain in effect.
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 licenced turkey producers in Ontario responsible for producing over 63,000,000 kilograms of turkey during the 1999/2000 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.
Live turkey prices were fairly stable in 1999 and the first 10 months of 2000. There was a 2 cent per kg price decrease across all categories in 1999, followed by a 1 cent per kg increase to hen and tom categories in May 2000. Two pricing meetings were held between the Board and the Committee in the autumn of 2000. No price changes in any category of turkey were implemented at a meeting held October 24, 2000, but the parties agreed to meet again. On November 17, 2000 the Board wrote to the Committee and indicated that it intended to increase live turkey prices across all categories by 2.0 cents per kg, effective November 27, 2000. The parties met on November 22, 2000 to discuss the price increase. After that meeting the Board passed Pricing Order 290 which increased the prices. The Committee appealed that decision to the Tribunal.
Past relations between the processors and the Board had been positive and there had been no appeal of a pricing decision since 1997.
The Issue
The issue before the Tribunal is: should the live prices of all categories of turkey be increased by 2 cents per kg, effective November 27, 2000 or should the prices remain the same as those set in Pricing Order 289.
The Evidence and the Findings
Mr. Robert Shapiro, in an opening statement, submitted that it was the Committee’s understanding that the Board implemented the November 27 price increase as it believed that turkey producers’ heating costs would increase in the winter of 2000-01. Mr. Shapiro suggested that processors were being asked to pay these increased costs through a live price increase as the Board felt processors could pass on these increased costs to their customers in the strong Christmas market. Alternatively, if processors could not pass on these costs, the Committee understood the Board position was that processors could afford to absorb these increases since processor margins were very healthy at the time. He noted that the Board had said that since November 1997, processor gross margins have increased more than producer gross margins. He said the Committee understood the proposed price increase was designed to maintain producers’ current margin levels.
Mr. Shapiro indicated that the Committee’s position was that:
Producer gross margins in the first ten months of 2000 were as high as they had ever been and that there would be no hardship on producers in absorbing extra heating costs in the upcoming winter.
Processors’ costs for energy, packaging and transportation had increased over 1999.
Wholesale Christmas turkey prices were already largely established, and would be lower than 1999 Christmas prices and no greater than Thanksgiving 2000 selling prices. Processors could not pass on a price increase at that time.
The birds shipped from November 27th to Christmas will have incurred almost none of the projected heating cost increases as they were placed and brooded in the summer and early fall. Approximately 70% of all heating costs are incurred during the brooding stage, which lasts on average 3 - 5 weeks after placement of chicks.
It would be unreasonable to compare the relative change in producer and processor margins between November 1997 and November 2000, as processors were experiencing significant real losses in 1997, while producers were still profitable.
The Board’s argument that they were entitled to maintain current historic high margins was without merit. He submitted that producers were a monopoly supplier, with guaranteed customers, and the Board has the power to set supply, price, and terms and conditions of sale.
Mr. Shapiro indicated that the Committee did not dispute that there would be a 2.0-2.5 cent per kg increase in producers’ heating costs. However, he noted that feed and poult costs for toms, and to a lesser extent hens, had dropped since the May 2000 price increase. Mr. Shapiro, supported by his witnesses, indicated that processors’ costs had risen. Packaging and energy cost increases were emphasized. He also noted that the retail sector was highly concentrated and that it was difficult for processors to pass on their cost increases.
Mr. Shapiro presented data he had compiled on the gross margins of turkey producers and processors over time. He noted that processor gross margins were healthy in 2000, but lower than the year before in the broiler and hen categories. He also pointed out that processor margins were more volatile than producer margins. Mr. Shapiro submitted that producer gross margins were at historic high levels and that this level of return should not be the new benchmark for a fair price. He quoted a 1997 speech by the Chairman of the Ontario Farm Products Marketing Commission to support this view.
In response to questioning, Mr. Shapiro indicated:
He agreed that producers’ heating costs would increase. He had no specific knowledge regarding feed costs. His position was that if producers’ margins decline due to increased heating costs rise, they should try to offset this cost increase with improved efficiency.
There had been a merger of two processors with regard to slaughtering facilities, but there were still four large companies competing in the retail market.
He agreed that the festive season is the best season for processors, that they have a large proportion of their fresh sales at Christmas and that processors can recover higher prices for fresh turkey than for frozen turkey.
He agreed that processor margins on Cryovac product (frozen turkeys that are packaged in a vacuum sealed bag) were higher in last two years than they had been in recent years, that 1999 margins were at record levels and that 2000 had been a good year for turkey processors.
He agreed that wholesale prices for turkey usually decline in the first quarter of each year. He indicated that the proposed price increase was not warranted at any time, but that if processor margins were irrelevant, then the first quarter would be the time to increase the price to recover heating cost increases. However, he suggested that processor margins were not irrelevant. Mr. Borg indicated that wholesale prices were more closely linked to storage stocks than live prices, but that when processor margins declined then processors requested price reductions on live birds.
Mr. Shapiro suggested that, under a supply management system there is effectively a ‘floor price’ as producers are mandated to achieve a fair return. He felt there should also be a ‘ceiling price’ to ensure that returns remain fair, however he did not suggest specific floor or ceiling prices. He suggested that while fairness depended on the relative position of producers’ and processors’ gross margins, this does not mean that they have to be equal at all times. He stated that while processors lose large amounts of money at times, producers do not and that a mathematical comparison of relative welfare was therefore not appropriate.
He believed the majority of birds marketed over the Christmas season were broilers and hens. Mr. Borg confirmed this.
Approximately 25% of processors’ annual sales are fresh turkeys. The ratio of fresh:frozen sales is much higher in the three festive seasons – Thanksgiving, Christmas and Easter.
Approximately 40% of Ontario turkeys are grown on processor-owned farms. Mr. Shapiro’s witnesses indicated that in April 1999 heating costs represented approximately 4% of the total cost of raising a turkey, but that heating costs had doubled since then while feed and poult costs had only increased by 2.3%. The appellants claimed that corporate farms continuously strive to improve efficiency.
Mr. Shapiro did not know if processors were hedging or locking in fuel prices.
Imports were not seen to have any impact on whole bird prices. Imports were thought to affect boneless meat sales.
Approximately 75% of fresh and frozen turkey was marketed through six major chains of grocery stores.
On behalf of the Board, Mrs. JoAnn Crane submitted that its position was simple, it acknowledged that both producers and processors are making money but submitted that while producers had previously refrained from increasing prices for the good of the industry, processors had made record profits. She stated that the decision to raise prices by 2 cents per kg would not increase producer margins as both heating and feed costs were rising. She stated that the price increase was needed to keep pace with these cost increases.
With regard to the timing of the price increase, Mrs. Crane indicated that the Board felt the Christmas season was a better time to increase prices than the first quarter of 2001. This was because processor returns have tended to decline after the Christmas season and the processors do not like to incur live turkey price increases when the wholesale price is depressed. She also noted that there was a large volume of fresh turkey sales over Christmas and that processors could more easily pass on cost increases on fresh turkey sales. She noted that in a conversation with the Board, Mr. Horel had said that it was prudent to recover increased input costs from the market place whenever the opportunity exists and the market will bear it.
Mrs. Crane said the Board did not accept the processors’ position that the relative welfare of parties may only be considered when prices are being reduced, as to accept that position would be to effectively cap the live price. She suggested that the only ceiling on live price is if:
- it is too high and drives processors out of business; or 2) it is too high and drives processors into slaughtering other meat or poultry rather than turkey. She said that it was up to the Tribunal to decide what is a fair price, but that the Board asked that Pricing Order 290 be upheld.
Representatives of the Board submitted that:
Energy costs had increased and feed prices were expected to increase.
It had refrained from increasing live turkey prices in order to support a national marketing program that commenced in 1999.
Wholesale turkey prices had increased to record highs in 1999 and 2000.
It had shifted allocation to tom production at the expense of broiler and hen producers, at the request of processors. In May 2000 the Board reduced broiler and hen quota by 7.75% and tom quota by 2.5% and required that turkeys grown for export must be toms.
Production facilities were under-utilized due to the quota reductions and broiler and hen producers’ overhead costs were increased.
The cost reduction in the production of toms and hens that Mr. Shapiro referred to is not being realized. That cost decrease was based on an update of productivity factors based on turkey production in the first 6 months of 2000. That was an unusual period as producers were growing heavy toms with an average weight of 14.07 kg, to take advantage of a conditional quota program. They had since returned to growing smaller toms.
In previous appeals to the Tribunal the Board had defended its position as returns to producers were insufficient. The current price increase was intended to maintain producer margins at the current profitable levels so that they would not have to incur losses.
Recent storage stock and domestic disappearance data were widely believed to be unreliable and should not be a factor in the appeal.
Mrs. Crane presented data she had compiled on the costs, prices and gross margins of turkey producers and processors over time. She pointed out that since 1997 processor margins had increased by 27 cents while producer margins increased by only 12 cents. She submitted that both producers and processors were losing money in 1997. She also pointed out that since 1995 there had only been one year where processor margins were close to or less than producer margins.
Mrs. Crane submitted that the proportion of turkey sold as fresh product had increased from 19.62% in 1994 to 30.03% in 2000 and that processors received higher prices for fresh product. She pointed out that as much of the December sales are fresh product sales, the processors margins were high enough to accommodate a 2.0 cent per kg price increase on live turkeys.
In response to questions, representatives of the Board indicated that:
Producer margins are healthy and no hardship would be incurred if the live price was not increased this time.
The Board wants producers to stay current as energy costs and feed costs were increasing, and a poult price increase was anticipated. Producers are no different than processors in that they continuously look for ways to increase efficiency and lower costs. The sources of the feed price estimated increase were feed industry representatives from Floradale and Master Feeds, and farm publications.
There should be no ceiling and no floor on producer prices and margins.
They were not claiming that Robin Horel supported the price increase. They were pointing out that his marketing philosophy was to increase prices when the market will bear it.
The Board felt processors could attempt to pass on the price increase to their buyers. At the October pricing meeting processors indicated that most prices had been set for the Christmas market, but that some were still being negotiated. The Board suggested in October that the price may be going up.
While processors were receiving record margins in 1999, producers were receiving good margins. Producers were frustrated that sales increases were not as high as expected when the national marketing program was launched. They felt this could have been due to profit taking by processors. Producers and processors contributed 0.05 cent per kg each to the national marketing program.
It was a Board decision to shift allocation from broilers and hens to toms, after consultation with processors. All producers had their quota reduced but all had access to a conditional quota pool if they could grow toms. As a result, tom producers’ overhead costs did not increase.
No price reduction was put in place when tom producers were growing heavy toms and their productivity was enhanced. The Committee did not ask for a price decrease. Producers were unlikely to produce large toms again. The normal size of toms was approximately 12.6 kg.
Turkeys marketed in December have not incurred the total amount of the energy cost increase, but had incurred some of these costs.
It was appropriate to compare relative welfare of producers and processors between November 1997 and November 2000. The Board was not suggesting that processor and producer margins should be the same. It was acknowledged that producers and processors have different expenses. It was agreed that tom producers’ margins had risen by approximately 50% since 1997 and that processors margins rose by approximately 73% in that time period. The Board believed this justified a price increase.
Approximately 60% of turkey producers use natural gas and the balance heat with propane. Propane costs had doubled since mid-summer 2000. Fuel prices rose in the fall. The Board had no authority to implement an energy surcharge, over and above the price set.
Prices set by the Board are minimum prices. No more than 1% of turkeys sold would be expected to command a premium over the minimum price.
The Board and the Committee usually meet in late October or early November to discuss prices. Either party may initiate a meeting.
Whole bird sales were in decline but there had been a sales increase in the further processed turkey market. The Board was concerned with reported large storage stocks of broilers and hens but felt the most recent data on stock levels was inaccurate.
In his summation, Mr. Shapiro noted that the Board had acknowledged that: producer margins were at record levels; that very little of the increased energy costs were reflected in turkeys marketed in December; that feed and poult prices for toms and hens had decreased since April 2000; and that producers were unlikely to suffer hardship if the appeal were to be granted. He said there was no indication that prices would drop in the Spring when the wholesale market price usually drops. He submitted that it was not appropriate to compare relative welfare of producers and processors from 1997 to the present, as 1997 had been an unprofitable year for processors. He said he did not deny that there will be energy cost increases, but said that there was insufficient notice of the price increase for processors to pass on these costs. He reiterated that the Committee did not support the 2 cent per kg price increase implemented by the Board and asked that the appeal be granted. Mr. Spurr reminded the Tribunal that it had agreed to treat this as a final offer arbitration and urged the panel to consider which party had the most reasonable position. He stressed that the Board proposal was to increase prices so that producers could maintain their profit margin. He pointed out that the result of granting the appeal would be reduced margins for producers. He stressed that this was a reasonable time to raise prices as processor margins were healthy and the market was strong. He reminded the Tribunal that both parties agreed that heating costs were higher and that there were signs that feed costs were increasing. He also stated that both parties accept the concept of using relative welfare of producers and processors in making pricing decisions. He acknowledged that processors claimed to have been losing money in 1997, but noted that the Tribunal took that into account when it made a pricing decision at the time. Mr. Spurr said that the Board does not accept that the producer live price should reach a glass ceiling at some time. He said the Board could not price like a monopoly as there were only three main buyers and the Board has to be reasonable or the processors will not buy the product. He stated that the Board had exercised its quota and price authority responsibly and they now want to increase prices so producers can recover their costs. He acknowledged that the timing of the increase was novel but submitted that producers may never recover these costs if the appeal were to be granted, as it would be difficult to raise prices when processor margins are lower in the new year. Mr. Spurr asked that the appeal be denied.
The Tribunal examined the evidence placed before it and concluded that:
Turkey producers’ heating and energy costs had increased significantly but producers had not incurred those costs on the turkeys being marketed in the 2000 Christmas season.
It would be difficult for producers to make up for increased costs through efficiency gains.
Both sides of the industry were financially sound. Producers would not suffer hardship if the appeal were granted. Processors would not suffer hardship if the appeal were denied.
The decision to increase the prices was made after the Christmas wholesale prices had been established.
Profit margins in the turkey industry have been cyclical. The Tribunal did not find that the arguments with regard to relative welfare or maintaining existing margins were convincing.
The Tribunal noted that reported storage stocks were high but put no weight on that evidence as neither party expressed confidence in this data.
Decision and Reasons
After careful consideration of the evidence filed and the submissions made, the Tribunal decided to direct the Board to rescind Pricing Order 290 and reinstate Pricing Order 289.
The reasons for this decision are:
The cost increases cited as a rationale for the price increases had not been incurred on the product being marketed at the time that the price increase was put into place.
The Board has the opportunity to recover these costs by increasing prices at a later date.
Processors had little opportunity to recover their increased costs from their customers, due to the timing of the price increases.
Dated at Guelph, Ontario this 5th day of January, 2001.