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:

Fennel and Callahan v Dairy Farmers of Ontario

Fennel and Callahan v DFO 2003 ONAFRAAT 32

STATUTE:

Ministry of Agriculture, Food and Rural Affairs Act

HEARING:

October 23, 2003

DATE OF DECISION:

November 10, 2003

2003-32

NEUTRAL CITATION:

2003 ONAFRAAT 32

Fennel and Callahan v Dairy Farmers of Ontario

IN THE MATTER OF THE FARM PRODUCTS MARKETING ACT AND SECTION 16 OF THE MINISTRY OF AGRICULTURE, FOOD AND RURAL AFFAIRS ACT.

AND IN THE MATTER OF:

An Appeal to the Agriculture, Food and Rural Affairs Appeal Tribunal by:

Jacqueline Fennel, Spencerville, ON

David J. Willis, Wingham, ON

Reg and Joanne Shay, Winchester, ON

Peter and Henny Lothman, Harriston, ON

Gordon McBride, Beachburg, ON

Paul L. Lucke, Plainfield, ON

Thomas Patrick Callahan, Corbyvile, ON

from decisions of the Dairy Farmers of Ontario (DFO) by which it cancelled their licenses to market milk and ceased pick-up of their milk.

Before:

Denis O’Connor, Vice Chair; George Klosler, Member; Doug Flook, Member

Appearances:

Donald R. Good, counsel to the appellants: Jacqueline Fennel, David J. Willis, Reg and Joanne Shay, Peter and Henny Lothman, Gordon McBride

Anthony Peter Girard, counsel to the appellant Tom Callahan

Geoffrey Spurr, counsel to the respondent, Dairy Farmers of Ontario

DECISION OF THE TRIBUNAL

This matter was heard in Guelph, Ontario on Thursday, October 23, 2003. The appellants appealed from decisions of the Dairy Farmers of Ontario (DFO) to cancel their licences to market milk and cease pick up of their milk, effective their last regularly scheduled pick up in July 2003. Prior to the commencement of the hearing in this matter, the Tribunal was notified that Mr. Paul Lucke had withdrawn his appeal on a similar matter.

Statutory Context

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.

Tribunal may refuse to hear appeal

16.(4) The Tribunal may refuse to hear the appeal or, after a hearing has commenced, refuse to continue the hearing or make a decision if it relates to any order, direction, policy, decision or regulation of which the appellant has had knowledge for more than one year before the notice is filed under subsection (1) or (2) or, if in its opinion,

(a) the subject-matter of the appeal is trivial;

(b) the appeal is frivolous or vexatious or is not made in good faith; or

(c) the appellant has not a sufficient interest in the subject-matter of the appeal.

Conditions for appeal

16.(5) No appeal may be taken from an order, direction, policy, decision or regulation of a local board or a marketing board unless,

(a) the appellant has first applied to the local board or marketing board for a hearing and the local board or marketing board has refused to grant, in whole or in part, the relief requested by the appellant or has not decided the matter within sixty days of the application for a hearing; or

(b) the appellant and the local board or marketing board have waived their respective rights under clause (a) in writing.

Agreed Statement of Facts

Mr. Donald Good presented the Tribunal with copies of a document entitled “Agreed Statement of Facts”, signed by counsels to all parties. Key points in this document are:

• The appellants were all dairy farmers who had sold milk on the export market prior to the termination of the Export Contract Exchange (ECE) in January 2003.

• On FE 25 03, the DFO informed all milk and cream producers they would have to hold at least 5 kg of milk quota in order to continue in milk production in Ontario. The DFO required that this level of quota be attained by JL 31 03.

• Effective AP 01 03, the price paid by DFO for over-quota milk shipped by quota holders was set at the prevailing world price for milk for the first 3% over-quota, and zero for any milk shipped in excess of 3% over-quota. Non-quota holders were paid $12.84 per hectolitre for all milk shipments made between AP 01 03 and JL 31 03.

• The appellants all signed undertakings to purchase at least 5 kg of quota by JL 31 03. However, this level of quota was not acquired by the appellants and the DFO cancelled their licences and ceased pick up of their milk effective AU 01 03.

• The appellants appeared at a hearing before the DFO and requested the restoration of their licences. Some of the appellants noted that producers shipping to the Georgian Bay Milk Co. were able to continue to ship milk until NO 30 03. The DFO upheld its earlier decisions regarding the cancellation of their licences.

• The DFO informed the appellants that if it were to recommence picking up their milk, they would receive zero payment, and be responsible for costs of $3.91 per hectolitre.

• Georgian Bay Milk Co. was willing to purchase the appellants’ milk and sell it in the export market.

• The parties recognized that the Deputy Minister, Ontario Ministry of Agriculture and Food, had initiated a national dialogue on the development of a national dairy export structure.

• The parties recognized that the appellant Mr. Gordon McBride had other orders and issues regarding his licence and that the restoration of his licence would be subject to the resolution of those issues.

The Issues

The issues before the Tribunal were:

1. Should the licences to market milk of any or all of the appellants be reinstated?

2. In the event that any of the appellants’ licences are reinstated, should they be allowed to ship milk to Georgian Bay Milk Co., rather than the DFO?

The Evidence and Submissions

Chris Birch

A letter by Mr. Chris Birch, President, Georgian Bay Milk Co. indicating that company’s willingness to take the milk of the appellants was submitted in support of the “Agreed Statement of Facts”.

Tom Callahan

Mr. Tom Callahan told the Tribunal he sold his quota in October 2000 but continued to ship milk exclusively to the export market. He said he had been considering selling his remaining quota as he did not have much left as most was sold to finance the rebuilding of his facility after a barn fire some years before. Mr. Callahan said he was persuaded to sell his remaining quota after reading an article on the export market dated August 10, 2000, written by Mr. John Core, former Chair, DFO and published in the Ontario Milk Producer magazine. He said the export market looked like a solid market, although he knew the prices in the export market were volatile. He said he was prepared for the price risk but that he had no idea that the export market might be completely shut off.

Mr. Callahan said he had been in milk production since 1970 and that he had shipped on both the domestic and the export market. He said he currently had 50 cows but that most had been dried off. Mr. Callahan said he had expected the DFO would deal with the World Trade Organization (WTO) and look after his interests.

Gordon Coukell

Mr. Gordon Coukell, Chair DFO, told the Tribunal the DFO collectively markets the milk of all producers on an equitable basis. He explained the DFO worked with other industry participants to establish the ECE, which allowed for milk to be shipped to the export market, under contract. He said that no special status was envisioned for non quota holders under the ECE. He explained that the WTO Appellate Body ruled against Canada on DE 20 02, and that the ECE was shut down effective DE 31 02. He said no other province had provided exemptions for non quota holders in the re-regulation process. Mr. Coukell said that DFO did not believe it was in milk producers’ best interests to pursue another export program at this time.

Mr. Coukell told the Tribunal that DFO Board members had spoken at a wide variety of meetings and made it clear that there were significant risks in the export system, due to the potential for trade challenges. He said they also clearly indicated that there were no guarantees for either price or market security on the export market. He said that producers making management decisions knew they would have to live with their decisions if the export system was successfully challenged. He pointed to an article dated September 14, 2000 written by Mr. John Core and published in the Ontario Milk Producer magazine.

Mr. Coukell said the DFO decided in February 2003 to:

1. Rescind an exemption to a DFO regulation which had allowed for the ECE, effective FE 28 03, with an exception for any legitimate contracts that may be allowed to continue according to terms of the compliance agreement negotiated with the United States and New Zealand.

2. With the cancellation of the ECE exemption, require all producers to hold a minimum of 5 kg quota. In order to allow non quota holders to make management decisions, they proposed to continue picking up their milk until MR 31 03; and to provide those producers wishing to enter the domestic system a transition period up to JL 31 03 to acquire at least the minimum 5 kg of quota.

Mr. Coukell said the DFO cancelled the export program as a result of the WTO decision and subsequent statements of the Government of Canada. He said their plan for compliance was discussed with industry stakeholders and approved by the Ontario Farm Products Marketing Commission.

Mr. Coukell said the DFO acted responsibly and in good faith. He said they continued to pick up the appellants’ milk until the end of July 2003, even though the appellants did not purchase quota in the transition period as agreed to in the undertakings they had signed in March.

Mr. Coukell said that non quota holders shipping to Georgian Bay Milk Co. were allowed to continue shipping milk until NO 30 03, as a result of special circumstances. He said no other non quota holders except for the appellants were still producing milk. He noted the appellants’ milk was not being picked up. He said he understood that the Georgian Bay Milk Co. shippers were to be treated as a distinct group. He did not know if extra shippers could be added to the Georgian Bay Milk Co. group, as a result of a quasi-judicial exemption, but noted that the appellants had not appealed until after the tri-country agreement which resolved the WTO issues was made.

Mr. Coukell said the DFO ran a quota exchange every month. He said producers offered to sell or buy a specific volume of quota at a specific price, and that all sales were conducted at the market clearing price. He said purchasers must provide a letter of credit to the DFO. He emphasized that this price was established by producers themselves, not the DFO. He said that a former non quota holder, Mr. Lucke, had purchased quota on the exchange. He said the DFO was not preventing the appellants from doing the same, although he acknowledged they may have personal reasons or financial circumstances preventing them from acquiring quota. He acknowledged that quota to cover the production of a small herd of 20-25 cows would cost in excess of $500,000.

Mr. Coukell said the intent of the 5 kg minimum quota requirement was to make sure anyone planning to enter the dairy industry knew what they were getting into, and that it is not an industry that you can jump in and out of easily as significant investment is required. He said that was enough quota for approximately five cows and that in his view this was not an economically feasible farm size. He said the minimum quota requirement was introduced in 1995 or 1996.

Mr. Coukell said the intent of the pricing policy changes was to bring production more in line with quota holdings. He explained this was necessary as the volume and value of milk and dairy products that can be exported was curtailed as a result of the WTO Appellate Body decision. He explained that due to the new policy, the appellants would receive a negative return on all milk shipments if they were to be allowed to market milk without quota. He agreed this would not be practical.

Mr. Coukell said that to be re-licensed, after having been out of production, a producer’s facilities would need to be inspected and meet regulatory requirements.

Mr. Coukell said he understood that a national dialogue on a dairy export system was still underway but that no specific program was being discussed. He acknowledged that there could be a new dairy export program developed.

Summations

Mr. Good explained that the appellants he represented could not afford to purchase quota and could not afford to ship milk to the DFO at a loss. He said the key issue was whether or not they could be allowed to ship to Georgian Bay Milk Co. for the export market. He suggested that the Tribunal allow them to do so as: their milk would not displace milk produced for the domestic market; the Minister favoured that a new national export program be developed to act in harmony with supply management; it was likely that non quota holders would supply the new export stream; and the Georgian Bay Milk Co. would provide a legal outlet for the appellants’ milk until November 30, 2003. Mr. Good pointed out one of the objectives of the Milk Act is to promote and expand the industry in Ontario.

Mr. Girard adopted Mr. Good’s submissions on behalf of his client, Mr. Callahan. He added that the DFO allowed his client and others to enter the free market without warning them that the market could collapse completely. He said his client had done nothing wrong but was a pawn of international politics. He suggested that the DFO had induced Mr. Callahan to divest of his quota and enter the foreign market and should be held somewhat responsible for his current situation. He pointed out that Mr. Coukell had testified that the guiding principle of the DFO was to have all producers benefit equally from the market and he submitted that Mr. Callahan had not benefited equally. He asked the Tribunal to consider the equity of a big organization against a small farmer. He pointed out that quota values had increased dramatically in the past three years and said the impact of canceling the ECE was much greater on a small producer with little quota than on a larger, richer producer.

Mr. Spurr said the Georgian Bay Milk Co. situation was unique to the milk producers currently involved with that company. He explained that a Tribunal decision on an appeal by the Georgian Bay Milk Co. had been set aside by the Minister, but that the company was allowed to continue operating until November 30, 2003. He submitted the appellants were asking the Tribunal to broaden the Minister’s decision regarding Georgian Bay Milk Co.. He said this would be inappropriate because the Georgian Bay Milk Co. shippers were different from the appellants in that they were non quota holders who were shipping in a segregated milk stream prior to the closure of the ECE. He pointed out that the Tribunal had refused to allow other shippers to join the Georgian Bay Milk Co. appeal at a pre-hearing conference in Spring 2003.

Mr. Spurr reminded the Tribunal that the appellants had been given a transition period to allow them time to purchase quota because they had indicated they were going to try to purchase quota. He said they were paid more for their over-quota milk shipments than quota-holding producers were paid for over-quota milk shipped in the months of April 2003 – July 2003 inclusive.

Mr. Spurr argued that the DFO had not induced Mr. Callahan to sell his quota in 2000. He said Mr. Callahan made that decision, knowing the export market was subject to treaties and circumstances beyond the DFO’s control. He said it would be unfair for Mr. Callahan to receive special treatment not available to other dairy farmers who were equally unfortunate.

Mr. Good said the appellants were not asking the Tribunal to modify the Minister’s decision on the Georgian Bay Milk Co. matter. He said the appeal was from DFO’s decision to not let the appellants be added to the Georgian Bay Milk Co. shippers. He submitted the Tribunal decision at the Georgian Bay Milk Co. pre-hearing conference was irrelevant to these appeals. He also suggested there was a benefit to the industry to keep the appellants in the industry as non quota holding milk producers would be needed if a new national export program were to be implemented.

The Findings

The appeal that was originally brought to the Tribunal was from decisions of the DFO to cancel the producer licences and cease picking up milk produced by the appellants. The evidence presented regarding the current pricing policy of the DFO made it clear to the Tribunal that there is no benefit to the appellants or to the industry to allow them to continue to ship milk to the DFO without holding quota. This would result in their shipping their product at a loss.

The proposal brought to the DFO by the appellants represented by Mr. Good – that these producers be exempt from the 5 kg minimum quota policy and be allowed to ship to Georgian Bay Milk Co. - would presumably at least give the appellants a positive return. However, the Tribunal finds there is no justification for allowing additional producers to be given the opportunity to ship to Georgian Bay Milk Co.. The Tribunal notes that the Minister’s decision on that matter allowed the company to receive milk shipments only until November 30, 2003. While the Minister has directed that a national dairy export system, operating in harmony with supply management, be explored, there was no evidence before the Tribunal to indicate that an export system would be in place by November 30, 2003. Allowing the appellants to ship to Georgian Bay Milk Co. would only solve their problem for a short time. As well, the Tribunal sees no justification for treating these producers any differently than other producers of export milk who had to make the decision to either purchase quota or exit the industry.

In reviewing the articles written by former DFO Chair John Core which were submitted as evidence, the Tribunal does not agree with Mr. Girard’s submission that the DFO induced producers to sell quota and produce solely for the export market. It is clear that the DFO tried to develop a WTO neutral system but that it was unsuccessful. The Tribunal finds that the DFO did caution producers that the export market was unstable and that it would not be able to market the milk of producers shipping to the export market, should this market dry up

The Tribunal recognizes that individual producers were affected differently by the closure of the ECE. The Tribunal does not accept the argument that producers who had minimal participation in the export market and were thus less affected by its closure, should compensate those producers who opted to ship all or most of their milk production to that market. While the DFO may strive for equal treatment of individual producers in similar markets, it cannot be expected to equalize returns between producers making radically different management decisions as to what extent to participate in the domestic and export markets. Individual producers must take responsibility for the decisions they make, within the context of the supply managed dairy market.

Decision and Reasons

After careful consideration of the evidence filed and the submissions made the Tribunal has decided to deny the appeals of Jacqueline Fennel, David J. Willis, Reg and Joanne Shay, Peter and Henny Lothman, Gordon McBride and Tom Callahan.

The reasons for this decision are:

1. The appellants were treated no differently than other producers holding less than 5 kg of quota when the ECE was closed.

2. There was no evidence presented that a national export milk program would be implemented in the near future.

3. The Tribunal finds the DFO did not induce the appellants to sell their quota or produce without quota and should not be held accountable for the appellants’ individual management decisions.

4. Allowing the appellants to ship over-quota milk to the DFO would result in a negative return in excess of $3.91 per hectolitre of milk shipped.

Dated at Guelph, Ontario the 10^th^ day of November, 2003.