Gilvesy and by River Ridge Limited v Ontario Flue-Cured Tobacco Growers' Marketing Board, 2005 ONAFRAAT 3

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: Gilvesy and by River Ridge Limited v Ontario Flue-Cured Tobacco Growers' Marketing Board

Gilvesy and by River Ridge Limited v Ontario Flue-Cured Tobacco Growers' Marketing Board 2005 ONAFRAAT 03

STATUTE: Ministry of Agriculture, Food and Rural Affairs Act

HEARING: January 24, 2005 and January 26, 2005

DATE OF DECISION: January 28, 2005

2005-03

NEUTRAL CITATION: 2005 ONAFRAAT 03

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 John Gilvesy, Tillsonburg, Ontario and by River Ridge Limited from:

1. The December 14, 2004 decision of The Ontario Flue Cured Tobacco Growers' Marketing Board (OFCTGMB) not to allow quota holders who completed Section B1 of the OFCTGMB Application for 2004 Marketing Quota form to rent out 100% of their 2004 marketing quota.
2. A decision of the OFCTGMB not to provide 100% of a kiln conversion rebate to quota holders who completed Section B1 of the OFCTGMB Application for 2004 Marketing Quota form.
3. A decision of the OFCTGMB to deny Mr. Gilvesy's request for a regulatory exemption to allow him to sell Basic Production Quota with marketing quota attached, past the December 7, 2004 deadline.
4. A decision of the OFCTGMB to allow quota holders who did not complete Section B1 of the OFCTGMB Application for 2004 Marketing Quota form to participate in the first round of a quota auction to be held under the Tobacco Transitional Assistance Program.

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

Appearances:

John Gilvesy, appellant, representing himself and River Ridge Limited

Barry Bresner, counsel to the respondent

Vicky Malcolm, witness

Jason Lietaer, witness

DECISION OF THE TRIBUNAL

This appeal was heard in Guelph, Ontario on Monday, January 24, 2005 and Wednesday, January 26, 2005. Mr. Gilvesy and River Ridge Limited appealed to the Agriculture, Food and Rural Affairs Appeal Tribunal (the Tribunal) from decisions 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.
• receive funding from a quality assurance program in 2004.
• sell basic production quota (BPQ) with 2004 marketing quota (MQ) attached, after the deadline date.
• hold a separate quota auction for tobacco growers who indicated their intention to exit the industry in 2004 through a program sponsored by the federal government.

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

The OFCTGMB took the position that only growers who grew tobacco in 2004 and completed the required documentation should benefit from assistance through the quality assurance program.

The OFCTGMB took the position that it had no authority to set the terms of quota auctions to be held under a federal government program and thus the Tribunal had no jurisdiction to hear that portion of the appeal. During the course of the hearing, Mr. Gilvesy and River Ridge Limited withdrew their appeals from the OFCTGMB decision denying their request for a separate quota auction, and its decision to deny their requests regarding the sale of BPQ with 2004 MQ attached.

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. John Gilvesy told the Tribunal he was a tobacco grower who owned BPQ in his own name and was a shareholder in River Ridge Limited (RRL), a company which also owned BPQ. He said he had decided to exit the industry as it was in decline and had opted to participate in a federal government Tobacco Assistance Program (TAP) which was to purchase BPQ through a reverse auction process, whereby growers with the lowest bids were selected to sell their BPQ. Mr. Gilvesy said that when the TAP was announced it was clear that it was to be used to buyout tobacco growers in 2004, and that growers selling BPQ through the TAP could not grow a crop in 2004.

Mr. Gilvesy explained that he and RRL normally had tobacco grown by a sharecropper, which was risk-free. He said the income they would have earned in 2004, had their sharegrower grown a crop for him was approximately $7,200 - close to $4,000 from the crop and $3,300 from a kiln conversion program. Mr. Gilvesy said the OFCTGMB decision to allow them to rent out 44% of their MQ would allow them to earn only $1076.

Mr. Gilvesy told the Tribunal that he had relied upon information provided to him by the OFCTGMB in making the decision not to enter a sharegrower agreement in 2004. He referenced documents submitted by both parties. Mr. Gilvesy told the Tribunal that the rules changed in Fall 2004 and the federal TAP program did not purchase any BPQ from tobacco growers. He said the OFCTGMB was instrumental in preventing a reverse auction for BPQ that would have been held in 2004, as it had cancelled information meetings which were to be held in November 2004.

Mr. Gilvesy explained that he understood there was a risk that his BPQ would not be sold through the TAP, as his bids might be too high. He said he also recognized that there was a risk that the federal government would not provide the promised funding. However, he said there was no indication of any risk due to rule changes in the program. He said it was clear that there was to be one auction for growers who indicated their intention to sell BPQ through the TAP in 2004, and if there were still funds available, a second auction for other growers.

With regard to the request for funds under the kiln conversion program, Mr. Gilvesy said he owned 12 bulk kilns that had all been converted to indirect heat in 2001 and 2002. He submitted documentation that indicated RRL received $3,318.36 under a Kiln Conversion Rebate Program in April 2004. He said he would have received kiln conversion funding for the 2004 crop year if he had entered into his usual sharegrower arrangement.

Mr. Gilvesy also indicated:

• He had been reducing his BPQ holdings over the past few years.
• Combined, he and RRL had only enough BPQ for 2-3 acres of tobacco. It was not efficient to plant and harvest this acreage on his own so chose to work with a sharegrower.
• He had the option of selling BPQ on the open market, but opted to try to sell it through the TAP program.
• There was no guaranteed price in the TAP, but he expected it would pay more than the open market as its purpose was to consolidate the tobacco industry and the open market price was not enough to do that.
• He has planted as late as June 25th, due to frost damage to earlier planted crops.
• He did not need to make a decision as to whether or not to plant a crop until mid-June 2004. He had been keeping his options open.
• The OFCTGMB told growers that anyone planning to participate in the TAP in 2004 should not plant a crop or rent out quota.
• He heard at a Zone Meeting that there was to be only one reverse auction for all tobacco growers.
• The 2004 crop was good but the price was poor.
• He could not sell his kilns as there was no market for them.
• He understood his sharegrower was required to fill out a Quality Assurance Booklet with information about the crop in order for him to be eligible for funds related to kiln conversion.
• He knew there was a Quality Assurance Program but the cheques he received indicated they were related to a Kiln Conversion Rebate Program.
• He received rebate cheques in each of 2001, 2002, 2003 and 2004. The full cost of his kiln conversion had not been covered by the rebate cheques.
• The second rebate cheque he received was accompanied by a letter indicating it was the final rebate cheque, but he received two more. The industry wanted to tie the cheques to quality issues.
• It was a requirement of the OFCTGMB that kilns be retrofitted to indirect heat.

Ms. Vicky Malcolm, Secretary to the OFCTGMB was called as a witness by Mr. Gilvesy. She said she had worked for the OFCTGMB for 30 years and had held her current position for five years. Ms. Malcolm testified that:

• The OFCTGMB had a financial commitment from the federal government for the TAP program when it asked growers to indicate their intention to participate through the Application for 2004 Marketing Quota form. The OFCTGMB was still in discussion with the federal government regarding the criteria for the program.
• The OFCTGMB Board of Directors made the final decision as to the wording on the form. They had obtained legal advice.
• Thirty-six growers indicated they wanted to exit the industry through the TAP in 2004.
• Growers could sell BPQ on the open market in 2004, either before or after the TAP auction.
• The OFCTGMB had allowed growers to rent out 100% of their MQ in the past due to crop failure and for health reasons.
• She understood the TAP program was unique, but she had not been involved in an earlier quota removal program.
• In a draft contract, the federal government changed the proportion of federal funding that was to be paid to Ontario tobacco growers from what had earlier been agreed.
• Information meetings on the TAP auction were cancelled on November 26, 2004.
• The OFCTGMB did not always issue supplemental MQ to growers, but if it did in the 2004 crop year, the 56% of MQ that Mr. Gilvesy and RRL could not rent out would be distributed to growers who planted tobacco in 2004.
• If the TAP removed BPQ from the market, remaining growers would benefit by being allowed to grow a larger percentage of their BPQ.
• If his shareholder had grown a crop for him in 2004, and filled out the appropriate paperwork, he would have been eligible for funds under the Quality Assurance Program.
• The Kiln Conversion Rebate Program was a $20 million program that ran in 2001 and 2002 and was funded by the Ontario government. It provided funds to tobacco growers who had converted kilns to indirect heat.
• Tobacco buyers funded the Quality Assurance Program. It was a different program and it required growers to complete a Quality Assurance Booklet and send it in on time.
• The OCTGMB used the same software for the Quality Assurance Program as it did for the Kiln Conversion Rebate Program. That was why "Kiln Conversion Rebate Program" was written on the cheques.

OFCTGMB Case

Mr. Jason Lietaer General Manager, OFCTGMB, told the Tribunal his job was to oversee staff, implement the policies of the OFCTGMB, and obtain information and advice for the OFCTGMB.

Mr. Lietaer explained that the OFCTGMB was in the third of what was expected to be a four year program designed to improve the quality of Ontario tobacco. He said domestic buyers paid a levy of 6 cents per lb. on tobacco they purchased and these funds were paid to growers who had converted kilns to indirect heat. He said that to qualify each year, growers must have planted a crop that year and provided information on the crop to the OFCTGMB. Mr. Lietaer confirmed that Mr. Gilvesy would have been eligible for funding in 2004 if he had a crop and had his sharegrower filled out the paperwork.

Mr. Lietaer said he had been involved in negotiating the TAP. He said the program was announced in May 2004 and the OFCTGMB asked the federal government to clarify the details in May and June 2004. He said the federal government suspended communications when an election was called and did not return his calls until September 2004. Mr. Lietaer explained that ultimately the new federal Minister of Agriculture, the Honourable Andy Mitchell, changed the program and the OFCTGMB could not sign what it saw as an unfair agreement. He said the OFCTGMB did not have the authority to stop the TAP auction.

Mr. Lietaer said that in his view there is currently more uncertainty about the TAP program than there had been in November 2004.

In response to questions, Mr. Lietaer indicated:

• The OFCTGMB thought 73 million lbs. of BPQ should be retired. At a price of $1.45 per lb. that would cost approximately $100 million.
• In 2004, 36 growers with 3.8 million lbs. of BPQ indicatd they wanted to particpate in the TAP program.
• The OFCTGMB wanted each grower in Ontario and Quebec to receive the same amount of federal funding under the TAP.
• The OFCTGMB asked the federal government to postpone its information meetings on the TAP. It was fair to assume that the meetings would have taken place if it had not made this request. It was not fair to assume that an auction would have taken place in 2004 if it had not made this request.
• Tobacco growers were concerned about the reverse auction process and believed they would be put at a competitive disadvantage because the United States government had a far more generous tobacco buyout program.
• Under the Quality Assurance Program, funds are paid to growers based on the number of kilns that they converted under the Kiln Conversion Rebate Program, provided they still own the kilns.
• The tobacco industry was about to start the fourth of five marketing rounds. A sixth round could also be held if necessary. The fourth and fifth rounds would be approximately 30 days each.

Summations

Mr. Gilvesy told the Tribunal that the OFCTGMB had an obligation to look after all tobacco growers, not just those intending to continue in the industry. He said he relied on information provided to him by the OFCTGMB when he decided not to enter a sharegrower agreement in 2004 in order to be eligible for the TAP program.

Mr. Gilvesy said the OFCTGMB was responsible for the cancellation of the TAP auction planned for December 2004. He argued that the OFCTGMB had admitted this by offering affected growers the opportunity to rent out 44% of their 2004 MQ. He submitted that this was not sufficient, and that even renting out 100% of his MQ would not earn him as much income as he would have made had he entered into a sharegrower agreement. He said the OFCTGMB had agreed in principle that all growers should be put on a level playing field. He said that allowing he and his company to rent out 100% of their 2004 MQ and receive funding under the Quality Assurance Program would somewhat level the playing field.

Mr. Gilvesy asked the Tribunal to consider his situation as similar to that of a grower seeking a regulatory exemption on compassionate grounds or because of a crop failure. He pointed out that in those situations the OFCTGMB had allowed growers to rent out 100% of their MQ. He said the delayed implementation of the TAP program was not dissimilar to those scenarios, as it was also a unique situation.

Mr. Gilvesy said he expected there would eventually be an auction under the TAP program, and that all growers would be allowed to participate. He asked the Tribunal to keep that in mind when making its decision

Mr. Bresner told the Tribunal that Mr. Gilvesy and RRL wanted to be paid under a program they did not participate in and wanted to earn income from MQ without growing a crop. He argued that this would not be fair. He reminded the Tribunal that growers were required to grow tobacco and make the effort to record information on their crop in order to be eligible for funding under the Quality Assurance Program. He said the appellants had not done so in 2004.

Mr. Bresner said there was always a risk that programs announced by governments will be withdrawn until they have actually signed a contract and provided funds. He submitted that tobacco growers were warned of that risk. He said Mr. Gilvesy accepted that risk in June 2004 but when the program was changed and he could not sell his BPQ through the TAP program in 2004 he found the risk to be no longer acceptable. Mr. Bresner said the OFCTGMB did what it could for tobacco growers but that it could not dictate to the federal government. He said it was not the OFCTGMB that changed the rules and the OFCTGMB could not sign a bad deal to benefit 36 growers at the expense of all the others.

Mr. Bresner submitted that the OFCTGMB position - that growers in the appellants' position be able to rent out 44% of their MQ - was appropriate. He said Mr. Gilvesy and RRL should not be guaranteed a profit when they did not take the risk of growing a crop. He said they should not be in a better position than tobacco growers who grew a crop in 2004.

The Findings

The issues before the Tribunal in this matter are:

1. Is the decision of the OFCTGMB to allow Mr. Gilvesy and RRL to rent out 44% of their marketing quota, rather than 100% of their marketing quota fair?
2. Should the Tribunal allow Mr. Gilvesy and RRL to receive funding under a Quality Assurance Program for which they would have been eligible had they not indicated they intended to participate in the TAP program in 2004?

It is clear to the Tribunal that the appellants had been in the process of exiting the tobacco industry and saw the TAP as an opportunity to get completely out in a reasonable manner. Mr. Gilvesy clearly recognized there was a risk that he might not be able to exit through the TAP, as indications were that there would be a bidding process in which his bid might not be accepted. However, he did not see the risk that there would be no reverse auction held at all in 2004 under the TAP. Both parties agreed that in June 2004 there was a reasonable expectation that there would be a TAP program in 2004

Because the combined BPQ holdings of Mr. Gilvesy and RRL were not large enough to grow an efficient-sized crop, using a sharegrower was the only logical option for him to utilize his production quota. However, the Tribunal finds that they faced the same risk as other growers did in deciding whether or not to volunteer to participate in the TAP in 2004.

The Tribunal is concerned that the OFCTGMB did not adequately warn growers of the risk they undertook in not growing a crop in the hope of being eligible for a federal program when the details of said program had not been solidified. As a leader of the industry, and the primary source of information about the TAP for growers, the onus is on the OFCTGMB to caution growers. In the Tribunal's view the structure of the application documents sent to tobacco growers in the Spring 2004 and the information provided to tobacco growers by the OFCTGMB about the TAP created the expectation that there would be payouts under the TAP in 2004.

The Tribunal agrees with Mr. Gilvesy that the OFCTGMB must be fair to all growers. The Tribunal does not agree that there is a parallel between this situation and that of growers granted the right to rent out 100% of their MQ due to crop failure or on compassionate grounds.

The Tribunal finds that the OFCTGMB was partially responsible for Mr. Gilvesy and RRL having no income from tobacco in 2004, but also finds that the appellants share this responsibility. The Tribunal recently heard an appeal by a group of tobacco growers with common circumstances to these appellants. In that matter it found that the fairest solution was to allow the appellants to rent out 80% of their 2004 marketing quota. The Tribunal took the same approach in this instance.

With regard to the question regarding funds from the Quality Assurance Program, the Tribunal understands the appellants' point that they would have been eligible for this program in 2004, had they not tried to participate in the TAP. However, the Tribunal notes that this program is essentially funded by buyers of tobacco for the benefit of those growers who grew tobacco and are willing to provide information to benefit the industry. When Mr. Gilvesy and RRL chose not to grow tobacco in 2004, they had no legitimate expectation of revenue from the Quality Assurance Program. The Tribunal finds in favour of the OFCTGMB in this aspect of the appeal.

Decision and Reasons

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

1. The OFCTGMB is to exempt Mr. John Gilvesy and RRL 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.
2. The appeal of the OFCTGMB decision to deny Mr. Gilvesy and RRL funding under the Quality Assurance Program in 2004 is denied.

The reasons for this decision are:

1. The Tribunal finds that the OFCTGMB, in its communications with tobacco growers during 2004 created a level of expectation about the TAP and at the same time did not adequately communicate the risks to the growers. However, the appellants must bear some of the responsibility for their own business decisions.
2. It would be inappropriate to allow payments to growers who did not meet the eligibility criteria for the Quality Assurance Program. The appellants chose not to participate in the program when they chose not to enter a sharegrower agreement in 2004.

Dated at Guelph, Ontario this 28th day of January, 2005.