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 2002 ONAFRAAT 44
STATUTE:
Ministry of Agriculture, Food and Rural Affairs Act
HEARING:
November 25, 2002
December 4, 2002
2002-44
NEUTRAL CITATION:
2002 ONAFRAAT 44
Turkey Committee of the Ontario Poultry Processors’ Association v Ontario Turkey Producers’ Marketing Board
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 the Turkey Committee of the Ontario Poultry Processors' Association, Suite 310, 250 The Esplanade, Toronto, Ontario from an order of the Ontario Turkey Producers' Marketing Board (Pricing Order 296) dated October 24, 2002 to increase the price levels for broiler and hen turkeys by 3 cents/kg, and for tom turkeys by 2 cents/kg, all effective October 28, 2002. The Turkey Committee sought reductions in these price increases in the amount of 1 cent/kg for broiler and tom turkeys and 2 cents/kg for hen turkeys.
Before:
Murray Cardiff, Chair; Doug Flook, Member; Tom Callaghan, Member
Appearances:
Robert Shapiro, for the appellant, the Turkey Committee of the Ontario Poultry Processors' Association (OPPA)
Robert Wilson, for the respondent, the Ontario Turkey Producers' Marketing Board (OTPMB)
Art Roder, Chair, OTPMB, witness
DECISION OF THE TRIBUNAL
This appeal was heard in Guelph, Ontario on Monday, November 25, 2002. The Turkey Committee of the OPPA appealed from a decision of the OTPMB to increase the price of live turkeys, effective October 28, 2002, by 3 cents/kilogram in the broiler and hen weight categories and by 2 cents/kilogram in the tom category. The Turkey Committee of the OPPA agreed that turkey prices should increase, but asked the Tribunal to order increases in the amount of 2 cents/kilogram in the broiler category and 1 cent/kilogram in the hen and tom category.
At the request of the parties and by order dated October 31, 2002 the Tribunal determined that the appeal would be decided by way of a final offer selection process.
Statutory Context
Subsection 16(2) of the Ministry of Agriculture, Food and Rural Affairs Act is as follows:
Idem
(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.
Subsection (4) outlines conditions under which the Tribunal may refuse to hear an appeal. Subsection (5) provides for an opportunity for the parties to resolve the matter prior to an appeal to the Tribunal.
The Issue
The issue before the Tribunal was which of the following pricing options should be implemented:
OTPMB
OPPA Turkey Committee
Broilers
3¢/kg
2¢/kg
Hens
3¢/kg
1¢/kg
Toms
2¢/kg
1¢/kg
The Evidence
Facts Not In Dispute
Turkey is marketed under a supply management system in Ontario. Ontario's share of national production is determined by the Canadian Turkey Marketing Agency (CTMA) and allocated to producers by the OTPMB. The OTPMB sets the price of live turkey. The Turkey Committee of the OPPA acts as an advisory body to the OTPMB on pricing matters and other matters. Its members process over 95% of Ontario-grown turkeys. Processors advise the CTMA on supply matters via a national association, the Canadian Poultry and Egg Processors Council.
The parties told the Tribunal that turkey was not priced at regular intervals but that either the OTPMB or the Turkey Committee could request a pricing meeting at any time. It was noted that the recent pricing history in the industry was as follows:
JN 2001
Price decrease of 2¢/kg for broilers and hens No change in price of toms
By order of the Tribunal
OC 15 2002
Price increase of 1¢/kg for broilers and toms
By agreement
AU 01 2002
Price decrease of 1.5¢/kg for broilers, hens and toms
By agreement; original order modified and appeal withdrawn
The August 2002 pricing agreement included an agreement that neither party would request a pricing meeting before Thanksgiving 2002.
Turkey Committee Position
Mr. Robert Shapiro outlined the key points in support of the Turkey Committee pricing position as follows:
Selling prices in all three categories of turkey were low in 2002 and there was weak demand for turkey. Thanksgiving 2002 sales volume was lower than the previous 3-year average. The problem was exacerbated by an influx of out-of-province turkey.
Turkey processors' gross margins in the first ten months of 2002 were 25-46% lower than the previous 3-year average for this time period. Producer gross margins were 4-9% lower in this time period.
The price for cryovac turkeys (frozen) for the Christmas season were lower than the Christmas prices over the three previous years. While fresh turkey prices were expected to be higher, the volume of fresh sales was expected to be lower than cryovac sales.
High storage stocks and increased imports will offset the benefits of lower domestic production in the latter part of 2002. Storage stocks were not reduced as much as expected over Easter 2002. The CTMA predicts 12.7 million kg of turkey will be in storage on January 1, 2003. Processors prefer storage stocks of 10 million kg at that time of year.
Competing meats, including chicken, pork and to some extent beef, are expected to be plentiful and cheap in the coming months. Christmas hams are a threat to turkey sales.
While feed costs had increased over the past ten months they had leveled off and were projected to decline in the next few months. Corn and soybean prices between June 5, 2002 and November 13, 2002 were referenced.
Processors have suffered more than producers from the weak market in 2002. Processors who also owned production facilities had indicated their processing operations were less successful than their production barns.
Processors were proposing a price increase for all categories of turkey as they recognized that producers' costs had increased.
Mr. Shapiro submitted that comparisons of processor margins between the summer months and the Thanksgiving season were unfair as the market is seasonal. He said it was more appropriate to compare like marketing periods in different years, taking into account that Thanksgiving does not fall on the same day every year.
Mr. Shapiro suggested that turkey producers would remain profitable if the prices were set at the levels desired by the OPPA Turkey Committee and that the issue before the Tribunal was to what extent producers should share in the weak markets experienced by processors in 2002.
Mr. Shapiro explained that processors had agreed to purchase an additional 1 million kg of turkey between January 2003 and April 2003 as they were more optimistic about the market before the October storage stocks were known. He said they were also concerned that Ontario would lose market share if the turkey was not grown.
Mr. Shapiro indicated that poult prices were fairly stable.
In response to the OTPMB, Mr. Shapiro indicated:
Processor overhead costs had increased as a result of quota cuts, just as had producers' costs.
The Turkey Committee had better data sources than the OTPMB on the Thanksgiving market. The data presented by both parties showed that processor margins in October 2002 were poorer than margins in October 1999.
Processors bear the cost of storing turkey.
OTPMB Position
Mr. Art Roder told the Tribunal that turkeys are grown for 11 weeks for the broiler market, 15 weeks for the hen market and 17 weeks for the tom market. He explained it was important to understand the time lag between costs being incurred and turkeys being marketed. He said that the cost of feed was the largest cost in growing turkeys and that poults represented 20-30% of the cost of turkey. He said the Tribunal had told the OTPMB in the past that costs should be recaptured after they have been incurred and that the turkeys now going to market had consumed high priced feed.
Mr. Roder acknowledged that turkey processors had experienced difficulties but submitted they could regain lost margins between the Thanksgiving and Christmas markets. He said the OTPMB reviewed market statistics with processors at their October 2002 pricing meeting and indicated the OTPMB had heard that the fresh market for Thanksgiving was fine. He said the OTPMB justified its price increases on the basis of higher feed costs and higher overhead cost due to reduced supply. He also noted energy costs were high.
Mr. Roder outlined the key points in support of the OTPMB pricing position as follows:
Processors' margins had increased between the August 2002 pricing meeting and the October 2002 pricing meeting, whereas producers' margins had declined. Processors' margins increased by 26-45 ¢/kg; producers' margins decreased by 3.2-6.8 ¢/kg. It was agreed that the processor prices are usually higher in the festive season, but notwithstanding this, processors achieved a substantial increase in all categories while producer margins were decreasing.
The price increases proposed by the OPPA Turkey Committee in the broiler and hen categories would cover less than half the recent decline in producer margins. The increase proposed for the tom category would cover just over half the reduction in producers' margins.
Historically, processors achieve higher margins in the last three months of the year than they do in the first nine months. Data submitted by the processors showed their margins improved over the Thanksgiving period. The OTPMB expected that the market would continue to improve over the Christmas period.
With the exception of 1995, over half the volume of processors' fresh and frozen turkey sales have occurred in the last three months of the year when margins were relatively high.
Storage stocks should not be an issue as the current CTMA projection for January 1, 2003 was that storage stocks would be 12.7 million kg. That figure equates to 11.6 million kg when the data is adjusted to account for a change in the methodology used by the federal government to track poultry stocks. Processors had agreed to purchase an additional one million kg of turkey in the first four months of 2003 and they would not have done so if they were concerned about storage stocks. Also, processors had indicated to the OTPMB that storage stocks of 12 million kg on January 1, 2003 would be fine.
Mr. Roder indicated that the OTPMB believed that feed prices would continue on an upward trend as a result of market commentaries on the Chicago grain market. He also suggested it was fair to consider the lag time between feed price decreases and the marketing of turkey as the lag time for feed price increases has been noted.
Mr. Roder said that feed prices had started to climb before the OTPMB lowered the turkey prices in August 2002 but that they rose significantly more after the pricing decision. He noted that the August turkey price decreases were more than the OTPMB was initially prepared to approve but less than the processors' requested.
Mr. Roder clarified that had the industry decided not to grow the additional 1 million kilograms of turkey Ontario was allowed in 2003, the province's future market share would not be reduced.
Summations
Mr. Robert Wilson submitted that the price of turkey must be considered in the context of supply management. He pointed out that the OTPMB had implemented a 4% quota reduction in 2002 to address poor market conditions. He said processors were sending mixed signals as they did request that an extra 1 million kilograms be produced in 2003. He said neither producers nor processors were having a good year and both sides of the industry had suffered. He said if turkey processors were in truly dire straits they would not have offered any price increase.
Mr. Wilson suggested that no one was disputing the significance of feed costs to turkey producers and he suggested that the time to recover the high cost of feed was when the birds that ate it were being marketed. He also said that the timing of the price increase was appropriate as processors could withstand a price increase in the festive season when their margins are historically highest better than at other times of the year.
Mr. Wilson suggested that storage stocks were a necessary cost of doing business due to the seasonality of the turkey market. He said the producers shared in the storage cost through the OTPMB's moderate pricing demands. Mr. Wilson submitted that the OTPMB pricing order was a reasonable approach taken at a reasonable time. He said the onus was on the OPPA Turkey Committee to prove the OTPMB pricing decision was not reasonable and submitted it could not.
Mr. Shapiro told the Tribunal that pricing discussions in the turkey industry involve compromises, despite the OTPMB having the ability to set price. He said that the OPPA Turkey Committee initially offered no price increase in October 2002, but compromised after discussing the matter with the OTPMB.
Mr. Shapiro said that historically turkey price increases and decreases have occurred at different times of the year with no consistent pattern. He said the reduced production in 2002 had not improved the turkey markets. Mr. Shapiro said the processor position was that the increase in the feed and poult price had to be balanced against the abysmal margins received by processors in 2002. He said that he believed the OPPA Turkey Committee had shown the Tribunal that the price increases declared by the OTPMB were not reasonable or justifiable.
The Findings
The Tribunal notes that both parties to this appeal gave compelling arguments to support their positions. Both parties acknowledged the need for an increase in the price of turkey in all weight categories, despite a weakness in the market. As Mr. Shapiro pointed out, the issue to be decided is the appropriate amount of the price increases. The Tribunal finds in favour of the OTPMB on this matter.
The Tribunal was persuaded by the evidence of the OTPMB that the feed prices incurred by turkey producers in recent months warranted the price increases that it made in Pricing Order 296. The parties had conflicting views as to whether or not feed and poult prices would continue to be high in the coming months. The Tribunal was persuaded that the feed prices would remain high, relative to the feed prices experienced prior to the August 2002 price decreases.
It was clear to the Tribunal that the turkey market in 2002 to date was weak and that both processors and producers had experienced lower returns as a result. The Tribunal accepted the position of the OPPA Turkey Committee that the 2002 Thanksgiving market for turkey was depressed. The Tribunal was not convinced that this market depression would continue through the 2002 Christmas market. The Tribunal finds that storage stocks are not unreasonably high and notes that production is expected to be constrained for the balance of 2002. While importers may choose to import turkey in the festive season, and this could impact the wholesale price, the Tribunal could not determine the extent to which this would impact processor margins.
The Tribunal accepted the OTPMB argument that the timing of the price increases in Pricing Order 296 was appropriate, due to increased costs incurred by producers and the relative strength of the market over the festive season.
Decision and Reasons
After careful consideration of the evidence filed and the submissions made the Tribunal orders the appeal by the Turkey Committee of the OPPA is denied.
The reasons for this decision are:
The increase in feed costs warranted the price increases ordered by the OTPMB.
The timing of the price increase will better allow for processors to pass costs onto their customers than would be the case if prices were increased after the festive season.
Dated at Guelph, Ontario the 4th day of December, 2002.