Ontario Quota Rights Organization vs. Dairy Farmers of Ontario
In the matter of the Ministry of Agriculture, Food and Rural Affairs Act.
And in the matter of:
An Appeal to the Agriculture, Food and Rural Affairs Appeal Tribunal by the Ontario Quota Rights Organization (OQRO) from a decision of the Dairy Farmers of Ontario (DFO) not to rescind its November 17, 2006 Quota Policy on Transfer Assessments.
Marthanne Robson, Vice Chair; John Rudics, Member; William Schaefer, Member
On behalf of the Ontario Quota Rights Organization
On behalf of the Dairy Farmers of Ontario
Decision of the Tribunal
The appeal was heard on February 3, 4, and 5, 2009, in Ottawa, Ontario, and on April 27 through to May 1, and May 29, 2009, in Guelph, Ontario.
The Ontario Quota Rights Organization ("OQRO") is an unincorporated
association of dairy farmers who came together in the fall of 2006 in
response to their concerns about the implementation of a new dairy quota
transfer assessment policy by the Dairy Farmers of Ontario ("DFO").
The OQRO requested that the DFO rescind the policy and the DFO declined
to do so. The OQRO therefore appealed to the Tribunal, requesting that
the policy be rescinded and that monetary compensation be paid to its
Dairy quota is regulated by the DFO under the Milk Act and represents the right to produce and sell milk. Dairy quota is normally purchased through the quota exchange which is operated by the DFO. Between 1996 and 2006, the cost of dairy quota doubled from about $15,000 to about $30,000.
Between 1980, when the quota exchange was introduced, and 1996 there had been a 15% transfer assessment on quota.
Concerns over rising quota prices were discussed at the DFO meetings as early as 2003. At the 2005 fall policy conference, the DFO presented a paper suggesting the reintroduction of the transfer assessment. Delegates were split on the issue. A task force was formed between the DFO and the Québec milk board, the Fédération des producteurs de lait du Québec ("FPLQ").
Summary of Evidence
Ontario Quota Rights Organization (OQRO)
The OQRO called 23 active and former dairy producers as witnesses, as well as an expert witness, Dr. Al Mussell. Many of the dairy producing witnesses for the OQRO testified that the November 2006 quota policy was not meeting its objectives as stated by the DFO, in that quota prices have continued to increase since its implementation. They also testified that they were dissatisfied with the process used by the DFO in the development of the policy, which affected both the confidence they had in the DFO as well as their ability to manage their farming operations. They further testified that, during meetings in October and November 2006, they were informed by DFO board members that special consideration would be given on a case-by-case basis where particular circumstances were experienced.
Dr. Al Mussell prepared a report which explores the application of the
quota policy adopted in November 2006 that includes a conceptual model
for the valuation of quota, a test of that model, and an analysis of the
limitations and financial implications of the policy. His report concluded
that "milk prices are the key fundamental driver of quota values",
and that the relationship between interest rates and quota values is statistically
insignificant. The report also observed that the transfer assessment on
the sale of quota has the effect of 1) reducing the number of transactions
on the exchange, and 2) weakening the balance sheets of dairy producers'
operations resulting in an unrealized loss of $943 million (15% of the
$6.3 billion in the value of quota holdings in Ontario). The report noted
that prospective buyers exercised greater caution.
Dairy Farmers of Ontario (DFO)
The DFO called a total of five witnesses, including two DFO staff members, one active dairy producer, and two expert witnesses, Dr. John Groenewegen and Dr. George Brinkman. DFO staff testified that:
The DFO witnesses also testified about the events in 2006 leading up to and following the adoption of the quota policy. These events were not disputed by the OQRO and are included in the Background section, above.
DFO witnesses testified that the objective of the policy was to stabilize quota values. The policy introduced mechanisms of accountability for quota buyers. They stated that milk quota in Ontario is the property of the DFO and that it is a right to a market. It is not recognized as legal property under the Personal Property Security Act. It is an intangible asset which financial institutions cannot use as security; hence letters of direction are issued by the DFO.
The active dairy producer who testified for the DFO told the Tribunal that he has viewed quota as a tool with which he could generate an income on his dairy operation. He testified that Dairy Producer Committees meet every six weeks: have annual meetings: attend policy conferences, regional meetings, and the DFO annual general meeting: and communicate information to producers in their areas. He affirmed that discussions took place at the fall policy conference in 2003, along with a presentation regarding the rising value of quota. He further testified that the DFO was justified in cancelling the November 2006 quota exchange and adopting the November 17, 2006 quota policy due to the leak of the October 2006 proposed policy as a means of ensuring all producers were operating with the same knowledge of quota policy.
Dr. Groenewegen testified that quota prices are affected by what producers are willing to pay for quota. This is based partly on earnings before interest, taxes, depreciation, and amortization (EBITDA), and expectations of increase in value over time; the amortization period of a loan; the financial community's views on supply management as an area of investment; the use of earnings from the use of quota to help pay for expansions; uncertainty in policy at the World Trade Organization; and the supply and demand for quota on the monthly exchange.
Dr. Groenewegen disagreed with the Mussell report's assertion that milk price is the major determinant of quota values. In this opinion, high quota values are an entry barrier affecting the industry's sustainability. He testified that the objectives of the policy have been met, in that it has stabilized and/or reduced quota prices, and fostered sustainability of the industry by facilitating access to quota.
He further testified that, even if the policy was announced months before its implementation, buyers would have likely waited for the price to decrease before buying, and sellers would have likely tried to exit the industry before the transfer assessment was in place. This, he added, would have likely resulted in more offers to sell than offers to buy, and caused the price to decrease. He noted that, had there been advance notice, producers selling quota before the transfer assessment took effect may have received a lower return on their quota than they would have if they sold their quota after the November 2006 policy was implemented.
Dr. Brinkman testified that the financial viability of Canadian-Ontario
agriculture has become more vulnerable in recent years, and is in high
jeopardy of having financial problems due to the overcapitalization of
farming operations, meaning excessive capital is used to create an income.
He testified that a sustainable price-to-earnings ratio is 16 to 1, and
that Ontario agriculture is presently at a ratio higher than 200 to 1.
Forty five per cent of dairy producers' assets are tied up in quota, equating
to an average of $1.4 million per producer which do not contribute to
the productivity of the farming operation. He further testified that in
the period of 1981 to 2008, overall farm debt in Canada increased by 309
per cent, whereas over that same period, overall farm debt in the United
States increased by 19 per cent. This, he noted, means that Canadian farmers
have a debt-to-income ratio that is 20 times greater than farmers in the
U.S., and makes them 20 times more vulnerable to rising interest rates.
The issues before the Tribunal were:
Findings and Analysis
The OQRO requested "that the Tribunal rescind or strike down the November 17, 2006, policy. However that the Tribunal's decision apply only to the current members of the Group, not to all dairy farmers in Ontario."
The OQRO argued that Tribunal has the power to make any order to direct the DFO to take any action it could have taken on its own accord. The DFO provided compensation to two other dairy producers, while acting within its authority, and the Tribunal has this same authority.
The OQRO requested monetary relief for the members of its group, totaling $15,823,810.78:
According to the DFO, the Notice of Appeal filed by the OQRO sought the rescission of the policy in its entirety, and noted that the appeal is "not an exemption case." It further argued that "the issue before the Tribunal is whether to rescind the November 2006 polic(y)" and that "there is no other relief that can be granted in this case because of the way that the OQRO has framed it."
The OQRO requested the DFO rescind the policy at the November 2007 hearing and did not request exemptions for its members at that time. In the Notice of Appeal, the OQRO appealed the policy, and did not request exemptions from the policy. Thus, the OQRO requests that the policy be rescinded, but that only its members be exempted from or compensated for the transfer assessment policy. The Tribunal notes that not all members of the OQRO have been subject to the transfer assessment, as they have not sold their quota.
Subsection 16(5) of the Ministry of Agriculture, Food and Rural Affairs Act ("MAFRA Act") provides for conditions that must be satisfied before the Tribunal may hear an appeal:
The Tribunal has broad powers on an appeal of a DFO policy, including the authority to substitute its opinion for that of the DFO. To consider a request for relief that was not argued before the DFO goes beyond these powers. In this case, the Tribunal finds that it does not have jurisdiction to grant exemptions or compensation because the appellants did not request this relief of the DFO and were not denied exemptions or compensation by the DFO.
Furthermore, the Tribunal finds that it is not appropriate to consider requests for exemptions or compensation for a group of producers when a policy is being appealed and its rescission requested. Individual circumstances will undoubtedly vary from producer to producer. Evidence regarding the individual circumstances of affected producers would be required to consider requests for exemptions and compensation.
The Tribunal did not hear sufficient evidence in order to determine the merits of the request for exemption nor were any particular criteria for exemption argued. There was no explanation offered why the OQRO members should be treated differently than other producers.
For these reasons, the Tribunal will consider this appeal to be a request to have the November 17, 2006 policy rescinded, and will not consider individual exemption requests. The evidence given by OQRO members regarding the effects that the policy change had on them will, however, be considered in determining whether to rescind the policy.
Since the Tribunal will not be dealing with requests for individual relief for the members of the OQRO, the composition of the OQRO membership is not relevant. The issue does merit brief comment.
The DFO did not object to the OQRO as a group. Under the MAFRA Act, an unincorporated association may appeal to the Tribunal. The DFO did take issue with the addition of new members after the OQRO's hearing before the DFO board, and the eligibility of these individuals for any relief sought by the OQRO.
At the outset of the hearing in Ottawa and again at the hearing in Guelph, the OQRO updated and added to its list of members. The Tribunal informed the parties of one Tribunal member's acquaintance with some of the new members. The OQRO members in question agreed to withdraw from the OQRO.
The Tribunal finds that DFO has the legal authority to develop and adopt policies regarding dairy quota, pursuant to specific subsections in Subsection 7(1) of the Milk Act , and Section 6 of Ontario Regulation 354/95 , as excerpted below.
The OQRO initially argued that there is a duty of procedural fairness owed by the DFO to dairy producers in making quota policy, but this argument was later abandoned. The Divisional Court in Dairy Farmers of Ontario v. Denby,  O.J. No. 4474 clearly ruled that there is no duty of procedural fairness owed by DFO to dairy producers when making policy. The decision was released on October 16, 2009, after the hearing of this case. The parties provided written submissions on the relevance of that decision to this case.
The OQRO argued that the procedure followed in developing and implementing the policy was flawed and that a flawed process could be a basis for allowing the appeal, notwithstanding the absence of a duty of procedural fairness. According to the OQRO, the policy was flawed in its lack of proper design, because an attempt to implement a similar policy had already been rejected and because the DFO failed to consult with dairy farmers prior to implementing the policy. It also argued that the DFO did not undertake sufficient research prior to developing the policy and adopted it with insufficient notification and in undue haste.
Under the broad powers of the Tribunal granted by subsection 16(11) of the MAFRA Act, the Tribunal holds a new hearing, not merely a review hearing. The Tribunal may make any decision that the DFO could have made, including decisions regarding the implementation of policy. The Tribunal therefore finds that concerns about the way in which the policy was implemented are validly before the Tribunal, and may be considered when deciding whether to rescind the policy or not.
In order to determine whether to substitute its own decision for that of the DFO, the Tribunal should consider the policy as well as the policy making process as a whole. While the Tribunal cannot impose a duty of procedural fairness on the DFO when they make policy, the way the policy was implemented could be relevant to the Tribunal's determination of this appeal.
The Tribunal finds that the DFO did consult by discussing potential changes to its quota policy during spring regional meetings, dairy producer committee meetings, and annual general meetings, as early as 2003. Therefore, the Tribunal will not rescind the policy on the basis of alleged inadequate consultation.
The Tribunal finds that it is unlikely there would be any substantial difference in the impact on quota prices by a sudden implementation as opposed to giving advance notice. On October 19, 2006, the DFO canceled the November exchange and on November 17 it announced its new policy. The evidence demonstrated that more quota was offered for sale on the December 2006 quota exchange than was bid on for purchase. Had DFO given notice of the policy, the supply of quota would also likely have exceeded the demand, depressing the exchange clearing price. Thus, it is possible that sellers may have received a price lower than the potential $25,500, which was the maximum return a seller would receive with the application of the policy. Thus, the Tribunal will not rescind the policy based on the lack of a notification period.
Part of the mandate of the Board of Directors of DFO is to develop policy that will assist in maintaining a healthy and viable dairy industry in Ontario. Expert witnesses for DFO testified that the Ontario dairy industry is greatly overcapitalized, especially when compared to the American dairy industry or to the price-earnings ratios of healthy stocks on the stock markets.
Quota values more than doubled between the time that the transfer assessment was removed in 1996 and re-introduced in 2006. As of 2006, $6.3 billion of the $13.8 billion in total dairy farm assets in Canada were in quota, and an estimated 50% of the value of quota was covered by debt. Dr. Groenewegen testified that high quota prices are an entry barrier to the dairy industry. In his opinion, lower quota values bode well for the industry, providing a better return on assets and improving the equity position of producers.
There was no evidence submitted by the ORQO to challenge or contradict the evidence of rising quota values prior to November 2006. The OQRO indicated that they were content with a system in which buyers and sellers established quota prices on the quota exchange, with no restrictions on rising quota values.
The Tribunal accepts the evidence of the DFO's expert witnesses regarding overcapitalization of farms, the doubling of quota values, the increasing debt-to-asset ratio, and increasing barrier to entry. The Tribunal finds that DFO did have sufficient grounds to be concerned about rising quota values and was justified in addressing this concern through policy.
Dr. Groenewegen testified that the objectives of the policy were to stabilize and/or reduce quota prices, and to foster the stability of the supply managed dairy industry in Ontario. Expert testimony and evidence demonstrate that since the introduction of this policy quota prices have fluctuated slightly but in general have stabilized. Even OQRO's expert witness, Dr. Mussell, supports this conclusion, though he focused more on the reduction of the volume of quota exchanged after the policy was implemented.
Some of the OQRO witnesses testified that quota prices have not shown consistent signs of decrease but, instead, have risen since the introduction of the new policy.
The Tribunal accepts the evidence of the DFO regarding the stabilization of quota prices, and finds that quota prices have stabilized since the introduction of this policy. Further, by making dairy quota more affordable, the policy facilitates entry into the industry for new dairy producers.
Moreover, the Tribunal finds that it is more probable than not that this policy had a significant impact on the stabilization of quota values, for the following reasons:
All dairy producers were affected by this policy. Those who were exiting the industry in the near term were subject to the transfer assessment on all but the last 10 kg of quota. Producers who purchased quota were subject to the pay-what-you-bid provision of the policy as well as the transfer assessment if and when they sold their quota.
DFO witnesses stated the policy was intended for the well being of the industry, and that DFO was aware of the negative impact the policy would have on some producers, particularly for sellers of quota or producers who were close to retirement and wished to leave the industry. The DFO chose to implement the policy nonetheless, without including any provisions to minimize or reduce the impact on that particular group of producers.
OQRO witnesses who had sold their quota testified as to their financial losses as a result of this policy. However, DFO provided evidence to demonstrate that, after the application of the transfer assessment, these producers have not suffered losses, but in fact, their quota holdings appreciated significantly in value since the quota was acquired.
The Tribunal finds that the DFO's November 2006 policy should not be rescinded on the basis of its consequences to OQRO members or to other producers, for the following reasons:
The Tribunal finds that, on balance, the positive impacts of the policy
on the industry as a whole outweigh the negative impacts to a subset of
producers that have benefited by way of their success in the industry
and by way of the net gain in the value of their quota.
Order of the Tribunal
For the reasons cited above, the Tribunal hereby Orders that the appeal by the Ontario Quota Rights Organization of the decision of the Dairy Farmers of Ontario not to rescind its November 2006 Policy on Quota Transfers be denied.
Dated at Ottawa, Ontario, this 18th day of December, 2009.
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