Ontario Dairy Council (ODC) vs Director

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 the Ontario Dairy Council, of Mississauga, Ontario, from the decision of the Director under the Milk Act in which the Director granted a "Permit to Construct or Alter a Building Intended for Use as a Plant" to Esskay Dairy Ltd.

Before:

Susan Whelan, Vice Chair, Nicholas Richter, Vice Chair, and Sharon Weitzel, Member (Ms. Weitzel recused herself from the panel after the hearing and took no part in the decision)

Appearances:
Mr. Tom Kane, on behalf of the Ontario Dairy Council, Appellant
Mr. Kristopher Crawford-Dickinson, Counsel on behalf of the Director, Respondent
Mr. Azad Damani, on behalf of Esskay Dairy Ltd., Respondent

Decision of the Tribunal

This appeal was heard in Guelph, Ontario, on Tuesday, November 8, 2011. The Ontario Dairy Council ("ODC") appealed to the Agriculture, Food and Rural Affairs Appeal Tribunal (the "Tribunal") from the decision of the Director under the Milk Act (the "Director") in which the Director granted a "Permit to Construct or Alter a Building Intended for Use as a Plant" to Esskay Dairy Ltd. ("Esskay Dairy").

Background

Esskay Dairy proposes to manufacture lassi, an ethnic yogurt drink, from premises in Millbank, Ontario. The premises previously housed the now-defunct Mornington Dairy facility. Esskay Dairy proposes to install new and used equipment into an existing building at the premises in order to manufacture and distribute its product to customers in Ontario. Esskay Dairy proposes to use milk from cows, goats, and sheep in its manufacturing process. Only milk from cows and goats is regulated under the Milk Act.

As required by section 14(1) of the Milk Act, Esskay Dairy applied to the Director for a "Permit to Construct or Alter a Building Intended for Use as a Plant." In a letter dated August 18, 2011 (the "Decision Letter"), the Director approved Esskay Dairy's application and granted a permit so that Esskay Dairy could proceed with construction at its proposed dairy facility.

ODC appeals the Director's decision to grant Esskay Dairy a permit. ODC asks the Tribunal to overturn the Director's decision on the basis that the Director did not satisfy the requirements of section 14(3) of the Milk Act in granting a permit to Esskay Dairy. In particular, ODC alleges that the Director failed to comply with section 14(3)(a) of the Milk Act by failing to take into account the impact of her decision on the facilities of the existing plants in operation.

The Parties to the Appeal

ODC, as appellant, and the Director, as respondent, both appeared as parties on the appeal. Esskay Dairy was added as a responding party at the hearing. Although served with the notice of hearing, the Dairy Farmers of Ontario ("DFO") did not participate in the appeal.

The Issue to Be Determined

The sole issue for determination on this appeal is whether the conditions in section 14(3)(a) of the Milk Act for the issuance of a permit have been satisfied. Section 14(3)(a) provides:

14. . . .

(3) No permit shall be issued by the Director unless,

(a) in the opinion of the Director, the plant is necessary and desirable, having regard to the needs of the producers in the locality in which it is proposed to locate the plant and to the facilities of the existing plants in operation. . . .

Scope of the Appeal

An issue arose early in the hearing regarding the scope of this appeal. Mr. Kane, on behalf of ODC, indicated that he intended to discuss, among other things, the criteria for the issuance of a permit to construct or alter a building intended for use as a plant and its relationship to the criteria for the issuance of a licence to operate a plant (these two types of permissions are referred to in these reasons, respectively, as a "permit" and a "licence"). Specifically, Mr. Kane indicated that he intended to discuss ODC's concern that, while the industry is given notice of applications for a permit, since 2007 the industry has not been given notice or an opportunity to provide input into the decision-making process for the issuance of licences. Mr. Kane stated that this appeal was the only opportunity under the current procedures for the industry to provide input on both the permit and the licence.

Mr. Crawford-Dickinson, on behalf of the Director, disagreed with ODC's position. Mr. Crawford-Dickinson noted that, under the existing legislation, a person has to make separate applications for both a permit and licence, and the Director issues separate decisions for each. Mr. Crawford-Dickinson indicated that the Director had not yet made a decision in this case as to whether to issue a licence to Esskay Dairy. If such a decision were made, Mr. Crawford-Dickinson suggested, ODC would have a right to appeal that decision to the Tribunal pursuant to section 16(1) of the Ministry of Agriculture, Food and Rural Affairs Act. Mr. Crawford-Dickinson therefore argued that anything having to do with licensing was not properly before the Tribunal on this appeal. The only issue before the Tribunal on this appeal was whether the Director should have issued a permit to Esskay Dairy.

The Tribunal ruled that, as indicated in the notice of hearing, this appeal is from a decision of the Director to issue a permit to Esskay Dairy and not about the issuance of a licence. Accordingly, the appeal proceeded solely on the issue of whether the Director's decision to issue a permit to Esskay Dairy should be set aside. The Tribunal noted, however, that it would allow the parties to make submissions with respect to other provisions of the Milk Act and the regulations under the Milk Act for the purposes of statutory interpretation or legal argument, as it is appropriate for the Tribunal to look at the statute as a whole.

The Evidence

The Tribunal heard from only two witnesses: Mr. Kane on behalf of ODC, and Mr. Damani on behalf of Esskay Dairy. The Director chose to call no witnesses, but did cross-examine the other parties' witnesses and also made submissions. All of the parties filed documentary evidence, which was admitted into evidence by the Tribunal on consent.

The central document in this appeal is the Decision Letter of the Director. That letter provides, in relevant part:

In accordance with Section 14 (3) of the Milk Act, the Director is of the opinion that the plant is necessary and desirable having regard to the needs of the producers in the locality in which Esskay Dairy proposes to locate its plant and to the facilities of the existing plants in operation. The Director is of the opinion that the plant is necessary and desirable for the following reasons:

1. Esskay Dairy proposes to manufacture products that will satisfy a growing ethnic market with a yogurt drink product common in South and Central Asian, and Middle Eastern countries and meet the growing demand for local and differentiated food and dairy products in Ontario. Direct benefits will include the creation of local jobs and support for businesses in the supply chain.
2. The cow milk Esskay Dairy is requesting is available on-demand in Ontario for any processor of yogurt. It is our understanding that any processor of yogurt can request and receive as much milk as they need for their operation. Thus, to deny Esskay Dairy a permit would simply give preference to existing processors over those seeking to enter the industry.
3. Several similar processors of yogurt have been permitted and licensed by the Director of the Food Inspection Branch since 1993. Similar to these operations, Esskay Dairy is proposing to manufacture a relatively small amount of yogurt (0.6% of the provincial total) and market to a growing ethnic market as a unique local product. In the opinion of the Director the potential for any new, differentiated products expanding the total demand for milk, and hence, the supply of milk far outweigh any negative impact on existing processors. It is anticipated that this product may displace imports of yogurt into Ontario as Esskay Dairy will emphasize the fact that the product was produced locally as part of its marketing of the product.
4. This application is supported by the Dairy Farmers of Ontario.

The Director went on to confirm in the Decision Letter her understanding that Esskay Dairy's initial plans and drawings had been reviewed by the appropriate Ministry staff and that Esskay Dairy intended to meet all applicable regulations.

Having found that Esskay Dairy's proposed plant was necessary and desirable, within the meaning of section 14(3)(a) of the Milk Act, and being satisfied that the proposed plant would comply with the regulations under the Act (which is required under section 14(3)(b) of the Act, but was not seriously disputed on this appeal), the Director issued a permit to Esskay Dairy as she was required to do under section 96 of Regulation 761 under the Milk Act.

Mr. Tom Kane

Mr. Kane is the President of ODC. He testified that ODC is the provincial, not-for-profit association that represents the interests of the dairy processing sector. ODC was established in 1971, and currently has forty processing member companies with fifty-five facilities that manufacture all types of dairy products, including fluid milk and cream, yogurt, ice cream, specialty cheeses, cheddar cheese, butter, and milk powders. Collectively, the members of ODC process approximately 97% of all the milk produced in Ontario and have annual sales in excess of $5.5 billion. The membership is diverse and is comprised of small, family-owned businesses, dairy farmer cooperatives, and large multi-national enterprises. Mr. Kane indicated that ODC has a board of directors of sixteen industry representatives, who authorized this appeal.

r. Kane advised the Tribunal that ODC launched this appeal because it feels aggrieved by the Director's decision to grant a permit to Esskay Dairy. ODC contends that the Director failed to satisfy the requirements of section 14(3) of the Milk Act in granting the permit because, ODC alleges, the Director did not take into account the impact on the facilities of the existing plants in operation. Mr. Kane referred to the Director's four reasons for issuing the permit and indicated that those reasons either had nothing to do with the permitted criteria or failed to take into account the needs of the existing dairy processing industry in Ontario as required by section 14(3) of the Milk Act. As a result of the Director's decision, Mr. Kane stated that the current licence holders in the province would be negatively impacted, as there would be less milk available for the existing processors to manufacture cheese and butter.

Mr. Kane took issue with the Director's interpretation of the words "necessary and desirable" in section 14(3)(a) of the Milk Act. He indicated that, while there was no doubt that it would be desirable to have another manufacturing facility in the province, ODC disagreed with the Director's determination that such a plant was necessary. ODC's view is that in order for a plant to be necessary, it must be both needed and required. ODC questioned why another plant was necessary in this sense.

Mr. Kane responded to each of the four reasons given by the Director for issuing a permit to Esskay Dairy. With respect to the Director's first reason, Mr. Kane noted that this reason was interesting because it brought into consideration the consumer. Mr. Kane stated that the Milk Act makes no reference to consumers' needs but only to producers' and processors' needs. He reminded the Tribunal that market conditions, consumers' needs, job creation, and support for the supply chain are not really criteria listed in the Milk Act or Regulation 761.

Even if servicing the market were to be included in the criteria to be considered by the Director, Mr. Kane testified that the Director had failed to recognize the negative impacts to the facilities of other plants in operation. Mr. Kane told the Tribunal that lassi is already produced by at least three, small, family-owned dairy companies in Toronto: Hans Dairy Inc., MC Dairy Company Ltd., and Zaika Foods Ltd. Mr. Kane said that the competition resulting from Esskay Dairy's application would be negative and that job losses could accrue to the existing plants in operation. He also noted that lassi is produced by at least three companies in Western Canada (Bles Wold Farmhouse in Alberta, Mother Dairy in Alberta, and Meadow Fresh in British Columbia), all of whom can distribute their product across the country to serve the growing ethnic market.

Mr. Kane questioned how the Director had determined that Esskay Dairy's application would meet the growing demand, to what extent jobs would be created, to what extent Esskay Dairy would be taking market share from existing facilities, and what analysis was conducted to determine that there would be no direct impact on the existing plants in operation. Mr. Kane's view was that there would be no positive impact on the province as the product is already on the market. He also remarked that the reduction in the milk supply to all existing industrial milk plants would be a serious negative impact.

With respect to the Director's second reason for granting the permit, Mr. Kane testified that at the time of the Director's decision, industrial milk was supplied to yogurt processors on demand, but effective November 1, 2011, this was no longer the case. Because of the increasing demand for industrial milk by yogurt processors, DFO had implemented a new allocation system for yogurt plants in order to protect the milk supplies of the existing cheese and butter plants. Mr. Kane filed a letter from DFO explaining the new system, which establishes a base for all existing yogurt plants, calculated as the greater of the milk used in the production of yogurt in the past year or the average volume used in the production of yogurt over the past two years (a dairy year runs from August 1 of one year to July 31 of the next year). To allow for growth, all yogurt processors with a base greater than 10.0 million litres annually will have a 20% growth allowance. Those yogurt processors with a base volume less than 10.0 million litres annually will not be restricted to the 20% growth allowance. Although this new allocation system was not in place at the time that the Director made her decision, Mr. Kane testified that it was widely known in the industry at the time of the Director's decision. Mr. Kane's view was that Esskay Dairy would not be able to obtain a supply of milk under the new allocation system.

Mr. Crawford-Dickinson objected to the admissibility of this evidence. He argued that any evidence of a new policy that took effect after the Director's decision was improper and inadmissible. The thrust of his argument was that the Director does not know at any given time what policy changes might occur in the future. If the Director had based her decision on possible future policy changes, Mr. Crawford-Dickinson alleged, then Esskay Dairy would have had a ground of appeal for considering irrelevant facts. Mr. Crawford-Dickinson therefore asked that all references to the new policy in the evidence, including the documentary evidence filed by ODC, be excluded. The Tribunal ruled that ODC would be permitted to give this evidence, subject to any argument that the parties wished to make as to the relevance of the evidence.

Mr. Kane provided a helpful overview of the national supply management system for milk. He testified that this system was introduced to Ontario forty-one years ago by the provincial government and the milk marketing board. Under the National Milk Marketing Plan signed some three decades ago, Ontario can only produce 31.4% of all the industrial milk that is required to fulfill the national market for dairy products. Industrial milk is used to manufacture such products as yogurt, ice cream, cheese, and butter. Mr. Kane explained that industrial milk is regulated at the national level pursuant to a Market Sharing Quota (the "MSQ"). According to documents filed by ODC with the Tribunal, the MSQ is the national milk production target for industrial milk in Canada. The target is monitored constantly and is adjusted when necessary to reflect changes in demand. Mr. Kane testified that Ontario can only produce 31.4% of any increase in the MSQ with respect to industrial milk. This is in contrast to fluid milk, which can be produced within Ontario in order to meet any increase in local demand. Mr. Kane testified that there were discussions at the national level to take yogurt out of the national category and bring it within provincial jurisdiction, which would then allow the province to produce as much milk as it wanted in response to any increased demand for yogurt. However, any such change would require unanimous consent, which has not yet been achieved.

Mr. Kane testified that, under the old on-demand system, yogurt plants could obtain as much industrial milk as they wanted. The industrial milk that remained (known as the "residual supply") was allocated to cheese and butter plants by means of Plant Supply Quota ("PSQ"). Mr. Kane explained that, as the requirements for the on-demand delivery of milk to yogurt plants increased, the volume of the residual milk supply had to go down. Every time there was an application for a new yogurt processing facility in the province, the volume of milk available to the cheese and butter plants was reduced. Mr. Kane testified that the province does not have the ability to increase its production of milk just because the Director grants a new plant licence. The National Milk Marketing Plan does not permit a province to increase its share of the MSQ. Mr. Kane explained that if the MSQ were to increase as a result of an increase in local demand, Ontario would only be able to produce 31.4% of the increased supply of industrial milk, with the balance coming out of the existing plants in Ontario (presumably because the increased milk being utilized in Ontario could only be matched by a 31.4% increase in supply, leaving a deficit of 69.6% that would have to come out of the residual supply of industrial milk in the province).

Mr. Kane commented that the volume of industrial milk being produced in Ontario is not enough to satisfy the market for Ontario's existing industrial milk plants. He provided the Tribunal with copies of milk marketing forecasts from DFO for the last four dairy years. These tables indicate that, for the dairy year commencing in August 2010 and ending in July 2011, PSQ facilities received only 92.25% of their quotas. Mr. Kane testified that, from the point of view of the existing plants in operation, this would indicate that markets are not being served. Having a new plant licence granted by the Director, he said, had the potential of making that situation worse. He indicated that over the last four dairy years, the milk supplied to cheese and butter plants decreased by 4%. Over that same period, the MSQ increased by 4.5% and on-demand milk utilization in Ontario increased by 3.2%. In Mr. Kane's view, the granting of Esskay Dairy's application would increase the on-demand portion of the milk supply (assuming that Esskay Dairy obtained its supply under the old system) and further decrease the volume of milk available to the existing facilities that manufacture cheese and butter. Those facilities, he said, were already in a situation where they could not meet the current market for their industrial cheese products. This, he said, was not necessary or desirable, taking into consideration the plants in operation under section 14(3) of the Milk Act.

The Tribunal notes that the tables provided by ODC indicate that, for the dairy years ending in July 2008, 2009, and 2010, the PSQ facilities received more than 100% of their allotted supply. It was only in the dairy year ending in July 2011 that the PSQ facilities received less than their allotted supply. Mr. Kane did not address this issue, but it does leave an open question as to whether the situation in the most recent dairy year was an anomaly (although there does appear to be a general downward trend).

Under cross-examination by Mr. Crawford-Dickinson, Mr. Kane testified that, currently, industrial plants receive 1.3 billion litres of milk in the industrial category. There are currently 48-50 licensed facilities that receive industrial milk. Under the on-demand system, once an applicant acquires the right to obtain industrial milk on demand, it can take as much milk as it wants under that category. Mr. Kane acknowledged that a plant's ability to take milk on demand would be limited by the capacity of the plant. He also acknowledged that, if the plant needed to install additional equipment to increase its capacity, this would be an alteration to the plant that would require a further permit from the Director. He further acknowledged that, in considering such an application, it was reasonable to assume that the Director would look again at the impact on existing facilities.

Mr. Kane explained that there were a number of opportunities for new entrants to gain a supply of milk. DFO has a program that permits new processors to receive up to 300,000 litres of milk each year through the Artisan Dairy Program. The Artisan Dairy Program (originally the Artisan Cheese Program, but recently expanded to include other dairy products) set aside a pool of 3 million litres of milk that could be applied for by new entrants. It appears from a letter from DFO dated July 20, 2011 (filed with the Tribunal by the Director) that, under the Artisan Cheese Program, only several hundred litres annually were being utilized out of the pool of 3 million litres. The letter states that, until this milk is fully allocated, Ontario's existing quota plants are receiving a share of this unallocated milk. Mr. Kane explained that, currently, this unallocated milk becomes part of the residual milk supply and is then divided up among the PSQ plants. Mr. Kane added, however, that the original pool of 3 million litres had originally come from the PSQ supply, so DFO was actually giving the unutilized milk back to the PSQ plants. He admitted, however, that a processor who obtains milk from the Artisan Dairy Program has no impact on the industrial milk supply, presumably because the unallocated milk in the Artisan Dairy Program is separate from the industrial milk supply. When asked by Mr. Crawford-Dickinson whether ODC had been supportive of the Artisan Cheese Program, Mr. Kane responded that ODC had chosen not to exercise its right of appeal.

Mr. Kane confirmed in response to questions that yogurt processors can now apply under the Artisan Dairy Program. The program requires the processor to have a new and innovative product. When asked if Esskay Dairy could have obtained a supply of milk under the Artisan Dairy Program, Mr. Kane responded that, if Esskay Dairy had applied, they would have been accommodated.

At the national level, Mr. Kane testified that new entrants can also obtain a supply of industrial milk under the Domestic Dairy Product Innovation Program (the "DDPIP") overseen by the Canadian Dairy Commission. He stated that the DDPIP provides milk supplies of up to 5 million litres annually to plants that can demonstrate that they are introducing a new, innovative product that will increase the consumption of Canadian produced milk. In response to questions, Mr. Kane confirmed that the DDPIP would have been available to Esskay Dairy and that the DDPIP has entertained applications from other yogurt manufacturers over the years. Mr. Kane explained that the DDPIP has the ability to issue additional milk supplies of up to 3% of the MSQ, or 150 million litres, and therefore puts greater milk supplies into the system. In the case of an Ontario plant, DFO would be required to produce additional litres under the DDPIP, which would then be directed to whichever plant had applied for it. Mr. Kane indicated that ODC supported the DDPIP.

Other options for Esskay Dairy that were identified by Mr. Kane were for Esskay Dairy to purchase dairy components from other licensed dairy plants or to invest in an ongoing operation with a yogurt base under the new allocation policy of DFO.

With respect to the Director's third reason for granting the permit, Mr. Kane reiterated his earlier testimony that Esskay Dairy's product was not a unique, local product because, he said, the exact same products were already on the market from at least three local Ontario companies. He repeated that a new processing facility would not expand the total demand for milk because Ontario can only produce 31.4% of any expanded demand for milk. Mr. Kane questioned how the Director had determined that any negative impacts on existing plants would be outweighed by Esskay Dairy's application, as well as the Director's rationale for determining that Esskay Dairy's application was necessary and desirable.

With respect to import replacement, Mr. Kane testified that the granting of Esskay Dairy's application would not have the impact on the importation of yogurt as the Director claimed. He explained that, as part of Canada's international trading agreement, there is a Tariff Rate Quota (the "TRQ") for the importation of yogurt that has been established for Canada and is set at 7,170,978 kilograms annually. He said that just because more yogurt is produced in Ontario by a new plant, it will not reduce the TRQ for the product. He provided documentation to the Tribunal confirming that, in calendar year 2010, the TRQ for yogurt was fully utilized.

When pressed on this issue by Mr. Crawford-Dickinson, Mr. Kane agreed that the fact that Ontario imports milk products indicates that markets are not being served. He disagreed that if a market becomes served, the need to import could be reduced. He said that importers will bring in yogurt products regardless of what is going on in the industry, and would make this profitable by way of subsidies or other economic incentives. In spite of these denials, Mr. Kane did acknowledge that if consumers made a choice to buy Esskay Dairy's product, that could have an impact Canada-wide. When pressed as to whether there was a market for Esskay Dairy's product, Mr. Kane responded that Esskay Dairy would just be displacing the three other Ontario producers or maybe some imports.

Mr. Kane also took issue with the Director's statement in the Decision Letter that "several similar processors of yogurt have been permitted and licensed . . . since 1993." Mr. Kane testified that, of the eleven licensed yogurt manufacturers in Ontario that currently purchase milk from DFO, two were granted a licence in 1994, at a time before the current pooling agreements and when milk supplies were abundant. The remaining plants, he said, were licensed before 1993. Mr. Kane testified that, since that time, there have been no plant licences or permits granted for yogurt manufacturers receiving milk from DFO.

Mr. Kane provided the Tribunal with a list of plant applications for permits and licences over the past eight years, not just for yogurt but for other dairy products as well. It appears from this list and Mr. Kane's evidence that, other than Esskay Dairy, there were four other applications over the past eight years involving the manufacturing of yogurt. Two applicants planned to obtain their milk supplies from another licensed dairy plant; one planned to process fluid milk (which does not affect the industrial milk supply) and then to use its own bi-products to manufacture yogurt; the fourth was seeking a milk supply from DFO but, according to Mr. Kane, the plant was never built. It was not clear from Mr. Kane's evidence whether this fourth plant had been granted the licence that it was seeking.

The Tribunal notes that the list provided by Mr. Kane dates back only to July 2003 and not all the way back to 1993. It is therefore difficult for the Tribunal to verify the accuracy of the Director's statement that several similar processors of yogurt have been permitted and licensed since 1993. Based on Mr. Kane's evidence, however, at least two of the eleven existing yogurt manufacturers who purchase milk from DFO received their licences in 1994, so the Director's statement would appear to be accurate.

With respect to the Director's fourth reason for granting a permit, Mr. Kane stated that DFO had supported this application but then instituted a new milk allocation policy that, according to Mr. Kane, would prevent Esskay Dairy from receiving any milk. Mr. Kane said that this created a dilemma that ODC could not fully understand.

After addressing the Director's four reasons for granting the permit, Mr. Kane brought to the Tribunal's attention two earlier decisions regarding applications for a licence, one by the Director and one by the Tribunal. The first decision, from 1986, involved an application by Kenneth M. Furlong for a licence to manufacture skim milk cheese. It appears from this decision that the Director held a hearing to determine whether Mr. Furlong's application for a licence should be refused. The application was opposed by ODC, the Ontario Creamerymen's Association, and the Ontario Milk Marketing Board. In written reasons issued by the Director, the application was refused on a number of grounds. Mr. Kane called the Tribunal's attention to the Director's acceptance in that case of ODC's arguments that the application might place increased pressure on the availability of industrial milk for cheese and butter plants. The Tribunal notes, however, that the Director also found that the proposed plant could not operate legally under the Milk Act and the regulations under the Act. In addition, the Director noted several concerns about the applicant's lack of qualifications to operate a plant and public health concerns reported to the Director by the Supervisor of Plant Inspection.

The other case raised by Mr. Kane is a Tribunal decision from 1988 involving an application by Paul Lalonde for a licence to operate a cheddar cheese plant in Northern Ontario. Mr. Lalonde was appealing the denial of his application for a licence by the Director. The application was opposed by ODC and by Ault Foods Limited ("Ault Foods"), which operated a cheese facility in the region. The Ontario Milk Marketing Board did not oppose the application. The appeal was denied by the Tribunal. Mr. Kane pointed out that the Tribunal in that case found that a provision similar to section 14(3)(a) of the current Milk Act was relevant to considering the need for another plant in Northern Ontario. Mr. Kane highlighted the Tribunal's finding in that case that it would not be financially viable for Mr. Lalonde's proposed plant to utilize approximately the same volume of milk annually as the Ault Foods plant to manufacture similar cheese products which were already available to consumers in the area. Finally, Mr. Kane noted that the Tribunal in that case found that industrial milk processors at the time were unable to fully utilize existing processing capacity because of constraints imposed on the industry by the National Milk Supply Management program.

The Tribunal notes that in the Lalonde case, the applicant had no practical cheese-making experience, and was working as a car salesman at the time. There was a surplus of cheddar cheese in Ontario at the time, and there had already been job losses at the Ault facility, which had excess capacity. The applicant was seeking an annual supply of two million litres of milk, which, according to the evidence of the Ontario Milk Marketing Board, would be diverted directly from Ault's plant. The Tribunal was provided with financial data from Ault indicating that the Ault facility was already operating at an annual loss and would be in financial difficulties if the licence were granted. The Tribunal found that a reduction in the amount of industrial milk available to the Ault plant would jeopardize its viability, resulting in job losses and significant increases in raw milk transportation costs.

The Tribunal asked Mr. Kane how ODC's request to set aside the granting of Esskay Dairy's permit would advance the statutory purpose set out in section 2(a) of the Milk Act, which is to "stimulate, increase and improve the producing of milk within Ontario." Mr. Kane responded that the government, processors, and farmers were trying to achieve this purpose by providing flexibility in the system. He cited the DDPIP, which has the ability to issue milk supplies of up to 3% of the MSQ. He expressed the view, however, that there were still limitations of supply management that had to be acknowledged.

Mr. Azad Damani

Mr. Damani testified on behalf of Esskay Dairy. Mr. Damani testified that, before deciding to proceed with its application, Esskay Dairy had conducted research on its proposed lassi product in Europe, where a friend owns a plant now worth 18 million Euros. Mr. Damani testified that the proposed lassi product was made from cow's milk, goat's milk, and sheep's milk. Mr. Damani said that the proposed lassi product was a truly unique product that was not on the market anywhere else. He said that he felt that there was a big need for the product in Canada, and mentioned that in Europe the product is supplied to schools. He thought that the product would be profitable, and said that Esskay Dairy was planning to stay for a while. Mr. Damani predicted that Esskay Dairy's plant would bring a lot of prosperity to the Kitchener-Waterloo area, and would cut down on exports from Greece and Italy.

Mr. Damani testified that Esskay Dairy chose to locate in Millbank because of the existing dairy plant there. Esskay Dairy thought that there were benefits to being in that plant as opposed to building a brand new one. Mr. Damani said that the nearest processing plant was in Guelph, about a 45-minute drive from Millbank. Mr. Damani testified that Esskay Dairy plans to hire 15-20 employees (including office staff) from the local community. Esskay Dairy also plans to source all of its milk from local producers, which would lower their transportation costs. In this regard, Mr. Damani tendered into evidence a letter of support from Quality Sheep Milk, a local supplier of sheep's milk in Salford, which is close to Millbank. Mr. Damani said that Esskay Dairy plans to buy sheep's milk from Quality Sheep Milk and that, given the proximity to the proposed plant, the transportation costs would be minimal. There was also a letter of support from Ed Zehr, a producer of goat's milk in Newton, also close to Millbank. Mr. Damani testified that Esskay Dairy would like to purchase goat's milk from Mr. Zehr, which would save Mr. Zehr on transportation costs and therefore benefit producers. Mr. Damani also tendered into evidence a letter of support from Silani Sweet Cheese Ltd. ("Silani Cheese"), which is a member of ODC. Mr. Damani acknowledged on cross-examination by Mr. Kane that Silani Cheese does not manufacture yogurt products.

Mr. Damani confirmed that Esskay Dairy's application for a permit was supported by DFO. In a letter from DFO to the Ministry dated July 29, 2011, DFO stated that it fully supported Esskay Dairy's application. The letter also confirmed that milk for yogurt products was supplied on-demand and had no supply restrictions. There is no reference in DFO's letter to any proposed changes to the milk allocation system for industrial milk.

Esskay Dairy's application for a permit, filed with the Tribunal, indicates that Esskay Dairy expects to process 400,000 litres of cow's milk annually and 40,000 litres of goat's milk. The products to be produced are listed as lassi and goat milk feta. On cross-examination by Mr. Kane, Mr. Damani testified that it was the inclusion of goat's milk and sheep's milk that made Esskay Dairy's proposed lassi product a unique product. When Mr. Kane asked why the use of goat's milk and sheep's milk in the lassi product was not mentioned in Esskay Dairy's application, Mr. Damani replied that his partner knew all the details of the application but that he was sure that goat's milk and sheep's milk would be used, although he did not know the exact percentages. The Tribunal notes that goat's milk is mentioned in the application, although its use in the proposed lassi product is not clearly set out. Mr. Damani said that he was aware that sheep's milk does not fall under the Milk Act, which may explain why sheep's milk was not mentioned in the application, although there was no evidence on this point.

Mr. Damani testified that the proposed plant would be able to process up to about 500,000 litres of milk; if the plant went up to 600,000 litres they would have to make modifications to the plant. He agreed that Esskay Dairy would have to apply to the Director to make modifications at that time. He said that it would not be feasible to increase capacity by adding more shifts because Esskay Dairy would need more storage, holding tanks, etc. Mr. Damani recognized that Esskay Dairy's supply of milk could change based on a number of factors, and he accepted that reality. He thought it reasonable that others who operate in the industry understand that they have the same kinds of constraints.

Analysis and Findings

A plain reading of section 14(3)(a) of the Milk Act indicates that, before a permit to construct or alter a building intended for use as a plant may be issued, the Director must form the opinion that the proposed plant is necessary and desirable, having regard to the needs of the producers in the locality in which it is proposed to locate the plant and to the facilities of the existing plants in operation. There is no issue in this case that the Director formed the opinion required of her under section 14(3)(a) of the Milk Act. Nevertheless, the Tribunal has the power under section 16(11) of the Ministry of Agriculture, Food and Rural Affairs Act to substitute its opinion for the opinion of the Director and to order the Director to take such action as she is authorized to take under the Milk Act and as the Tribunal considers proper. It therefore falls to the Tribunal in this case to review the evidence and determine whether Esskay Dairy's proposed plant is necessary and desirable, having regard to the needs of the producers in the locality in which it is proposed to locate the plant and to the facilities of the existing plants in operation.

In approaching its analysis of section 14(3)(a) of the Milk Act, the Tribunal finds it helpful to begin with section 2 of the Milk Act, which sets out the legislative purpose of the Act:

2. The purpose and intent of this Act is,

(a) to stimulate, increase and improve the producing of milk within Ontario;

(b) to provide for the control and regulation in any or all respects of the producing or marketing within Ontario of milk, cream or cheese, or any combination thereof, including the prohibition of such producing or marketing in whole or in part; and

(c) to provide for the control and regulation in any or all respects of the quality of milk, milk products and fluid milk products within Ontario.

As section 2 indicates, the Milk Act has a twofold purpose: (1) to stimulate, increase and improve the producing of milk within the province, and (2) to provide for the control and regulation of the dairy industry in Ontario. The first purpose is set out in section 2(a) of the Milk Act, while the second is encompassed by sections 2(b) and 2(c) of the Act.

In approaching section 14(3)(a) of the Milk Act, it is important to keep this twofold purpose in mind. The meaning of the phrase "necessary and desirable" is not immediately apparent from section 14(3)(a) of the Milk Act. Reading section 14(3)(a) together with section 2 of the Milk Act, however, helps to give meaning to the phrase. It is clear from section 2 that the legislative purpose of the Milk Act is both to stimulate, increase and improve the producing of milk within the province and to provide for the control and regulation of the dairy industry in Ontario. Taking into account this legislative purpose, it is reasonable to conclude that for a plant to be necessary and desirable it must have at least the potential to stimulate, increase, and improve the producing of milk within Ontario and must also fit within the overall statutory scheme for the control and regulation of the dairy industry within Ontario.

In deciding whether a proposed plant is necessary and desirable in this sense, the Director is required to have regard both to the needs of producers in the locality in which it is proposed to locate the plant and to the facilities of the existing plants in operation. This means that the Director must give due consideration to the impact that her decision will have on both producers and processors. If neither group benefits, it would be unlikely that the proposed plant would be necessary and desirable within the meaning of section 14(3)(a). If both groups benefit, the proposed plant may well be necessary and desirable within the meaning of the section, assuming that the other legislative objectives are met. The situation is more difficult, however, where, as in this case, one group may benefit and the other group may suffer as a result of the Director's decision.

In determining how to resolve such conflicts, it is helpful once again to look at section 2 of the Milk Act. It is important to note in this regard that, with respect to the control and regulation of the dairy industry under sections 2(b) and 2(c) of the Milk Act, the legislative purpose extends both to the producing and to the marketing of milk within the province ("marketing" is defined in section 1 of the Milk Act to include "advertising, assembling, buying, distributing, financing, offering for sale, packing, processing, selling, shipping, storing and transporting"). This is explicitly so in section 2(b), which refers to both producing and marketing, and implicitly so in section 2(c), as the quality of milk and milk products encompasses both producing and marketing. In contrast, the legislative purpose of stimulating, increasing, and improving the producing of milk within Ontario, as set out in subsection 2(a), does not extend to marketing (which, as noted above, includes processing). This suggests that where there is a conflict between stimulating, increasing, and improving the producing of milk and the needs of processors, the former may take priority over the latter, all other things being equal.

This is not to say that the Director should disregard the interests of processors in deciding whether to issue a permit to an applicant. Producers and processors are part of the same supply chain, and it is in the interests of both producers and processors to have a healthy processing sector. In determining whether a permit should be issued, the Director is required to give due regard both to the needs of producers and to the needs of processors. In an ideal world, those needs would always coincide. Unfortunately, we live in a less than ideal world, and the Director is sometimes required to balance the needs and interests of one group against the needs and interests of the other in order to advance the legislative purpose of the Milk Act. Where the Director cannot satisfy the needs of both producers and processors, she is entitled to decide in favour of producers if doing so would stimulate, increase, and improve the producing of milk within Ontario and would otherwise advance the legislative objectives of the Milk Act.

In making her decision, the Director is entitled to look at the dairy industry as a whole. Producers and processors do not exist in isolation from other sectors of the dairy industry. The industry is highly interdependent, from farmer to consumer, and the effects of a decision to issue a permit may have far-reaching implications for the industry as a whole. The creation of local jobs, the development of new products to meet the needs of consumers and markets, the promotion of local products, and support for other businesses in the supply chain are all legitimate areas of concern so long as they advance, or reasonably could be expected to advance, the legislative objectives of the Milk Act and do not conflict with the Director's statutory obligations under section 14(3)(a) of the Act.

In some cases, the Director may face a complex balancing act, and it is understandable that those who may be adversely affected by the Director's decision feel that their needs and interests were disregarded. Although section 14(3)(a) of the Milk Act gives the Director a fair amount of discretion in deciding whether to issue a permit, her decision is reviewable by the Tribunal based on the specific facts of each case.

In this case, the Tribunal finds that Esskay's Dairy's proposed plant is necessary and desirable within the meaning of section 14(3)(a) of the Milk Act. The Tribunal finds that, while there may be some negative impacts on the existing facilities in operation, the proposed plant would likely benefit producers and advance the legislative objectives of the Milk Act, for the following reasons:

1. Esskay Dairy is proposing to manufacture a unique product made from cow's milk, goat's milk, and sheep's milk. While there are other lassi products on the market in Ontario, Esskay Dairy's proposed product has the potential to expand the overall market for lassi by providing a new formulation that may offer new and different flavours, textures, and other sensory qualities.
2. Esskay Dairy is proposing to locate its plant well outside the Toronto area, where the other three Ontario lassi plants are located. Esskay Dairy will therefore be able to market its product as a local product within the Kitchener-Waterloo Region and surrounding area, which has the potential to attract new consumers who are looking for a product local to their area rather than a product manufactured in Toronto or Western Canada.
3. There is some, perhaps limited, potential for Esskay Dairy's lassi product to displace imports. Although Mr. Kane presented evidence that currently the import quota for yogurt is being filled in its entirety, he also acknowledged on cross-examination that Esskay Dairy's product may have the ability to displace some imports.
4. If Esskay Dairy's product is successful, it has the potential to increase the overall demand for milk in Ontario, which would have the potential to increase the supply of milk in Ontario to some extent. While the Tribunal accepts Mr. Kane's evidence that only 31.4% of that growth could be produced in Ontario, that growth would nevertheless benefit producers, although to some extent at the expense of processors. The Tribunal notes, however, that it may be possible for Esskay Dairy to secure a supply of milk from the DDPIP, which, according to Mr. Kane's evidence, would increase the overall supply of milk produced in Ontario. It may also be possible for Esskay Dairy to secure a supply of milk from the Artisan Dairy Program, which would tap into a large, currently underutilized pool of milk that has been set aside specifically for innovative new products, including yogurt products.
5. DFO fully supported the application at the time that the Director made her decision, which in itself is evidence that the proposed plant would benefit producers in the province. There is no evidence before the Tribunal that DFO has withdrawn its support, notwithstanding the recent change in the allocation system for industrial milk.
6. The proposed new plant would create local jobs and would rejuvenate a defunct dairy processing facility. While obviously not determinative, these benefits may nevertheless be considered in deciding whether to issue a permit, as discussed above.
7. According to Mr. Damani's evidence, the proposed new plant would reduce transportation costs for some producers.

All of the above benefits, if realized, would advance the legislative purpose of stimulating, increasing, and improving the producing of milk within Ontario. While many of the benefits are only potential, such is the case with any new business and for any new entrant into the dairy industry. Only time will tell whether those benefits are realized, but denying Esskay Dairy's application for a permit, as requested by ODC, does nothing to stimulate, increase, or improve the producing of milk within Ontario.

With respect to the legislative purpose of providing for the control and regulation of the dairy industry in Ontario, there is no evidence before the Tribunal that Esskay Dairy's proposed plant would not fit within the existing statutory scheme. This is obviously an issue for the Director to consider, in carrying out her statutory function, if and when Esskay Dairy applies for a licence to operate the proposed plant.

The Tribunal acknowledges that granting Esskay Dairy's application could have negative impacts on some processors. While the Tribunal accepts Mr. Kane's evidence that there may be some reduction in the residual supply of milk for cheese and butter plants if Esskay Dairy obtains its milk from the industrial milk supply, the Tribunal notes that the amount of milk requested by Esskay Dairy is very small (400,000 litres or approximately 0.03% of the 1.3 billion litres of industrial milk processed annually), and any negative impacts are therefore also likely to be very small. In addition, it appears from Mr. Damani's evidence that any increase in Esskay Dairy's milk supply beyond 500,000 litres would require alterations to the plant, which would provide the Director with a further opportunity to review any negative impacts on existing processors. The Tribunal also notes that, under DFO's new milk allocation system, existing yogurt plants are able to increase their milk supplies quite substantially, which would have a similar impact on the residual milk supply and does not appear to be a source of concern to ODC. Finally, if Esskay Dairy obtains its milk from the DDPIP or the Artisan Dairy Program, the negative impacts feared by ODC may not occur at all.

The Tribunal notes in this regard that no member of ODC testified as to the negative impacts that it would suffer if the Director's decision were upheld, nor was there any financial disclosure or expert evidence to support ODC's allegations about negative impacts and possible job losses. This was in stark contrast to the Lalonde case cited by ODC, in which Ault Foods made financial disclosure and a representative of Ault Foods testified regarding the existing plant's operations and the negative impacts that the proposed new plant would have on the existing plant. ODC has the onus on this appeal, and it would have assisted the Tribunal to receive the kind of evidence that was provided in the Lalonde case. The only member of ODC that did provide evidence in this case was Silani Cheese, which supported Esskay Dairy's application.

The Tribunal recognizes that there remains an issue regarding the recent change to DFO's allocation system for industrial milk. It is not fair to judge the Director's decision on the basis of a new policy that was not in effect at the time of her decision. On the other hand, the Tribunal has now heard evidence regarding the new policy, as well as the other potential sources of supply such as the DDPIP and the Artisan Dairy Program. The Tribunal considers it appropriate in this case to leave it up to Esskay Dairy to secure a supply of milk if it wishes to proceed with its proposed new plant. It is possible that DFO, having fully supported Esskay Dairy's application at the time, will find a way to accommodate Esskay Dairy's needs under the new system. It is also possible that Esskay Dairy will be able to secure a supply of milk from another source. Regardless, it is not necessary to decide those issues on this appeal.

Decision and Order

For all of the above reasons, the Tribunal orders that ODC's appeal is hereby dismissed.

Dated at Guelph, Ontario this 9th day of February, 2012