Agriculture, Food and Rural Affairs Appeal Tribunal

1 Stone Road West Guelph, Ontario N1G 4Y2 Tel: (519) 826-3433, Fax: (519) 826-4232 Email: Tribunal@OMAF.gov.on.ca

Tribunal d’appel de l’agriculture, de l’alimentation et des affaires rurales

1, chemin Stone Ouest Guelph (Ontario) N1G 4Y2 Tél.: (519) 826-3433, Téléc.: (519) 826-4232 Email: Tribunal@OMAF.gov.on.ca

AGRICULTURE, FOOD AND RURAL AFFAIRS APPEAL TRIBUNAL

APPEAL: Zantingh Direct Inc. v Ontario Pork Producers’ Marketing Board

Zantingh Direct Inc. v OPPMB 2004 ONAFRAAT 38

STATUTE: Ministry of Agriculture, Food and Rural Affairs Act

HEARING: September 27, 2004, September 28, 2004, September 29, 2004 and September 30, 2004

DATE OF DECISION: November 3, 2004

2004-38

NEUTRAL CITATION: 2004 ONAFRAAT 38

Zantingh Direct Inc. v Ontario Pork Producers’ Marketing Board

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

AND IN THE MATTER OF: An Appeal to the Agriculture, Food and Rural Affairs Appeal Tribunal by Zantingh Direct Inc. from decisions of the Ontario Pork Producers’ Marketing Board whereby it rejected Zantingh Direct Inc.’s recommendations for changes to its framework for buying/selling “off sort” or “lightweight” hogs.

AND IN THE MATTER OF: A subsequent decision of the Ontario Pork Producers’ Marketing Board dated April 6, 2004 whereby it rejected Zantingh Direct Inc.’s “5% proposal”.

AND IN THE MATTER OF: A subsequent request by Zantingh Direct Inc. dated April 30, 2004 that the Agriculture, Food and Rural Affairs Appeal Tribunal reconvene the hearing into this matter to deal specifically with the Zantingh Direct Inc.’s “5% proposal”.

Before: Murray Cardiff, Chair; Elwood Quaile, Member; Ralph Huckle, Member

Appearances: Scott Snider, counsel to Zantingh Direct Inc., appellant Sean Foran, counsel to Ontario Pork Producers’ Marketing Board Brad Zantingh, Business Manager, ZDI, witness for appellant Andy Marks, Director of Sales and Logistics, OPPMB, witness for the respondent Larry Skinner, Chairman, OPPMB, witness for the respondent Larry Martin, Ph.D., witness for the appellant John Groenewegen, Ph.D., witness for the respondent

DECISION OF THE TRIBUNAL

This matter was continued in Guelph, Ontario on September 27, 2004, September 28, 2004, September 29, 2004 and September 30, 2004. Zantingh Direct Inc. (ZDI) appealed to the Agriculture, Food and Rural Affairs Appeal Tribunal (the Tribunal) from decisions of the Ontario Pork Producers’ Marketing Board (OPPMB) by which it declined to amend its policies related to the marketing of “lightweight” or “off sort” hogs. The Tribunal issued a decision on January 20, 2004. In that decision it directed the OPPMB to hold a hearing to consider a new ZDI proposal, the ‘5% proposal’, which was introduced in the course of the Tribunal hearing. The Tribunal reconvened this matter on May 25, 2004 but adjourned the hearing to allow for a ‘revised 5% proposal’ to be considered by the parties.

The proposal under consideration in September 2004 was that ZDI, and other hog assemblers, be permitted to market hogs in the weight range 215-300 lbs. live weight (market weight hogs) up to a maximum of 5% of their total sales of hogs sold for slaughter that are: under 215 lbs. live weight, over 300 lbs. live weight, and hogs that are exempt from the OPPMB marketing regulations.

The terms “chance hogs” and “for production” hogs are not industry standards but were used throughout the hearing and understood by participants in the hearing. “Chance hogs” are market weight hogs that are shipped in loads of “off sort” hogs, sows or boars where the producer did not intend to ship a market weight hog. “For production” hogs are those the producer intended to market for slaughter weighing between 215-300 lbs. live weight.

Statutory Context

The appeal comes to the Tribunal by way of Subsection 16(2) of the Ministry of Agriculture, Food and Rural Affairs Act, which states:

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.

The Evidence

Brad Zantingh

Mr. Brad Zantingh was recalled. He told the Tribunal ZDI had developed its ‘revised 5% proposal’ to attempt to address the concerns of the company and the OPPMB. He said it was imperative that ZDI retain the ability to provide one-stop service to its clients by marketing all hogs delivered, and that it be the only entity settling payment with producers who use its services. He said it could not do that if it acted as a standard yard, assembling hogs for the OPPMB. Mr. Zantingh said he understood that the OPPMB was concerned with a loss of market clout if market weight hogs were marketed by ZDI.

Mr. Zantingh introduced five charts depicting the types of hogs assembled by ZDI in five separate weeks; he said the charts were representative of ZDI’s business. He explained that 5% of the “off sort” hogs, sows and boars would amount to approximately 200 hogs per week. He said if ZDI could market this number of market weight hogs each week it could accommodate all its customers who ship mixed loads, but not all of the shipments of five to seven customers who ship loads of predominantly market weight hogs to ZDI.

Mr. Zantingh told the Tribunal if ZDI could not continue to sell market weight hogs, higher costs would be incurred and passed on to pork producers. He said ZDI costs would increase because:

• full loads of hogs would not be shipped to its buyers
• extra penning would be required to separate market weight hogs from other hogs
• two settlement statements would need to be generated
• extra holding costs would be incurred if producers could not be reached to give direction as to what grid to use for market weight hogs.

Mr. Zantingh testified that ZDI estimated that 5% of all “off sort” hogs shipped for slaughter by Ontario pork producers would amount to approximately 400 hogs per week. He said even if there were 800 market weight hogs per week sold through the ‘revised 5% proposal’, this would be considerably less than the 80,000-100,000 market hogs sold to small processors each year. He said since ZDI was to be audited on sales of lightweight hogs, the same auditor could monitor sales of market hogs to ensure the company did not exceed the proposed 5% limit.

In response to questions, Mr. Zantingh indicated:

• In addition to producers, ZDI purchased hogs from transporters, sale barns and other assemblers.
• Other “off sort” hog handlers would be able to market the equivalent of 5% of their “off sorts” as market weight hogs under the ZDI proposal.
• The OPPMB had never dictated to ZDI what type of hog assembler it could be, or that it would have to cease its specialized sorting service; he was not aware of ZDI ever applying to be a licensed hog assembler.
• Under the ‘revised 5% proposal’, ZDI would be able to purchase market weight hogs that were specifically grown to be market weight hogs (for production hogs), but could not exceed the proposed 5% cap.
• ZDI built in a buffer when it selected the 5% figure.
• Based on information filed in 2003, ZDI received a better price than the OPPMB for hogs weighing less than 215 lbs.; the OPPMB received a better price for market weight hogs shipped through the pool or pool plus programs. ZDI had different buyers in 2004.
• In total, ZDI marketed approximately one load of market weight hogs per week, but the hogs were not necessarily all shipped in the same load.
• In theory, if ZDI became a licensed assembler it could ship market weight hogs it receives to the OPPMB. That would affect its transportation costs on its “off sort” hogs, sows and boars.
• ZDI customers may ship to ZDI because they do not want to deal with the OPPMB on issues such as crippled or dead hogs.
• ZDI does not deal directly with producers on all hog shipments; sometimes it settles with transporters or sale barn operators.
• ZDI was incorporated on December 1, 2001; before that the business was run under two different names.
• In 1995 the combined companies marketed an average of 1,000 hogs per week; by 2004 the average was 4,000 hogs per week. Sows and boars were the main business.
• Market weight hogs stay on the ZDI premises 24-36 hours. All pens contain feeders and water and hogs could be housed longer if necessary.
• Holding hogs longer would require additional floor space and additional feed.
• The quality of pork decreases if hogs are held too long in an assembly yard.
• ZDI could not provide its current level of service if it acted like a standard assembly yard.
• ZDI has no impact on the market price paid for market weight hogs by Ontario packers and U.S. packers.
• If ZDI did not improve hog marketing it would not have customers.
• ZDI buys sows and “off sort” hogs from out of province. These would be included in calculating the base under the current proposal but the proposal could be revised to remove them from the calculation.

Larry Martin

Dr. Larry Martin. Ph.D. was qualified as an expert witness as an agricultural economist and as a specialist in the pork industry.

Dr. Martin told the Tribunal he was asked to look at the impact of the ‘revised 5% proposal’ on the market clout, or market power, of the OPPMB. He said the market hog business was a small portion of ZDI’s business, at 3.9-7.1% of the hogs marketed in the five weeks of data compiled by Mr. Brad Zantingh. He said the one to one and one half loads of market weight hogs handled by ZDI each week represented at most 0.26% of the total market hogs shipped in Ontario. Using ZDI’s estimate that it handles half the “off sort” hogs in the province, Dr. Martin estimated the total market hogs that could be shipped through “off sort” assemblers at 0.5% of the total market. Dr. Martin said there was currently no economic incentive for pork producers to ship more “off sort” hogs, so this market share should not increase.

Dr. Martin testified that he reviewed literature and determined that competition bureaus in Canada, the United States and Europe become concerned when one company operating in an unregulated market controls 35-60% of the market. He said his own view was that control of 70-75% of the market would be required to give a business market power. Dr. Martin concluded that allowing “off sort” buyers to market 0.5% of market weight hogs produced in Ontario would not affect the market power of the OPPMB. Dr. Martin said that ZDI could not provide hog packers with the guarantee of supply they would need in order for it to take the market away from the OPPMB.

Dr. Martin told the Tribunal that the analysis by Dr. Groenewegen, the expert retained by the OPPMB, looked at the effect of dual marketing on the OPPMB market power. He said this was not appropriate as dual marketing implied that producers had a choice between marketing through the OPPMB or a third party. He said the ‘revised 5% proposal’ was an exception for a small number of hogs for people with one type of business. With respect to the degree of market power held by the OPPMB being affected by the proposal, Dr. Martin said he had never heard of the concept of degree of market power at the 99.5% to 100% market share level.

In response to questions, Dr. Martin clarified that he included sows and boars in his definition of “off sort” hogs. He also indicated:

• The number of market weight hogs that could be marketed through the ‘revised 5% proposal’ would increase if the number of sows and boars marketed in Ontario increased.
• If the number of sows were to be increased, he expected a corresponding increase in the number of market weight hogs produced.
• He was unsure of the market price for sows but believed his price analysis on light weight/overweight hogs would hold true and there would not be an economic incentive to increase sow production.
• He agreed there were approximately 4,000 pork producers in Ontario and relatively few processors, with two processors controlling 75% of the market.
• He agreed that a processor who also produced hogs could become an “off sort” buyer but said he did see why they would do so.
• Competition bureaus become concerned when one firm substantially controls the market; the objective is to promote effective competition in the marketplace and protect consumers and competitors from abuse.
• The Farm Products Marketing Act (FPMA) was designed to allow local boards the exclusive right to market hogs. It is not intended to ensure effective competition in the marketplace.
• He would expect no difference in the OPPMB’s market power if it had 70% of the market or 80% of the market. Entities with less than 30% of a market cannot exercise market power.
• If demand for hogs under 215 lbs. or over 300 lbs. were to increase, the OPPMB would need to change the definition of “off sort” hogs.

Andy Marks

Mr. Andy Marks was recalled. He told the Tribunal that ZDI had not applied to be a licensed assembler of market weight hogs, but that the OPPMB had no objection to the company being licensed as an assembler. He said this would not prevent ZDI from continuing to offer its one-stop sorting and grading service. He explained that the OPPMB would pick up the market weight hogs from ZDI.

Mr. Marks said short loads occurred but that the OPPMB tried to put together more than one lot of hogs to fill its trucks. He said that if there was a short load the increased transportation costs were shared by all producers shipping in that pool, rather than just those with hogs on the short load. Mr. Marks said ZDI should not have to build additional pens as hogs were normally booked a week in advance and pick up trucks routed such that they were not held long in assembly yards. He acknowledged that if producers had contracts with specific packers, ZDI would need to have an additional pen for each of six packers.

Mr. Marks said most producers who shipped mixed loads of sows and market weight hogs received two or more settlement statements and cheques, and that none had complained about this to the OPPMB. He said that concerns about dead or discounted hogs could be referred to the OPPMB Customer Service Line by ZDI, or producers could call the line directly. Mr. Marks said certain categories of lame hogs could not be legally shipped without a veterinarian’s certificate and confirmed that the OPPMB had introduced a $50 fee for producers who ship lame hogs to processors without one.

Mr. Marks said that some assembly yards provided a market selection service, whereby the producer authorizes the assembler to sell their hogs on the grid or market of the assembler’s choice. He said there was no such thing as a standard yard, as yards offered a different mix of services.

Mr. Marks said the OPPMB small processor exemption affected approximately 100 small processing plants, who could each purchase up to 20 market weight hogs per week. He explained that these processors were not in competition with the OPPMB.

In response to questions, Mr. Marks indicated:

• The four largest processors purchased 85-90% of the hogs. The intent of the FPMA is to counterbalance this. If more marketers were allowed this could reduce the price.
• The ‘revised 5% proposal’ did not rely on the use of non-industry terms such as ‘chance hogs’ and ‘for market production’. The cap reduces the number of hogs that could theoretically be marketed through the proposed exemption, relative to the original ‘5% proposal’.
• ZDI could sell more market hogs through the ‘revised 5% proposal’ than it could have under its original proposal, given its understanding of ‘chance’ and ‘for production’ hogs.
• A regulation under the FPMA provided for the OPPMB to set sow prices but it was not being done. A negotiating agency for sows and boars had been at an operational standstill since Quality Meat ceased slaughtering sows in Ontario. Most Ontario sows are slaughtered in the U.S.
• He acknowledged that some of ZDI’s customers would have difficulty giving one week’s notice as to the size of hogs they were shipping.
• He agreed there were increased shipping costs when partly filled trucks are used.
• It is the producer’s responsibility to inform the assembler if they are growing under contract for a specific processor.
• ZDI would not be required to treat contracted hogs any differently than any other hog assembler if it were to become a licensed yard.
• 35-40% of Ontario hogs are shipped directly to the processor; not through an assembler. The trend is toward direct shipments.

Larry Skinner

Mr. Larry Skinner was recalled. He told the Tribunal the OPPMB had introduced its “off sort” hog framework because there had been a shift in production practices, with larger facilities operating on an ‘all in,all out’ basis which increased the number of “off sort” hogs coming to market. He said the framework legitimized that process, created price transparency and met the needs of the industry. He explained that the OPPMB allowed hogs that fall out of the market weight category to be sold through assemblers as they were less desirable to the market and the OPPMB did not obtain the best returns for lightweight hogs.

Mr. Skinner testified that the OPPMB was empowered under the FPMA to market all hogs for slaughter in Ontario. He said the ‘revised 5% proposal’ contravened the single desk selling function of the OPPMB and diluted its ability to market all hogs in the best interest of all producers. He acknowledged that the marketing system sometimes constrained an individual producer from obtaining the highest possible price, but said this was so the OPPMB could obtain a better price for many hog producers. He explained the OPPMB tried to optimize the returns for the sector.

Mr. Skinner said that the OPPMB opposed the introduction of new sellers into the hog market, regardless of the proportion of the market they can fill. He said he was also concerned that “off sort” hog assemblers such as ZDI would be the ‘thin edge of the wedge’, as once some competition was allowed it would be difficult to justify refusing to allow other competitors access to the market. He said it would also be more difficult to adjust the weight range of market weight hogs in response to changing demand if other players were allowed in the market.

In response to questions, Mr. Skinner added:

• The OPPMB had marketed sows in the past but that was not the focus of its current marketing efforts. With approximately 2.5% of market, the OPPMB did not have market clout in the sow market at this time.
• He agreed that, on a numerical basis, ZDI proposed to market an insignificant number of market weight hogs.
• Certain types of hogs marketed for slaughter, such as sows and boars, were exempt from the requirement that they be marketed through the OPPMB. The FPMA allowed for these exemptions. It is actually the people marketing them who are exempt.
• The purpose of the FPMA was to give local boards the power to act as a single desk seller, but the OPPMB was also given the ability to exempt hogs from its marketing authority.
• “Off sort” hogs are not exempt from the OPPMB marketing authority but they will be able to be marketed by other entities under the new framework.
• Small processors were exempt from buying market weight hogs up to a certain limit. Small processors do not compete with the OPPMB; they do not sell live hogs. Small processors were audited.
• The ultimate buyer of market weight hogs shipped through ZDI did not matter to the OPPMB; its concern was that no market weight Ontario hogs are to be sold through a competitor.
• Ontario pork processors could purchase hogs from out of province, but rarely did.
• Over the last ten years, the desired market weight range had shifted by 5-10 kilograms.
• There were at least three other assemblers who purchased sows in Ontario.

John Groenewegen

Dr. John Groenewegen was qualified as an expert witness as an agricultural economist with a specialty in supply management systems.

Dr. Groenewegen told the Tribunal he had been asked by the OPPMB whether the ZDI ‘revised 5% proposal’ would have any impact on the OPPMB’s market clout, and that he concluded that it would have a detrimental effect. Dr. Groenewegen said he looked at the factors that affect the bargaining power of suppliers using an established framework which included the following factors:

• few suppliers and more concentrated than the industry it sells to
• minimal substitute products
• the supplier group poses a credible threat of forward integration
• industry buying the product is not an important customer of the supplier group
• suppliers’ product is important to the buyers’ business
• suppliers’ products are differentiated, or have built in switching costs.

Dr. Groenewegen said the latter three of the above listed factors would not change should the OPPMB be required to operate in a dual marketing environment. With regard to the other three factors, Dr. Groenewegen said the OPPMB would face competition from ‘off sort’ buyers marketing market weight hogs; buyers could cause price competition and discounting between buyers and the threat of forward integration by the OPPMB would be reduced.

Dr. Groenewegen stated the small processors who process market weight hogs obtained directly from producers do not compete with the OPPMB because most of the hogs they slaughter are ‘custom kill’ and they do not take ownership of the hog or meat, and because they do not sell live hogs. He also noted that small processors were limited to a specific volume, 20 head per week, with no opportunity for growth, whereas under the ZDI ‘revised 5% proposal’ the number of exempt hogs would vary.

Dr. Groenewegen stated that allowing small volumes of market weight hogs to be sold by hog assemblers would reduce the effectiveness of the OPPMB’s ‘single desk selling’ authority. He said that an assembler looking for a market for a load of market weight hogs could approach the same processor as the OPPMB and the price would be driven down if it were Friday afternoon when there are few alternative markets. Dr. Groenewegen said Dr. Martin had asked the wrong question in looking at when competition bureaus would become concerned. He said the issue was that the OPPMB marketing power was reduced when it was not receiving all the market weight hogs produced in Ontario.

Dr. Groenewegen also indicated:

• He had not worked directly with the regulation of the pork industry and did not believe he had been retained by the OPPMB in the past.
• Pork was not a supply managed industry, as there were no border controls.
• His methodology was based on the principles of competition and market power.
• It was plausible that the U.S. border could be closed to market hogs, or effectively closed as a result of countervailing duties.
• The sale of one hog per year outside the OPPMB authority would not hurt its market power; one or two truckloads per week would reduce its market power.
• The OPPMB could re-route loads of hogs to avoid flooding the spot market.
• He understood ZDI was in a growth business; as the number of producers shifting to ‘all in, all out’ production systems, increases, the proportion of the market hogs able to be shipped off-board under the ‘revised 5% proposal’ could increase to 1.5% of the total market.
• He had no evidence that any price competition had occurred as a result of ZDI selling market weight hogs in competition with the OPPMB; his opinion was that it could happen.
• The Lerner market power index was a well established economic model and it supported his view that the loss of 0.5% of a market would reduce market power.
• Based on the price information submitted by ZDI, its customers were not acting in their own best interests in shipping market weight hogs to ZDI; but there may be other reasons why they shipped their hogs to ZDI.

Summations:

Mr. Snider asked the Tribunal to consider whether or not ZDI’s participation in the market weight hog market stimulated, increased or improved the marketing of hogs in Ontario; he submitted that its 1,500 customers showed that it did. He said the only other consideration was whether or not ZDI’s operation posed a threat to OPPMB and he argued that it did not.

Mr. Snider told the Tribunal that ZDI’s ‘revised 5% proposal’ addressed the concerns that the OPPMB had with its earlier proposals. He said Mr. Skinner had acknowledged that less than 0.5% of market weight hogs could be marketed through “off sort” buyers under the current proposal. Mr. Snider said this was less than the OPPMB share of the sow market, in which it acknowledged that it had no market clout.

Mr. Snider said the only witness to suggest that the OPPMB would lose market power if the appeal were granted was Dr. Groenewegen. He asked the Tribunal to disregard much of this testimony on the grounds that his example was far fetched, he had little experience in the hog industry and he was argumentative rather than forthright in answering questions. He asked the Tribunal to favour the testimony of Dr. Martin, who was qualified as an expert hog specialist.

Mr. Snider told the Tribunal that the OPPMB was mistaken in believing that allowing an additional seller would be contrary to its enabling legislation, the FPMA and regulations. He pointed out that the legislation allowed for exemptions and that there were already several classes of hogs exempt from marketing through the OPPMB. He said these included sows and boars and hogs in certain weight ranges. He argued that an exemption under the ‘revised 5% proposal’ would only be contrary to the legislation if it hurt the OPPMB’s market power. He pointed out that under the proposal the OPPMB would retain authority over exempt hogs, would receive its service fee and price information on exempt hogs and could revisit the issue if there were a change in market conditions or if the exempt hogs harmed the market.

Mr. Snider argued that the OPPMB argument that this proposal would be the ‘thin edge of the wedge’ and allow for further off-board marketing of market weight hogs was speculative and should be given no weight. He said future proposals, if any were made, would be dealt with through the established process under the legislation, just as the ZDI proposals had been. He said that each proposal must be judged on its own merits and it would be unreasonable to do otherwise.

Mr. Snider argued that ZDI’s current method of business was more efficient than sorting out market weight hogs and selling them through the OPPMB. He pointed out that any additional costs to market hogs shipped to ZDI would be passed on to producers. He said these additional costs could not be justified in the absence of any harm to Ontario producers from ZDI’s current method of doing business. Mr. Snider also asked the Tribunal to consider the impact that denying the appeal would have on the relationship between ZDI and its customers.

As an alternative to the ‘revised 5% proposal’, Mr. Snider said it would be possible for ZDI to continue its current operation with a 4% cap, as long as this was measured on an annual basis, to allow for variation in the percentage of market weight hogs it receives from week to week.

Mr. Foran submitted that the OPPMB acted in the best interests of all producers and asked that the Tribunal do the same. He said the ‘revised 5% proposal’ was not in the best interests of Ontario pork producers because:

• it was contrary to the statutory intent to allow direct marketing of slaughter hogs
• allowing other entities to compete against the OPPMB in its core weight category would be a threat to its market power
• there was no need to allow competitors into market weight hog business and no demand from producers to do so, and the single desk selling authority of the OPPMB should not be put at risk in the absence of a clear reason to do so.

Mr. Foran said there was no question that the FPMA and regulations gave the OPPMB the authority to be the sole marketer of hogs for slaughter in Ontario. He agreed with Mr. Snider that the OPPMB had the authority to exempt certain classes of hogs from its marketing regulations but Mr. Foran argued that the exemption that ZDI was seeking was different from the existing exemptions. Mr. Foran said that Ontario pork producers had, through the OPPMB, chosen not to pursue the market for sows and boars. He said the OPPMB had chosen not to focus on “off sort” hogs that were heavily discounted in Ontario, Quebec and the U.S., although he noted they would still be covered by the “off sort” framework. Mr. Foran said the difference with the ZDI proposal was that it proposed an exemption for “off sort” buyers to allow them to compete with the OPPMB in the core market for market weight hogs.

Mr. Foran said the test the Tribunal should use was not whether or not there would be undue harm caused by the proposed initiative, but rather whether or not the intent of the legislation was that the OPPMB have exclusivity. He submitted that if producers wanted to remove the single desk selling authority of the OPPMB they could do so through the political process.

Mr. Foran said there was a danger that if the Tribunal allowed “off sort” hog buyers to compete with the OPPMB, this would open the door to other competitors. He referenced Dr. Martin’s testimony that as long as the OPPMB held 75% of the market it would have significant market power.

Mr. Foran suggested that the approach Dr. Martin took in assessing the threat that the ‘revised 5% proposal’ posed to the OPPMB’s market power was flawed. He said Dr. Martin looked at the standards used by competition bureaus whose role was to ensure healthy competition in an unregulated marketplace. He said this was not appropriate to the regulated Ontario hog market, where the intent of the legislation was to prevent competition. Mr. Foran asked the Tribunal to favour the testimony of Dr. Groenewegen in this regard. He said Dr. Groenewegen had provided complete answers to the questions posed.

Mr. Foran said that even if the Tribunal did not accept Dr. Groenewegen’s evidence that the OPPMB would lose market power if the appeal were granted, it should deny the appeal on the grounds that the OPPMB would lose its market exclusivity.

Mr. Foran asked the Tribunal to recall that ZDI counted transporters, sale barns and multiple barns belonging to the same producer as its customers and suggested there may not be 1,500 true producers in its clientele. He said the OPPMB had never said ZDI would have to operate as a standard yard, and that there was in fact no such thing as a standard yard. He suggested ZDI could continue to serve customers who delivered mixed loads if it became a licensed assembler and would still be able to offer its comprehensive sorting service. Mr. Foran asked the Tribunal to consider that no producers spoke in support of the ZDI proposal at the hearing.

With regard to the efficiency argument, Mr. Foran said the trend was toward more ‘all in-all out’ production and ZDI could fill its trucks with “off sort” hogs. He said there was no evidence that there was any premium for “off sort” hogs, which he submitted were undesirable. He suggested that ZDI received less than the OPPMB for market weight hogs because they used them to fill loads of less desirable hogs to raise the average price. Mr. Foran argued that it would not be reasonable to protect the price of undesirable hogs by allowing for market weight hogs to be marketed at discounted prices. Mr. Foran said the evidence of lower prices for market weight hogs shipped to ZDI should be interpreted as causing harm to producers.

Mr. Foran argued that there was no merit in ZDI’s arguments regarding producers receiving two cheques, the theoretical need for additional penning and the dilemma in determining producers’ intentions when they accidentally ship market weight hogs to ZDI. He said Mr. Zantingh had acknowledged ZDI bought hogs from other assemblers and agreed it did not always settle directly with producers. Mr. Foran said that in those cases its clients would receive at least two cheques. He said other assemblers managed to determine their customers’ market desires before hogs were received and ZDI could do the same.

Mr. Snider replied that the price information provided showed that there was a net gain to ZDI’s customers when mixed loads of market weight hogs and “off sort” hogs were sold through ZDI. He said pork producers were interested in their total returns and would not use ZDI if they did not benefit.

Mr. Snider said Mr. Foran’s argument regarding the intent of the legislation was poor, as there would be no point in including an appeal process if the OPPMB could simply fall back on the exclusivity argument. He reiterated that the OPPMB did not exclusively market all slaughter hogs, as allowed in the legislation, because it had exempted some classes of hogs. He said ZDI was not asking for a true dual marketing system, like that used by the Ontario Wheat Producers’ Marketing Board. He submitted it only wanted a limited exemption that would allow it to continue to serve its customers well.

The Findings

The parties to this proceeding presented very different views of the intent of the OPPMB’s enabling legislation, the Farm Products Marketing Act (FPMA). The purpose of the legislation is set out in Section 2 of the FPMA which is as follows:

Purpose of Act

2. The purpose of this Act is to provide for the control and regulation in any or all aspects of the producing and marketing within Ontario of farm products including the prohibition of such producing or marketing in whole or in part. R.S.O. 1990, c. F.9, s. 2.

The FPMA allows for considerable powers and authorities to be granted to local boards which are established under the statute. The OPPMB is one such local board. The Tribunal finds it is quite clear that the OPPMB has been delegated the authority to act as a single desk seller for hogs produced in Ontario and marketed for slaughter, with the exception of hogs produced in certain geographical areas of the province.

Powers are delegated to the OPPMB through Regulation 419 under the FPMA. “This Regulation provides for the control and regulation in any or all respects of the producing and marketing within Ontario of hogs, including the prohibition of such producing and marketing in whole or in part.” (Section 2, Regulation 419). Subsection 5(h) of Regulation 419 states:

5. The Commission delegates to the local board its powers to make regulations with respect to hogs,

(h) providing for the control and regulation of the marketing of hogs, including the times and places at which hogs may be marketed;

The OPPMB General Regulations include:

3. Any persons who produce hogs shall offer to sell or sell hogs through Ontario Pork and shall be registered with Ontario Pork, except to the extent that the person is exempted under this regulation.

4. No person shall assemble, buy, finance, offer for sale, pack, process, sell, ship, store or transport hogs that have not been sold through Ontario Pork except to the extent that the person is exempted under this regulation.

The Tribunal finds that the intent of the regulations under the FPMA which govern the OPPMB is that it be able to act as a single desk seller for hogs produced for slaughter. However, the OPPMB has also been granted the ability to exempt classes, varieties and grades of hogs and the people who produce or market them from its regulations. The evidence was that the OPPMB does use this exemption authority – the example of sows and boars was cited frequently over the course of the hearing. The Tribunal notes that the exemptions granted to date have been for 100% of the category of slaughter hogs, with the exception of a limited number of market weight hogs marketed directly to small processors. The Tribunal was not persuaded that there is any parallel between that exemption and the ZDI ‘revised 5% proposal’. The preponderance of the evidence on this issue was that market weight hogs processed by small processors were largely for the ‘cut and wrap’ custom kill market and that the small processors were not in competition with the OPPMB.

The Tribunal heard conflicting testimony regarding the impact of implementing the ‘revised 5% proposal’ on the marketing power of the OPPMB. The best evidence on this point was the information provided by the two experts called to testify. The Tribunal finds the testimony of both expert witnesses – Dr. Martin and Dr. Groenewegen – to be credible. Both these witnesses acted with professionalism at the hearing and both gave clear testimony and forthright answers to questions.

The two experts took quite different approaches as to how to assess market power. Dr. Martin started with the premise of a free market and determined the points at which various competition bureaus become concerned with the share of a market obtained by a single entity. His own view was that controlling 70-75% of a market was sufficient to exercise meaningful market power. Dr. Groenewegen started with the premise of a monopoly and determined the point at which market power would be eroded. He testified that one or two loads of hogs each week could erode the OPPMB’s market power. The Tribunal finds that Dr. Groenewegen’s analysis is more appropriate to the market under consideration. There is a regulated market for hogs in Ontario, and while out-of-province hogs could be brought in to compete with the OPPMB, the evidence was that this rarely occurs. The market is much closer to the monopoly scenario that Dr. Groenewegen used as a starting point than the free market scenario used by Dr. Martin in his analysis.

As well, the Tribunal finds that Dr. Groenewegen’s example of competition affecting the spot market is quite plausible. The Tribunal concludes that allowing “off sort” buyers to compete with the OPPMB in the market weight hog category would erode the OPPMB’s market power.

The Tribunal was not persuaded by the arguments that ZDI provided a more efficient marketing system than the OPPMB. The Tribunal agrees that ZDI provides a valuable service to its customers with its sorting methodology, which appears to be particularly useful to those using the increasingly popular ‘all in, all out” production system. However, there was no evidence that ZDI was any better than the OPPMB at marketing hogs in the 215-300 lb. market weight hog class. Mr. Brad Zantingh testified that ZDI would incur additional costs if it were to continue in the market weight hog business as a licensed assembly yard. The Tribunal does not disagree, but was not persuaded that these costs would be onerous. Further, ZDI would not be disadvantaged relative to any other hog assembler wishing to provide a similar service.

The Tribunal gives some weight to the ‘thin edge of the wedge’ argument put forth by the OPPMB. The Tribunal agrees that it would be difficult to justify allowing some competitors in the market weight hog category and not others wishing to market a similar volume of hogs. However, the Tribunal also agrees with Mr. Snider that each proposition must be dealt with on its own merits.

In reaching its decision on this matter, the Tribunal considered what would be in the best interests of Ontario pork producers. The Tribunal finds that the risk to the marketing system through the loss of market power by eliminating the single desk selling function far outweighs any benefit to ZDI’s customers from ZDI being allowed to use market weight hogs to fill up loads.

Decision and Reasons

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

1. The appeal by ZDI from decisions of the OPPMB not to adopt its ‘5% proposal’ or its ‘revised 5% proposal’ is dismissed.

The reasons for this decision are:

1. Allowing competitors in its core market of market weight hogs would diminish the OPPMB’s market power.

2. The OPPMB provides an efficient mechanism for marketing market weight hogs. The Tribunal finds that the OPPMB has developed an expertise in marketing this category of hogs.

The Tribunal was not persuaded that the ZDI ‘revised 5% proposal’ was in the best interests of the Ontario pork industry. The single desk selling function performed by the OPPMB is proven to be a benefit to all hog producers in Ontario. The evidence did not support a change to the single desk selling mechanism.

Dated at Guelph, Ontario this 3rd day of November, 2004.