Integrated Farming Ltd. v. Ontario Processing Vegetable Growers, 2015 ONAFRAAT 26

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 Courriel: AFRAAT@ontario.ca

AGRICULTURE, FOOD AND RURAL AFFAIRS APPEAL TRIBUNAL

APPEAL:

Integrated Farming Ltd., v Ontario Processing Vegetable Growers

Integrated Farming Ltd., v Ontario Processing Vegetable Growers 2015ONAFRAAT26

STATUTE:

Ministry of Agriculture, Food and Rural Affairs Act

HEARING:

November 30, 2015

DATE OF DECISION:

December 18, 2015

2015-26

NEUTRAL CITATION:

2015 ONAFRAAT 26

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 Integrated Farming Ltd., from a decision of the Ontario Processing Vegetable Growers denying a licence to produce and market tomatoes for processing to Integrated Farming Ltd.

Before:

Harold McNeely, Vice-Chair; Marthanne Robson, Vice-Chair; and Arnold Strub, Member

Appearances:

Robert Shapiro, Counsel for Integrated Farming Ltd.

Geoff Spurr, Counsel for Ontario Processing Vegetable Growers

Sam Diab, President, Highbury Canco Corp - Witness

Art DeBrouwer, Owner of Eau Road Farms – Witness

John Mumford, General Manager, Ontario Processing Vegetable Growers – Witness

DECISION OF THE TRIBUNAL

This appeal was heard in Guelph, Ontario, on November 30, 2015. Integrated Farming Ltd., (“IFL”) appealed to the Agriculture, Food and Rural Affairs Appeal Tribunal (the “Tribunal”) from the decision of Ontario Processing Vegetable Growers (the “Board”) denying a licence to IFL to produce and market tomatoes for processing.

Background

Integrated Farming Limited (IFL) is a joint venture company owned in equal parts by Highbury Canco Corporation (“Highbury”), a tomato/vegetable processor, and Eau Road Farms (ERF), a farming enterprise. Highbury was formed in 2014 after the H.J. Heinz Company announced the closure of its Leamington Ontario tomato processing facility in 2013. Highbury purchased the facility from Heinz. Art DeBrouwer is the principal of ERF. Mr. DeBrouwer has grown tomatoes for 28 of his 30 years of farming. He produced tomatoes for Heinz for many years.

Sam Diab, President and Chair of Highbury, was Plant Manager/General Manager at Heinz in Leamington at its closure. He is a third-generation Heinz employee.

John Mumford, General Manager of the Board for 35 years, gave evidence on behalf of the Board.

In Ontario, processors and producers of tomatoes for processing must be licensed under the Farm Products Marketing Act and its regulations. The authority to licence producers is delegated to the Board. Tomatoes are the biggest revenue crop the Board deals with; they have the highest farm gate value. The industry volume over the last few years was 502,000 tons in 2013 (last year of Heinz operation), 380,000 tons in 2014 and 440,000 tons in 2015.

The price of tomatoes for processing is established by negotiation amongst the processors in Ontario and the Board. Prior to Highbury’s arrival on the scene, the other tomato processors had signed a Memorandum of Agreement following mediation in early 2014, establishing three price categories: tomatoes for paste, tomatoes for whole pack and tomatoes for juice. Highbury, in its negotiations with the Board, proposed a fourth category of pricing: tomatoes for industrial paste.

In the Board’s view, there was no fourth end use category for industrial paste; industrial paste was included in the tomatoes for paste category. Highbury was unsuccessful in its attempt to have this fourth end use category included in its contract.

In April 2015, Highbury announced a joint venture with ERF in the form of a new company which became known as IFL, and which requested a producer licence from the Board. The Board refused the request. A reconsideration hearing was held by the Board in June, 2015. The Board maintained its decision to refuse a licence to IFL. IFL appealed that refusal to the Tribunal.

The Board refused the licence because it believed the joint venture was an arrangement created to circumvent pricing when Highbury was unsuccessful at achieving a fourth price category for industrial paste. The Board stated: “the proposed joint venture between HCC [Highbury] and Eau Road Farms is simply an arrangement between the parties to provide access to a tomato production contract, likely in exchange for a lower price for tomatoes…” It was merely an attempt to achieve indirectly what Highbury could not achieve directly. The Board found that Highbury did not bring anything of value with respect to production to the joint venture and the joint entity would not be more attractive to Highbury’s customers. Lastly, to grant the licence would “undermine the orderly marketing of vegetables for processing in Ontario”.

IFL proposed calling two witnesses, Sam Diab and Art DeBrouwer, as a panel to give their testimony together, submitting that it would be more time efficient. The Board objected that this was not the usual way of proceeding. There were no requests by the parties to exclude witnesses from the hearing. The Tribunal ruled that Mr. Diab and Mr. DeBrouwer could testify together and permitted Counsel for the Board to cross-examine the witnesses separately.

Regulation 440 (S. 10 (d)) under the Farm Products Marketing Act sets out two specific reasons the Board can refuse a licence: where the applicant or licensee is not qualified or where the applicant or licensee has failed to comply with or contravened any regulation, etc. Nothing of the sort is alleged in this case. The Board, instead, relied on section 14 of the General regulations:

“No person shall be a party to any arrangement the effect of which is contrary to the negotiated agreement or award, the terms and conditions of any licence, any provisions of the Act or regulations, the plan or any order or direction of the local Board.”

Issue to be Decided

Was the Board correct in refusing to issue a licence to IFL to produce and market tomatoes for processing?

Findings and Analysis

Automatic Granting of the Licence

IFL argued that granting a producer licence is automatic. In Mr. DeBrouwer’s experience, he signed a contract and the licence was automatic. He never saw a paper licence. He assumed it was a rubber stamp. Mr. Mumford testified that 99% of requests for a licence go through without a challenge. However, that did not make the process automatic.

The Tribunal finds that the Board reviews applications and retains oversight for issuing producer licences. While the process is largely automatic, an application does not guarantee the issuance of a licence. The evidence disclosed that in the past, licences have only been denied where the applicant had breached the rules. No other reason had previously been identified to deny a licence to a producer.

Highbury’s History

In March 2014, Highbury began negotiations with the Board for a 2014 tomato crop contract. As noted above, all other tomato processors in Ontario had signed a Memorandum of Understanding (MOU) with three price categories, as a result of a mediated settlement. Highbury signed the MOU in April 2014, and was issued a processor licence.

In December 2014, Highbury requested a revision to the MOU to include a fourth category of pricing for “tomatoes for industrial paste for sale”. The Board refused this request. All tomato processors including Highbury had signed the five-year MOU (2014 to 2018), which set out competitive and economically viable prices. The Board stated it

was not prepared to provide a preference or undermine the current agreement in place.

In March 2015, Highbury made a final offer for 2015 tomato pricing to the Ontario Farm Products Marketing Commission (Commission), requesting an additional end-use class of “tomatoes for industrial paste for sale”. Highbury requested that this matter be arbitrated under the provisions of the regulatory scheme. The Board’s position was that tomatoes for industrial paste were covered by tomatoes for paste under the MOU. The MOU could be amended at any time with the approval of the parties, but the matter could not be arbitrated. The Commission agreed. Highbury requested that the Commission reconsider this decision, which it did. The Commission issued its decision on reconsideration on April 10, 2015.

The Commission found that the MOU “… does appear to exclude the creation of new end uses… if there is an industry need for a new end use, the industry as a whole should be engaged in those decisions. Such a change should not be introduced by one processor through arbitration.… The Commission is not convinced that there would be no impact on the existing classes if one processor accessed a new class at a lower price.… The Commission recognizes that the industry can and should continue to evolve to meet new markets and that regulated marketing can effectively respond to those changes by allowing for new products. If there is a need for a new class of tomatoes at a new minimum price, the industry as a whole should be engaged in those discussions. The Commission encourages HCC [Highbury] to continue its discussions on this matter with the industry as a whole…”

On April 14, 2015, four days after the Commission released its decision, Highbury announced a joint venture with ERF to form IFL, and requested a producer licence for IFL from the Board. On April 16, 2015, the Board refused the licence for the joint venture. Highbury requested a hearing before the Board which was held on June 16, 2015. The Board released its decision on June 25, 2015, maintaining its decision to refuse a licence. At the Tribunal hearing, IFL alleged that the Board refused to grant the licence because Highbury raised the issue of a fourth end use price.

Vertical Integration

The Farm Products Marketing Act provides specifically for vertical integration, setting out the rules relating to producer-processors. In its decision, the Board stated S. 10 “… makes it very clear that integrated operations such as this proposed here do not entitle either the producer or processor entity involved to gain any advantages by such arrangements…” The Tribunal does not agree with that interpretation.

Section 10 (1) states: Any person who is a producer and a processor of a regulated product is entitled in the person’s respective capacities as a producer and as a processor to all the rights and privileges and is subject to all the duties and obligations of a producer and a processor.

There is nothing within the rules and regulations that preclude a producer and a processor from forming a joint venture to produce tomatoes. IFL is not an entity contemplated by Section 10 of the Act. IFL is not a producer-processor. It is a producer formed by a joint venture between a producer and a processor.

Purpose of the Joint Venture and Contributions of the Parties

Mr. DeBrouwer and Mr. Diab met in January 2015 at an industry event. Both were looking to expand their businesses. Mr. DeBrouwer had not contracted with Highbury for tomatoes during the 2014 season. Mr. Diab did not know of Mr. DeBrouwer when he worked at Heinz. In March or April 2015 they had more detailed discussions around the structure of their proposed joint venture.

ERF and Mr. DeBrouwer would bring lengthy experience as a tomato producer to the venture. Highbury would contribute expertise in logistics, supply chain management, risk management, and currency hedging. Mr. DeBrouwer testified that he had never even considered risk management for currency fluctuation or for sourcing inputs such as diesel fuel or fertilizer. In the past, he had just called around to suppliers and asked for prices. He noted that Highbury used many of the same suppliers, and the joint venture could benefit from bulk purchases, which ERF would not have access to on its own.

In its decision, the Board stated “… The Board accepts Mr. DeBrouwer’s evidence that he entered this arrangement for the promise of a tomato contract”. At the Tribunal hearing, Mr. DeBrouwer testified that was not his evidence, or if he had said that, he did not express himself clearly. He explained that if all growers were to fulfill delivering their base contract tonnage to Highbury, then, as a partner in IFL, Highbury would likely choose IFL to deliver excess tonnage. This would therefore give ERF, as the other partner in IFL, an advantage over other tomato producers under contract with Highbury. It would be a way to grow and expand.

In its decision, the Board stated that it was not clear what was meant by logistics, the value added that Highbury submitted that it would bring to the joint venture. Mr. Diab testified that he provided the same information to the Board hearing, as he had before the Tribunal. He was not asked to elaborate about the meaning of logistics at the Board hearing.

The Tribunal finds that Highbury does contribute to the joint venture. There were advantages in production, by accessing Highbury’s experience in logistics, such as transportation, risk managing foreign currency, closer involvement in quality control and timing of deliveries. For Mr. DeBrouwer and ERF, partnering would share/mitigate risk and give access to equity or cash for land and equipment.

Point of Differentiation

Mr. Diab testified that Highbury was exploring two business strategies: bulk industrial paste and consumer packaged goods. Customers were concerned with year over year fluctuation in product consistency. Customers preferred the consistency of the California tomato paste. Highbury wished to explore whether greater consistency could be achieved if there were more control over production/growing. With IFL, Highbury would have more control over the growing process.

Highbury had a second business strategy in consumer packaged goods, e.g. pasta sauce. Mr. Diab described some research which was conducted with a consumer panel of multiple generations. They were shown a product label for pasta sauce with the statement “from our field to your plate”. Participants were asked about their purchase intent. They responded that they would choose the Highbury “field to plate” product first, because it was made in Canada and second, because the company grew its own tomatoes.

Mr. Mumford testified that processors were under a lot of pressure from customers to document traceability and that these requirements now formed part of their contracts. He noted that it was very difficult to differentiate the source of vegetables while operating a continuous processing system, such as an evaporator.

No specific evidence was put forth by IFL on how Highbury would track IFL sourced tomatoes during processing, nor were any questions put to either IFL witness on that subject. Proof of the ability to trace the tomatoes is not a pre-requisite to obtaining a licence.

The Board did not accept that there could be any point of differentiation for tomatoes grown by IFL. The evidence before the Tribunal was that market research showed that consumers expressed a greater intent to purchase a product that was grown by the processor. This evidence was not challenged by the Board at the Tribunal hearing. There was no indication whether this evidence was available to the Board at its own hearing.

The Board did question whether the statement “from our field to your plate” was accurate. Mr. Diab did not agree that the statement was not accurate.

The Tribunal finds that there is a point of differentiation for Highbury in buying tomatoes that are grown by a joint venture in which it participates.

Joint Venture Only for the Purposes of a Lower Price on Tomatoes

The Board believed that there was no benefit to the joint venture arrangement between Highbury and ERF, other than the likelihood of a processor paying less for tomatoes. The Tribunal disagrees.

IFL’s only source of revenue would be from the sale of tomatoes. The Board reasoned that if IFL made a profit, 50% would be passed on to Highbury as an equal partner. The Board assumed that Highbury’s share of the profits would be allocated to the purchase price of tomatoes from IFL. Highbury would in effect be receiving a discount on the tomatoes it contracted for with IFL. Mr. Diab’s testimony was that in the initial startup, profits would be kept in IFL. There was no evidence to contradict this, other than the suggestion that profits could be allocated to reducing the cost of tomatoes.

Both Mr. Diab and Mr. DeBrouwer testified that the contract for tomatoes between Highbury and IFL would be at the negotiated contract price. Both parties acknowledge that the Board has the power to verify the contract price for tomatoes by examining the books and records of both producer and processor.

Section 6 (1) of the FPMA requires, upon request, the production of books, records and documents regarding regulated products. The Act does not appear to limit the Board’s power to examining merely the contract price of tomatoes. No specific submissions were heard from either party on this point.

The Tribunal notes that Sections 25- 27 of the Agreement for Marketing the 2014 Crop of Tomatoes for Processing between Highbury and the Board refers to reports that must be filed by the processor with the local board, which include productivity calculations, net harvest, yield, percentage of raw products in each end-use category, etc.

The Tribunal was not directed to any provision in the FPMA or regulations that grants the Board jurisdiction over input costs, or the allocation of profit and loss on the production of tomatoes.

In the Tribunal’s view, the Board erred when it considered there could be only one possible purpose for the joint venture, to achieve a lower tomato price indirectly as a discount on potential profits of the joint venture. While the Tribunal accepts that it is possible that Highbury profits could be allocated to reducing the cost of tomatoes purchased from IFL, the only evidence before the Tribunal was that profits would be reinvested in IFL. The Board’s view that the joint venture arrangement was “likely in exchange for a lower price for tomatoes” was not supported by the evidence.

Highbury Bulk Paste Business Strategy

According to Highbury, the tomato processing industry in Ontario has about 300,000 tons of unused capacity. In 2013, Heinz processed 210,000 tons of tomatoes; in 2014 Highbury processed 41,000 tons of tomatoes. That would leave at least 169,000 tons of unused capacity at Highbury’s facility. According to Mr. Diab, Highbury was simultaneously engaged in strategies for two different lines of business.

Mr. Diab testified that in retrospect, he should have announced the joint venture at the same time as the discussions regarding the fourth end use pricing. The Tribunal recognizes that the timing of the joint venture announcement might appear suspicious to the Board, coming only four days after notice of the failure to achieve a different forth end use price. The Tribunal disagrees with the Board’s conclusion that the joint venture was merely an attempt to circumvent pricing restrictions.

The Tribunal accepts the evidence of the appellant, that Highbury was pursuing two distinct business strategies: one, the joint venture between Highbury and ERF, with the aim of producing tomatoes more economically, and having a point of differentiation for consumers. The second strategy was to arrive at a fourth end use price for tomatoes for industrial paste. This was separate and distinct from the joint venture IFL.

The Board is actively involved in negotiations with all tomato processors in the province with respect to a price for tomatoes for industrial paste. The Commission also recommended such discussions take place. The Tribunal does not agree with IFL's allegation that the denial of the licence was related to raising the issue of the fourth end use price.

Why not Contract with ERF Directly

The Board questioned why Highbury did not contract directly with ERF in 2014. When Highbury took over the Heinz facility, 43 scorecards for former Heinz growers were made available to them. Highbury picked 10 growers which were recommended on the basis of such things as yield, willingness to harvest in bad weather or on Sundays and other qualitative aspects. Highbury signed contracts with 10 growers with good scores for the 2014 growing season. Mr. DeBrouwer’s Eau Road Farms was not one of those recommended growers. Mr. Diab testified that there were some flaws in the 10 recommended growers. He was not aware of Mr. DeBrouwer’s score. He found out later that Mr. DeBrouwer was a large supplier to Heinz. It was a mystery to Mr. Diab why Mr. DeBrouwer was not in the top 10. Mr. Diab was not aware of anything that would have prevented ERF from contracting with Highbury in 2014 or 2015.

In 2015, Highbury purchased 2.5 million tomato seedlings, intending that IFL would grow them. This represents about 8,000 tons of tomatoes.

When the Board denied IFL’s application for a producer licence in April 2015, Mr. Diab testified that Highbury did not offer a contract to ERF for the plants originally destined for IFL because he did not want to be seen to be offering an unfair advantage to one grower with whom Highbury had a joint venture.

Mr. DeBrouwer testified that he was quite surprised when he was not offered the contract; he assumed that he would get it when the licence for IFL was denied. He did not have any conversation with Mr. Diab about that. The contract was offered to Mr. DeBrouwer’s uncle and nephew who had a separate farming enterprise, DeBrouwer Farms Ltd.

The Tribunal notes that had Highbury signed a contract with ERF, the term would be for three years.

The Tribunal accepts that there were legitimate reasons for not contracting directly with ERF, and that no adverse inference should be drawn from that.

Floodgates Argument

The Board determined, in its initial decision, April 16, 2015, that issuing a licence to IFL “would undermine the orderly marketing of tomatoes for processing in Ontario.” According to Mr. Mumford, the Board viewed this joint venture arrangement as a problem which, if allowed to continue, would just grow. The Tribunal notes that no other processors or producers sought leave to participate in this hearing, nor was anyone called to testify. Mr. Mumford did make reference to some conversations he had had raising some potential concerns, but no direct evidence was brought forward.

It is not enough for the Board to assert that issuing a licence to IFL would “undermine the orderly marking of vegetables for processing” and that “it is not difficult to envision these joint ventures becoming a requirement” without some evidence to support those assertions.

The Tribunal does not agree with the Board’s view that this arrangement would open the floodgates to other similar arrangements. There was evidence that serious discussions were under way on pricing with all tomato processors in the province. This supports Mr. Diab’s claim that a fourth end use for industrial paste is a legitimate and real business strategy. The Board is participating in those discussions and the Ontario Farm Products Marketing Commission has encouraged those discussions to take place. Mr. Diab testified that other processors were not interested in getting involved in the growing and producing of tomatoes. The Tribunal did not hear any evidence to the contrary.

Summary of Findings

1. The process of granting a producer licence is largely automatic; however an application/signing a contract does not guarantee the issuance of a licence.
2. There is nothing in the rules or regulations that preclude a producer and a processor from forming a joint venture to produce tomatoes. IFL is not an entity contemplated by Section 10 of the FPMA.
3. Highbury does contribute expertise to the joint venture IFL, and the joint venture offers advantages to ERF as outlined in the analysis section.
4. There is a point of differentiation for Highbury by offering a field to plate product to consumers.
5. The Board erred when it determined there could be only one purpose for the joint venture, to achieve a lower tomato price indirectly.
6. Highbury was pursuing a legitimate business strategy to achieve a fourth end use price for industrial paste. This was not the reason IFL’s licence request was denied.
7. Highbury had legitimate reasons for not contracting directly with ERF.
8. The Tribunal does not agree with the Board’s view that the IFL joint venture would open the floodgates to other similar arrangements.

The Board is required to apply the same standard of proof as the Tribunal, the standard in civil actions referred to as “on the balance of probabilities”. It must be shown that it is more likely than not that IFL was attempting an end run on contract pricing to obtain a lower price for tomatoes. The Board’s conclusion does not meet that standard of proof. The Tribunal finds that the Board failed to give weight to the evidence of other legitimate purposes for the joint venture, and focused only on the possibility of a lower price for tomatoes.

Order of the Tribunal

The Tribunal orders that the Board issue a producer licence to IFL for the 2016 growing season, as soon as practical, upon the same general terms and conditions available to other tomato producers.

Dated at Ottawa, Ontario this 18^th^ day of December, 2015.