International Dairy Direct – Broker Agent v. Dairy Farmers of Ontario, 2003 ONAFRAAT 2

Agriculture, Food and Rural Affairs Appeal Tribunal 1 Stone Road West

Guelph, (Ontario) N1G 4Y2 Tel: (519) 826-3433, Fax: (519) 826-4232 Email: AFRAAT@ontario.ca

Tribunal d’appel de l’agriculture, de l’alimentation et des affaires rurales 1 Stone Road West

Guelph (Ontario) N1G 4Y2 Tél.: (519) 826-3433, Téléc.: (519) 826-4232 Email: AFRAAT@ontario.ca

AGRICULTURE, FOOD AND RURAL AFFAIRS APPEAL TRIBUNAL

APPEAL:

International Dairy Direct – Broker Agent v Dairy Farmers of Ontario

International Dairy Direct – Broker Agent v DFO 2003 ONAFRAAT2 1

STATUTE:

Ministry of Agriculture, Food and Rural Affairs Act

HEARING:

June 24, 2003

DATE OF DECISION:

July 17, 2003

2003-21

NEUTRAL CITATION:

2003 ONAFRAAT2 1

International Dairy Direct – Broker Agent v Dairy Farmers of Ontario

IN THE MATTER OF THE MILK 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 International Dairy Direct, Sunderland, Ontario from a decision of Dairy Farmers of Ontario dated March 14, 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.

Before:

Denis O'Connor, Vice Chair; George Klosler, Member; Russ Piper, Member.

Appearances:

Donald Good, counsel to the appellant

Geoffrey Spurr, counsel to the respondent

Bill Denby, appellant

Richard Gaerke, witness, on behalf of the appellant

Peter Gould, witness, on behalf of the respondent.

Gordon Coukell, witness, on behalf of the respondent.

DECISION OF THE TRIBUNAL

This appeal was heard in Guelph, Ontario on June 24, 2003. International Dairy Direct - Broker Agent (IDDBA) appealed to the Agriculture, Food and Rural Affairs Appeal Tribunal (the Tribunal) from a decision of the Dairy Farmers of Ontario (DFO) wherein it refused to change its plan for complying with a World Trade Organization (WTO) ruling on Canadian dairy exports.

The Background

On December 20, 2002, a WTO Appellate Body upheld the findings of a WTO Compliance Panel and ruled that Canadian milk in the export market was subsidised, due to cross-subsidisation from Canadian milk sold in the domestic market through a regulated marketing system.

In response to the WTO ruling, the DFO decided to re-regulate the Ontario dairy industry and to bring the marketing of all milk in Ontario under its jurisdiction as provided for under the Milk Act. On February 25, 2003, it released a plan to re-regulate the industry.

Mr. Denby, on behalf of IDDBA, appealed this decision and appeared before the DFO on March 12, 2003. Mr. Denby asked the DFO to consider an export plan which IDDBA proposed and which IDDBA developed to be in compliance with the WTO ruling and the established regulatory jurisdiction of the DFO under the Milk Act.

The Issue

The issue before the Tribunal was:

1Should the March 14, 2003 decision of the DFO not to vary or rescind its plan for complying with the WTO ruling be varied to allow for the IDDBA plan for exporting milk produced in Ontario to be implemented?

Statutory Context

The relevant statutory authority for the appeal by IDDBA is Subsection 16(2) of the Ministry of Agriculture, Food and Rural Affairs Act, which is reproduced below:

Idem

16.(2) Subject to subsections (4) and (5), if a person is aggrieved by an order, direction, policy, decision or regulation made under the Farm Products Marketing Act by a local board or under the Milk Act by a marketing board, that person may appeal to the Tribunal by filing with the Tribunal and sending to the local board or marketing board written notice of the appeal.

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.

Preliminary Matters

At the onset of the hearing, Mr. Good told the Tribunal that the appellant wished to rely on the similarity of its appeal to that of a recent appeal by the Georgian Bay Milk Company (GBMC) and asked that the Tribunal decision in that proceeding be treated as a precedent in this matter.

He submitted that the Tribunal ruled in the GBMC matter that issues regarding the export of milk produced by non quota holders should be examined and determined by the Department of Foreign Affairs and International Trade (DFAIT). Mr. Good submitted that the IDDBA appeal merited similar consideration.

Mr. Good told the Tribunal that he did not represent the appellant when it appeared before the DFO, and that he had been retained subsequent to the filing of its appeal with the Tribunal. He asked the Tribunal to amend the Notice of Hearing to reflect additional issues which he was prepared to represent. He said the appellant had the right to discuss its export plan with DFAIT, but that DFAIT would not talk to IDDBA until there has been some dialogue with the DFO.

Mr. Spurr responded that the decision of the Tribunal with regard to the GBMC was not yet final, as the Honourable Helen Johns, Minister of Agriculture and Food (the Minister) had been asked by the DFO to review it. He said it was not appropriate to use it as a precedent. Mr. Spurr also noted that the Secretary to the Tribunal had attempted to consolidate the appeals of GBMC and IDDBA based on the apparent similarity of the issues under appeal, but that GBMC did not agree that the issues were similar and it was decided the appeals should be heard separately. Mr. Spurr submitted that the determination of the Tribunal to hear the matters separately was an assurance that the matters were separate and distinct. He also noted that the Ontario Farm Products Marketing Commission (OFPMC) was a party to the GBMC hearing before the Tribunal but not to this proceeding.

Mr. Spurr told the Tribunal that IDDBA objected to the re-regulation of the industry and asked the DFO to endorse its export plan and the DFO declined to do so. He said he was concerned that the relief now sought was different than what was asked of the DFO.

The Tribunal considered the submissions of the parties with regard to modifying the issues being appealed. The Tribunal decided that Mr. Good had sufficient time before the date of the hearing to raise the matter of amending the Notice of Hearing. The Tribunal decided the respondent would be unfairly disadvantaged if the scope of the appeal was varied, as it had prepared its briefs and argument in response to the published issues stated in the Notice of Hearing.

The Tribunal directed the parties to limit their submissions and responses to the matter described as being under appeal as stated in the Notice of Hearing.

The Evidence and the Findings

Richard Gaerke

Mr. Richard Gaerke told the Tribunal that he owns a milk processing plant in Union City, Indiana, U.S.A.. Mr. Gaerke told the Tribunal that:

• His plant has the capacity to separate and evaporate 90,000 pounds of milk per hour.
• The plant is not presently operating, as his company is being financially re-structured in an attempt to recover from pecuniary difficulties.
• The profit margin minimum for his processing plant is 50,000 pounds of milk per day (approximately five loads) seven days a week.
• Any milk processed in the plant was required to meet all conventions of the United States Department of Agriculture (USDA) and the Food and Drug Administration (FDA).
• There is a market in the U.S.A. for unsubsidized milk imports.
• There are few barriers to commercial agreements between dairy producers and dairy processors in the U.S.A..
• There is dialogue between federal and state level industry stakeholders in the U.S.A. dairy industry.

Mr. Gaerke responded to questions that:

• His company, Hartland Processing, is preparing a business plan to schedule payments to debtors in order to avoid bankruptcy proceedings.
• The plant processed fluid milk into skimmed milk and condensed milk at a rate of 16 to 18 million pounds of fluid milk per month from 1999 to 2001. The milk was sourced from Ohio and Indiana producers through a broker. The producers were paid the U.S.A. Blend Price for the fluid milk.
• At no time did Hartland Processing own the milk or the finished product. He did not know if any fluid milk was exported to Canada at that time.
• The U.S.A. Blend Price fluctuates from month to month and is calculated as an average of four class prices (Class 1, 2, 3, and 4).
• Milk produced in the U.S.A is generally priced at world market prices.
• The U.S.A. Blend Price for fluid milk is typical of prices that Canadian producers are paid.
• The joint venture plans discussed with IDDBA to date involved Hartland Processing as a custom processor only. IDDBA would be expected to market the processed products.
• Hartland Processing had been discussing the joint venture plans with IDDBA for approximately six weeks.
• The processing fee expected to be paid to Hartland Processing for its part in the plan is competitive within the dairy processing industry.

Bill Denby

Mr. Bill Denby stated that he was the principal of IDDBA and he had over 18 years of experience in the dairy industry. He said he was familiar with provincial and federal trade policies. He said that he appeared before the DFO to discuss a WTO compliant export plan.

Mr. Denby told the Tribunal that:

• The FDA issued a raw milk permit to his company to ship fluid milk into the U.S.A..
• IDDBA proposed a trade plan to broker the export of fluid milk that was produced by Ontario producers in excess of quota. It offered to pay Ontario producers at prices that were above the cost of production.
• IDDBA proposed to take ownership of the milk, arrange the transportation of the milk and contract all quality testing. He said it would employ only licensed milk handling personnel.
• Implementation of an export plan and the co-operation of industry stakeholders would stimulate growth and stability in the present passive domestic market.
• He had made several attempts to bring his company's proposal before the DFAIT and had repeatedly been met with the insistence that there be provincial industry-wide support for the proposal.
• IDDBA wants the opportunity to present its export proposal directly to DFAIT.
• The export proposal is not fully developed and he anticipates making some changes and refinements.

In response to questions, Mr. Denby indicated:

• He is a quota holding dairy farmer.
• He wanted an opportunity to discuss his proposal with provincial industry stakeholders such as the DFO, Large Herd Association, Ontario Federation of Agriculture, Ontario Dairy Herd Improvement Association and the Christian Farmers Federation of Ontario.
• There is no impediment to discussing the proposal with industry stake holders at present but it is widely known that DFO must also endorse the plan in order for it to be implemented.
• The most recent joint venture between IDDBA and Hartland Processing had not been negotiated when IDDBA had its hearing before the board.
• Discussions for joint ventures between IDDBA and several other U.S.A. processors were underway, but no firm agreements had been reached.
• If Hartland Processing was able to co-operate fully the IDDBA proposal could be implemented immediately.
• If the IDDBA plan were implemented with Hartland Processing, IDDBA would contract with Canadian producers to pay them using the cost of production as a base.
• The Canadian cost of production is higher than the U.S.A. domestic price.
• U.S.A. import regulations require that the milk and the resulting product of processing must be given an estimated value before the U.S.A. will consent to the importation.
• IDDBA would charge a fee of $1 per hectolitre as well as the transportation costs and other minor costs.
• IDDBA would also manage the sale of the finished product. IDDBA planned to sell a small amount of product in Canada and the bulk of product in the U.S.A. IDDBA would sell the processed products at wholesale prices.
• The milk would be processed into cheese, yogurt, ice cream and chocolate milk.
• IDDBA anticipated expansion of its business into the U.S.A. niche market for Bovine Somatatrophin (BST) free milk.
• Chocolate milk may be sold in the U.S.A when IDDBA gets U.S.A. Grade A approval.
• Chocolate milk would have to be sold by an agent, as it was not proposed that Hartland Processing would own or market any of the finished products.
• Chocolate milk is considered to be a flavoured beverage and is not subject to the same Canadian import regulations as other milk products. Chocolate milk processed in the U.S.A could be sold in Canada. Over quota milk produced in Canada for this chocolate milk re-importation market could displace milk produced within quota.
• The planned joint venture for processing and marketing chocolate milk would have to be flexible, as shipments of fluid milk to processors would be distributed over several markets to avoid charges of dumping within the U.S.A. market.
• Risks to producers for participating in the IDDBA plan included possible sanctions from the DFO for producing milk in excess of quota.
• The IDDBA proposal would provide a faster more flexible flow of milk to processors.

Mr. Denby said he did not know if the IDDBA proposal had been presented to the OFPMC. He said the proposal had not been presented to the provincial Minister of Agriculture nor to DFAIT. Mr. Denby stated he attended an industry stakeholder meeting on January 24, 2003 which the OFPMC had organized. He said the recent WTO ruling was discussed and that the DFO and other industry stakeholders had discussions on an export market plan as a result of that meeting. He said the OFPMC ordered the DFO to work with industry stakeholders in developing an export plan, but the DFO never seriously entertained any proposals.

Mr. Denby acknowledged the IDDBA proposal is fairly speculative and some further definition is required. He clarified that:

• IDDBA does not intend to replace the Export Contract Exchange (ECE); rather it is a private enterprise for the export and marketing of fluid milk.
• Milk destined for export within the IDDBA scheme would need to be separated into a specific stream to allow for exclusive quality control, testing and transportation.
• Producers would be informed of any costs related to participating in the proposal.
• IDDBA would not include any policies within its proposal that would infringe upon the integrity of the supply management system.

Mr. Denby responded to questions about an advertisement placed in the Ontario Farmer, March 25, 2003 edition, to solicit over quota milk. He said that:

• His U.S.A. raw milk shipping permit listed some 526 producers. The permit enables IDDBA to ship the production of approximately 5000 cows per day to the U.S.A.
• The U.S.A. does not have volume restrictions for fluid milk imports but does require that milk be non-subsidized.
• IDDBA has not exported any milk as an entity to date but he participated as an exporter through InterNat Dairy Services.
• Approximately 1200 producers had contracted with InterNat Dairy Services.
• The "good prices" advertised for contracts in March 2003 referred to unsubsidized milk at U.S.A. Class 3 prices. The contracts were to have been offered through the ECE but it was shut down in response to the WTO ruling.
• The U.S.A. Class 3 price is approximately 70% of the Canadian domestic price for milk.
• Milk produced for a price that is less than the domestic price it is not necessarily subsidized.

Gordon Coukell

Mr. Gordon Coukell, Chair, DFO, told the Tribunal that:

• The WTO and Canada have established benchmarks for milk that is considered subsidized. In the view of the WTO, the Canadian average cost of production, not the individual cost of production, is the deciding factor between subsidized and unsubsidized milk.
• Only the WTO can determine if export milk is compliant with its December 2002 ruling.
• DFAIT does not make rulings on trade proposals but offers its opinion on the defensibility of trade proposals.
• Canada has limits on the importation of milk and milk products.
• Immediately following the WTO ruling there was a serious concern that sanctions against any number of Canadian trade commodities would be applied by countries retaliating against Canada for selling subsidized milk, as defined by the WTO, on the world market.
• The DFO met with a senior trade policy advisor with the Ontario Ministry of Agriculture and Food and the Secretary of the High Commission for New Zealand to discuss the threat of retaliation.
• The DFO brought its proposal for complying with the WTO ruling to the OFPMC on February 13, 2003.
• The response of the DFO to the WTO ruling was tabled during the transition phase of winding down the ECE.

Mr. Coukell told the Tribunal that the DFO response for compliance with the WTO ruling was circulated among all dairy industry stakeholders.

Mr. Coukell provided clarification of the class based pricing system for milk. He said:

• Milk is divided into designated price classes which are determined by its end use.
• Class 5, which is generally used for export milk and processed products sold in Canada, is broken down into sub-classes alphabetically.
• Class 5 (d) is managed by the Canadian Dairy Commission and Class 5 (d) milk is used exclusively in export markets.
• The Canadian Class 5 price is based on the U.S.A. Class 3 price. The Class 5 price generally lags behind the U.S.A. Class 3 price by two or three months.

Mr. Coukell told the Tribunal that export milk that finds its way back into Canada for further processing has an impact on the domestic supply. He said Canada has a tariff threshold for milk being brought into Canada from the U.S.A. and it is met by the volume moving across the border in cross-border shopping. He said that chocolate milk is excluded from the tariff threshold.

Mr Coukell told the Tribunal that he had not been apprised of any details of the IDDBA export marketing proposal until the hearing before the Tribunal. He stated that the IDDBA plan is constantly changing. Mr. Coukell said he could not predict the actions of the DFO Board of Directors but he believed it would have difficulty in making any recommendations regarding the IDDBA proposal given there is no plan or discussion for milk exports at the federal level.

Mr. Coukell told the Tribunal that the supply management system is designed to produce milk for the domestic market. He said the notion of production above quota allotments was not a policy of the DFO. He stated that there is often surplus production within the regulated marketing system but that no programs should be in place to encourage production in excess of quota.

In response to a question, Mr. Coukell said the WTO found the Canadian ECE allowed subsidized milk to be offered for sale on the world market; the problem that it was designed to avoid. He also confirmed that some of the documentation DFO submitted to the Tribunal in this proceeding was the same documentation that was submitted to the Tribunal at the GBMC hearing.

Peter Gould

Mr. Peter Gould told the Tribunal that he is the Director of Marketing and Production for the DFO and Director of Regulatory Compliance, Raw Milk Quality Program. He testified that:

• All producers, regardless of whether or not they hold quota, must produce milk in Grade A facilities.
• The U.S.A. FDA may inspect Canadian dairy premises, but their approval of quality does not have any bearing on the inspection and quality standards in place in Ontario.
• As Director of Marketing and Production at the DFO it is his responsibility to oversee the allocation of quota and volume of milk allocated to processors.
• Allocation of milk to Canadian processors is based on plant supply entitlement.
• Since the termination of the ECE, the DFO has been committed to supplying processors with their requested volumes of milk.
• The milk supply to processors can be increased through incentives to the producers for increasing their production.

Mr. Gould told the Tribunal that he was involved in the development of the export marketing scheme that was administered through the ECE. Mr. Gould said that it was his experience that DFAIT did not assist with the formulation of a proposal, but that it was DFAIT's function to criticize the practicality of a proposal.

Mr. Gould said the OFPMC did not direct the DFO to take any particular action with regard to its response to the WTO ruling, but that it facilitated discussions with stakeholders. Mr. Gould said he had appeared as a witness at the GBMC hearing and had testified about a proposal that was submitted to DFAIT.

Submissions

Mr. Good submitted to the Tribunal that, as a result of its decision of June 4,2003 in the GBMC appeal, it directed that GBMC, the OFPMC and the DFO consult and agree upon a plan for export milk produced by non-quota holding producers, and ordered that this plan should be submitted to DFAIT. Mr. Good argued that the IDDBA proposal for the marketing of milk for export was an idea that merited the same consideration by DFAIT. Mr. Good argued the Tribunal should find that evidence from the appeal of GBMC was applicable to the IDDBA appeal. He said that, based on precedent, and the fact that similar evidence was used and there are analogous circumstances between the IDDBA appeal and the GBMC appeal, the Tribunal should make a similar order that the IDDBA proposal be discussed and eventually be submitted to DFAIT.

Mr. Good told the Tribunal that IDDBA regarded the preservation of the regulated marketing system and the adherence to WTO conventions as inviolable. He said IDDBA would not consider proposing any scheme that contravened these two ideals. Mr. Good asked that the Tribunal make an order in the appeal of IDDBA that mirrored Points 1 through 3 of its order in the GBMC decision. Mr. Good suggested the Tribunal could reach the same conclusions in the IDDBA matter as it did in the GBMC appeal but for different reasons.

Mr. Good said that IDDBA requested that it be given an opportunity to develop its proposal and discuss it with the DFO and the OFPMC. He said the proposal should then be submitted to DFAIT.

Mr. Spurr told the Tribunal that Mr. Good's inference that the testimony presented at the GBMC hearing was the same as the evidence presented at this proceeding was not accurate. He suggested the factual evidence between the two appeals was different. He said that the GBMC appeal involved only non-quota holding producers whereas the proposal by IDDBA sought to include both quota holding and non-quota holding producers. He said this was significant because the WTO ruling did not specifically capture the status of non-quota holding producers. He argued that the lack of clarity on the position of non-quota holding producers was not a deficiency of the WTO ruling that could be exploited to justify the Tribunal making the same decision in this appeal as it made in the GBMC case. Mr. Spurr argued the Tribunal should not treat the GBMC decision as a precedent as the decision was under review.

Mr. Spurr told the Tribunal that another significant difference between the two appeals was that the OFPMC was a co-respondent with the DFO in the GBMC appeal, whereas the DFO was the sole respondent in this matter. Mr. Spurr told the Tribunal that the involvement of the OFPMC was necessary in any matters where policy development was at issue. Mr. Spurr stated that the appellant did not appear to understand the process of policy development.

Mr. Spurr told the Tribunal that it was inappropriate for the DFO to endorse a scheme that included tactics for avoidance of charges of 'dumping' milk on the U.S.A. market. Mr. Spurr told the Tribunal that, based on it merits, the IDDBA proposal for export marketing of milk should be rejected as it was incomplete, there were no written agreements between any of the business partners, it was constantly being changed and it was highly speculative.

Mr. Good clarified that IDDBA did not object to consulting with the OFPMC on its export milk proposal. He said that while the evidence in the GBMC proceeding was not identical to the evidence in the current proceeding, there was similar evidence that milk is subsidized if it is sold at less than the cost of production.

The Findings

The appellant argued that this panel of the Tribunal should use the June 4, 2003 Tribunal decision on the GBMC appeal as a precedent, on the grounds that the circumstances of the two appellants are similar. While the Tribunal may have regard to its past decisions, it rules on each appeal before it on the merits of the evidence presented at the hearing of the matter in question.

In this case, the appellant and the respondent disagreed as to whether the IDDBA appeal and the GBMC appeal were similar. The Tribunal finds that while both appeals related to proposals to allow for the export of unsubsidized milk, there are separate and distinct differences in the two appeals. The producers that might become involved in the IDDBA proposal would be comprised of both quota holding and non-quota holding producers. The Tribunal hears each appeal on the merits of its evidence. The Tribunal does not agree that the June 4, 2003 decision in the GBMC appeal was made upon consideration of matching evidence or, that it sets a precedent that obliges this panel to make a corresponding order.

The fact that the Minister of Agriculture and Food had been asked to review the Tribunal decision on the GBMC matter was not pertinent, as, due to the distinct differences in the two cases, the June 4, 2003 decision was not applicable in this case.

Mr. Denby testified that the IDDBA proposal would not include policies that would negatively impact the supply management system. It was acknowledged that over quota milk would be purchased by IDDBA under its proposed plan. Mr. Coukell’s evidence was that over quota milk production is viewed as undesirable within the regulated marketing system. The Tribunal favours the testimony of Mr. Coukell on this point and finds that this aspect of the plan, as described, would have a negative impact on the supply management system. The Tribunal notes that this aspect of the proposed plan would result in treating some quota holding producers differently than others with respect to any milk they produced in excess of their quota allotment. The Tribunal also finds that the evidence was not clear that over quota milk would be purchased at prices that would prevent a cross-subsidization claim in the eyes of the WTO.

Mr. Denby testified that the IDDBA proposal would not contravene the WTO ruling. The Tribunal also heard testimony about the function of the OFPMC and the DFAIT in developing and supporting programs to allow milk to be exported. As well, the uncontested evidence was that the WTO alone will determine whether or not an export program is compliant with the WTO agreement. The Tribunal was not persuaded that the appellant had developed a specific proposal that could be shared with provincial stakeholders and DFAIT for their input. The testimony of Mr. Denby and Mr. Gaerke indicated to the Tribunal that there are no firm or binding agreements between IDDBA and any potential processors. The Tribunal was also told that the export plan requires further development. While the Tribunal acknowledges that Mr. Denby has engaged the verbal confidence of other participants in his proposal, it is not confident that the IDDBA plan includes concrete policies that clearly define how the plan would operate.

The Tribunal does see merit in the development of a national export plan to allow dairy industry stakeholders to supply export markets for dairy products in addition to supply managed domestic markets, if all stakeholders can agree on such a plan, in compliance with international agreements.

Decision and Reasons

After carefully considering the evidence filed and the submissions made, the Tribunal decided to deny the appeal.

The reasons for the decision are:

1. The proposal to allow for over quota milk to be exported by IDDBA will negatively impact the supply management system in Ontario.

2The DFO's March 14, 2003 decision not to change it's policy for complying with the WTO ruling was not made with prejudice to IDDBA and it was not inconsistent with the application of its policies to any other milk broker.

3The IDDBA proposal was not clearly defined.