Georgian Bay Milk Company v Dairy Farmers of Ontario, 2003 ONAFRAAT 17

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:

Georgian Bay Milk Company v Dairy Farmers of Ontario

Georgian Bay Milk Company v DFO 2003 ONAFRAAT 17

STATUTE:

Ministry of Agriculture, Food and Rural Affairs Act

HEARING:

May 5-8, 13, 15, 2003

DATE OF DECISION:

June 4, 2003

2003-17

NEUTRAL CITATION:

2003 ONAFRAAT 17

Georgian Bay Milk Company v Dairy Farmers of Ontario

IN THE MATTER OF THE MILK 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 Georgian Bay Milk Company, Barrie, Ontario from:

1. A decision of Dairy Farmers of Ontario dated March 28, 2003 by which it refused to change its plan for complying with the World Trade Organization ruling related to Canada’s milk export practices, which was released February 25, 2003;

2. A decision of Dairy Farmers of Ontario dated January 30, 2003 and clarified January 31, 2003 by which it required that any milk delivered to an Ontario plant on behalf of Georgian Bay Milk Company will have to be through the fungible milk supply with milk pickup and delivery organized by DFO.

3. A decision by the Ontario Farm Products Marketing Commission dated February 24, 2003 by which it chose to hear only one interested party – the Dairy Farmers of Ontario – before deciding to allow the Dairy Farmers of Ontario to shut down Georgian Bay’s export business.

Before: Murray Cardiff, Chair; Paul Gillen, Vice Chair; Doug Flook, Member

Appearances:

James McIlroy, counsel to Georgian Bay Milk Company Ltd.

Geoffrey Spurr, counsel to Dairy Farmers of Ontario

Tom Graham, counsel to the Tribunal

Chris Burch, Georgian Bay Milk Company Ltd., witness

Kempton Matte, Saputo Inc., witness

Albert Borgo, Quality Cheese Inc., witness

Gordon Coukell, Dairy Farmers of Ontario, witness

Peter Gould, Dairy Farmers of Ontario, witness

Bobby Seeber, Ontario Ministry of Agriculture and Food, witness

DECISION OF THE TRIBUNAL

This appeal was heard in Guelph, Ontario on May 5-8, 2003, May 13, 2003 and May 15, 2003.

Georgian Bay Milk Company Ltd. (GBMC) initiated its appeals as a result of actions taken by the Dairy Farmers of Ontario (DFO) and the Ontario Farm Products Marketing Commission (OFPMC) following the release of a decision by an appellate body of the World Trade Organization (WTO). The WTO decision affected the mechanism by which Canadian dairy producers exported raw milk and dairy products. The OFPMC did not attend the hearing.

Statutory Context

The appeals come before the Tribunal by way of the Ministry of Agriculture, Food and Rural Affairs Act. Subsections 16(1) and 16(2) of that Act state:

Appeal to Tribunal

16. (1) Subject to subsection (4), if a person is aggrieved by an order, direction, policy or decision of the Commission or Director, made under the Farm Products Marketing Act or the Milk Act, that person may appeal to the Tribunal by filing with the Tribunal and sending to the Commission or Director written notice of the appeal.

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 allows for the Tribunal to refuse to hear the appeal under certain circumstances. Subsection 5 requires that appellants first apply to the marketing board for a hearing, unless both parties waive their right to a hearing.

Also relevant to these appeals is Section 2 of the Milk Act. Section 2 states:

Purpose of Act

2. The purpose and intent of this Act is,

(a) to stimulate, increase and improve the producing of milk within Ontario;

(b) to provide for the control and regulation in any or all respects of the producing or marketing within Ontario of milk, cream or cheese, or any combination thereof, including the prohibition of such producing or marketing in whole or in part; and

(c) to provide for the control and regulation in any or all respects of the quality of milk, milk products and fluid milk products within Ontario. R.S.O. 1990, c. M.12, s. 2.

The Milk Act is administered by the OFPMC. The OFPMC is given specific duties, responsibilities and powers under the Milk Act and is empowered to delegate power and authority to the DFO. The DFO has been authorized to require that milk be produced and marketed on a quota basis, and be sold through the DFO. The DFO has the authority to exempt any class of milk or milk producer from any of its regulations. The DFO also has the responsibility for administering the provincial raw milk quality program.

The Background

Prior to January 1, 2003 there existed a system in Ontario whereby milk producers could export milk and/or sell milk to processors who then exported dairy products. Export contracts were registered on an Export Contract Exchange (ECE) in Ontario. The ECE was used by milk producers who also shipped to the domestic market (quota holders) and by milk producers who shipped solely to the export market (non quota holders).

The ECE was allowed under a national Commercial Export Milk (CEM) mechanism. That mechanism was developed in response to a ruling by the World Trade Organization (WTO) that a levy-based system, which was restricted to quota holders, was not compatible with Canada’s international trade obligations. Under the CEM mechanism, “commercial export milk or cream” was defined as “milk or cream that is

(a) produced and marketed under a sales contract between the producer of the milk or cream and a buyer in which any dairy product that is, or is manufactured from, the milk or cream is destined for export: (b) marketed in a province set out in the schedule and in a manner that is consistent with exclusions from the dairy product marketing laws in that province; (c) marketed in export trade or is manufactured into a dairy product that is marketed in export trade; and (d) not subject to a program established by the Commission under paragraph 9(1)(i) of the Act.”

Paragraph 9(1)(i) of the Act provided that the Canadian Dairy Commission could establish programs upon entering into agreements with a province or a marketing board to coordinate the marketing of dairy products. Ontario was among the provinces set out in the schedule referenced in point (b) above.

On December 20, 2002, in response to challenges by the United States and New Zealand, a WTO Appellate Body ruled that the export of milk by Canadian producers via the CEM mechanism was subsidized. Most producers participated in a regulated domestic marketing system and this created a higher domestic price for milk. The WTO found this created an inequity for other milk producers in world markets. In the matters before this Tribunal, the most relevant findings of the WTO Appellate Body were:

“114. In addition, we can see no reason to exclude the cost of quota from the COP standard. On the contrary, to the extent that the acquisition or retention of quota involves economic costs for the dairy producer, these costs should be reflected in the COP standard. In that respect, we are not persuaded by Canada that the cost of quota should be excluded from the COP standard because it relates solely to the domestic market. In the first Article 21.5 proceedings, we held that the COP standard must be determined for “all milk, whether destined from domestic or export markets”. Thus, in principle, the costs of quota form part of the COP standard. It remains, however, to decide how quota costs are to be incorporated into the standard.”

“115. In these second Article 21.5 proceedings, there is very little evidence on record relating to the cost of acquiring or retaining quota, and the Panel did not make any specific findings relating to the cost of quota. Instead, in the absence of evidence, the Panel made a general statement that, “[i]f anything, additions reflecting the cost of quota” should be made to the CDC data on costs of production. In other words, the Panel believed that the CDC data understated the real costs of production because they did not include an amount for the cost of quota. But the Panel was unable to quantify the addition it believed should be made. As the Panel had found that the evidence before it supported a finding that CEM sales are, on average, made at a price below the COP standard, this general remark did not have any bearing on the Panel’s conclusion. In light of this fact, and in the absence of evidence relating to quota, we make no determination as to how, precisely, the cost of quota should be reflected in the COP standard.”

“116. Accordingly, we find that any transport, marketing, and administrative costs are to be included in the COP standard applied under Article 9.1(c), as are any costs of acquiring and retaining quota. The Panel committed no error of law in its assessment of these costs.”

“120. The evidence submitted to the Panel by the complaining Members, in the form of CDC data, included amounts for all these costs, other than quota. According to this evidence, the industry-wide cost of production figure for the year 2000 was C$57.27 per hectolitre (“hl”), and for 2001, it was C$58.12/hl. The average prices for CEM for these periods were C$29/hl and C$31.72/hl, respectively. Thus, as the Panel found, on an industry-wide basis, CEM prices are significantly below the COP standard. On the basis of this evidence, the Panel found that there was a prima facie case that “ payments” are being made. Moreover, under Article 10.3 of the Agreement on Agriculture, the burden of proof was on Canada to establish the contrary. The Panel found that Canada had not satisfied that burden. We can see no error in the Panel’s assessment of the evidence.”

“124. On appeal, Canada argues that the Panel erred under Article 9.1(c) of the Agreement on Agriculture, in particular by finding that a “demonstrable link” exists between Canadian governmental action and the financing of CEM payments. Canada claims that it has removed government action from “every stage of the export transaction” and that producers and processors “freely choose to enter into export transactions”. Therefore, Canada argues that no demonstrable link exists between governmental action and financing of CEM payments.”

“136. We have also upheld the Panel’s finding that producers make “payments”, under Article 9.1 (c) of the Agreement on Agriculture, to processors through sales of CEM at prices that are below the COP standard. As a result, producers’ sales revenues do not recoup all of the costs associated with producing and selling CEM. As this short- fall in revenues must be “ financed” from some other source, sales of CEM necessarily involve the “financing” of “payments”. The crucial question is the source of that financing and, in particular, whether the financing occurs “by virtue of governmental action”.”

“ 138. We note that CEM is produced almost exclusively by the same producers who supply milk to the domestic market. It is not contested that these producers use the same production facilities to produce domestic and export milk- that is, the same land, cattle, buildings, machinery, milking facilities, and so on. Indeed, in some provinces, even after production, both regulatory classes of milk have common storage and transportation facilities. There is, in other words, a single line of production for all milk, whatever its destination market.”

“143. In these circumstances, we agree with the Panel that the evidence indicates that a “significant percentage” of producers are “likely” to make sales of CEM at below the costs of production as a result of highly remunerative in-quota sales in the domestic market. For these producers, domestic sales are likely to “finance” payments made on the sale of CEM. Although the Panel’s finding is based on “likelihood”, this likelihood seems, to us, to be rather high. Any producer whose fixed costs have been, in large part, covered by domestic sales, and who has sufficient capacity to produce for the export market, has a powerful profit incentive to sell CEM at a competitive export price, even if that price is below the average total cost of production, as long as the price is above marginal costs of production. In any event, we recall that, pursuant to Article 10.3 of the Agreement on Agriculture, Canada bears the burden of proving that sales of CEM do not involve the granting of export subsidies.”

“144. It falls now to consider the role of the Canadian government in financing payments made on the sale of CEM. We have agreed with the Panel that a significant percentage of producers are likely to finance sales of CEM at below the costs of production as a result of participation in the domestic market. Canadian “governmental action” controls virtually every aspect of domestic milk supply and management. In particular, government agencies fix the price of domestic milk that renders it highly remunerative to producers. Government action also controls the supply of domestic milk through quota, thereby protecting the administered price. The imposition by government of financial penalties on processors that divert CEM into the domestic market is another element of governmental control over the supply of milk. Further, the degree of government control over the domestic market is emphasized by the fact that government pools, allocates, and distributes revenues to producers from all domestic sales. Finally, governmental action also protects the domestic market from import competition through tariffs.”

“152. Before concluding, we wish to comment on Canada’s arguments concerning the approximately 100 producers out of the 8,000 who sell CEM, and out of the total of 19,000 producers that do not participate in the domestic market at all and sell solely CEM. Canada argues that the Panel erred in finding that, for these producers, sales of CEM involve payments “financed by virtue of governmental action”. We do not believe that it is necessary for us to make any findings regarding these 100 producers. The complaint made by New Zealand and the United States is that Canada has acted inconsistently with its export subsidy commitments under the Agreement on Agriculture.

Canada may act inconsistently with these commitments, as we have found, even if some producers never make payments financed by virtue of governmental action.”

In response to the December 20, 2002 ruling, the Government of Canada took steps to shut down the CEM mechanism, which encompassed the ECE in Ontario. Effective December 31, 2002, the Ontario ECE was disbanded. Producers were permitted to continue to ship milk on contracts registered prior to December 31, 2002 for a transition period that ended on April 30, 2003.

After the WTO Appellate Body decision was released the OFPMC organized a meeting of industry stakeholders which was held on January 24, 2003. Both the DFO and GBMC made presentations at that meeting. The OFPMC then directed the DFO to undertake further consultations with industry stakeholders and report back to the OFPMC on February 15, 2003. The DFO consulted with GBMC on February 7, 2003 and with other stakeholders on January 28, 2003. On February 15, 2003 the DFO told the OFPMC that it planned to comply with the WTO Appellate Body ruling and that its plans included the following:

1. Holding discussions with the Ontario Dairy Council and individual processors to address milk supply concerns in Class 5(a), (b) and (c).

2. Review changes to DFO’s PSQ policy to ensure milk for export will be supplied to those processors who can export either subsidized or non-subsidized products.

3. DFO regulation exemption rescinded as of February 28, 2003 for the Export Contract Exchange (ECE) with an exception provided for any legitimate contracts that may be allowed to continue according to the terms of the compliance agreement negotiated with the U.S. and New Zealand.

4. With the cancellation of the ECE exemption, all producers will be required to hold the minimum of 5 kilograms of quota. In order to allow non quota holders to make management decisions, we propose they receive milk pick-up until March 31, 2003. Those producers wishing to enter the domestic system would be given a transition period up to July 31, 2003 to acquire at least the minimum 5 kilograms of quota.

On February 24, 2003, the OFPMC indicated it accepted the DFO proposal. The DFO publicized its plan for complying with the WTO Appellate Body’s ruling the following day.

In the course of the proceeding before the Tribunal, the parties indicated that Canada, the U.S. and N.Z. had agreed to settle their dispute with regard to exports of dairy products from Canada. The mutually agreed solution required that:

• Provinces eliminate the CEM program by April 30, 2003 and Canada complete all consequential amendments to federal statutes by August 1, 2003.

• For the dairy marketing year that began August 1, 2002, Canada will not exceed its WTO export subsidy reductions for butter and skim milk powder. Canada will exceed its commitments for cheese and other milk products, but confirms that no new CEM contracts were entered into after December 31, 2002 and, subject to judicial and quasi-judicial proceedings, there will be no further deliveries of CEM milk beginning May 31, 2003.

• There will be no exports to the U.S. of any milk and cream for which export subsidies have been granted.

• No further Class 5(d) permits will be issued by Canada before August 1, 2003.

• For the dairy marketing year beginning August 1, 2003 and subsequent years, Canada’s exports of dairy products for which export subsidies have been granted will not exceed the quantities and budgetary outlays specified in its WTO Schedule.

The U.S. and N.Z. agreed to withdraw their requests to retaliate against Canada and Canada withdrew its request for arbitration on the proposed retaliation.

The Issues

The issues before the Tribunal were:

1. Should the Tribunal order the DFO and the OFPMC to facilitate the presentation of GBMC’s Program for Unsubsidized Export Milk to DFAIT?

2. If milk is to be allowed to be exported by GBMC, should the Tribunal order the DFO to allow for this export milk to be transported in segregated trucks?

3. Should the Tribunal order the OFPMC to hold a public hearing on the question of whether or not the GBMC Program for Unsubsidized Export Milk should be implemented?

4. If the Tribunal orders that the GBMC Program for Unsubsidized Export Milk be submitted to DFAIT, should the Tribunal order the DFO and OFFPMC to take any further action to implement the program?

5. Does the DFO have the constitutional authority to prevent the production and marketing of milk for export?

The Evidence

Export Milk Plan Issue

Mr. Chris Birch, President, GBMC, told the Tribunal that the company was established in June 2002 and that it had shipped export milk through two streams – directly to a U.S. based customer as raw milk, and through Canadian processors as exported dairy products. He said GBMC handled the milk of approximately 30 non quota holding milk producers, that it had listed its contracts on the ECE as limited contracts with specific terms and conditions, and that the contracts could only be filled by GBMC producers.

Mr. Birch acknowledged that GBMC had shipped export milk that was not registered on the ECE in early June 2002 when it was starting up, and in October and November 2002. He said the company did not want to be associated with the ECE in case the WTO ruled that its practices were non-compliant with an international agreement. The company also had a dispute with the ECE administrator with regard to fees. He said GBMC agreed to resume registering its export contracts on the ECE as a result of pressure from the DFO and government, but that the fee dispute was unresolved. Mr. Birch said that in December 2002 GBMC began shipping to domestic processors who then exported dairy products.

Mr. Birch explained he objected to the decision of DFO to re-regulate milk exports because:

• GBMC dealt exclusively with non-quota holding milk producers.

• Federal government officials had indicated the WTO had not ruled on the question of export shipments by non quota holders.

• There was no cross-subsidization of GBMC producers’ export milk sales as they had no sales in the domestic market.

• The DFO had no involvement with GBMC aside from licensing producers who met quality standards.

• The DFO decision would shut down GBMC’s business if upheld by the Tribunal.

• It was possible for domestic milk shippers and export milk shippers to coexist in the province as export milk shipments would have no impact on the domestic market.

Mr. Birch pointed out that GBMC contributes to the provincial economy. He said exporting milk processors would have to import milk, process it and re-export it as processed products if they did not have access to milk from non quota holders. Mr. Birch said he agreed that Ontario must comply with the WTO ruling but submitted it should not restrict export milk shipments any more than necessary in order to comply with the ruling.

Mr. Birch also said he did not believe the DFO had any authority to regulate milk produced for export, as he believed that was a federal responsibility. He said that the Department of Foreign Affairs and International Trade (DFAIT) would defend a system that allowed non quota holders to export milk, provided the province was behind it.

Mr. Birch said that attempts to limit exports beyond what is required by international trade agreements were contrary to the Milk Act (Ontario). He said the domestic market was a mature market and growth in the milk industry was dependent on exports.

Mr. Birch testified that he did not agree that milk exported from non quota holders was a part of the CEM mechanism that the WTO Appellate Board ruled was non compliant. He said the WTO had decided not to rule on the issue of non quota holders’ milk shipments. He said he believed Canada could comply with the WTO ruling without restricting milk exports by non quota holders. He acknowledged that it was necessary for the DFO to exempt non quota holders from a requirement to sell milk to the DFO in order for a stand alone export program to exist.

Mr. Albert Borgo, Vice President, Quality Cheese Inc. testified that his company had one processing plant, located in Vaughan, Ontario, and that it exported Brie and Camembert cheese to the U.S.. He said these cheeses may be exported to the U.S. duty free. Mr. Borgo said Quality Cheese Inc. had been purchasing export milk from the GBMC and other export milk producers. He said Quality Cheese Inc. started to purchase milk produced in the U.S. under a federal Import for Re-Export Program (IREP) when the DFO decided to re-regulate the export milk market. Mr. Borgo said relying on the IREP program to source milk would inhibit his company’s growth because:

• Milk transportation costs were higher.

• The price of IREP milk fluctuated; whereas GBMC had given him a fixed price for the year.

• IREP milk was subject to currency risk and extra transaction costs.

• IREP milk was subject to border delays that could hurt the milk quality.

Mr. Borgo said he opposed the DFO decision to re-regulate export milk as it had adversely affected his company’s ability to compete in export markets and expand. He said the DFO decision forced Quality Cheese Inc. to replace milk produced in Ontario with milk produced in the U.S.. He said he had written the Minister of Agriculture and Food (the Minister) about the situation but had not approached the DFO directly. Mr. Borgo said the quality of IREP milk was satisfactory.

Mr. Kempton Matte, Senior Vice President, Saputo Inc., told the Tribunal that he sat on the board of the Ontario Dairy Council, a processor association, and was responsible for the milk supply of Saputo Inc. He explained that Saputo Inc. was a multi-national company and the largest dairy processor in Canada. He said the company was active in the export market and that this market was essential to future growth, as the domestic market was mature.

Mr. Matte said he was opposed to actions taken by the DFO and endorsed by the OFPMC as they impeded the company from obtaining export milk from non quota holders. He said the WTO Appellate Body ruling did not require Canada to stop the production of export milk by non quota holders, and that these producers could not be cross-subsidized as they had no domestic sales. He said he believed the DFO decision was contrary to the intent of the Milk Act.

Mr. Matte said that Saputo Inc. would use the IREP program as much as possible but that it did not provide a reliable source of milk. He cited higher transportation costs and the expectation that IREP milk would need to be isolated from Canadian milk in the processing plants, due to the use of recombinant bovine somatotrophin in the U.S.. Mr. Matte said his company would build more plants outside of Canada to service the international cheese market if it could not get a reliable milk supply in Canada. He said one Ontario plant would be closed. Mr. Matte explained that Saputo Inc. began to reduce exports from Canadian plants in 2002, in anticipation of a negative ruling by the WTO Appellate Body.

Mr. Matte agreed that Canada should fully comply with the WTO Appellate Body ruling but said that it had made no findings with regard to non quota holders. He said he did not believe the risk of retaliation by the U.S. or N.Z. would increase if non quota holders were allowed to continue producing export milk. Mr. Matte said he did not believe that Canada’s credibility would be harmed by introducing a new export milk mechanism as long as it put forward honest and clear facts to support its position. He said it would be up to the WTO to determine if a new program is WTO-compliant. Mr. Matte said the CEM mechanism which the WTO Appellate Body found to be non-compliant was a higher risk option than more market-based systems.

Mr. Matte testified that Saputo Inc. had helped the province of British Columbia develop a plan to allow for non quota holders to produce milk for export and that DFAIT had indicated it was defensible. He said ultimately the province withdrew its support for the plan. He said there were no non quota holders in B.C. before the WTO Appellate Body decision was released on December 20, 2002. Mr. Matte said all provinces had re-regulated producers who had been shipping export milk. He said Ontario, Quebec and Alberta all had non quota holding milk producers.

Mr. Matte said that no subsidized milk or dairy products could be exported to the U.S, under a provision of the North American Free Trade Alliance (NAFTA). He said a two-price system where no subsidized product was used was possible, but that dumping was not permitted.

Mr. Gordon Coukell, Chair, DFO, told the Tribunal he had been a member of the DFO board since 1986 and had been active in the dairy industry since the late 1950s. He said the DFO had a long history of participating in trade negotiations and had spent over $3.5 million unsuccessfully defending Canadian export milk programs since 1998. He said Canada could not continue to be found guilty of circumventing WTO rules without losing credibility at the negotiation table.

Mr. Coukell said the CEM program which the WTO Appellate Body had ruled against in December 2002 allowed all milk producers to enter into contracts to produce milk for export and there was no special status for non quota holders. He said that winding down the CEM program meant that non quota holders would be required to purchase a minimum of 5 kg of marketing quota, in order to continue producing milk in Ontario. He clarified that the DFO was putting stricter production controls in place to discourage over-quota production. Mr. Coukell said the DFO was concerned about the risk of retaliation from the U.S. and N.Z. if Canada did not shut down its CEM program and he suggested that non quota holders had nothing to lose in the event of retaliation. He also pointed out the Government of Canada had committed to shutting down the CEM program.

Mr. Coukell said the WTO Appellate Body used an industry average cost-of-production (COP) benchmark to establish whether or not milk was subsidized. He said it did not matter if non quota holders received no returns from the domestic market because if their price was below this industry average COP – approximately $59/hl – they were deemed to be subsidized by the WTO Appellate Body. He said the DFO had considered the potential risk that non quota holders would be found to be subsidized when it decided to re-regulate. He acknowledged that federal government officials were of the view that non quota holders are not subsidized, and that the WTO ruled neither for nor against non quota holders. But, he also said there was a theory that non quota holders could be cross-subsidized even though they had no domestic milk sales. He said DFO did not share the federal government’s view with regard to non quota holders.

Mr. Coukell acknowledged that the WTO Appellate Body did not rule on the specific question of non quota holders and he said it would be up to another panel of the WTO to determine the significance of this finding. However, he said the DFO did not support any action, such as implementing a new export milk program, which would lead to further WTO challenges. He said he did support a proposal to initiate trade challenges against the U.S. and N.Z. dairy systems as he said those countries should be required to abide by the WTO rules. Mr. Coukell indicated the DFO was not concerned about the IREP program, and its impact on Ontario milk producers, provided all products manufactured from imported milk were exported.

Mr. Coukell explained that Canada was allowed a specific amount of subsidized exports of dairy products under the terms of the WTO agreement. He said milk producers supplying the domestic market needed the flexibility to export small surpluses from time to time. He said small surpluses were necessary in order to fill the domestic market needs. Mr. Coukell explained that quota holding Canadian milk producers did not want to lose any of the allowable subsidized exports to non quota holders. He said that the export of raw milk, which is 87% water, was not an efficient way to use the allowable subsidized milk export permits. He explained the Canadian Dairy Commission (CDC), a federal body, was responsible for issuing 5d permits for subsidized dairy products.

Mr. Coukell disputed the testimony that the domestic dairy market was a mature market. He cited specific growth categories and noted the DFO actively promotes milk. He acknowledged that the domestic market was eroded by imports of blended dairy products via loopholes in trade agreements. He also acknowledged that high tariffs protected the domestic dairy market and that the WTO agenda included lowering tariffs.

Mr. Coukell said DFO had acted responsibly and effectively to ensure compliance with the December 20, 2002 WTO Appellate Body decision. He said every other province had also brought all milk back under regulatory control, effectively eliminating non quota holders. He said the actions of the DFO and the OFPMC were in the best interests of the dairy industry. He submitted that non quota holders should not be allowed to subject the dairy industry to retaliation or another WTO challenge. He confirmed that no quota holders were producing milk specifically for the export market.

Mr. Coukell confirmed the DFO position did not change as the result of consultations with the industry which were ordered by the OFPMC but said other stakeholders positions were considered. He confirmed that he presented the DFO position to the provincial Rural Caucus before it was approved by the OFPMC.

Mr. Peter Gould told the Tribunal that as the Director of Marketing, DFO, he was responsible for milk transportation and supply to processing plants. He explained he was also appointed under the Milk Act as the Director of the Raw Milk Quality Program, and in that role he enforced provincial regulations with regard to the quality of milk at the producer level.

Mr. Gould said the ECE allowed both quota holders and non quota holders to enter into export contracts. He said there were no non quota holders in Ontario before the ECE was established. He said all GBMC producers’ farms were inspected, licensed and met Grade A standards. He stated that of the 28 current GBMC shippers, 24 had been quota holders at one time. Mr. Gould said GBMC export contracts were registered on the ECE, which was part of the CEM program. He estimated that approximately 10% of the milk produced in Ontario was exported. Mr. Gould clarified that the DFO had no involvement in the operation of the ECE program. He said that all milk transported through DFO agents was tested for quality.

Mr. Gould agreed the domestic milk market was a mature market but said there were growth opportunities and he expected it to grow 2-3% per year. Mr. Gould said specialty cheese, yogurt and ice cream were all strong performers and new technologies were being developed to produce nutritionally enhanced dairy products. He agreed that curtailing exports would negatively impact future growth.

Mr. Gould said the DFO had recently increased quota by 5% and expected to issue a further increase later in the year. However, he pointed out that milk producers as a whole cannot continue to market significant amounts of over quota milk and the DFO had changed its policy such that producers would have a negative return on milk shipments in excess of 3% over quota. He said that producers with small amounts of quota were in a similar position to non quota holders in that they needed to purchase quota in order to continue their current operations. He said no one would be able to produce and market milk in Ontario without holding at least 5 kg of quota.

With regard to the WTO Appellate Body decision, Mr. Gould said the issue was whether exports were subsidized or not. He said milk sold via the CEM program was found to be subsidized and Canada was required to shut down the program. He agreed that the WTO Appellate Body relied on the finding that producers were cross-subsidized by a higher domestic price. He said that from the perspective of foreigners, they see a product sold at higher prices domestically than it is internationally and may not see a separation between milk produced by quota holders and that produced by non quota holders. He said the goal of the WTO was to put agriculture on a level playing field and the selling price should approximate long term costs.

Mr. Bobby Seeber, Senior Policy Advisor, Ontario Ministry of Agriculture and Food (OMAF), testified that he was part of a team led by DFAIT which defended the CEM program. He confirmed there had been no distinction made between non quota holders and quota holders in the ECE program and that the WTO Appellate Body had not ruled on the question of whether or not non quota holders were subsidized.

Mr. Seeber told the Tribunal that the WTO challenges of Canada’s dairy marketing practices by the U.S. and N.Z. had been resolved on May 9, 2003 and indicated the threat of retaliation by those countries was minimal. He said it was now left to the provinces to regulate their dairy markets in a manner that respects international agreements. Mr. Seeber said all provinces had taken measures to cease CEM production and the federal government had agreed to amend its regulations related to the CEM by late Summer 2003. He said N.Z. and the U.S. had agreed to a transition period proposed by Canada and had withdrawn their requests for retaliation.

Mr. Seeber testified that the December 20, 2002 WTO Appellate Body decision had compared a COP calculated by the CDC on an industry wide basis to publicly known export prices to determine that exports were subsidized; and that the panel had indicated that quota costs and other factors should be included in the COP calculation. He said the WTO had determined that sales of milk to processors via the CEM were less than the industry average COP. He said this ruling was unique to this specific case. Mr. Seeber said it was not clear that this methodology would be considered in the event that a challenge was initiated against a new export mechanism. Mr. Seeber explained there was no basis for the notion of cross-subsidization in the WTO Agreement on Agriculture. He said the December 20, 2002 ruling broadened what was considered to be agricultural export subsidies.

Mr. Seeber said because the WTO Appellate Body did not rule on the question of whether non quota holders were subsidized, it was not known if it was necessary to re-regulate non quota holders. He said N.Z. and U.S. officials had indicated that allowing non quota holders to export milk through an alternate mechanism would be contentious. He acknowledged the U.S. and N.Z. had ceded their retaliation rights without tying down the non quota holders issue. He said it would be up to a new panel of the WTO to determine if this was allowable under international trade agreements. However, Mr. Seeber also noted there were other trade dispute settlement mechanisms available to aggrieved countries.

Mr. Seeber said that in his view the IREP program was both WTO and NAFTA compliant. However, he pointed out that, like the non quota holders issue, it had been raised as an issue at one time but had never been addressed by the WTO Appellate Body. He said N.Z. had raised the issue of non quota holders with the WTO Appellate Body and had suggested that even if the non quota holders were distinct, an argument could be made that the source of milk for processors operating in both the domestic and export markets was irrelevant. He confirmed the WTO Appellate Body did not rule on that argument.

Mr. Seeber acknowledged he made a presentation to the OFPMC at its January 24, 2003 meeting of industry stakeholders. He said he focused on trade policy issues and the trade interests of the province. Mr. Seeber pointed out that Canada had just lost key arguments it made to the WTO Appellate Body and the province was looking at a process to comply with the ruling and avoid retaliation. He said he had the authority to make this presentation and that he did not have it vetted by his manager or the Ministry of Enterprise, Opportunity and Innovation. He said OMAF was the lead ministry in the province on the dairy challenge.

Mr. Seeber said he helped prepare a briefing note for the Minister after the OFPMC industry stakeholder meeting. He agreed there was no mention of the Government of Canada position on non quota holders in the Minister’s brief, and that the positions of the industry stakeholders were not included. He reminded the Tribunal that where areas of provincial authority are an issue, the Government of Canada cannot stand alone. He said both the province and the federal government would need to assess the merits and risks related to any potential new export mechanism. Mr. Seeber told the Tribunal that briefing notes to the Minister are vetted through an executive in OMAF and routed through a strategic policy unit.

Mr. Seeber said he concurred with the federal position that non quota holders were outside the scope of the WTO decision. He said he did not know if that meant non quota holders could export milk. He said he would need to review a specific proposal in order to form an opinion. He said he did agree that non quota holders were not cross-subsidized.

Mr. Seeber confirmed that he had provided information to GBMC about the ECE mechanism in 2002. He said he gave the same information to others who asked for it. Mr. Seeber said he was aware of GBMC’s concern that it would be disadvantaged by listing its contracts on the ECE. He said he thought these fears were groundless. He said the WTO Appellate Body did not distinguish between the various export mechanisms put in place in different provinces. Rather, it made a blanket determination that the CEM mechanism was non-compliant.

Fungible Milk Supply Issue

Mr. Birch told the Tribunal GBMC arranged for its own transport of milk and did not pay milk transportation fees to the ECE administrator. He said GBMC used a DFO-approved transporter. Mr. Birch explained it was important to GBMC to keep its milk completely separate from milk produced by quota holders as GBMC did not want there to be any possibility that the transport of its milk could be found to be subsidized through the transport of higher priced domestic milk.

Mr. Birch agreed that the Ontario ECE program did not distinguish between quota holders and non quota holders and made no mention of segregated milk. He said it was necessary to keep milk for export to the U.S. separate, as the U.S. Food and Drug Administration (FDA) needed to know exactly which Ontario farms the milk was produced on.

Mr. Birch said GBMC was able to ship milk in segregated trucks to Ontario plants in January 2003, but was ordered to stop by the DFO. He said the segregated shipments had recommenced, once the Tribunal clarified the scope of the statutory stay of the DFO decision, after a pre-hearing conference in April 2003.

Both Mr. Borgo and Mr. Matte testified that their companies were not concerned about whether or not export milk was delivered in separate tanker trucks than domestic milk. Mr. Borgo explained a paper audit was conducted to demonstrate that milk products were exported.

Mr. Coukell testified that the CEM mechanism allowed for all producers to participate as export milk could be transported with domestic milk to minimize the cost of transporting small volumes of export milk from several farms. He said the transportation of a fungible milk supply had never been identified as an issue at the WTO. He agreed with Mr. Birch that raw milk exported to the U.S. had to be segregated to satisfy FDA rules. However, he submitted that all milk delivered to domestic plants should be part of the fungible milk supply. He said segregating GBMC producers from other producers would result in lost income to transport agents serving their part of the province.

Mr. Gould testified that GBMC had been permitted to deliver two loads of segregated milk to Ontario exporting processors over the 2002 Christmas period, as the company’s U.S. customers could not accommodate the milk. He said these were ad hoc arrangements and no other ECE milk that was sold to Ontario exporting processors had been segregated from the fungible milk supply. He said he was aware of Mr. Birch’s position that GBMC could not ship via the fungible milk supply to Ontario plants but that he did not accept his rationale.

Mr. Seeber said there was no requirement that CEM milk be segregated in Ontario or any other province. He said the milk was required to be transported by certified truckers, for quality control.

Ontario Farm Products Marketing Commission Issue

Mr. Birch testified that on January 9, 2003 GBMC asked the OFPMC to hold an oral hearing on proposed regulatory changes that would affect the export milk market. He said the OFPMC declined to hold a hearing, and instead organized an industry meeting where each of six participants was allowed ten minutes to speak. He said that further to that meeting, the OFPMC directed the DFO to consult with industry stakeholders and report back to it.

Mr. Birch said he met with DFO representatives on February 7, 2003 to discuss GBMC’s ten point Program for Unsubsidized Export Milk. He said he understood that the DFO did not put that program before the OFPMC when it reported back on February 13, 2003 and that the OFPMC subsequently endorsed the DFO plan to re-regulate the export sector. Mr. Birch said the OFPMC decision to endorse the DFO plan without subjecting it to public scrutiny effectively put GBMC out of business without having the opportunity to be heard.

Mr. Matte testified that the Ontario Dairy Council told the OFPMC at its January 24, 2003 meeting that the WTO ruling did not cover non quota holders and allowing the DFO to re-regulate would devastate the dairy industry and result in sales losses of over $50 million, at least two plant closures and 200 lay-offs. He said that a scenario which would allow non quota holders to provide unsubsidized milk to processors was discussed at the OFPMC meeting. He said this would allow exports to continue and minimize the risk of a future trade challenge. Mr. Matte said Saputo Inc. had twice asked the OFPMC to hold a hearing on the matter.

Mr. Coukell acknowledged the DFO did not present the GBMC Program for Unsubsidized Export Milk to the OFPMC and did not inform the OFPMC of the Ontario Dairy Council position with regard to non quota holders when it reported to the OFPMC.

Constitutional Argument

Mr. McIlroy stated that milk produced for intra-provincial trade falls within provincial authority while milk produced for export and inter-provincial trade is under federal authority. He argued that the DFO did not have the authority to regulate GBMC producers, as their milk was destined for export. Mr. McIlroy said in the past the DFO had been delegated authority over export trade via a federal Milk Order under the Agricultural Products Marketing Act (Canada). He said the federal government had revoked its Milk Order in 2000. He said that the federal government also amended key definitions in its Canadian Dairy Commission Act and the regulations thereunder in 2000, and that, as a result, that statute no longer required that milk produced for export be marketed through the DFO.

Mr. Spurr said that it was not necessary for the federal government to delegate the DFO authority over export milk through a Milk Order, as it had that authority via the Canadian Dairy Commission Act. He said DFO authority is derived from the Milk Act (Ontario) and regulations under the Canadian Dairy Commission Act. He said the Milk Act required that all milk produced in Ontario be marketed to the DFO; there was no longer an exemption for milk produced for export. He said that because there was no provincial exemption for milk produced for export, this milk did not meet the definition of CEM milk in the Dairy Products Marketing Regulations under the Canadian Dairy Commission Act. He concluded that meant Section 8 of these regulations applied to this milk. He said Section 8 specifically provided that where milk produced for intra-provincial trade must be marketed through a marketing board, so too must milk produced for export or inter-provincial trade.

Mr. Spurr and Mr. McIlroy disagreed as to whether or not the definitions in the Canadian Dairy Commission Act and the regulations thereunder provided that both raw milk and cream and dairy products were covered by Section 8 of the regulations. Mr. McIlroy also submitted that the Canadian Dairy Commission was expressly authorized to use provincial powers but that there was no corresponding authority over export milk delegated to the DFO.

Summations

Mr. McIlroy told the Tribunal that the Government of Canada had consistently stated that the December 20, 2002 WTO Appellate Body decision does not apply to non quota holders and that it would assist in the implementation and defense of a credible, WTO-compliant mechanism to allow for the export of milk produced by non quota holders.

He submitted that the DFO decision should be overturned, as it was contrary to the intent of the Milk Act as it would not “stimulate, increase and improve the producing of milk within Ontario”. Mr. McIlroy reminded the Tribunal that:

• Quality Cheese Inc. would have to replace Ontario-produced milk with imports under the IREP program.

• Saputo Inc. was shifting production for export markets out of Canada.

• The Ontario Dairy Council estimated sales would be lost, plants would close and employees would be laid off by Ontario dairies if they could not source milk for export.

• The George Morris Centre had concluded the domestic market for fluid and industrial milk was mature and the industry would shrink if it lost the export market.

• The DFO had taken steps to limit the production of over-quota milk.

• The DFO acknowledged the domestic market was eroding due to the import of designer blends of dairy products.

• High tariffs protecting the domestic dairy market were on the table in the current round of international trade negotiations.

Mr. McIlroy also submitted that the decision making process used by the DFO and the OFPMC to eliminate the non quota holders’ export business was flawed. He said the DFO took its position in December 2002 and did not have an open mind to the views of other industry stakeholders. He pointed out that the DFO fears of retaliation were unfounded as the WTO dispute was settled on May 9, 2003. He also suggested the DFO was acting inconsistently in encouraging challenges of other countries’ export practices while at the same time attempting to curtail the export activities of GBMC. He said the OFPMC had acted hastily in endorsing the DFO proposal two business days after indicating it needed further information from the Government of Canada and one day after Mr. Coukell spoke to the Rural Caucus. Mr. McIlroy also suggested that the OFPMC had not properly briefed the Minister on the implications of regulating non quota holding export milk producers.

Mr. McIlroy said that since GBMC had been given an opportunity to make its case and subject the DFO decision to scrutiny, it no longer required a hearing before the OFPMC. He said GBMC wanted the Tribunal to:

• Direct the DFO and the OFPMC to submit its Program for Unsubsidized Export Milk to DFAIT and request that DFAIT approve it as WTO-compliant.

• If the Program is found to be WTO-compliant by DFAIT, direct the DFO and OFPMC to make all legal and policy changes required to implement it.

• Order that all milk produced by GBMC producers may be segregated from the provincial milk supply.

He also asked that this panel of the Tribunal remain seized of the matter and asked that the Tribunal order that the stay in effect by virtue of GBMC’s appeals be extended until the GBMC Program for Unsubsidized Export Milk is implemented.

Mr. Spurr submitted the Tribunal should give a greater than usual degree of deference to the decisions of the DFO on the matters under appeal as they were policy issues made with the participation of the OFPMC and the Minister, and as the appellants were asking the Tribunal to significantly vary the decisions. He reminded the Tribunal that it stands in the shoes of the DFO and the OFPMC but that it can only order such actions as those bodies are authorized to take under the Milk Act. He also pointed out that the members of the DFO board are democratically elected by Ontario milk producers.

Mr. Spurr said the DFO was required to eliminate the ECE as it was part of the CEM mechanism that the WTO Appellate Body had ruled was non-compliant. He said once the WTO determined that milk exported through the CEM was subsidized, it was clear that Canada had exceeded its allowable subsidized exports and the DFO was obligated to bring milk producers back into compliance with the international trade agreement. He noted that there had never been a distinction made between milk produced by quota holders and non quota holders for ECE contracts.

Mr. Spurr argued that an electronic mail transmission from the Minister dated March 24, 2003 confirmed that she was aware of the DFO plan to re-regulate the industry in response to the ruling of the WTO Appellate Body. He said it was clear she had asked the OFPMC to hold its initial industry consultation and had been fully informed on DFO’s plan throughout the process.

Mr. Spurr said that the fact that the May 9, 2003 agreements between Canada, the U.S. and N.Z. required the elimination of the CEM program confirmed that the DFO acted correctly in eliminating the ECE. He noted that other provinces responded in similar fashion and that the federal government had committed to make the necessary regulatory amendments to eliminate the CEM. He argued that there was extensive evidence filed which demonstrated that GBMC operated under the CEM.

With respect to the DFO decision not to endorse the Program for Unsubsidized Export Milk developed by GBMC, Mr. Spurr pointed out that it was ultimately the Province of Ontario that should submit a new export plan to DFAIT. He submitted it was incumbent on GBMC to demonstrate that its proposal is in the best interests of the Ontario dairy industry.

Mr. Spurr agreed with Mr. McIlroy that it would be up to the WTO to determine whether or not milk exported by non quota holders was WTO-compliant. However, he said it was clear that GBMC business plan required that export milk be sold at less than the industry-average COP and he submitted that the risk of another WTO panel ruling against Canada’s dairy industry would be borne by all producers, including quota holders.

With regard to the milk segregation issue, Mr. Spurr submitted that subsidized export limits are based on volume and price and the means by which a product is transported is irrelevant. He also said GBMC’s rationale for segregating milk was inconsistent as its business plan required milk to be segregated in transit, but not in processing facilities.

Mr. Spurr reminded the Tribunal that there were three purposes of the Milk Act. He said the intention to stimulate, increase and improve the marketing of milk must be read in context with the intentions to control all aspects of production and marketing and to control and regulate the quality of milk and milk products. Mr. Spurr submitted that the purpose of the statute was to increase the production of milk within a regulated system. He suggested that the DFO decision was in accordance with this principle.

Mr. Spurr argued that, if the Tribunal agreed that the GBMC Program for Unsubsidized Export Milk should be submitted to DFAIT, then GBMC should not be able to continue its business in the interim. He reiterated that Canada had agreed to eliminate the CEM program. He therefore submitted that in order to allow GBMC to continue to operate on an interim basis, the Tribunal would need to order the DFO to “carve out” GBMC shippers from its regulations. He said it would be extraordinary for the Tribunal to extend a stay beyond the date of its decision, or to remain seized of a case.

With regard to the appeal related to actions of the OFPMC, Mr. Spurr said any errors in procedure were cured by the hearing conducted by the Tribunal and submitted that GBMC did not demonstrate that the OFPMC decision was outside its mandate.

Mr. Spurr asked that all three appeals be dismissed.

The Findings

Export Milk Plan Issue

The Tribunal heard considerable testimony and reviewed documentary evidence on the question of whether or not the December 20, 2002 ruling of the WTO Appellate Body applied to non quota holders. It is clear to this Tribunal that the WTO Appellate Body chose not to consider whether or not 100 non quota holders received export subsidies. No ruling was made either for or against the non quota holders. Paragraph 152 of the decision indicates that Canada can exceed its subsidized export commitments even if some milk exports are not subsidized.

The WTO Appellate Body ultimately found that Canada had acted inconsistently with its international agreements. Canada and the provinces responded by eliminating the CEM mechanism, which allowed both quota holders and non quota holders to produce milk for export. The mutually agreed solutions submitted to the WTO by Canada, N.Z. and the U.S. on May 9, 2003 have effectively resolved the dispute which led to the WTO proceeding.

The first issue before this Tribunal is whether or not GBMC’s plan for a new WTO-compliant export plan should be submitted to DFAIT for its consideration. The appellant argues that the DFO and the OFPMC went further than required by the WTO Appellate Body’s unfavourable ruling in removing the ability of non quota holding producers to ship unsubsidized milk for export. This Tribunal agrees that the DFO decision would effectively require all non quota holders to participate in the domestic market and thereby cause any export milk they produce to be subsidized. This would remove the possibility of their participating in a WTO-compliant export scheme, should Canada and the province opt to develop one.

The Tribunal finds that the DFO and the OFPMC should be required to forward a plan to allow for unsubsidized milk produced by non quota holders to DFAIT. The Tribunal will order that a plan for unsubsidized milk exports be submitted to DFAIT. The Tribunal has no objection to GBMC, the DFO and the OFPMC amending the GBMC Program for Unsubsidized Export Milk if they mutually agree to improvements to the plan. However, if these three parties cannot agree on modifications to the plan, the original GBMC Program for Unsubsidized Export Milk is to be submitted to DFAIT.

The Tribunal was persuaded by the testimony of Mr. Matte and Mr. Gould and by documentary evidence submitted by the appellant (The WTO Dairy Export Decision:What Next For Growth in the Canadian Dairy Industry?; Mussell, Al; George Morris Centre Special Report, January 21, 2003; ODC Presentation to Export Meeting; Kane, Tom; January 24, 2003) that the Canadian dairy industry is a mature market which cannot be expected to expand more than 2-3% per year. Further, the appellant and the DFO both acknowledged that high tariffs that provide some protection to the domestic industry were at risk in the current round of trade negotiations.

The Tribunal finds that the industry as a whole could be better served by policies which allow industry stakeholders to pursue a growth-orientated market that encompasses both export and domestic sales.

The Tribunal also recognizes that there are benefits to the processing sector from having a stable source of unsubsidized Ontario milk due to the drawbacks of the IREP.

The Tribunal notes that at the time the DFO made its decision with regard to regulating non quota holders, there was a concern that the U.S. and N.Z. might retaliate as a result of the December 20, 2002 ruling by the WTO Appellate Body. However, when the matter was before this Tribunal, it was clear that there was no longer a risk of retaliation. The Tribunal therefore gave little weight to that argument.

The DFO also raised the concern that any new export program that Canada pursues would also be challenged. The Tribunal acknowledges this possible risk, but finds that it does not warrant the DFO position that no further unsubsidized exports should be considered. The WTO made no ruling with respect to whether or not non quota holders were subsidized. Also, Mr. Seeber’s evidence was that the WTO Appellate Body ruling with regard to the COP was specific to the particular case before it.

The Tribunal considered all three of the objectives set out in the purpose and intent of the Milk Act. The Tribunal finds that regulatory changes that allow for unsubsidized non-quota holders to produce milk solely for the export market are in accordance with the intent of the Milk Act. Clearly, this would “stimulate, increase and improve” milk production as it would allow for additional milk producers to establish production facilities in the province. The GBMC Program for Unsubsidized Export Milk calls for this production to be limited to producers who do not ship into the domestic market. The Milk Act allows for these producers to be separately regulated such that they must produce on licensed facilities to meet Ontario quality standards but are not required to participate in the domestic market. GBMC also recognized the need to ensure that quality is maintained through the use of qualified, licensed milk transporters.

The Tribunal does not accept Mr. Spurr’s argument that the Tribunal should give greater deference to the DFO decision because the OFPMC and the Minister were briefed on it. The evidence was clear that the DFO position and Mr. Seeber’s concerns were presented to the Minister. The Tribunal could not determine whether or not the Minister was briefed on the federal government’s position, other industry stakeholders’ views or the economic impact of eliminating exports by non quota holding milk producers.

An ancillary issue before the Tribunal is whether to allow GBMC to continue to operate while DFAIT and the province consider the proposed plan for unsubsidized exports. The Tribunal finds that GBMC can continue to market export milk until DFAIT and the province have made a determination as to the viability of the proposed unsubsidized export milk program or until November 30, 2003, whichever occurs first. However, the Tribunal will order that the company be restricted to marketing each month no more its average monthly shipments between January 1, 2003 and April 30, 2003 inclusive. The Tribunal will also order that GBMC be restricted to obtaining milk from producers who were producing milk for the company on May 15, 2003. GBMC shippers are to be exempt from the requirement to hold marketing quota. This will allow the company to remain in business while a determination is being made on the proposed unsubsidized export program. The Tribunal finds that GBMC should be left in a position to participate in a new program, should one be implemented. The Tribunal will order that DFO has the discretion to extend the regulatory exemption if steps are underway to implement a program for unsubsidized exports.

The authority for the DFO to submit a plan to allow for unsubsidized milk produced by non quota holders to DFAIT is found in Subsections 4(d) and 4(f) of Regulation 354/95 under the Milk Act. The DFO has been delegated the powers:

“4(d) to stimulate, increase and improve the marketing of milk by such means as the marketing board considers proper”; and

“4(f) to take such action, make such orders and issue such directions as are necessary to enforce the due observance and carrying out of the Act, the regulations, the plan or an agreement or award.”

The authority for the DFO to exempt GBMC and the producers supplying it from DFO regulations is derived from Subsections 5(r.1) and 5(r.2) of Regulation 354/95 under the Milk Act. The DFO has been given the authority to make regulations:

“5(r.1) providing for the exemption of any class, variety, grade or size of milk or cream from any or all of the regulations under the plan;” and

“5(r.2) providing for the exemption of any person or class of persons engaged in the producing or marketing of milk or cream or any class, variety, grade or size of milk or cream from any or all of the regulations under the plan.”

Implementation of Program for Unsubsidized Export Milk

The appellant asked the Tribunal to order the OFPMC and the DFO to take any action that might be required to implement the GBMC Program for Unsubsidized Export Milk, in the event DFAIT supports it. The Tribunal finds it is premature to order the implementation of the program before DFAIT has provided its advice as to the program’s compatibility with international trade agreements. The Tribunal was persuaded that there is merit in considering an unsubsidized milk export program, but it believes it would be inappropriate to order the implementation of a specific program in the absence of all relevant information.

Fungible Milk Supply Issue

On the question of whether unsubsidized export milk should be segregated from the domestic milk supply, the Tribunal finds in favour of the appellant’s position. The parties did not disagree that milk should be segregated if it is shipped directly to the U.S.. It is not clear that it is strictly necessary to separate this milk from the fungible milk supply for shipments to domestic plants. However, keeping the unsubsidized export milk segregated leaves the processor the flexibility to segregate it in the plant. While the Tribunal recognizes there may be an increased cost to transporting milk in a segregated supply, it notes that the cost will be borne by the unsubsidized non quota holders shipping the milk. There will be no impact on the transportation cost to quota holders shipping milk via the DFO to the domestic market.

The Tribunal stresses that GBMC will be required to use DFO approved transporters and have milk graded by licensed Ontario milk graders.

The DFO has the authority through Regulation 354/95, under the Milk Act, to exempt GBMC and the milk producers who supply it from the requirement that milk be transported via the fungible milk supply.

OFPMC Issue

The Tribunal accepts Mr. Spurr’s argument that the hearing conducted by the Tribunal cured any errors in procedure that may have been made by the OFPMC. As well, the appellant indicated a hearing before the OFPMC was no longer required.

The Tribunal will order the OFPMC to cooperate with GBMC and the DFO in submitting the GBMC Program for Unsubsidized Milk Exports to DFAIT.

The OFPMC has powers similar to those of the DFO under the Milk Act. In addition it has the duty and responsibility “to co-operate with the Canadian Dairy Commission or any other agency of Canada or of any province of Canada respecting the producing, processing and marketing of milk and milk products.”

Constitutional Issue

On the constitutional question, the Tribunal accepts Mr. Spurr’s argument that the DFO has been delegated the right to regulate the production of milk in Ontario, whether or not that milk is consumed in the province or destined for export. The Tribunal finds that milk production is a provincial responsibility.

The concept of cooperative federalism, whereby the provincial and federal governments may use their respective powers over intra-provincial and inter-provincial/export trade to regulate the marketing of an agricultural product, has been upheld by the Supreme Court of Canada. The Tribunal was not persuaded by Mr. McIlroy’s arguments that there were any irregularities in the federal legislation which would prevent the DFO from exercising its provincial authority to regulate the marketing of milk, whether it is produced for the provincial, national or export market.

Decision and Reasons

After careful consideration of the evidence filed and the submissions made the Tribunal orders:

1. The DFO and the OFPMC are to consult with GBMC on its Program for Unsubsidized Export Milk and are to make any modifications to the proposed program that the DFO, OFPMC and GBMC mutually agree should be made.

2. The DFO and the OFPMC are to submit the GBMC Program for Unsubsidized Export Milk, as modified in accordance with Point 1 of this Order, to the Department of Foreign Affairs and International Trade. If the parties are unable to agree to amendments to the GBMC Program for Unsubsidized Export Milk, the February 6, 2003 draft of the program is to be submitted to DFAIT. A proposal is to be submitted to DFAIT no later than August 1, 2003.

3. The DFO and the OFPMC are to request DFAIT officials to provide an opinion as to whether or not the proposed program is compliant with Canada’s international trade obligations.

4. The DFO is to use its authority to make regulations to exempt non quota holding milk producers who were shipping milk to GBMC as of May 15, 2003 from: a) the requirement that they acquire and hold a minimum of 5 kilograms marketing quota; b) the requirement that they need quota to produce and market export milk each month, provided their monthly shipments do not exceed their monthly average milk shipments to GBMC between January 1, 2003 and April 30, 2003 inclusive; c) the requirement that their milk production be transported through the fungible milk supply. These producers are to be exempt from these regulations until November 30, 2003 or until the Government of Canada and the province have made a determination on the viability of the proposed Program for Unsubsidized Export Milk, whichever occurs first.

5. The DFO shall have the discretion to extend the period of the exemptions listed in Point 4 of this Order if steps are underway to implement a program for unsubsidized milk exports.

6. The DFO is to amend its policies and regulations to allow GBMC to directly contract with DFO approved milk transporters for the transportation of milk produced by the non quota holding milk producers referenced in Point 4 of this Order and contract for the grading and quality testing of that milk.

7. The DFO is to continue to license the non quota holding milk producers referenced in Point 4 of this Order while they are exempt from holding marketing quota in the same fashion as if they were not exempt from DFO regulations.

The reasons for this decision are:

1. The Tribunal is persuaded by the evidence that there is merit in investigating the development of an export program for unsubsidized milk.

2. The Tribunal is of the view that GBMC should be allowed to continue to operate its business for a reasonable period of time while the federal and provincial authorities consider the merits of implementing an export program for unsubsidized milk.

Dated at Guelph, Ontario the 4th day of June, 2003.