Turkey Committee of the Ontario Poultry Processors’ Association v Ontario Turkey Producers’ Marketing Board, 2003 ONAFRAAT 29

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

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

Turkey Committee of the Ontario Poultry Processors’ Association v OTPMB 2003 ONAFRAAT 29

Ministry of Agriculture, Food and Rural Affairs Act

September 11, 2003

DATE OF DECISION:

September 26, 2003

2003-29

2003 ONAFRAAT 29

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

IN THE MATTER OF RULE 16 OF THE AGRICULTURE, FOOD AND RURAL AFFAIRS APPEAL TRIBUNAL RULES OF PROCEDURE.

AND IN THE MATTER OF: An Appeal to the Agriculture, Food and Rural Affairs Appeal Tribunal by the Turkey Committee of the Ontario Poultry Processors' Association, Suite 310, 250 The Esplanade, Toronto, Ontario from a decision of the Ontario Turkey Producers' Marketing Board (Pricing Order 297) on price levels of broiler and hen turkeys to come into effect Monday July 28, 2003 at 12:01 a.m.. The Turkey Committee seeks reductions in these price levels in the amount of 3 cents/kg for both broiler and hen turkeys.

Before:

Murray Cardiff, Chair; Denis O'Connor, Vice Chair; Doug Flook, Member.

Appearances:

Mr. Robert Shapiro, on behalf of the Turkey Committee, Ontario Poultry Processors Association.

Mr. Geoffrey Spurr, counsel to the Ontario Turkey Producers' Marketing Board.

Mr. Paul Borg, Turkey Committee, Ontario Poultry Processors Association, appellant.

Mr. Art Roder, Chair, witness for the Ontario Turkey Producers' Marketing Board.

DECISION OF THE TRIBUNAL

This appeal was considered in Guelph, Ontario on Wednesday September 11, 2003. The Agriculture, Food and Rural Affairs Appeal Tribunal (the Tribunal) received an appeal from the Turkey Committee, Ontario Poultry Processors Association (OPPA) from the decision of the Ontario Turkey Producers' Marketing Board (the Board). The appeal sought the reduction in price for live hen and broiler turkeys from the Board's increase of 3.0¢/kg under Pricing Order No. 297 dated July 23, 2003.

Statutory Context

Subsection 16(2) of the Ministry of Agriculture, Food and Rural Affairs Act is as follows:

Idem

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

The Issue

The issue before the Tribunal was should the 3.0 ¢/kg increase in the live price of hen and broiler turkeys under the Board's Pricing Order 297 be maintained or, should there be no increase in the live price of turkey from Pricing Order 266 in these two categories.

The Background

The Ontario Turkey Producers' Marketing Board decided July 23, 2003 to increase the price of live hen and broiler turkeys by 3.0 ¢/kg effective July 28, 2003. The OPPA's request that the Board reconsider the pricing decision was denied so the appeal was brought to the Tribunal.

As the result of a pre-hearing motion, the Tribunal considered and granted the requests of the parties to have the appeal determined by the process of final offer selection.

The Canadian Turkey Marketing Agency (CTMA), with input from provincial stake-holders, sets the level of production for turkey in Canada. The Board sets live prices for turkey in Ontario by size category.

The hearing of this matter was originally scheduled for Friday August 15, 2003 at the Tribunal Boardroom, the Government Building, 1 Stone Road Guelph. The hearing was rescheduled to September 11, 2003 due to a widespread electricity outage which commenced August 14, 2003. The parties had prepared their briefs with data that was available before the initial August 15 2003 hearing date.

The Evidence

Mr. Shapiro told the Tribunal that the Board most recently increased the live price of hen, broiler and tom turkeys in its October 24, 2002 Pricing Order 296. He said that Pricing Order 296 was appealed by the OPPA to the Tribunal; the appeal was denied. Mr.Shapiro said that the OPPA met with the Board in July, 2003 to discuss pricing. Mr. Shapiro told the Tribunal that the position of the OPPA was that:

Since October 2002 the cost of feed and poults for hen and broiler trukeys has declined. The major commodities making up turkey feed are corn and soybeans. Record corn and soybean yields in 2003 are expected to influence the price of feed downward in late fall 2003.
The Board expects to capitalize on projected processor gains during the Thanksgiving and Christmas season.
Producers are currently experiencing significant economic gains.
Producer gross margins for 2002 were approximately 6.0 ¢/kg; conversely, 2002 was the worst of four consecutive bad years for processor gross margins.
Processor gross margin comparisons are derived from very low sales volumes in 2002 and 2003.
Storage stocks are considered to be adequate, going into the festive season.
Lilydale Co-operative is a large turkey processor in Alberta; it is undergoing severe financial difficulty. There is a serious possibility that Lilydale Co-operative will liquidate its significant storage stocks over the festive season to compete with product from Ontario processors.
The Bovine Spongiform Encephalopathy (BSE) situation has created uncertainty among all other meat protein suppliers. There was some concern that beef might displace turkey.

Mr. Shapiro told the Tribunal that the Board's response to OPPA concerns regarding the live price increase was to suggest that processors set a wholesale price for hens and broilers that would recover any downward profit fluctuations as a result of the price increase. Mr. Shapiro told the Tribunal that such a pricing scheme would not be useful for that purpose. He said that the live price of turkey is not connected to the retail price which is governed by market influences.

Mr. Shapiro explained to the Tribunal that the major cost components for producers of turkey are poult and feed. He stated that the Canadian Turkey Marketing Agency (CTMA) reported the weekly poult and feed costs. He said that producers experienced net margin improvements of 3.0 ¢/kg for broilers and hens since the last price increase of October 2002. He said that the margin had increased by a further 3.0 ¢/kg due to declining feed and poult costs since October 2002. Mr. Shapiro submitted that the additional price increase of 3.0 ¢/kg that the Board was currently seeking when factored with the previous producer margin increases could be expressed as a total of 9.0 ¢/kg in margin improvements to producers within one year. Mr. Shapiro presented graphical analysis of feed and poult prices from October 2002 until August 2003. He said that the graphs indicated that feed and poult costs had declined steadily since October 2002.

Mr. Shapiro submitted that:

Pricing meetings were held: September 21, 2001, July 26, 2002, October 18, 2002 and July 18, 2003.
Feed and poult prices fell in the weeks leading up to August 8, 2003 the last reported data published before this hearing.
The OPPA Turkey Committee accurately predicted that the cost of feed would fall in autumn 2002.
Seasonality affects processor gross margins and their profit highs are counter-balanced by periods of severe losses. There is no seasonality to producer margins.
The intention of the Board to capitalize on expected profit increases by its customer, the OPPA, is not a legitimate reason for increasing live prices while turkey producers benefit from declining production costs.
Agricultural publications, Ag-Alert and AGRIWEEK indicate that the price of corn and soy will drop as autumn 2003 progresses and the new crop replaces the old.
Processors made a reasonable offer to the Board at the last pricing hearing before the Tribunal November 25, 2002. Market prices were not a factor in that offer.
Sales statistics for each category are misleading if volumes of less than 5000 kg are recorded.
The 3.0¢/kg price increase by the Board is unjustified and unreasonable.

Mr. Shapiro responded to questions that:

At present processor margins were better than at the same time last year.
The financial difficulties of Lilydale Co-operative and the uncertainty surrounding the BSE situation has definitively resulted in lower prices for pork; however; they are not the only factors threatening healthy margins for processors.
The Board intends to take advantage of projected increases in processor margins by increasing the live price for broilers and hens going into the festive season.
The OPPA Turkey Committee has two processor members and three processor/marketing members.
The OPPA Turkey Committee members participate in discussions relating to turkey production at the national level. They are also members in a national association of processors.
The expected fall in soy and corn prices is projection derived from published statistics. There is no certainty to market factors.
The cost of feed and poults constitutes about 60 % of the cost of raising turkey.
OPPA Turkey Committee projections are based on committee members long standing experience in the turkey processing industry and gross margin statistics compiled in 2003.
Members of the OPPA Turkey Committee produce about 40% of turkey raised and marketed in Ontario.
Results in 2002 illustrate the relationship between processor profits and live price: processor profit margins were poor in 2002. The pricing of birds in 2002 was also poor.
Processors analyse pricing structures at their discretion as necessary.
Analyses of sales volumes for a calendar year will reveal trends more clearly than analysis of sales from January to July.
The Board justifies it's price increase based on projections from sales analysis from the first seven months of 2003.
For any sales for which no price data is available the Board unfairly assumes that processors are making large returns. This may not necessarily be the case. For example, branded product development requires capital investment that may not be immediately recouped through strong sales.
There is no reliable data for inventory stocks.
The processors decided to accommodate the price increase of 2002 after unsuccessfully appealing to the Tribunal. The OPPA do not wish to see a pattern of festive season price increases every year.
It is certain that Lilydale Co-operative has a considerable inventory and it is reasonable to expect that it would be liquidated in November and December 2003. Turkey from any other province may also compete with Ontario processed birds.
Processors will not be able to recoup the effects of price increase on margins from the market.

Mr. Art Roder, Chair of the Board testified before the Tribunal. He said that the Board has justifiably and fairly increased the price of hens and broilers by 3 ¢/kg. Mr. Roder told the Tribunal that the argument of the OPPA Turkey Committee, that low volumes and the threat of inexpensive beef flooding the market and displacing turkey during the festive season is not a reasonable justification for withdrawing the price increase. He explained that the OPPA Turkey Committee and the Board held a meeting on July 23, 2003 to discuss prices. He said that market statistics were also reviewed at that meeting. Mr. Roder submitted that:

In July 2003, market data indicated improvements from 2002.
The global quota was reduced from 131 million kg for the 2001/2002 quota year to 126 million kg for the 2002/2003 quota year. Ontario production will be cut by 40% which tends to have the effect of lowering stocks. The global quota for 2003/2004 will be the same as for 2002/2003.
There may be turkey shortages; stocks were down 6.2 million kg from 2002 as of July 1, 2003.
In June 2003 the supplies of turkey were the lowest since June 1999 and October stocks are forecast to be 4.6 Mkg lower than 2002.
Processor margins for fresh and Cryovac broilers and hens under 7 kg were 8.0 ¢/kg and 16.0 ¢/kg higher than they were in 1999-2001, a time when both producers and processors made reasonable profits. During the same time span producer margins were 5.0 ¢/kg and 6.0 ¢/kg.
The Board receives data on wholesale price volumes for 15.10% of sales, a decline from previous years when 27.59% of sales volumes were reported.
In 1999 and 2000 producers and processors had good margins. The data from the first six and seven months of those years was averaged and compared against margins in 2003; the result was that processor margins were positive whereas producer margins were negative.
The Board has no set policy regarding live price and is always prepared to discuss pricing. Pricing increase decisions are made after evaluating data that includes statistics on feed costs and stock levels.
At present storage stocks are good and the market looks promising.
Processors reported wholesale prices on small volumes of sales in June 2003. These sales reports do not account for the total volume, as the processors do not report wholesale prices for value-added products.
Turkey frequently moves in and out of Ontario at various prices.
The Board recognized that boneless, skinless breast meat sales are slow and appropriately refrained from raising the live price of toms.
Feed and poult costs in 2003 are much higher than the average of costs for 1999/2000.
Processors can request another pricing meeting if the threat of beef displacing turkey occurs and losses are sustained as a result.

Mr. Roder responded to questions that:

He is aware of Lilydale Co-operatives's difficulties, the outcome of the situation is not known.
June 2003 data indicates that 1000 kg were sold and yet the data for disappearance indicates that over one million kg disappeared nationally.
OPPA Turkey Committee data, as submitted to the Tribunal, indicates that sales figures are not available on 98% of the total Ontario slaughter in June 2003.
The Board must base its actions on whatever data is available to it. In June 2003 data was available for only 2% of sales. Prices for sales of value added products are estimated as there are no reports.
The OPPA Turkey Committee used data from the first seven months of 2003 in its submission for the hearing as did the Board.
The Board called the July 2003 meeting to discuss price so that the OPPA would know well ahead of the festive season what the pricing structure was and before any contracts were made so that it could not be argued that it was unfair to increase prices when contracts were already in place. A survey of boneless breast meat sales was in progress at the time of the meeting.
Between September and Christmas 50% of the annual processed product will be marketed, some of the product will come from frozen storage.
The Board's July 2003 Pricing Order was not made upon speculation of conditions but on known indicators.
In the past when there were large increases in corn and soy prices, industry stakeholders met and came to an agreement on pricing.

Summations

Mr. Shapiro told the Tribunal that the timeframe for assessing data to increase price was important. He said that the feed and poult costs were analyzed from the last hearing and it was found that broiler production costs fell by 3.24 ¢/kg and hen production fell by 2.95 ¢/kg. The OPPA Turkey Committee does not believe that this circumstances justifies a 3.0 ¢/kg price increase.

The OPPA Turkey Committee's projections for market conditions are not purely speculative. They are based on data from 1999 and 2000 which indicates that in those years producers had record profitability. He argued that there is no hardship for producers and they will continue to profit without the price increase. Mr. Shapiro submitted that the Board wished to take advantage of possible future margin increases for processors and that it was a calculated attempt to take advantage of those projected gains. Mr. Shapiro stated that margins for both producers and processors were unquestionably improved in 2003. He said that no representative analysis could be obtained from sales data based on 500 kg or less. Mr. Shapiro told the Tribunal that processors were looking forward to recover some of the losses from 2002 in 2003.

Mr. Shapiro stated that the processors were not unsympathetic to rising producer costs in 2002 but the notion that the Board put forth that processors were selling value added products and earning high margin returns was ridiculous. He said that there is a very specific market for whole birds and that the prices for turkey parts or value added products can fluctuate up or down. He said it cannot be assumed that the margins on unreported sales are high. Mr. Shapiro submitted that each processor keeps its own records and that the OPPA Turkey Committee requested that there be no price increase.

Mr. Spurr submitted to the Tribunal that that the processors accused the Board of being opportunistic and that the price increase was unjustified even though they had conceded that pricing for whole broilers and hens was good. Mr. Spurr argued that the processors had also submitted that 50% of their annual production is marketed at Thanksgiving and Christmas. He said that processor's concern that the market would be adversely affected by the BSE situation and Lilydale Co-operative's financial difficulties, was purely speculative. He said that turkey was an ethnic tradition during the festive season and that inexpensive beef would not displace it. Mr. Spurr said that there were no factual grounds for the supposition that product from Lilydale Co-operative would displace turkey from Ontario processors.

Mr. Spurr stated that the Board had compared margin returns during a timeframe of prosperity for both processors and producers before increasing the price. He said that the Board had made its analysis during similar conditions on the occasion of the price increase of October 2002. Mr. Spurr said that the disparity in producer and processor margins will increase during the festive season as prices increase. Mr. Spurr submitted that the Board's analysis of market conditions indicate a favourable time to increase the live price for hens and broilers.

Mr. Spurr pointed out that the national quota reduction impacted Ontario producer volumes and therefore the supply and price are affected. Mr. Spurr said that storage stocks were at their lowest level. He said that the processors will not reveal their pricing structure and that the onus is on them to do so to justify their objection to the Board's price increase. Mr. Spurr told the Tribunal that the Board's submission included an analysis of wholesale prices that indicated that there was an increase in the wholesale price of broilers from October 2002 to June 2003. He said that the wholesale price increase occurred after the October 2002 Pricing Order 296 came into effect and that despite the increase of 3.0¢/ kg processor margins increased where producer margins remained stagnant. Mr. Spurr said that the Board would re-open pricing discussions if requested and if the new pricing order created disastrous conditions.

The Findings

The Tribunal finds that margins indicated by the Board were clearly defined to indicate that the margins for producers were negative values compared to 2002 to 2003 and the margins for processors were positive values in the same period. The Tribunal also found that the price increase request from the Board was influenced by the fact that market factors were supportive and storage stocks were lower in 2003.

The Tribunal heard evidence regarding seasonality as it affects processor margins but it puts little weight on the purported influence, as storage and marketing of turkey by processors is a year round endeavor.

The June 2003 and July 2003 figures for sales volumes were the lowest reported; the figures that were reported, represented a very small portion of total turkey sales for those two months.

Speculative evidence with regard to feed and poult costs in the near future indicated that costs would fall. Similar speculative evidence was given with respect to corn and soy futures. The Tribunal does not place a great deal of importance on such predictions and it recognizes that any market change in this important cost of production (60%) can be addressed at future pricing meetings held at the request of either party. The evidence of impacts from present external factors (BSE and Lilydale Co-operative) is speculative and any serious influence can also be remedied through pricing meetings.

The processors make points in evidence that the gross margins as of July 28, 2003 are up for producers by 6.00 ¢/ kg and that feed and poult costs are down by 3.00 ¢/ kg.

Markets and storage stocks are in reasonably good order at this time and the producers felt that it was a suitable time to make up ground for an adverse year in 2002.

The Tribunal is convinced by the evidence that processors make the bulk of their turkey sales during the festive season and would therefore be in position to take advantage of good sales through Thanksgiving and Christmas.

The profit margin for producers is 53 cents for broilers and 54 cents for hens; The Tribunal agrees that these margins are the highest since the year 2000.

Decision and Reasons

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

The evidence of the Board on market factors as known in July 2003 was supportive of an increase in live price for broilers and hens.

Margins were positive for processors between 2002 and 2003 but negative for producers in that same time.

The Tribunal was convinced that the price increase under Pricing Order 297 provided an opportunity for producers to return them close to price levels achieved in the late 1990s and recover from the lower margins of the past four years.

Dated at Ethel, Ontario this Friday the 26th day of September 2003.