Pasztor et al. v Ontario Flue-Cured Tobacco Growers' Marketing Board, 2005 ONAFRAAT 2

Agriculture, Food and Rural Affairs Appeal Tribunal

1Stone Road West Guelph, Ontario

Tribunal d’appel de l’agriculture,

de l’alimentation

et des affaires rurales

N1G 4Y2

Tel: (519) 826-3433, Fax: (519) 826-4232

Email:Tribunal@OMAF.gov.on.ca

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:

Pasztor et al. v Ontario Flue-Cured Tobacco Growers' Marketing Board

Pasztor et al. v Ontario Flue-Cured Tobacco Growers' Marketing Board

2005 ONAFRAAT 02

STATUTE:

Ministry of Agriculture, Food and Rural Affairs Act

HEARING:

January 24, 2005

DATE OF DECISION:

January 26, 2005

2005-02

NEUTRAL CITATION:

2005 ONAFRAAT 02

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 Arpad and Lorine Pasztor, Char-Lyn Farms Ltd, Steve and Brenda Bozso, Rick and Donnie Pasztor, Rick Pasztor, William and Judy Toronyi, James Hoffer, Eric Hoffer, Thomas Balasz, Jack Elliot, Katherin Rusl, Jerome Vanderslyke, Jerome and Bertha Vanderslyke, Steve Leonard, Joe Vanlandshoot, George Rogers and Anton and Anna Hirmann (the appellants) from decisions of the Ontario Flue-Cured Tobacco Growers' Marketing Board dated December 10, 2004 and January 6, 2005 by which it refused to permit the appellants to rent out 100% of their 2004 marketing quota.

Before: Rod Stork, Chair; Mary Field, Member; Graeme Hedley, Member

Appearances:

Robert Nightingale, counsel to the appellants

Barry Bresner, counsel to the respondent

Arpad Pasztor, witness for the appellants

Brenda Bozso, witness for the appellants

Jason Lietaer, witness for the respondent

DECISION OF THE TRIBUNAL

These appeals were heard in Guelph, Ontario on Monday, January 24, 2005. The appellants were all tobacco growers who did not grow a crop in 2004 as they intended to participate in a quota buy-out program. They appealed to the Agriculture, Food and Rural Affairs Appeal Tribunal (the Tribunal) from a decision of the Ontario Flue-Cured Tobacco Growers' Marketing Board (OFCTGMB) to deny their requests to allow them to rent out 100% of their 2004 marketing quota.

The OFCTGMB had decided to allow them to rent out 44% of their quota. It was explained that this was calculated as the sum of 30% of their basic production quota (BPQ) which they would have been allowed to rent in the Spring, and 20% of the remaining 70% of their BPQ, which they would have been allowed to rent in the Fall, had they grown a crop in 2004.

At the onset of the Hearing, Mr. Nightingale told the Tribunal that Mr. Joe Vanlandshoot had withdrawn from the proceeding.

Statutory Context

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

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 local board for a hearing, unless both parties waive their right to a hearing.

The Farm Products Marketing Act allows for various powers and authorities to be delegated to a local board. The OFCTGMB is a local board under the Act and has been authorized to regulate the production and marketing of tobacco and to administer a quota marketing system (Regulation 435, as amended).

The Evidence

Appellants' Case

Mr. Arpad Pasztor told the Tribunal he had been a tobacco grower for several years and had intended to grow a crop with a sharegrower in 2004. He said he did not plant a crop because his local OFCTGMB Director informed him on May 3, 2004 that there was to be a federal government funded buyout program in 2004 and if he wanted to participate in it, he would be subject o three conditions:

• there be no carryover tobacco from 2003

• there be no crop planted in 2004, and

• there be no renting out of quota in 2004.

Mr. Pasztor said he understood the federal Tobacco Assistance Program (TAP) would be implemented in June 2004, would operate by way of a reverse auction system and would provide payment for relinquished quota to sellers in 2004. He pointed the Tribunal to press clippings, correspondence from the Minister of Agriculture of the day, the Honourable Bob Speller, and correspondence from the OFCTGMB regarding the TAP.

Mr. Pasztor testified that he and the other appellants had relied upon the information received from the OFCTGMB in deciding not to grow a crop in 2004, to be eligible for the TAP. He said the planting decision had to be made very quickly because tobacco had to be planted no later than June 10th, and soil had to be fumigated two weeks before planting. He explained that producers had to notify the OFCTGMB of their intention to participate in the TAP by June 25, 2004. He understood 33-35 producers had checked Box B1 on the OFCTGMB Application for Marketing Quota, which meant they intended to exit the industry through the TAP.

Mr. Pasztor testified that he learned the details of the reverse auction process through a letter dated June 8, 2004 from Fred Neukamm, Chair, OFCTGMB. He said the auction was to be held by sealed bid and was to be for growers who checked Box B1 in 2004, then if there were funds leftover a second auction might be held for other growers. He said quota surrendered would be cancelled by the OFCTGMB, not transferred to another grower. Mr. Pasztor said an advantage to being in the first auction was that there were only to be 35 growers bidding and that would likely ensure a high price.

Mr. Pasztor told the Tribunal he later heard there was to be only one auction for all growers. He said this was unfair as the growers who did not check Box B1 had the ability to grow a tobacco crop or rent out quota in 2004, whereas the appellants did not. He said he had income from other crops and had planted asparagus on his tobacco land in 2004.

Mr. Pasztor told the Tribunal he knew there was a warning on the Application for Marketing Quota that growers assumed a risk and that they might not meet the program criteria , the criteria might change and they might not obtain the desired price for quota. He said he did not understand the warning to mean the TAP buyout may not happen at all in 2004.

Mr. Pasztor said the OFCTGMB changed the rules after he and the other appellants had decided not to grow a tobacco crop in 2004. He said:

• the planned reverse auction for the growers who checked Box B1 was not held and the OFCTGMB indicated there would only be one auction for all growers

• information meetings scheduled for November and December 2004 were cancelled by the OFCTGMB because of a dispute with the federal government over funding

• the OFCTGMB announced it would re-assign marketing quota (MQ) assigned to the basic production quota (BPQ) surrendered under the TAP to other growers

• no payment was made to growers who wanted to exit the industry in 2004.

Mr. Pasztor said the appellants wanted to rent out 100% of their 2004 MQ to obtain some income. He cited examples of the OFCTGMB allowing 100% MQ rentals when growers had crop failures or their health deteriorated. He said if the appellants were allowed to rent their MQ they could obtain 50-70 cents per lb. He said this was less than he would have earned had he grown a crop as he normally made 90 cents to $1.20 per lb. Mr. Pasztor also said that the appellants were not eligible for $120 per kiln which they would have received as compensation for heat conversion, had they grown tobacco in 2004.

Mr. Pasztor told the Tribunal most growers with quota to rent had already rented it as the fourth of five selling rounds was about to commence, and recipients wanted to rent in for the fourth round. He said only the appellants would be hurt if the rental fee dropped due to an influx of MQ for rent. He said if the OFCTGMB decision were upheld, 56% of the MQ held by the appellants would be redistributed pro rata to all growers, whether they needed it or not. He said there was a demand for MQ because the negotiated market size in 2004 was 87.9 million pounds but the supply was 93 million pounds.

Mr. Pasztor told the Tribunal he and another grower had asked to be able to rent out 100% of their marketing quota in September 2004 but the OFCTGMB did not act on that request until December 2004.

In response to questions, Mr. Pasztor indicated:

• The appellants could have sold their BPQ on the open market in 2004.

• He thought the TAP would pay higher than the open market price but recognized there was no guaranteed price.

• It would not help the industry to sell BPQ on the open market; remaining growers would benefit if BPQ were surrendered through the TAP.

• It was known in the industry that BPQ could not be sold if it had tobacco attached.

• The mechanism of the TAP was not clear but both the federal Minister of Agriculture and the OFCTGMB Chairman said there would be a program in 2004.

• The OFCTGMB should not have announced the program if it did not have the cash.

• It was usual for the OFCTGMB to re-allocate unused MQ to all growers who planted a crop.

• The federal government had the authority on how the money would be allocated to the TAP.

• Government-run crop insurance policies could claw-back payments due to quota rental income, but private crop insurance providers could not.

• His cost-of-production (COP) was $1.20 in 2003. Market price was approximately $2.25 pr pound. Growers with stick kilns had a higher COP.

• Skills re-training funds were an important aspect of the TAP.

• The OFCTGMB could increase all growers' BPQ rather than re-distribute MQ assigned to relinquished BPQ. The marketing board had to live up to its negotiated market size.

• He heard that OFCTGMB Director Linda Vandendreissche told 70-80 people attending a District Meeting about the three criteria to participate in the TAP.

Mrs. Brenda Bozso told the Tribunal she attended a District meeting in June 2004 and OFCTGMB Director Gary Godelie also attended. She testified that information provided by the OFCTGMB was that there would be a reverse auction for those growers who wanted to sell out in 2004 and to be eligible they could not grow a crop, have a carryover from 2003 or have a sharegrower as the quota had to be unencumbered. She said there was to be a second auction for producers who wanted to exit later if funds were leftover. Mrs. Bozso said at a subsequent meeting in Fall 2004 that she was told there would be one auction with all growers lumped together. She also verified that she was the author of one of the written documents submitted as evidence.

Mrs. Bozso said she knew things were still unsettled in November 2004 and knew the OFCTGMB was frustrated with the federal government.

OFCTGMB Case

Mr. Jason Lietaer, General Manager, OFCTGMB, told the Tribunal his job was to implement the policies of the OFCTGMB, ensure Directors have accurate information to make decisions, and oversee the tobacco auction. He said he was involved in the OFCTGMB negotiations with the federal government regarding the TAP.

Mr. Lietaer said the TAP was announced on May 4, 2004 and was to have a budget of $71 million that was to be shared by tobacco growers exiting the industry in Ontario and Quebec, with some funds for skills training. He said there were still details to be worked out when the program was announced and the OFCTGMB worked with Minister Speller and forwarded his letters to tobacco growers. He explained negotiations were delayed due to a federal election and the appointment of the Honourable Andy Mitchell as federal Minister of Agriculture.

Mr. Lietaer explained the OFCTGMB understood, based on discussions with the federal government, that tobacco farmers could not grow a crop, not rent quota and hold no carryover if they wanted to participate in the TAP. He said the federal government insisted on a reverse auction. He said other details of the program were not clear. Mr. Lietaer said by November 2004 it appeared the federal government was no longer committed to an auction in 2004, but rather wanted an auction at which all growers could submit bids in 2005. He stressed there was still no final decision on the number of auctions and that the OFCTGMB preferred a set price.

Mr. Lietaer said the OFCTGMB scheduled information meetings with growers and representatives of the federal government, as there was considerable confusion as to how a reverse auction would work. He said the OFCTGMB cancelled those meetings when Minister Mitchell announced significant changes to the TAP, which would disadvantage Ontario tobacco growers.

Mr. Lietaer said the OFCTGMB was sympathetic to the appellants' position. He said there were 36 growers who checked Box B1 in 2004. He estimated there was approximately 1 million lbs. of MQ for the whole group; approximately 500,000 lbs. MQ was related to BPQ held by the appellants.

Mr. Lietaer said the going rate for renting marketing quota was 68-75 cents per lb. and that it was fairly stable. He said there was demand for MQ and he did not think the rental price was likely to drop if the appellants were allowed to rent 100% of their MQ. He did not agree that only the appellants would be hurt by a decrease in the quota rental price.

Mr. Lietaer said the average COP of tobacco growers was $1.66 per lb. for hand harvested tobacco and $1.40 per lb. when mechanized harvest was used, according to a recent study by the George Morris Centre. He said the quota rental cost would have to be added to growers who were renting in MQ. He said the price of tobacco was $2.23-$2.25 per lb.

Mr. Lietaer said tobacco growers earned approximately $30,000 per year from their crop. He said 25% had difficulty meeting operating commitments, and growers held on average between $300,000 and $400,000 in long-term debt.

Mr. Lietaer said the OFCTGMB position had always been that growers exiting the industry through the TAP would benefit from the buyout and growers remaining in the industry would benefit as they would be allocated more MQ. He explained MQ is allocated as a percentage of BPQ and a higher percentage could be allocated if BPQ were removed from the industry. He said allocating MQ as supplemental MQ would have the same effect as retroactively adjusting the percentage of BPQ that was issued as MQ.

Mr. Lietaer said allowing the appellants to rent this amount of MQ would hurt other growers as growers who grew a crop in 2004 would be entitled to 56% of the MQ assigned to the appellants' BPQ. He said unused MQ was normally issued in December as supplemental MQ to active growers. He said the OFCTGMB had to issue supplemental MQ to ensure enough tobacco was marketed to meet its contractual obligations.

In response to questions, Mr. Lietaer indicated:

• Growers should be able to rely on information provided to them by the OFCTGMB.

• In May 2004 the OFCTGMB felt that best advice it could give growers wishing to participate in the TAP was that they could not grow a crop, could not have carryover tobacco, must sell all of their BPQ through the TAP and could not lease their quota.

• On May 18, 2004 representatives of the federal government briefed some OFCTGMB Directors on the reverse auction method, using generic examples. More detailed documentation, tailored to the tobacco industry was requested by the OFCTGMB. That was distributed to growers on June 8, 2004.

• The OFCTGMB originally believed there would be a separate auction for growers exiting in 2004 but the federal government did not commit to this.

• It was still not known whether there would be one or more auctions. The federal government would determine how much money would be made available at each auction.

• The price received for quota at a reverse auction through the TAP would be influenced by the amount of funds the federal government committed to each auction.

• The 2004 tobacco crop was exceptionally good quality, with 80% A grades. The crop was large enough that he expected there would be significant demand for MQ.

• There had been half the normal amount of MQ rentals processed by the OFCTGMB in the 2004 crop year.

• The OFCTGMB decision gave the appellants the same rental options as other growers.

• The OFCTGMB had allowed growers to rent 100% of their MQ for compassionate reasons when it believed there was a legitimate problem. It had allowed 100% quota rental when a crop that was planted had failed.

• The OFCTGMB Application for Marketing Quota form was drafted before it received information on the auction process from the federal government.

• All tobacco growers have received supplemental MQ in the past. They may not understand where it comes from. Each year there are growers who do not use their MQ and it is distributed as supplemental MQ.

• Prices were good up to the last few days of the fifth round of marketing for the 2003 crop.

Summation:

Mr. Nightingale told the Tribunal the OFCTGMB needed to treat each producer in a fair manner and suggested the appellants had been treated unjustly. He said there were unique circumstances in 2004 because when the TAP was announced growers made planting decisions based on that announcement and information provided by the OFCTGMB, but the rules changed later in 2004 and the appellants were left without any income from tobacco or from the surrender of their quota through the TAP.

Mr. Nightingale said the appellants were not saying the OFCTGMB was in the wrong and they accepted that it was in ongoing negotiations with the federal government. He said what was needed was for the OFCTGMB to treat the appellants in a fair and consistent manner. He suggested allowing them to rent out 100% of their MQ would be fair. He pointed out the OFCTGMB had allowed other growers in unique situations to rent out 100% of their MQ.

Mr. Nightingale said it was not possible for the appellants' income to equal that of growers who planted a crop if their request was granted. He said there would be no harm to the OFCTGMB if these growers could rent out 100% of their MQ, and that any other grower with MQ to rent would already have done so by round four of the OFCTGMB auction. He said it would be fairer to allow the appellants to rent the MQ and salvage some income than to reallocate it to other growers, who may or may not need it. He said if the appellants were granted the right to rent out 100% of their MQ they would not object to being pooled with all other growers when the TAP auction was eventually held.

Mr. Nightingale asked that the Tribunal order that the appellants could rent out 100% of their MQ, and could rent it out during the fourth or fifth rounds of marketing. He said this would be an efficient method of seeing that MQ reached the hands of those growers that need it for the 2004 crop. He also asked the Tribunal to decide the matter as quickly as possible, as the fourth round was due to commence in a matter of days.

Mr. Bresner told the Tribunal the OFCTGMB and the appellants both had a reasonable expectation that the TAP program would be implemented by Fall 2004. He said the OFCTGMB did not agree that the rules had been changed, as it was a federal government program and was never a sure thing. He said the appellants took a calculated risk and they agreed to this risk when they checked off Box B1 in the Application for Marketing Quota.

Mr. Bresner said the OFCTGMB wanted to be fair to the appellants and felt that if they had not decided to try for the TAP buyout, they would have been able to rent out 30% of their MQ in the Spring so they allowed that as a Fall rental. He said the OFCTGMB also believed the appellants should be allowed the same 20% fall rental to which growers who planted a crop were entitled. Mr. Bresner said his client was of the view that to allow 100% rental of MQ would put the appellants in a better financial position than growers who planted a crop. He reminded the Tribunal there are no guaranteed returns in agriculture, and particularly not in tobacco.

Mr. Bresner said that the evidence was that MQ was being rented for approximately 70 cents per lb. and submitted that, even if that price dropped through an influx of MQ on the rental market, the cost would still come out of the pockets of active growers, increasing their COP. He said the OFCTGMB had to ensure the survival of growers staying in the industry. He said MQ would get to the producers who need it whether it was issued as supplemental MQ or rented out by the appellants.

Mr. Bresner told the Tribunal the OFCTGMB decision shared the burden between the appellants and active producers. He said using 100,000 lbs. of MQ at 70 cents per lb., an inactive grower would receive $30,800 without taking the risk of growing a crop. The same producer would receive $70,000 under the appellants' proposal. He submitted that if 100,000 lbs. were grown, only an exceptional producer could generate that type of return.

He said the OFCTGMB wanted the appellants to have a fair return for having their quota stay idle in 2004, but this was moderated by the recognition they had no operating expenses, took no risk in growing a crop and had other income on their tobacco land. He also pointed out they had the option of selling their BPQ in the open market, but took the risk that by holding it they would get a better price through the TAP.

Mr. Bresner argued that the federal government had not yet finalized its rules for participation in the TAP program and was responsible for delays in its implementation. He said he hoped the program would eventually be implemented and that the appellants would benefit from it.

Mr. Bresner asked the Tribunal to uphold the OFCTGMB decision to allow the appellants to rent out 44% of their 2004 MQ.

The Findings

The issue before the Tribunal in this matter is:

Is the decision of the OFCTGMB to allow these growers to rent out 44% of their marketing quota, rather than 100% of their marketing quota fair?

The Tribunal was presented with written documentation and heard testimony as to the information that was provided to tobacco growers by the federal government and the OFCTGMB in May and June 2004. It is clear that, at that time, there was an expectation by the OFCTGMB that the federal government would finance the purchase of BPQ from tobacco growers, in 2004. Ultimately, that did not occur and growers who had anticipated the TAP program were left in a difficult situation.

The Tribunal accepts the OFCTGMB position that there were no clear rules established as to how the TAP would operate. Growers had to make a quick decision as to whether or not to plant a crop of tobacco based on imperfect information. Those growers who took a chance and identified their intention to participate in the TAP, rather than grow a crop or rent out quota, did so knowing there was some risk involved. However, the Tribunal finds that the OFCTGMB did not clearly communicate the degree of risk involved to these growers.

The evidence before the Tribunal was that the OFCTGMB actively promoted the federal TAP, once a funding announcement had been made, but before details of the program had been finalized. From the correspondence sent out by the OFCTGMB, the Tribunal does not think that Mr. Pasztor, and the other appellants, were unreasonable in expecting that there would be a federally funded quota buyout in 2004. The Tribunal finds the OFCTGMB had some responsibility, in promoting the federal program, of adequately describing the risks and it finds that it has not adequately done so. Having said that, there is clearly also an obligation on individual growers to conduct their own risk assessment in making business decisions.

While the delay in implementing the TAP program appears to be largely due to a federal election and subsequent changes initiated by the federal government, the Tribunal also finds that the OFCTGMB is partially responsible for the delay. The OFCTGMB was clearly concerned that changes to the funding in the TAP put Ontario growers on an uneven playing field.

The Tribunal does not see a parallel between the situation the appellants are in and that faced by a grower who has planted a crop and is unable to harvest it, or a grower who has suddenly fallen ill. In those situations there is a crop in the ground, whereas in this situation there was clearly no intent to plant a crop once the TAP program was available.

The Tribunal heard conflicting evidence with regard to the COP of tobacco growers and the relative benefit to growing a crop in 2004 or renting out marketing quota in 2004. The parties did agree that the price of tobacco was expected to be $2.23-$2.25 per lb. and the usual rental fee was 70 cents per lb. The Tribunal accepts that in Mr. Paztor's case, he would have been better off to grow and market a crop, than to rent out 100% of his marketing quota.

The Tribunal finds that the fairest solution to this situation is to allow the appellants to rent out 80% of their 2004 marketing quota. This recognizes that the OFCTGMB was partially responsible for the difficult position that the appellants ended up in, but also puts a portion of the responsibility on the individual growers.

Decision and Reasons

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

1. The OFCTGMB is to exempt the appellants from OFCTGMB regulations which prohibit the rental of marketing quota for the 2004 crop year as follows:
   a) The appellants may rent out 80% of the 2004 marketing quota attached to their BPQ.
   b) Growers who rent in quota from the appellants may use it in the fourth round of marketing or the fifth round of marketing.

The reasons for this decision are:

1. The Tribunal is concerned that the OFCTGMB actively promoted the TAP before full details of the program were finalized, and did not adequately communicate the risks to tobacco growers.

2. The Tribunal believes there is an element of shared responsibility in this situation. As the industry leader, the OFCTGMB should have taken a more cautious approach in promoting the TAP until the details were clear. At the same time, the Tribunal acknowledges that individual growers have responsibility to do their own independent risk assessment leading to decisions in situations of imperfect knowledge.