Daryl Phoenix v. Egg Farmers of Ontario, 2016 ONAFRAAT 1

Agriculture, Food and Rural Affairs Appeal Tribunal

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: Daryl Phoenix v Egg Farmers of Ontario

Phoenix v Egg Farmers of Ontario 2016ONAFRAAT01

STATUTE: Ministry of Agriculture, Food and Rural Affairs Act

HEARING: December 21, 2015

DATE OF DECISION: January 6, 2016

2016-01

NEUTRAL CITATION: 2016ONAFRAAT 01

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 Daryl Phoenix, from a decision of the Egg Farmers of Ontario denying his request regarding policies and procedures for distributing production quota.

Before: John O’Kane, Vice-Chair Richard Smelski, Member Fred Stulp, Member

Appearances: Herman Turkstra, Counsel for the Appellant Daryl Phoenix, Egg Producer, Appellant George Pilgrim, Egg Producer, Witness for Appellant John Van Aert, Egg Producer, Witness for the Appellant Geoff Spurr, Counsel for the Respondent, Egg Farmers of Ontario Henry (Harry) Pelissero, Egg Farmers of Ontario General Manager, Witness for Respondent

DECISION OF THE TRIBUNAL

This appeal was heard in Guelph, Ontario, on Monday, December 21, 2015. Mr. Daryl Phoenix (the “Appellant”) appealed to the Agriculture, Food and Rural Affairs Appeal Tribunal (the “Tribunal”) from a decision of the Egg Farmers of Ontario (the “EFO”) regarding policies and procedures for distributing production quota.

Overview

Daryl Phoenix is an Ontario egg producer. Under provincial legislation, EFO regulates the production and marketing of eggs and is responsible for Ontario’s egg supply management system. Ontario is a participant in the national marketing scheme for eggs that is administered by a national egg agency, the Egg Farmers of Canada (“EFC”). One aspect of EFC’s mandate is to establish the demand for eggs in Canada and then allocate that amount among the provincial participants.

In 2012, EFO developed the Layer Leasing Pool (“LLP”) policy that essentially provided that any market growth in the egg sector that EFC allocated to EFO would be distributed according to the LLP. The LLP represented a policy change by EFO regarding how it allots production and marketing rights.

Historically EFO distributed the production/marketing rights, including both increases and decreases, on a pro-rata basis among egg producers.

Distinct from that historical approach, the LLP:

• gave all quota holders the right to access an equal share of the market growth
• distributed the market growth rights based on an annual “lease” concept
• quota holders with sufficient barn capacity could lease the right to produce eggs from EFO
• quota holders paid EFO an annual lease fee

Mr. Phoenix challenged that aspect of the LLP that provided for equal distribution of the rights to produce/market. Mr. Phoenix wanted the policy amended so that the market growth production/marketing rights were distributed on the historical pro-rata approach. Mr. Phoenix asserted, among other things, that equal distribution under the LLP:

• was unfair as it allowed small egg producers the same access as large egg producers
• caused distortions in the market
• encouraged inefficiency rather than efficiency
• would inevitably lead to increased costs of production that would ultimately result in increased costs to consumers

EFO rejected Mr. Phoenix’s challenge to amend the LLP policy at first instance as well as, after a further reconsideration.

Mr. Phoenix then appealed to the Tribunal under the Ministry of Agriculture, Food and Rural Affairs Act (“Act”).

At the start of the hearing, EFO raised as a preliminary issue section 16(4) of the Act and asked the Tribunal to exercise its discretion under that section to refuse to hear Mr. Phoenix’s appeal, on the basis that the LLP policy had been adopted by EFO in 2012 and Mr. Phoenix’s challenge of that policy did not happen until some two years later during 2014. The Tribunal reserved ruling on EFO’s preliminary issue until after hearing the entirety of the evidence. The Tribunal’s ruling on that issue is incorporated into these reasons.

For the reasons explained hereafter, the Tribunal denies Mr. Phoenix the relief requested and dismisses the appeal.

Background

The Appellant Daryl Phoenix and witnesses George Pilgrim and John Van Aert, all egg producers testified, as did EFO’s General Manager Harry Pelissero.

A. Egg Supply Management

Egg production and marketing in Ontario is regulated as part of a national system known as supply management. Each year EFC allocates the total anticipated demand for eggs among the participating provinces, including Ontario. Ontario’s historic allocation, dating back to the start of the national supply management system is approximately 30% of the national total and that entitlement is enshrined in a Federal Provincial Agreement. Using a laying hen ratio that is currently 25.44 dozen eggs per hen, that allocation of egg production is then translated into production “units” or egg laying hens. Currently in Ontario there are about 8.5 million laying hens, 400,000 of which are considered part of “backyard” flocks and about 700,000 of those hens are earmarked to produce for processed or industrial egg uses.

B. The Provincial Regulatory Regime

Within each province, a provincial commodity board operates under provincial legislative authority to administer the provincial side of the supply management system for eggs. In Ontario, EFO has been established and authorized under the Farm Products Marketing Act, Regulation 407 and Regulation 409 as the provincial regulator in respect of egg production and marketing.

Regulation 409 describes the scope of the marketing scheme or “plan” in section 3.

This plan provides for the control and regulation in any or all respects of the producing and marketing within Ontario of chicks-for-placement, eggs, hatching eggs and fowl, including the prohibition of such producing and marketing in whole or in part.

Regulation 407 describes the nature of the power and authorities of EFO. For example in section 6, EFO was given the power to:

• direct and control, by order or direction, …. the marketing of eggs ….
• prohibit the marketing of …. eggs …
• to determine …. the price …. for eggs ….
• to fix and impose service charges ….

An as additional example from Regulation 407, section 7, EFO was authorized to:

• require that eggs be marketed on a quota basis
• to fix and allot …. quotas…. on such basis as the local board considers proper
• to cancel or reduce, or refuse to increase, a quota ….

C. Quota Rights Historically

Historically EFO allotted entitlement rights to egg producers via quota rights. As the national market changed and Ontario’s share contracted or grew, the quota rights of egg producers were correspondingly decreased or increased on a pro-rata basis. Once an egg producer was allotted quota, that producer could sell the quota. The marketability of quota resulted in a market for quota that is currently about $296 per unit (laying hen).

D. Quota Rights Currently

More recently, EFO has begun developing differentiated entitlement rights that include non-transferable and non-saleable quota, and particular to the context of this appeal leasing entitlement rights to egg producers on an annual basis. Since 2010, EFO has not allotted any quota among egg producers that could be bought and sold.

E. The Layer Leasing Pool (LLP)

In 2012, EFO adopted the LLP. The LLP was developed as a result of a number of factors and with input from all Ontario egg producers, the egg processing industry, government direction and the current geopolitical climate. EFO explained several considerations for developing the LLP, including:

• A method of creating a pool of production and marketing rights to foster new entrants into the egg farming sector.
• Developments on the international trade scene where Canada’s supply management systems are typically the focus of domestic and international criticism.
• Encouraging smaller and less concentrated egg producers as a risk management strategy against disease outbreaks such as recently experienced in the state of Iowa where a significant percentage of the USA’s egg production was decimated by avian influenza.
• Creating a leasing fee allowed EFO to use the generated funds to reduce levies on egg producers and in the past few years, those levy reductions have resulted in $4-$5 million remaining in the pockets of egg producers.

EFO’s evidence on these points was not seriously challenged nor materially contradicted.

EFO conceded that the LLP had assisted smaller egg producers and new entrants to the system more than it had assisted larger egg producers. EFO conceded that both historically and under several of its existing policies, it had managed and distributed entitlement rights to quota on a pro-rata basis. EFO conceded that between the 1980s and 2010, all quota adjustments (up or down) had been on a pro-rata basis.

EFO also conceded that if the LLP changed from equal distribution to pro-rata distribution such a change would not affect any of EFO’s other policy programs such as the Mortality Allowance Policy, the Flock Placement Incentive Policy, the Program 358 Policy, the Market Growth Program or the Home Week Policy. EFO conceded that currently in Ontario the majority (180 of 331) of egg producers are responsible for only 16% of the total egg production resulting in the voting power within EFO being in the hands of smaller egg producers. EFO also conceded that there was some political concern, both provincially and federally, about maintaining the number of egg producers. EFO conceded that if it did not have the funds derived from LLP it would have to find another way to address the levy gap between the table egg sector and the processing or industrial egg sector.

F. The Phoenix Egg Operation

The Phoenix family has been involved in the egg production and marketing business in Ontario since June 1985. The Phoenix family egg quota holdings have increased from just over 2,000 units in 1985 to approximately 53,000 units currently. Of the approximately 331 quota holding egg farmers in Ontario, there are only 38 egg farmers that have as much or more quota than the Phoenix egg production and marketing business.

In 2014, Mr. Phoenix applied to EFO under the LLP and leased 1,861 units. However, for 2015, Mr. Phoenix missed a deadline to submit his leasing application and therefore did not lease under the LLP for 2015. For 2016, Mr. Phoenix will lease 6,630 units, the maximum under of the LLP for a quota holder.

In 2014, Mr. Phoenix began his challenge to the LLP, and in a September 4, 2014 communication to EFO, asserted that: “I think this way of leasing is very unfair. The lease should be done on a percentage base.” Mr. Phoenix testified that as an example, an egg producer with a 6,000 unit quota could apply under the LLP and receive the right to lease 6,630 units, which would essentially double that egg producer’s production. By contrast, Mr. Phoenix with 53,000 units would only be entitled to lease the same 6,630 units. That illustration demonstrated Mr. Phoenix’s view of the unfairness in equal distribution under the LLP. Mr. Phoenix confirmed that under the LLP he would actually be entitled to lease more entitlement rights from EFO than he would receive if the distribution had been done pro-rata. Despite being in a position of getting more production units under equal distribution than under a pro-rata distribution, Mr. Phoenix explained he was fighting against equal distribution because it made him feel like a thief. He explained that all he wanted was to be treated fairly and that it was wrong for EFO to be the largest quota holder and charging a lease rate of $7.30 per unit.

Mr. Phoenix confirmed that he wanted the LLP “scrapped” and ultimately the quota distributed to egg producers on a pro-rata basis. Mr. Turkstra confirmed that despite Mr. Phoenix’s evidence about scrapping the LLP, this appeal was confined to seeking to change the LLP from equal distribution to pro-rata distribution, but otherwise leaving the LLP intact.

Mr. Phoenix explained that in his view the LLP allowed egg producers to split their quota to new properties and take advantage of getting the equal distribution multiple times. He viewed that as unfair and asserted that it promoted inefficiency.

Mr. Van Aert’s testimony and Mr. Pilgrim’s testimony supported Mr. Phoenix’s testimony about the unfair nature of equal distribution on large egg producers. Both supporting witnesses also advocated scrapping the LLP and distributing quota pro-rata.

Mr. Van Aert explained how he acquired an adjacent property, transferred some of his existing quota holdings to that property, and built facilities to raise laying hens. He explained how by doing that he was able to double up on the equal distribution for each of his properties. He explained how his brother had severed an existing 200 acre farm into two 100 acre farms, transferred some of the quota holdings, and built facilities to raise laying hens. He testified that while this allowed the doubling up of the amount that could be leased under the LLP, there were inefficiencies having two barns because it required two wells, two back-up generators, two coolers and two sorters. He characterized these anecdotes as egg producers, he included, farming the policy, rather than egg farming.

All the Appellant’s witnesses testified that the EFO policies should be seeking efficiencies and not inefficiencies.

During re-examination, Mr. Van Aert confirmed that his evidence was not intended to suggest that big egg producers are more efficient than small egg producers. He clarified that his evidence was focused on the inefficiency of him as an egg producer having different locations to house laying hens that could be housed at one consolidated larger facility.

Issues and Analysis

The issue for determination on this appeal is relatively simple: has the Appellant proven on a balance of probabilities that this Tribunal should exercise its statutory discretion under section 16(11) of the Act:

Upon an appeal to the Tribunal under subsection (1), the Tribunal may by order direct the Commission, the local board, the marketing board or the Director, as the case may be, to take such action as it or he or she is authorized to take under the Farm Products Marketing Act or the Milk Act and as the Tribunal considers proper, and for this purpose the Tribunal may substitute its opinion for that of the Commission, the local board, the marketing board, or the Director.

More particularly in the context of the specifics of this appeal, the issue can be stated as: has the Appellant proven on a balance of probabilities that this Tribunal should direct the EFO to amend the LLP to distribute any future entitlement rights among egg producers pro-rata, rather than by equal distribution?

It was uncontested that the EFO policy embodied in the LLP was the product of a process that involved gathering and considering the views of egg farmers, the processing industry, the government and the provincial regulator. While it was clear that the Appellant and his supporting witnesses opposed parts of, if not all of the LLP, and that they considered the process of developing the LLP undemocratic, there was no evidence that would compel the Tribunal to ignore the process that produced the LLP.

Based on the largely uncontested evidence of EFO, the Tribunal finds that the LLP is the product of reasonable considerations that included:

• Input from stakeholders
• Fostering new entrant access
• International trade pressures
• Risk management
• Funding levy reductions
• Political pressures

It was uncontested that the LLP was a new approach to distributing entitlement rights that gave EFO additional flexibility in managing the egg production and marketing sector. The Appellant did not prove that EFO’s equal distribution approach under the LLP was contrary to provincial legislation or to the regulations or policies of EFO. While it was clear the Appellant did not approve of equal distribution under the LLP, there was no evidence or authority to suggest that it was outside EFO’s authority to introduce equal distribution under the LLP.

During argument, the Appellant suggested this new distribution approach distorts the historical approach. It should be recalled that there are approximately 7.7 million units in the current system that were distributed using that historical pro-rata approach. So far under the new LLP equal distribution there were 263,161 units in 2014 and 596,560 units in 2015. For 2015, less than 8% of the total units in the system were distributed under the LLP. The Appellant did not provide any evidence that would allow the Tribunal to make a finding that the LLP distorts the system.

During argument, the Appellant suggested that the inefficiencies and duplication of operations as explained by Mr. Van Aert would inevitably lead to an increase in the cost of production of eggs and result in increased prices to consumers. The Appellant did not provide any evidence that would allow the Tribunal to make such a finding.

In these circumstances, the Tribunal is not satisfied that the Appellant has discharged its onus of proof in this appeal and therefore the appeal is hereby dismissed.

Preliminary Matter

At the start of the hearing EFO made a motion under section 16(4) of the Act, that the Tribunal refuse to hear the appeal, because the Appellant had knowledge of the LLP for more than a year.

As a matter of improved practice, the Tribunal encourages that where a party intends to invoke section 16(4), they do so by way of preliminary motion supported by appropriate affidavit evidence much earlier in the process than at the start of a substantive appeal hearing.

EFO’s motion relied on the fact of almost two years between introducing the LLP and the Phoenix appeal. While it was clear that the Phoenix appeal was made more than one year after the policy was introduced, that alone was not enough evidence for the Tribunal to consider such a serious motion. Circumstances may exist where passage of time exceeding one year could alone satisfy a Tribunal, but not in these circumstances. Given that all parties were present and prepared to proceed, this panel concluded it was better to hear the appeal evidence in totality before making a decision on the preliminary motion.

The evidence showed that while the LLP was adopted in 2012, there were no distributions among existing egg producers until 2014 because EFO was using the market growth allocations to create a new entrant pool in 2013. Therefore, we give Mr. Phoenix the benefit of the doubt that he may not have fully appreciated the impact the LLP would have on his egg operations until 2014 and therefore, we decline to exercise our discretion to refuse to hear the appeal.

Order of the Tribunal

The Tribunal hereby orders:

1. The appeal be and is hereby dismissed.

2. The requested appeal relief is denied.

Dated at Brampton, Ontario this 6th day of January, 2016.