Steven Baes vs. Dairy Farmers of Ontario (DFO)

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 Steven Baes, Mitchell, Ontario, from a decision of the Dairy Farmers of Ontario denying his request to transfer quota from his farm (licence #596701) to the farm of family members, Baeverdale Farms Ltd. (licence #625612).

Before: Susan Whelan, Vice-Chair; Doug Flook, Member; Rob Scouller, Member

Appearances:
Steven Baes - appellant
Robert Shapiro - counsel for appellant
Michael Baes - Baeverdale Farms Ltd., witness for appellant
Leon Baes - Baeverdale Farms Ltd., witness for appellant
Geoff Spurr - counsel for respondent, Dairy Farmers of Ontario(DFO)
George McNaughton - witness for respondent

Decision of the Tribunal

This appeal was heard in Guelph, Ontario on May 11, 2011.

Appeal Overview

The appellant, Steven Baes, is a dairy farmer. Adjacent to his dairy operation is another dairy farm owned by a corporation called Baeverdale Farms Ltd. The owners of the farm corporation are Steven's father and mother, Leon and Bernadette Baes, and his brother and sister-in-law, Michael and Melissa Baes.

In 1994, Leon Baes transferred approximately 11 kgs of quota to his son Steven in an effort to get him started in dairy farming. The elder Mr. Baes' transfer arrangement was that in the event of any changes in Steven's circumstances, the quota would be returned to the father for his own dairy operation which is now Baeverdale Farms Ltd. (Baeverdale)

Steven subsequently purchased additional quota for his own dairy farm operation. Baeverdale asserts that a similar verbal agreement was made to transfer such additional quota to the family held operation should Steven ever run into problems in the future or decide to leave the dairy business.

Over the years some quota has been returned to the father. Steven Baes is now requesting an exemption from DFO's policy to allow him to transfer all of his remaining quota to Baeverdale, and to allow the merger of the quota under one licence. This situation has developed due to Steven's financial difficulties. Each of the Baes' indicated that Steven would then become an employee of Baeverdale.

At the hearing and the reconsideration hearing before the DFO, the exemption request was denied. Accordingly, Steven Baes has now appealed to this Tribunal.

Preliminary Matter

At the onset of the hearing, it was drawn to the Tribunal's attention by both parties that tabs 12 and 13 of Exhibit #1, the appellant's document brief, contains personal and confidential information related to dairy producer exemptions/special consideration requests from DFO quota policies that should be removed from public access. The Tribunal agrees that this information is personal and confidential and hereby orders that the documents contained in tabs 12 and 13 of Exhibit #1 be sealed.

Issues

1. Whether Steven Baes should be granted an exemption from the DFO policy?
2. If so, what amount of quota should be transferred?
3. Whether DFO properly considered Steven Baes' exemption request?
   

Evidence

Appellant

The appellant's evidence was provided by a panel of Baes family witnesses. Michael, Steven and Leon, all answered direct and cross examination questions individually. Michael testified, substantiated by the other two witnesses, that a verbal agreement accompanied the transfer of quota between Steven and his father in August 1994 when Steven first started his own dairy farming operation. The agreement was that in the event Steven was no longer utilizing his quota, the transferred quota would be returned to the father.

Several examples of the integration between the two farming operations were provided to the Tribunal. Although Steven owns his cattle, quota and some implements, the land farmed by Steven is owned by his father and mother, who also own the fixed assets on the property. Steven is not charged rent on his home or barn. In addition, they testified that the two adjacent farms are integrated and worked together on a daily basis. The land and fixed assets on the Baeverdale farm are owned by Michael and Melissa Baes.

Steven has also acquired additional quota on his own since October of 1994. He stated he now owns 30.84 kgs of quota. In December of 2003 and 2005, Steven transferred 7 kgs of quota back to the partnership, now the corporation (Baeverdale) in which his father is a shareholder. Over the years, Steven has encountered financial difficulties and his farming operation has not been operating efficiently. He sold 4 kg of quota through the Board in 2005, 2006, 2007 and 2009 in an effort to sustain his operation.
The Tribunal was provided with a copy of a DHI Herd Management Report which showed that the milk production of the Baeverdale farm is in the top 90% percentile of production efficiency, whereas the milk production in Steven's herd is in the lower 25% percentile. In addition, Steven also had milk quality issues with high Somatic Cell counts.

The Appellant is asking for the transfer of all Steven's quota (30.84 kg) for the following reasons:

1. An agreement existed between the father and son, Leon and Steven in August of 1994, that the quota provided by the father at Steven's start up would be transferred back to the father if Steven was no longer utilizing that quota. There is no written agreement.
2. That the quota acquired by Steven should also be transferred to Baeverdale. The family members involved in Baeverdale and Steven testified that it was their agreement that should Steven no longer be utilizing his purchased quota, it would be transferred and merged with Baeverdale. There is no written agreement.
3. The farming operations between Baeverdale and Steven Baes are integrated to varying degrees. Steven owns his cattle, some equipment and his quota, whereas the fixed assets or the land and equipment on which he operates his dairy operation are owned by his parents. Heifers for both farm operations are raised together, and Steven pays for the feed and medicine for those heifers which are his.
4. On a daily basis, the farming chores are integrated. A hired hand works 5-10% of his time on Steven's farm. Feed for the cattle is prepared at Baeverdale and transferred to Steven's farm and Steven is then charged for the feed at a low preferential rate. Whenever Steven is in financial difficulty, his father Leon assists to keep Steven operating.
5. The Appellant and Baeverdale feel that the two operations are so integrated that prohibiting the transfer and merger of the quota would tear their operation apart. The transfer and merger of the quota would mean that three farm families would be able to make a living from Baeverdale with Steven as a hired hand.
6. That the health of Steven's herd would improve as indicated by the Veterinarian's letter of support. Although, based upon Michael's testimony, Baeverdale's existing dairy herd could also fulfil Steven's quota due to their exemplary production levels, it does not appear that the transfer of Steven's cattle to Baeverdale would be required.
7. That the financial health of the overall operation would be better served according to the letter from the Accountant of both farms.
8. Steven has been unable to fulfil his quota at times and has leased cattle from Baeverdale in order to do so.

Michael testified that Steven and Baeverdale have difficulty with the resultant affect of the present DFO quota policies which affect their proposed transfer. They understand that their request for the transfer and merger of quota falls outside the DFO policy. They realize that Steven needs an exemption from the policy to allow for the transfer and merger of any quota.

The appellant presented to the Tribunal a number of examples of quota policy exemptions previously allowed by DFO. The appellant stated that none were of the identical fact situation as this exemption request, and that this was the first request based on integration that had been before this Tribunal. It was argued that similar fact cases had not come before the DFO Board for exemption, highlighting integration as the unique circumstance.

Respondant

The major thrust of DFO's evidence supplied by its sole witness, Mr. McNaughton, was that the appellant's request to transfer the quota is not permitted under the present DFO quota transfer policy. The appellant wanted to transfer and merge all of his quota with that of Baeverdale Farms under one licence.

Mr. McNaughton outlined the evolvement of the DFO quota transfer policies before and since 2006. In essence, the early policies would have allowed for such a transfer, but this type of transfer has not been allowed since 2006.

Mr. McNaughton stated that the major reasons for the change to the DFO policy for the transfer of quota were:

1. to stop the escalation of the price of quota,
2. to make quota more equitably available to those wanting it, instead of moving it within families, and
3. to open up the opportunity for new dairy farm operators through the use of the quota exchange and dispel the image that the dairy industry was a closed shop.

Mr. McNaughton acknowledged that an agreement to return the quota from son to father was not uncommon and that he had no reason to doubt the veracity of Steven Baes' claim that an agreement existed between Steven and his father.

He also made the point that the integration of farming labour and equipment within and between families was not at all uncommon or unique, and had been discussed to some extent for other exemption requests, although not used as a major reason for such requests.

He pointed out that at the reconsideration hearing after the original decision by the review committee at DFO, the members had all the material supplied to the DFO by the Baes family. Therefore, they had sufficient information to consider an exemption, and he specifically referenced the letter from the Veterinarian and the Accountant.

Mr. McNaughton further outlined that there are three options currently available to Steven and Baeverdale if they wish to transfer or move quota, and they are as follows:

1. Steven could sell his quota on the exchange, and Baeverdale could buy quota from the exchange, recognizing this would be a slow accumulative process.
2. Steven could transfer his quota to Baeverdale and Baeverdale could continue to operate two different barns with two different licences. This would prevent the merger of the quota to operate under one licence.
3. Steven could sell his quota and Baeverdale could sell their dairy farm and buy a dairy farm with more quota if they wanted a larger dairy operation.

Mr. Spurr provided the Tribunal with four decisions as Authorities for transfers.

First, he referenced the case of Dairy Farmers of Ontario v. William Denby, et. al. (2009) Ont. Div. Ct. (File No. 47/09), which found that DFO had the right to provide policies for its members.

Secondly, in the Tribunal Decision of Ferme Martel Inc., dated March 2, 2010, it was held that exemptions should only be granted in unique and extenuating circumstances. Mr. Spurr emphasized that just being the first attempt at a request for an exemption on certain grounds, in this case family integration, is neither unique nor extenuating.

Thirdly, he referenced the Tribunal Decision of Victor Osztrovics, dated November 16, 2010, which further supports the position that exemptions are the exception not the norm.

And lastly, the decision of Marlor Farms Inc. v. The Ontario Flue-Cured Tobacco Growers' Marketing Board, 2010 ONSC 1573, found that the rights of the marketing organization took precedence over the rights of the individual. Counsel for the Appellant acknowledged these cases but felt that such a regime, as portrayed in these decisions, would never allow for an exemption, on any basis.

Analysis and Findings

The appellant has requested the transfer and merger of all of his existing quota to his father and thus Baeverdale, but in fact, there are two separate amounts of quota involved.

First, there is the quota that was initially bought by the father and transferred to the son Steven in 1994. Prior to 2010, Steven had transferred approximately 7 kg of the original 11 kg of quota back to the father.

The remainder of the quota now in Steven's possession, was purchased by the appellant on the quota exchange and was not a transfer from father to son as was the original transfer.

The appellant understands that he has no option to transfer the quota to Baeverdale under the present policy, whether he agrees with the policy or not.

DFO has been diligent in developing and applying its policies in an attempt to fulfil its corporate objectives. The Panel finds that the DFO did consider, in fact, in its process the possibility of an exemption. The Board of the DFO considered the request on August 24, 2010, and held a reconsideration hearing on October 26, 2010. However, the DFO concluded that they had not permitted quota to transfer from a brother on one farm location to a brother and father on another farm location since the policy change of October 2006, and therefore denied the request.

The Tribunal agrees with Mr. McNaughton's testimonty that the integration of land, equipment and labour between individual family members is not unusual in dairy farming nor is it an exceptional reason for an exemption.

Further, the Tribunal finds that the farming operations were not as integrated as the evidence attempted to persuade. It is the Tribunal's finding that if the operations were completely intertwined and integrated that there would not have been such a disparity in milk production and quality between the two farms.

The DFO does not question that in 1994 an agreement existed between the father and the Appellant when the father transferred approximately 11 kg of quota to Steven. The basis of that agreement was that in the event that Steven was no longer utilizing that quota that the 11 kg of quota would be returned to the father.

Therefore, the Tribunal finds that this exemption request should be divided into two parcels.

The Tribunal finds that the transfer of the original 11 kg of quota back to the father began in 2003 when Steven started selling or transferring his quota.

The uniqueness as it applies to this situation is that it involved a transfer back agreement made in 1994, which DFO accepts; and it is shown to have been an ongoing transfer back since 2003 only interrupted by DFO's policy change in 2006. Such a transfer back between the parties would have been allowed under policies prior to 2006, and the appellant and his father anticipated that this policy would continue.

To the Tribunal Panel's knowledge, there have been no cases before the DFO Board that involved a son to father transfer that had its original transfer agreement prior to 2006 and had been in the process of being completed.

The uniqueness and extenuating aspect in this case is that it involved a verbal agreement between the father and son that predates the limiting policy change by 12 years, and was in the ongoing process of completion.

In Mr. Spurr's "Book of Authorities", he refers to the Dairy Farmers of Ontario v. William Denby decision and the statement that: "There is nothing in the Tribunal's decision to indicate that any basis upon which it considered these respondents were in any different position than any other milk producer in Ontario who were subject to the new quota policy." The Tribunal feels that in this case, it can distinguish a different situation from that of other milk producers.

Mr. Spurr has also cited the Tribunal decision of Ferme Martel Inc. and the position of the Tribunal that an exemption should be "unique or extraordinary".
The dictionary refers to the word "unique" in its adjectival context as "unparalleled". Unparalleled could apply to this circumstance in that the DFO Board has never encountered such a situation. Although "first" does not necessarily make something unique, it could. At this point, we are not convinced that there will indeed be a similarly situated request, thus making this case "unique". In referencing "extenuating" in the dictionary, and using the synonym of "justifying", certainly an agreement made 12 years before a policy change, for a son to father transfer, and a recorded continuing implementation of that agreement over the years, would reach the level of unparalleled and justified.

Therefore, the Tribunal finds that an exemption should be applied in a limited manner. The original agreement between Steven and his father should be completed. The original transfer was approximately 11 kg and 7 kg have been returned, leaving an approximate additional 4 kg to be returned to the father. The appeal as it relates to the original transfer of quota from father to son shall be allowed.

However, the Tribunal also finds that the second part of the transfer and merger request is not the same as the first. If 4 kg of quota are returned to the father, based on the appellant's figure of holding 30.84 kg of quota, the appellant will still own approximately 26.88 kg of quota, which is not part of the original inter family transfer. This quota was purchased by the Appellant on his own behalf and between 2005 and 2009, the appellant sold a total of 4 kg of his quota through DFO. The Tribunal makes no finding on what agreement existed between the family members on the quota the appellant acquired from the DFO directly, only that the requested transfer exemption for this portion of quota is based upon a different factual background. The Tribunal finds no reason to amend the decision of DFO as it applies to this portion of the quota. Consequently, the appeal as it relates to this remaining quota is dismissed.

Order of the Tribunal

The Tribunal hereby orders that within 60 days of this decision becoming final within the meaning of Section 18(3) of the Ministry of Agriculture, Food and Rural Affairs Act, the remaining approximate 4 kg of quota (actual amount to be verified with DFO records) shall be transferred to the father, Leon Baes, now Baeverdale Farms Ltd.

Dated at Amherstburg, Ontario this 17th day of June, 2011