Senn et al. v. Dairy Farmers of Ontario, 2015 ONAFRAAT 2

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:

Senn et al. v Dairy Farmers of Ontario

Senn et al. v DFO 2015ONAFRAAT02

STATUTE:

Ministry of Agriculture, Food and Rural Affairs Act

HEARING:

October 27 - 31, 2014

DATE OF DECISION:

February 12, 2015

2015-02

NEUTRAL CITATION:

2015ONAFRAAT02

Senn et al. v Dairy Farmers of Ontario

IN THE MATTER OF SECTION 16 OF THE MINISTRY OF AGRICULTURE, FOOD AND RURAL AFFAIRS ACT, R.S.O. 1990, CHAPTER M.16, AS AMENDED.

AND IN THE MATTER OF: An Appeal to the Agriculture, Food and Rural Affairs Appeal Tribunal by Andy Senn and Franz Suter from the Dairy Farmers of Ontario (DFO) decision to deny their request for exemption.

Before:

Marthanne Robson, Vice-Chair John O’Kane, Vice-Chair Claire Belluz, Member

Appearances:

Anne Tardif, Co-Counsel for the Appellants, Andy Senn & Franz Suter Alyssa Tomkins, Co-Counsel for the Appellants, Andy Senn & Franz Suter David Wilson, Co-Counsel for the Respondent, Dairy Farmers of Ontario Graham Lloyd, Co-Counsel for the Respondent, Dairy Farmers of Ontario Andy Senn, Appellant Al Mussell, Expert Witness for the Appellant Alfons Weersink, Expert Witness for the Appellant John Saunders, Expert Witness for the Appellant John Groenewegen, Expert Witness for the Respondent George MacNaughton, Witness for the Respondent

DECISION OF THE TRIBUNAL

The appeal was heard in Ottawa, Ontario, on Monday, October 27 through to Friday, October 31, 2014. Mr. Andy Senn and Mr. Franz Suter of 2343193 Ontario Inc., (“Senn and Suter”) appealed to the Agriculture, Food and Rural Affairs Appeal Tribunal (the “Tribunal”) from the decision of the Dairy Farmers of Ontario (the “DFO”) to deny their request for an exemption.

Overview

Andy Senn and Franz Suter are very productive dairy farmers in Eastern Ontario. Between two numbered companies, they own and rent 2400 acres of land and milk 400 cows with 425 kg of milk quota. For ease of reference numbers are rounded. Their cows are among the top producers in their County and they have received numerous production awards.

Both Mr. Senn and Mr. Suter are originally from Switzerland, and came to Canada as farm apprentices in the late 1980s. In 1988 Mr. Senn purchased the "home" dairy farm subsequently expanding and renovating to include a 450 cow free stall barn. Senn and Suter each have four children, and they both have sons studying agriculture intending to carry on the family dairy farming business.

Senn and Suter are business partners and brothers-in-law. Suter came to Canada to work as Senn's apprentice after Senn bought the home farm. Suter later purchased a custom business. They continued to expand their operation over the next decades. In 2012 Senn and Suter purchased the nearby Gauthier farm, including quota, cows and land.

DFO policy requires that all dairy quota be purchased on the quota exchange, except for purchases of ongoing farm operations, such as acquiring the Gauthier farm, and certain transfers within families. DFO policy permits sharing milk production facilities while renovating or constructing new facilities, for a period of up to one year. This may be extended if there is significant progress with the construction.

DFO policy also prevents quota purchased as part of an ongoing operation from being merged with other quota holdings or vice versa; and requires the purchaser to ship milk for five years before being able to transfer quota from parent to child or relocate quota.

In 2012, the DFO granted Senn and Suter permission to transfer the "Gauthier" cows to their home farm to milk, while they renovated the Gauthier farm under a "shared facilities agreement". They have not renovated the Gauthier farm and continue to milk the Gauthier cows at the home farm.

Senn and Suter now seek permission to permanently transfer their entire quota to the home farm, continue to milk all the cows there indefinitely, effectively merging their quota and avoiding the need to renovate the Gauthier farm.

The issue before the Tribunal is whether Senn and Suter are entitled to exemptions to carry on milking cows at one location. They also allege that parts of the DFO's quota policy are unconstitutional, invalid and should not apply.

Background and Timing

The facts are not in dispute. A timeline of events is set out below.

1988 Mr. Senn comes to Canada as an exchange student.

1988-89 Mr. Senn purchases the home farm (80 cows, 350 acres and 47 kg of quota).

1989 Mr. Suter comes to Canada and works with Mr. Senn.

1994 Senn and Suter incorporate (2343193 Ontario Inc., usually referred to as Senn and Suter).

1993-94 Build free stall barn for 100 cows; increase milk production by milking three times a day.

1996 Addition of 50 stalls and milking parlor. Total 90 kg quota.

1998-99 Purchase another farm with 40 kg quota and more land.

2004 Build 450 cow free stall barn and purchase 100 kg quota, plus another 60 kg (wanted a large enough operation to offer full-time work; difficult to get part-time workers).

2008 Purchase heifer farm with additional 450 acres; applied for a grant to build a biodigester to treat manure.

2012, March/ April Gauthier farm listed for sale with 400 acres

2012, July 17 Purchase and sale agreement signed for Gauthier farm with 80 acres.

2012, 31 July Complete "intent to transfer quota" DFO form.

2012, August DFO grants permission to move cows from Gauthier farm to home farm on closing date, October 1, 2012 until September 2013, to permit renovations at Gauthier farm under shared facilities agreement.

2012, 1 October Purchase of Gauthier farm completed. Gauthier cows move to home farm.

2013, August/ September Request exemption 1) to transfer ownership of Gauthier farm quota to sons; 2) from requirement to produce milk for five years at Gauthier farm, before relocating to a new property to be purchased; and 3) extend shared facilities agreement to permit new facilities to be built

2013, October 30 DFO grants request to 1) transfer quota to the sons; 3) extend shared facilities agreement to January 31, 2014, but 2) denies request to relocate before five years. Imposes a penalty if milk is not shipped from Gauthier farm by February 1, 2014.

2013, December 3 Upon reconsideration DFO confirms decision.

2014, January 29 Senn and Suter appeal that decision to the Tribunal.

Analysis and Discussion

The Regulatory Scheme for Producing and Marketing Milk

To understand the request for exemption in its policy context, and the challenge to the constitutional validity of DFO Quota Policy, the regulatory scheme is reviewed below.

The production and marketing of milk in Ontario is regulated by overlapping federal and provincial jurisdiction. The jurisdictional overlap is addressed via complementary and interlocking federal and provincial legislation. Since this appeal engages no issues of constitutional competency, or any federal-provincial dynamic, these reasons will focus on the provincial legislative regime.

The Ontario Farm Products Marketing Commission

The Legislature tasked the Ontario Farm Products Marketing Commission (“Commission”) with three principle objectives established as the purposes of the Milk Act: (1) stimulating, increasing and improving milk production; (2) controlling and regulating milk production and marketing, including prohibiting both activities; and, (3) controlling and regulating the quality of milk. ( Milk Act, R.S.O. 1990, c. M. 12, Section 2 and 3)

Subsection 3(1) of the Milk Act describes the Commission’s duties and responsibilities while subsection 3(2) sets out a list of powers granted to the Commission to discharge those duties and responsibilities. Subsection 3(5) authorizes the Commission to delegate to a marketing board certain of those subsection (2) powers.

Subsection 7(1) of the Milk Act empowers the Commission to make regulations regarding producing and marketing milk. The Legislature granted the Commission very expansive regulation making authority detailed in fifty subparagraphs of subsection 7(1).

The Legislature also gave the Commission authority to delegate its subsection 7(1) powers to a marketing board under subsection 7(8) of the Milk Act.

Subsection 7(9) of the Milk Act confirms that where the Commission authorizes a marketing board to exercise any of the powers from the expansive list in subsection 7(1), the marketing board, when exercising such powers, may do so by “regulations, orders, policies and decisions or issue directions”.

Subsection 7(10) of the Milk Act also confirms that everything done by a marketing board under the authority of paragraph 15 of subsection 7(1) shall be “deemed to be of an administrative and not of a legislative nature”. The powers “deemed” to be administrative are:

• Fixing and allotting quota to persons on such basis as the marketing board considers proper.
• Refusing to fix and allot quota to any person for any reason the marketing board considers proper.
• Cancelling or reducing or refusing to increase the quota to any person for any reason the marketing board considers proper.
• Permitting any person to whom a quota has been fixed and allotted to market over their quota on such terms and conditions as the marketing board considers proper.

It is apparent from language of the Milk Act that the Legislature intended marketing boards with broad and flexible quota powers.

Dairy Farmers of Ontario

The DFO was continued as a marketing board from its former title as the Ontario Milk Marketing Board under Ontario Regulation 760 made under the Milk Act. That Regulation set out the marketing plan for the “control and regulation of the producing and marketing within Ontario of milk and farm-separated cream”.

The milk quota system is the principle control mechanism established in that marketing plan. In Ontario it is unlawful to produce and market milk without a quota. The quota is expressed in kilograms of butterfat.

The Commission delegated authority to DFO under Ontario Regulation 354/95 to implement the milk marketing plan. In that Regulation, the Commission directly incorporated words from the Milk Act when defining the application of the Regulation.

2. This Regulation provides for the control and regulation in any or all respects of the producing or marketing within Ontario of milk and farm-separated cream, including the prohibition of that producing or marketing in whole or in part.

In Section 4 of Regulation 354/95, the Commission delegated to DFO general powers requiring milk producers to register and to furnish information; empowering DFO to conduct inspections of both records and premises; stimulating, increasing and improving milk marketing; and authorizing cooperation with other provincial and national milk marketing agencies.

In Section 5 of Regulation 354/95, the Commission delegated to DFO a list of regulation making powers.

In Section 6 of Regulation 354/95, the Commission authorized the DFO to carry out eighteen actions (subsections (a) through (r)) associated with implementing the quota system.

Those Sections 4, 5 and 6 in particular of Regulation 354/95 animate the DFO’s authority generalized in Section 2, reproduced above. Recalling that the language of the Milk Act intended the marketing board with broad and flexible quota powers, the words of Regulation 354/95 reinforce that the DFO’s quota powers are broad and flexible.

The Legislature and the Commission, as the framers of the marketing system, in their collective wisdom saw fit to equip DFO with a range of tools to exercise those powers that included regulations, orders, policies and decisions or issue directions. The evidence demonstrated that the DFO has utilized most, if not all those tools to regulate the production and marketing of milk.

Dairy Farmers of Ontario Policy

The principle policy engaged in this appeal was DFO’s “Quota and Milk Transportation Policies” (“Quota Policy”) dated July 1, 2010. Certain amendments since that date relevant to this appeal are discussed below.

Quota is the primary regulatory mechanism for producing and marketing milk and DFO policy is clear that quota is the property of DFO.

Quota is the property of Dairy Farmers of Ontario (DFO). It is fixed and allotted to producers on such basis as DFO considers proper and is subject to the terms and conditions of DFO’s quota policies (Quota and Milk Transportation Policies, July 1, 2010, Part 1: Section A, 1.(a)).

DFO’s Quota Policy incorporates by reference certain of the powers that flow to DFO from the Milk Act via the Commission’s delegation regulation. George McNaughton, Director of Operations and Regulatory Compliance for the DFO, testified about DFO’s governance and process for developing the Quota Policy. Mr. McNaughton also serves as a technical resource for the DFO’s Quota Committee and sits on the P5 Technical Committee.

The P5 comprises the provincial milk marketing boards from Ontario, Quebec, New Brunswick, Nova Scotia and Prince Edward Island. The P5, at least at this point in history, is a consultative and advisory body engaged in encouraging the five member provinces to harmonize their quota policies.

The DFO is governed by a Board similar to a corporate board of directors. Ontario Regulation 760 established twelve geographic zones and the licensed dairy producers in each region elect one member of the Board. Among the regions the DFO has also established approximately forty-seven producer committees which assist the DFO with developing policies such as the Quota Policy. Those committees are democratically elected from dairy producers within the regions. DFO Board members meet with the producer committees periodically to discuss policy issues. DFO hosts annual regional meetings every fall and a spring policy conference to discuss and address dairy producer issues. The DFO also holds an annual general meeting that is open to all licensed dairy producers.

None of the evidence by Mr. McNaughton about policy development was controversial, nor was it seriously challenged during cross-examination. There was no contradictory evidence to suggest that the DFO Quota Policy was anything other the product of a democratic and informed policy debate that engaged the interests of dairy producers from across Ontario. Therefore there is no evidentiary basis for a finding that the DFO Quota Policies in issue are unsound, unwise or bad.

Quota Transfer Restrictions

The appellant has operated under the quota system for milk in Ontario for over twenty-five years. The appellant’s dairy farm operation has prospered under that system. Mr. Senn testified he has not challenged any DFO policy. This appeal does not directly challenge any DFO policy; rather the appeal seeks an exemption from DFO policy.

However, the appellant asserts that the DFO Quota Policy that operate as transfer restrictions, specifically section B.4 (Shared Facilities) and C.5 (purchase of quota as part of an ongoing operation including the restriction on moving quota before five years.), are unlawful.

The appellant concedes that subsection 16(4) of the Ministry of Agriculture Food and Rural Affairs Act bars it from advancing the asserted “illegality” of the policy since the appellant knew of the policy for more than one year.

Despite that legislative bar, the appellant advanced the “illegality” arguments as context for their arguments to support the Tribunal directing that the appellants are exempt from the transfer restrictions B.4 and C.5 of the DFO Quota Policy. As part of its context argument, the appellant argued there is neither express nor implied authority granted to the DFO to restrict quota transfers.

Under the milk production and marketing regime in Ontario quota is the property, of the DFO. As a matter of property rights, the DFO has the authority to restrict the transfer of its quota among milk producers.

Beyond that implied authority there is express authority granted to the DFO. The language of the Ontario Regulation 354/95 tracks precisely with the language the Legislature used in the Milk Act regarding the powers of the DFO.

The language of the Milk Act and Regulation 354/95 bestows broad and discretionary powers on the DFO to regulate milk production and marketing via a quota system. What the quota system looks like and how it operates were matters left to the DFO’s discretion to structure and administer via a mixture of regulations, orders, policies, decisions or directions.

It does not make sense to grant the DFO the authority expressly via subsection 6(m) of Regulation 354/95 to fix and allot 10 kilograms of quota to the appellant and 10 kilograms of quota to the Gauthier dairy farm but not the authority to restrict the transfer of quota between the appellant and Gauthier.

The appellant’s argument would mean the quota system is akin to a deck of playing cards that once dealt out by the DFO are then beyond the DFO’s regulatory authority. That cannot be what the Legislature intended and that is not what the Legislature and the Commission created via the Milk Act and Regulation 354/95.

Therefore, even if the appellant was not statutorily barred from challenging the DFO quota transfer restrictions in section B.4 and C.5, we would not give effect to its arguments of “illegality”.

The DFO fixed the maximum price that quota could be bought and sold on the quota exchange at $25,000 in 2009, to address concerns about rising quota values and over capitalization. This Tribunal confirmed the validity of that policy in Ontario Quota Rights Organization V. Dairy Farmers of Ontario 2009 ONAFRAAT 30.

At the time the DFO adopted the price cap policy, it relied on expert advice that it might take longer for producers to expand, but it would be a matter of months. At this hearing, Mr. McNaughton calculated that it would take approximately 39 years for Senn and Suter to acquire 187 kg of quota over the quota exchange. The appellant argued that because the DFO failed to accurately predict the impact, the price cap should be set aside. We have already noted that the appellant is out of time for challenging the policy. The DFO advised the Tribunal that quota transfer restriction policy would be reviewed in the near future. The Tribunal finds that there is no basis to set aside the price cap policy.

The [Competition Act](https://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-34/latest/rsc-1985-c-c-34.html)

The appellant asserted that the quota transfer restrictions are contrary to the Competition Act and that DFO is not able to avail itself of the regulated conduct defence because DFO’s quota transfer restrictions are not authorized by DFO’s governing legislation.

Section 45 (1) Every person commits an offense who, with a competitor of that person with respect to a product, conspires, agrees or arranges…

(c) to fix, maintain, control, prevent, lesson or eliminate the production or supply of the product.

Section 45 (7) creates what is referred to as the "regulated conduct defence" to section 45 (1) if the activities are authorized or required by federal or provincial law.

The Tribunal has determined that the DFO does have sufficient statutory authority to create quota transfer restrictions; therefore the regulated conduct defence is available to the DFO, even if there had been a breach of the Competition Act.

Having found the DFO Quota Policy valid, we can now examine the request for exemption.

Purchase of Gauthier Farm

The Gauthier farm was listed for sale in March 2012 for $10.5 million with 400 acres of land; 260 cows (80 heifers, 180 milking); 187 kg of milk quota; a tie stall barn; a free stall barn; other buildings and some equipment. Senn and Suter offered $9.5 million cash and later $9.6 million as a share purchase. Both offers were rejected. Some weeks later the Gauthiers made a new offer with only 80 acres of land. They had kept 300 acres for themselves for cash crops. According to Mr. Senn, the Gauthiers considered Senn and Suter had enough land already.

On July 20, 2012 an agreement of purchase and sale was completed between Senn and Suter (2343193 Ontario Inc.) and the Gauthiers for $6.55 million, with 80 acres of land, and the rest as per the original listing. Senn and Suter proceeded with lesser acreage to have another farm available for the next generation, and to acquire substantial quota.

The parties allocated nearly 70% of the purchase price ($4.425 million) to 177 kg of salable quota at $25,000 per kg. (10kg of every quota holding is not saleable). Mr. Senn testified he would not pay more per kilogram of quota, nor was there any reason he should. Senn noted the tie stall barn, where the Gauthiers milked their cows, was about 50 years old. The stalls were short and somewhat narrow. As the name implies, in a tie-stall barn, cows are tied to stalls where they are milked. The free stall barn, about 10 years old, had been built for heifers. The listing said it could easily be converted into a milking barn, but Senn noted upon inspection prior to purchase this was not true. The stalls were too small for properly milking cows, and in his opinion, the interior would have to be completely gutted. In a free stall barn, cows may walk around, and there are stalls for individual cows to lie down and rest. Typically milking is done in a parlor or by robots.

Intent to transfer

To purchase the Gauthier farm as an ongoing dairy operation, Senn and Suter completed a DFO "Intent to Transfer” form dated July 31, 2012. The form expresses various policy conditions as questions for prospective purchasers. Senn and Suter acknowledged they were purchasing all dairy facilities, associated land and quota used to carry on the dairy business. This was not true, as they only purchased 80 acres of the 400 acres used to carry on the Gauthier dairy business. Mr. Senn testified that in signing the form, he meant that he was buying all the land available for sale. He did not consider that to correctly answer yes to that question, they should have bought all 400 acres. DFO only received a copy of the purchase and sale agreement at the reconsideration hearing in December 2013, so could not verify the accuracy of that statement when the form was completed.

Mr. Senn also acknowledged that he understood the policy restrictions reflected in the form including that they could not merge quota, that they agreed to ship for five years before relocating or donating to a child. He also understood that as an existing quota holder they could not transfer or donate the quota to another location. Senn and Suter completed another document confirming the purchase of an ongoing operation dated August 30, 2012 in which they acknowledged that "quota acquired with the ongoing operation cannot ever be merged" (emphasis original).

Renovations and shared facilities

DFO policy, Section B.4 allows producers to share facilities for up to one year, while renovating or constructing dairy facilities, known as a "shared facilities agreement". In September 2013, the policy was revised to allow an extension beyond one year if there has been significant progress in building. The home farm and the Gauthier farm were held by separate numbered companies with distinct quota licenses, so they required DFO permission to move the Gauthier cows while they renovated.

In August, 2012 (prior to closing) Senn and Suter requested permission to move the Gauthier heard to the home farm to allow for extensive renovations. The home farm barn had space for 450 milking cows, so the move brought the home farm facility up to capacity. The DFO approved the request for one year, conditional upon Senn and Suter submitting engineering plans and providing an update in March 2013. On November 29, 2012, Mr. Senn submitted engineered plans to renovate the free stall barn and install two robot milking units. However by April 2013 renovations had not started. As of the Tribunal hearing in October, 2014 no work had been done to renovate the Gauthier farm.

Senn and Suter considered many options for renovating the Gauthier farm. They were searching for the "perfect" solution. They obtained different quotes to renovate both the tie stall and free stall barns, as well as for different milking equipment including adding hosing, and robotics. The barn renovations and a milking system could cost about $1 million, however even that did not provide the perfect solution Senn and Suter sought. The existing free stall barn was too narrow for the optimal setup for a robot milking system.

By August, 2013 Senn and Suter had concluded that the renovations were too expensive. They applied for an exemption to move the quota before the five years, and build a new barn at a new permanent site. They did not believe it made sense to renovate the barn and then move after five years. The plan then became to relocate to a piece of property adjacent to the home farm and build a new barn within walking distance but still separate. They could share storage and use of the bio digester (described below).

Senn and Suter provided no updates to DFO between November, 2012, when they sent the engineered plans, and August 2013. On August 8, 2013 the DFO wrote to Senn and Suter to remind them that the shared facilities agreement would end on September 30, 2013.

The Tribunal recognizes that plans are just that, plans. You do not stick to the plan just because it's a plan. The Tribunal finds that Senn and Suter, at least initially intended to renovate the Gauthier farm, and made good faith efforts to find a solution for renovations. They obtained various quotes from builders and suppliers they had used in the past, and travelled to investigate robot operations in British Columbia and Western Ontario. Producers are entitled to explore different options and change their mind about how they plan to proceed. They may also change their plans and arguments as they proceed through the request for exemption and reconsideration. However, their claims and arguments need to be honest and valid.

Request for exemption

In August and September, 2013 Senn and Suter requested exemptions from DFO policy

1. to transfer ownership of the Gauthier farm quota to their eldest sons;

2. from the requirement to produce milk for five years at Gauthier farm (Section. C.5 Purchasers (b) and (f)), to relocate to a new property to be purchased; and

3. to extend the shared facilities agreement to permit new facilities to be built.

In their initial request they claimed there were exceptional circumstances and new facts, including the cost of a new barn and there were only 80 acres of land associated with the operation. They submitted a quote to renovate the tie stall barn (approximately $176,000). At the Tribunal hearing, Mr. Senn testified that he did not want to renovate and use the tie stall barn. He admitted that neither of these were new facts. He was aware when he agreed to purchase the Gauthier farm in July, 2012 he was purchasing only 80 acres. He also testified he was prepared to walk away from the deal. He knew that considerable money would need to be invested to renovate the Gauthier facilities and that in September, 2012; he was prepared to spend $700,000 to renovate a barn.

The DFO granted the request for exemption to permit the transfer of quota to the sons as if it had taken place on the closing date (October 1, 2012). This suggestion was made by Mr. McNaughton in a conversation with Senn and Suter's lawyer prior to requesting exemptions. The shared facilities agreement was extended to January, 2014 to allow for renovations to the tie stall barn as submitted in their request. DFO refused permission to relocate the quota prior to five years.

The permission to extend shared facility use was granted based on the representation that the renovations to the tie stall barn could be completed within two weeks from the time construction materials were received.

The DFO Quota Committee initially considered the exemption request and made a recommendation in a report, to the DFO Board. The Board accepted the Committee's report, but added a 20% reduction in salable quota if milk was not shipped from the Gauthier farm by February 1, 2014, the end of the shared facilities agreement. This would amount to a penalty of $885,000 (177 kg x 20% x $25,000).

Mr. McNaughton advised Senn and Suter of the decision in a letter dated October 30, 2013, but provided no reasons or policy rationale. As the Board had endorsed the recommendations of the Committee, there was no reason the report could not have been sent with the decision letter. As part of the request for reconsideration process, a copy of the Committee's report was sent to Senn and Suter. They did not receive the report until the reconsideration hearing on November 26, 2013. There was no explanation or rationale given for adding the penalty. At the Tribunal hearing, DFO relied on Section A.1 (s) of the Quota Policy to justify the penalty.

Request for reconsideration

At a reconsideration hearing held November 26, 2013, Senn and Suter changed their arguments: the tie stall barn was run down and needed major renovations; renovations to the free stall barn would cost as much as a new barn; they did not want to invest in building something at the wrong location, and the risk to biodigester project.

Biodigester

In November 2013, for the first time, Senn and Suter alerted DFO about a biodigester which they were building on the home farm to treat manure for the entire herd. They claimed that trucking manure 3 km from the Gauthier farm to the home farm “would financially jeopardize the entire biodigester project”. They also submitted that they wished to build a new barn on a new site in the spring of 2014, which would allow them to pipe rather than truck manure.

The biodigester heats manure in a large tank, producing methane which then generates electricity. Electricity is sold back to the grid. Senn and Suter initially considered building a biodigester in January, 2008. They completed a feasibility study in March, 2010 for a facility that could accommodate 600 cows. The plan to build such a large biodigester was in the works two years before the Gauthier farm came on the market. Their nutrient management plan, dated March, 2013, notes that the manure from the heifer farm, some 17 km away from the biodigester would be processed on the home farm, and trucked there.

Senn and Suter retained an accounting expert who testified that the trucking costs associated with moving the manure from the Gauthier farm to the home farm could not be a true incremental cost. There would be a cost associated with dealing with the manure either by spreading it untreated on land or treating it first with the biodigester. In addition, there was a savings in buying an 80-acre farm where all the manure could not be spread. Therefore, there was no genuine financial jeopardy to the biodigester project.

DFO policy considerations

DFO policy permits producers to request an exemption (Section H.3), but does not set out any criteria for exercising its discretion. DFO argues that it cannot foresee every contingency upon which an exemption might be granted and believes it would not be useful to set out criteria.

Past decisions of the DFO and this Tribunal provide guidance. Exemptions may be granted for:

• Extraordinary or exceptional circumstances
• Hardship
• Death
• Family circumstances: marriage, intergenerational transfer, support of family

Exemptions are not granted based on

• Medical reasons (specifically excluded under S. H (3) (b))
• The particular financial circumstances of an individual farmer (Schnurr v CFO, 2012 ONAFRAAT 42)
• Decisions within the control of the party (Strik v. Dairy Farmers of Ontario, 2014 ONAFRAAT 5)

The report of the Quota Committee, dated October 16, 2013, which initially considered the Senn and Suter request for exemption, explained the policy rationale for the decision succinctly:

The primary quota policy objective is to transfer as much quota as possible over the quota exchange. DFO granted an exemption from this policy principle for the sale of quota as part of an ongoing farm operation. The exemption was granted so that a dairy farm remained operational. The five-year restriction on relocation to a facility that was not on land acquired as part of the ongoing operation was put in place to ensure the intent was to operate the farm and not for the purpose of purchasing a block of quota and relocating the quota.

The primary reason for asking to relocate the quota is because only 80 acres of land was acquired as part of the ongoing farm operations. The original offer was for 400 acres of land and the amount of land offered for sale was apparently changed. As the decision to purchase was within the purchaser's control, the committee does not feel an exemption to policy is warranted and is recommending this request be denied.

DFO's primary quota objective is to have quota transferred on the quota exchange, to give equitable access to all producers. Key operating principles for the DFO are the fair and equitable application of policies and putting the collective good of the industry ahead of individual needs of producers.

The shared facilities provision is to enable renovations without halting production and to permit ongoing revenue during renovations. The limited time for renovations, one year or perhaps more if renovations are well underway, prevents the use of the shared facilities provisions for de facto mergers.

The restriction on relocating ongoing operations is to discourage using the purchase of an ongoing operation to circumvent the quota exchange. Immediate relocation would contravene the P5 and the purpose of keeping existing farms in operation.

The DFO Strategic Plan does not set out all of its policy objectives. While the DFO’s objectives are encouraging efficient production and increasing production, the shared facilities are not designed to achieve economies of scale, or to permit de facto mergers.

The arguments put forward in the request for exemption and reconsideration did not reflect the true intentions of Senn and Suter, apart from the desire to provide a second dairy facility for the next generation. It was clear from Mr. Senn's evidence they did not intend to renovate the tie stall barn.

The biodigester was a red herring, and at the Tribunal hearing did not seem seriously advanced as a justification for an exemption. The argument that 80 acres was insufficient land for nutrient management ignored that the entire Senn and Suter operation had access to 2400 acres. It was not a new fact. The plan to build the biodigester began years before the Gauthier farm came on the market.

The decision to go ahead with the purchase of the Gauthier farm with only 80 acres was entirely within the control of Senn and Suter. According to Mr. Senn, even his neighbors, the Gauthiers, knew that he had enough land. Senn and Suter were aware prior to closing they would have to spend considerable amount of money renovating at least one of the barns on the Gauthier property.

Their accounting expert testified that if they intended to move in three years, rather than doing a million dollar renovation, it was more realistic to do minimal renovations to make the facility operational as it had been when the Gauthiers used it. They argued that it would cost them a least $180,000 a year extra to operate at two locations. There would be an additional $100,000 a year in capital cost expenses for the first five years, with additional capital costs for equipment and buildings in future years. They saved $3 million by purchasing an ongoing operation with only 80 acres of land rather than 400 acres. This gave them access to an additional 187 kg of quota, and more than covered the additional operating costs and capital costs. They already have enough land to operate both herds, as evidenced by their operations for the last two years.

So what is left of their justification for a request for an exemption? Senn and Suter admitted they are requesting a merger of their existing quota at the home farm with the Gauthier farm quota. At the hearing before the Tribunal, they argued that they should be entitled to an exemption because they are efficient producers, consistent with DFO policy objectives of efficiency, profitability and excellence in milk production. They believe they are entitled to an exemption as a reward for efficiency, to achieve economies of scale and to allow their operation to be more profitable. The Tribunal agrees with the DFO, these are not the basis on which to grant an exemption. On that basis, the appeal fails.

DFO policy requires a purchaser to ship milk on a continuous basis for five years before relocating quota. The appellant was entitled to milk at the home farm for one year under a shared facilities agreement. Extension of that period is only available if there has been significant progress in the work. To date, no work has been done. Therefore, the appellant will have to milk at the Gauthier farm for at least 4 years. The particulars are set out in the order below.

DFO Policy as a Tool to Shape Behaviour

As part of its decision denying the appellant’s exemption request, DFO required that the appellant return the cows to the Gauthier farm and milk them from that location by a certain deadline, failing which the appellant had to sell the Gauthier quota on the quota exchange less a 20% reduction of the 177 kg of saleable quota.

The effect of that decision, if the appellant refused to return the cows as directed to the Gauthier farm, the 20% reduction in saleable quota would have been returned to DFO. In arriving at that decision, DFO relied in part on Section A, paragraph 1(s) of Part 1 of the Quota Policy that provides:

If, through a series of transactions, DFO's policy intent is not met, the transaction may be denied, previous transactions reversed and/or the Board may issue an order to sell, on the quota exchange, the quota acquired.

The DFO witness referred to that provision as the "intent provision". The DFO conceded that the consequence of reducing the Gauthier quota by 20% was a penalty. The appellant argued that absent of the DFO enacting a regulation; it had no authority to impose a penalty that would reduce the appellant’s quota by 20%.

Regulation 354/95 Section 5 deals with penalties and the DFO’s powers to make licensing regulations. Subsection C.1 provides the DFO must, by regulation, provide for the imposition, amount, disposition and use of penalties where a licensee has been determined to have contravened any term or condition of a licence or any provision of the Act, the regulations, any plan or any order or direction of the DFO. However, the Milk Act empowers the Commission to delegate authority to DFO to “fix and allot” or “cancel or reduce” quota on such basis or reason that “the marketing board considers proper.”

The Milk Act does not direct that fixing, allotting, cancelling or reducing quota must be by regulation. Rather, the Milk Act provides that where the DFO is authorized by the Commission to fix and allot and cancel or reduce quota, it may do so by “regulation, orders, policies and decisions or issue direction”.

DFO has exercised that quota control via policy. The language of the policy on Part 1, Section A, paragraph (g) incorporates the language of the Milk Act,

DFO may refuse to fix and allot, cancel or reduce or refuse to increase quota for any reason it considers proper including contravention of DFO’s quota policies, orders or directions or any part of the regulations made under the Milk Act, the Agricultural Products Marketing Act or the Canadian Dairy Commission Act.

Arguably there is contradiction between the language of the Milk Act and Regulation 354/95 regarding penalties and a penalty under policy by way of reduction in the appellant’s quota. However, it is not open to the Tribunal to amend that legislation, our role is to interpret and apply the legislation as it stands.

The language of the Milk Act, Regulation 354/95 and the DFO Quota Policy mesh together seamlessly and provide clear authority to DFO to “cancel or reduce” quota, even where the effect of such cancellation or reduction is a penalty. Therefore, those provisions are a complete answer to the appellant’s argument that reduction of quota, even where it has a penalty effect, must be done by regulation.

For the milk supply management system created by the legislature to work, DFO must have effective tools to “manage” and shape the behaviour of the players within the industry in pursuit of the objects of the scheme. Without such effective tools, participants in the supply management system for milk could operate outside the system with impunity and thereby undermine supply management for milk in Ontario and thereby thwart the objects of the legislative scheme regulating milk production and marketing.

Enforcement tools are needed to create incentives to operate within the system. If not, there would be nothing to prevent the appellant from continuing to operate in contravention of DFO policy. Here, policy would prevent the appellant from moving the cows from the Gauthier farm for five years, except temporarily and with DFO permission during barn renovations. The temporary DFO permission has expired. No barn renovations have started. Over two years have passed since the cows were moved from the Gauthier farm. Therefore the DFO decision to require the cows return to the Gauthier farm by a certain date or else the quota is sold on the exchange is an appropriate incentive. The Tribunal also requires that the appellant return the cows to the Gauthier farm.

The only remaining issue is the quota reduction imposed of 20% or 35.4 kg in the event the appellant does not return the cows by the deadline. As previously noted 20% translates to $855,000.00 at the current quota exchange price. The Tribunal sees no direction in the Milk Act, the regulations or DFO policy to guide the determination of the quota reduction.

Common sense and common law traditions dictate that any penalty should be commensurate or proportional to the transgression in issue. The penalty should encourage the appellant to behave in the desired way and should discourage others within the system from operating contrary to policy or directions or orders.

Given the unopposed evidence about the appellant’s twenty-five year tenure within the milk supply management system; challenging no DFO policy previously; its successful farming operations,; its focus on farming efficiency; its award winning herds; and no evidence that the appellant has any history of operating outside the rules of the system, a quota reduction that translates to an $855,000.00 penalty seems disproportionate.

In the Tribunal’s view of the circumstances, a 10% quota reduction would be a meaningful consequence for this appellant and provide a strong message to dairy farmers that circumventing DFO policy will cause significant consequences. Any such reduction is only a last resort visited on the appellant if the cows are not returned to the Gauthier farm within the time frame ordered by the Tribunal.

Confidentiality of DFO documents

The Tribunal made a preliminary order following a pre-hearing conference that: "any document which the DFO considers confidential shall be clearly marked as such and shall be treated as confidential, as provided for under the Tribunal Rules, subject to the Appellant right to challenge the confidentiality at the hearing, or earlier if required.” The DFO provided considerable documentation to counsel for the appellant, some of which was redacted. According to counsel for both parties, there was considerable negotiation between them to address which documents, or portions thereof, would be considered confidential.

At the hearing, the parties agreed that any document which contained Senn and Suter financial information, such as their financial statements, would be considered confidential. In addition, DFO documents which contain the personal information of other parties, for example other exemption requests or at least the names of the individuals making their requests, would be considered confidential. There was, however considerable other documentation that the DFO claimed was confidential, in particular reports of the Quota Committee and minutes of the Board of Directors. In the end, the DFO did not pursue the claims of confidentiality on those documents, as the personal information, such as the identity of a producer seeking an exemption, was redacted.

The Tribunal is concerned with overly broad claims of confidentiality put forward by the DFO. The DFO is a producer organization; members of its Board of Directors are all producers. There does not seem to be any valid reason for such lack of transparency. As noted, Senn and Suter did not receive any rationale or justification for the denial of their exemption request until after they initiated the request for reconsideration. If they were entitled to that information at the request for reconsideration, why not provide it along with the decision letter? The Tribunal suggests the Committee report be made available to the producer whether or not the Board adopts all or part of the recommendation.

Order of the Tribunal

The Tribunal hereby substitutes its decision for that of the DFO as follows:

1. The appellant shall complete their current share transfer application to transfer to the Senn and Suter sons no later than March 15, 2015, failing which permission to do so expires;

2. The appellant shall file proof of the completed share transfer to the Senn and Suter sons with the DFO no later than March 30, 2015;

3. The Gauthier herd shall be returned and milked at the Gauthier farm commencing no later than May 15, 2015 and continuing until May 14, 2019;

4. In the event the appellant fails to begin milking the Gauthier herd at the Gauthier farm as directed, the appellant shall sell the Gauthier quota on the quota exchange, less a 10% reduction of saleable quota;

5. All materials marked as "confidential" which were not made exhibits in the hearing shall be returned to the party who originally produced the material.

Dated at Ottawa, Ontario this 12th day of February, 2015.