Rein Minnema, Huron County Pork Producers Association and District 10, 11, and 12 Pork Producers respectively vs. Ontario Farm Products Marketing CommissionIn the matter of the Ministry of Agriculture, Food and Rural Affairs Act, R.S.O. 1990, Chapter M.16, as amended;And in the matter of: Appeals to the Agriculture, Food and Rural Affairs Appeal Tribunal of a decision of the Ontario Farm Products Marketing Commission, dated October 6, 2008, regarding the Ontario Pork Producers' Marketing Board; Before: Frank Handy, Vice Chair of the Tribunal, Chair of this Panel; Appearances
Decision of the TribunalAll parties agree that the Ontario hog production industry is now in a state of crisis, has been in a state of crisis for some time, and seems likely to remain in a state of crisis for the foreseeable future. Some of the problems appear to be the following: the hog market in Ontario has significant overproduction relative to Ontario processing capacity and demand; Ontario producers are at a significant cost disadvantage to Quebec producers because of subsidies paid to producers in Quebec; the export market is hampered by "country of origin" labeling requirements that lessen the attractiveness of live hogs and partially and fully processed product in the USA; and, Ontario processors have to compete in Ontario and elsewhere against finished meat products produced on a national and international scale. Critics argue that Ontario Pork, the marketing board established under the Farm Products Marketing Act and Regulations, has been unresponsive to the current crisis and has an outmoded perspective, one that does not recognize the need for significant reform, more flexible marketing methods, and greater orientation to the needs of processors. Ontario Pork and appellants disagree with this position, and state that the underlying powers of Ontario Pork are not only necessary but must be preserved or enhanced in order to have equitable hog marketing. The Farm Products Marketing Commission convened a hearing over four days in late 2008 to consider these issues. Its decision has been appealed. The main appellants have asked us to reverse the decision of the Farm Products Marketing Commission (the Decision), Ontario Pork has asked us to modify it, and the respondents have asked us to confirm it. The Decision amended the regulatory powers of Ontario Pork by removing its ability to manage marketing contracts, and established an advisory committee with specific representation from parties who had been in an adversarial relationship with Ontario Pork. The operative portions of the Decision are as follows:
The parts of the primary Hog Marketing Regulation, Regulation 419, which have been amended or revoked are as follows (in bold face, statutory references deleted):
The Appeal before this Tribunal raised several procedural issues that the panel was required to decide on prior to the hearing. We do not propose to review these, except to point out that as a result of these matters Ontario Pork was required to clarify its position; in the Tribunal's view Ontario Pork was in the position of an appellant with regard to one issue (the removal of some of its powers) and in the position of a respondent on the others. Therefore, Ontario Pork took its place in the order of proceedings as the first respondent, and led its evidence after the rest of the appellants. Summary of Evidence The order of evidence was as follows:
District 10, 11, and 12 Pork Producers withdrew their appeal just prior to the commencement of the hearing, after negotiating a settlement of their primary concerns with Ontario Pork. The Open Marketing Group, a respondent, withdrew during the hearing because of other obligations and because the other respondents were presenting the same arguments as would have been presented by the Group. After the first two days of hearing, Ms. Lombardi, Vice-Chair of the Tribunal and member of the Panel, recused herself from the hearing in order to remove any potential apprehension of bias, because she had learned between the second and third hearing day that her employer had retained the firm of WeirFoulds to represent it in an unrelated matter dealing with land use planning. The hearing continued and was completed with a two-member panel. The first witness was Mr. Minnema on his own behalf. He is a very experienced hog producer, having been in business for over 30 years, and now running a 1200 sow operation. He has been a director of Middlesex County Pork Producers for some 20 years, and has worked on policy development and marketing committees for Ontario Pork. In Mr. Minnema's view, one of the main benefits of the marketing systems is that it allows him to concentrate on raising hogs, not on marketing and logistics; he has no worries about being paid, and the system has served him well. If the Commission's decision is implemented, Mr. Minnema fears that voluntary marketing would lead to deterioration in conditions and pricing, as the power that the marketing board can exercise now in dealing with processors would be lost. His sense is that the terms of direct marketing contracts with processors were initially very good, in order to be attractive and to allay producer concerns, but that on renewal the prices and terms have gotten worse. He does not see any benefit for producers in direct contracts, although he thinks there are significant benefits for processors. He feels that producers will be intimidated by the prospect of losing contracts to other producers into signing contracts that are more and more beneficial to processors. In his view, the deterioration in price and terms since the widespread introduction of direct contracting has been clear. He also indicated that Ontario Pork was an important player in terms of giving producers alternatives and dealing with hogs where direct contracts are not honoured or where the overall volume is not taken up in direct contracting. His concern is that without Ontario Pork the need to keep basically equivalent terms for payment and the virtual guarantee of payment created by financing security rules would disappear. Mr. Minnema commented on pork production in other jurisdictions, and stated that while he did not have full understanding of the Quebec situation, he noted that it appeared that producers had a much stronger structure and protection for growers, which would create further disadvantages for Ontario producers. In his view, a thorough study of the Quebec model should be undertaken before changing any of the Ontario regulatory structure. His other concern was that producers would have to engage in undercutting vis-à-vis each other in order to guarantee that their hogs would get to market, and this risk was especially high in current times, when processing capacity was low in relation to production and market conditions are poor. He thought that a "wild west" would occur in the market place if the Commission decision or Ontario Pork's proposed blanket exemption were to be implemented. He suggests that a standard base price with premiums would be a better approach to pricing, as hogs could then be pooled by characteristics. A base price model would encourage production of quality hogs, and should have some tie to U.S. pricing. Mr. Minnema also indicated he thought trucking should continue to be a shared or pooled cost because not sharing costs creates another incentive for producers to undercut each other on prices. While he is not opposed to direct contracts, Mr. Minnema says he can do without them, as relationships are built on handshakes, not on a contract. Mr. Minnema says he wants Ontario Pork to market in order to ensure marketing works well, so he does not have to fight over price, as Ontario Pork will take care of these issues for him. In his view, items such as logistics and settlement should be able to be worked out so long as there was still a role for Ontario Pork and the settlement is at processor cost. In considering the role of Conestoga/3P, a producer-owned packer, Mr. Minnema stated that he would like to see Conestoga work out a unique resolution within the current structure of Ontario Pork, but not at the cost of non-Conestoga producers. While other structures might be possible, the current financial structure administered by Ontario Pork is satisfactory, and in Mr. Minnema's view it would be a waste of time to make something new when there are much more pressing issues to worry about. New plans won't be better, and the cost in his view would be higher. If there was to be a change in structure, Mr. Minnema thinks an expression
of opinion from all producers would be necessary, and it would need to
be presented in a way that would allow people a good opportunity to study
and know the full implications of the plan. He feels previous attempts
to sort out these issues have resulted in bullying and intimidation, that
it is not easy to get people to have an open discussion, and that Ontario
Pork is not protecting producers who have contrary views. Collective marketing,
the key to managing the industry issues effectively, has in his view been
devalued. He feels that the group in favor of choice has started the process
of changing the structure of Ontario Pork without regard for true family
farms, and voices for change in the industry are not representative of
the majority. With regard to other issues in the Commission's decision, Mr. Minnema made the following observations:
In conclusion, Mr. Minnema said he felt that the impact of the Commission's decision was that everything gained as a result of having collective marketing power was being lost; what was being lost was irreplaceable, and producers were getting nothing in return. Producers are not aware of what is going on and do not understand the significance of the breakdown. It is sad to see what is left. On cross examination by Mr. Foran for Ontario Pork, Mr. Minnema acknowledged the work on behalf of all producers and the industry that Ontario Pork had done in dealing with an international trade dispute, and that only some producers had paid for that work. He also acknowledged that there were areas that benefited all sectors such as animal welfare, traceability, and disease prevention. Mr. Cohoe of Quality Meats cross-examined Mr. Minnema regarding contract price changes. Mr. Minnema acknowledged that the market was different now, and that there may be a number of reasons why prices change. Mr. Minnema conceded he did not know the relationship of Ontario to Quebec prices, and that premiums were possible in contracts even if they had a lower index value. Mr. Minnema also conceded that there is a problem if there are too many hogs and not enough hook space (processing capacity). Finally, he also acknowledged that in addition to a handshake there was a contract with specific terms for every contract he had entered into. In response to questions from Mr. Reesor on behalf of Synergy, Mr. Minnema agreed that there was no guarantee of payment by using Ontario Pork for marketing. In response to questions from Mr. Hunsberger of Conestoga, Mr. Minnema acknowledged that the Quebec contract had a US price, but insisted it was better because there was a base price. Mr. Jasper Vanderbas was called next in support of Mr. Minnema's appeal. Like Mr. Minnema, Mr. Vanderbas is a very experienced hog producer, having started in 1974 with one sow, and now running a farrow to finish operation on 250 acres. He has more than 20 years active involvement with Ontario Pork, including a stint as President for Oxford County producers; he participated in the Healthy Future project from 1998-2004, and is a Certified Crop Advisor and Nutrient Management Consultant. In his view, the current situation has been the logical outcome of the 1996 Farm Products Marketing Commission decision. Producers wanted marketing options kept open; processors argued for direct contracts, citing a need for direct 1-1 relationships because of issues such as specialty products and strategic alliances. Pricing based on a US price was discussed, but not accepted. In Mr. Vanderbas' view, the Commission in 1996 sided with the packers, although contracts were to be subject to Ontario Pork approval. Auctions gradually fell by the wayside in favor of 1-1 contracts or block sales by Ontario Pork to processors. However, the Commission in 1996 did nothing regarding pricing, didn't establish a clear role for Ontario Pork, did not specify how to get out of contracts or how to deal with contract disputes. The Commission did establish a protocol document regarding the relationship between Ontario Pork and processors, which has generally been followed since 2000. The failure to deal with pricing has been a huge weakness, and Ontario Pork has gradually become more passive in light of its reduced role. In Mr. Vanderbas' view, contracts were originally good because processors were bidding aggressively to gain market share, and to service the niche market for so called "story pork". However, in his view this is a small market and for the vast majority of producers there has not been a significant shift in conditions. However, there have been challenges, specifically in relation to the BSE crisis, when Maple Leaf wanted producers to use feed without meat and bone meal ingredients. Ontario Pork said this was not supported by science and there should therefore be a premium as non-bone meal feed was more expensive. In the face of such situations, without Ontario Pork producers would be at a significant power disadvantage when contracting with processors. In addition, his view was that an arbitration clause would not be worthwhile, as it would be a slow expensive process, likely costing more than the dispute would be worth, and even if initiated by producers the processors would have significant financial capacity overmatching individual producers. Mr. Vanderbas also recounted his master contract cancellation experience with Maple Leaf, which arose originally as a result of Conestoga producers going to Maple Leaf to try to mitigate the impact of the end of the Thorn Apple Valley contract to the US and then not renewing. He felt that there was no equality of bargaining power in such a situation. In his view, this is the type of situation that will occur more often if marketing is not under the control of Ontario Pork. He thinks that prices are coming down and terms will no longer be able to be negotiated if there is not a central marketing authority. The contracts are becoming more and more like a cash market, with three-month contracts becoming common and inequality of return to producers. Direct contracts have become the dominant form of marketing, and their terms will continue to be whittled down once processors have established market shares. Current conditions, in particular the effective closing of the US border with Country of Origin labeling requirements, oversupply, failure to tie prices to US counterparts, are exactly the conditions which require Ontario Pork to act to maintain margin, otherwise there will continue to be price erosion, erosion of terms, and a lack of competition in contracts means that there will be no new contracts on offer. Formula pricing negotiated by Ontario Pork would preserve some market, and would be preferable to direct contracts. The differences from Quebec mean that Quebec, having reduced Maritime production by shipping product from Quebec, is now looking west for new markets, and Ontario is vulnerable. Logistics and shipping costs are also in better balance in Quebec, as producers are compensated for holding pigs past delivery at the processor's request. (Mr. Vanderbas later corrected this information: producers continue to pay the cost of pigs held on the farm, but processors pay for losses en route to packing). Ontario's system already delivers the lowest share of consumer dollars to the producer of anywhere in the world, and the situation is not improving. Mr. Vanderbas then went through the policy development process of Ontario Pork. He explained that the local associations forward ideas to Ontario Pork for review on policy development days, where it tries to develop a consensus in resolutions that are then voted on by Counties and reviewed at a general meeting. Proposals that come directly from Ontario Pork work through a similar process, which takes in total about 2 years to complete. In Mr. Vanderbas' view, the grass roots producers were not aware of the proposed blanket exemption approach, and in his view the impact of it is the same as revoking marketing authority. The many advantages of Ontario Pork marketing: better access to buyers, equitable access to markets, more secure financial arrangements, promotion, advertising, quality assurance, price comparison information, dispute resolution and error correction will all be eroded. Mr.Vanderbas initially supported Conestoga's approach as a producer owned processor, because it created collective marketing clout and adhered to Ontario Pork rules; gradually, however, he felt that his interests were not best served by continuing with Conestoga, so he gave his notice and stopped shipping. He still sees a unique role for Conestoga in the marketplace, but feels Conestoga could fit into the existing Reg 419. Finally, Mr. Vanderbas stated that in his view the Commission's 2008 hearing was not triggered by a representative group of producers. He also felt HIAC as reconstituted by the Commission's decision is not representative of producers. Ontario Pork is a producer, not processor body, and HIAC as set up by the Commission was unbalanced in its representation of large Producers, and of processors. No one opposed to the Commission's views was invited to be on the reconstituted HIAC. The reasons for Ontario Pork keeping marketing authority are just as valid today as 30 years ago, says Mr. Vanderbas, especially now that government support has dwindled. Mr. Vanderbas complained that no one knows what government wants: we are overproducing, there are significant land use controls that restrict production, and Southwestern Ontario has very different conditions from the rest of Canada. Legislation needs to be enhanced to get a fair share of dollars to producers. The Commission decision has not dealt with a number of significant issues, and the situation is deteriorating as a result. On cross-examination by Mr. Foran for Ontario Pork, Mr. Vanderbas reiterated that the powers of Ontario Pork were in his view very significant, and should be maintained. He acknowledged there were a number of tools that might alleviate conditions in the market, such as an equivalent to the US Packers' and Stockyard's Act, buying through agents, and exemptions. He also agreed that the Strategic Planning process had been stalled by the Commission hearing process and the appeals. On cross-examination by Mr. Cohoe of Quality Meats, Mr. Vanderbas conceded he did not know all the details of all special programs, and that the more parties were involved, generally the more difficult it would be to establish reliable specialty production programs. He also acknowledged that the subsidy in Quebec might distort the market, as he said he had heard the subsidy was about $530 million dollars, but was not sure of the time frame for those payments. Under cross-examination by Mr. MacDougall and by Mr. Reesor for Synergy et al, Mr. Vanderbas acknowledged some benefits to particular terms of contracts. However, there was considerable disagreement over the validity of resolutions and the decision making process for Ontario Pork in developing a producer consensus. Conestoga's cross-examination through Mr. Hunsberger reviewed the evidence that Mr. Vanderbas had offered about his experience. Mr. Vanderbas re-iterated his view that Ontario Pork had become passive and producers are now at a disadvantage. He acknowledged, however, that the closing of the Thorn Apple Valley plant in Michigan had created some significant changes in the market. Mr. Nyenhuis was the next witness. Also an experienced hog producer, he spoke of his experience with the Perth County Pork Producers' Association. He spoke of the building of a grass roots movement trying to produce a plan the provincial government could support as the consensus of the industry. He has been making presentations on his own time and at his own expense to try to build this consensus, and has developed a Recovery Plan that is being reviewed with other associations with a request for input. The plan has five major elements, some well defined, others still in
development:
In his view, Ontario Pork needs its powers to implement the plan, whatever its final form. Some ideas would include giving Ontario Pork the power to match or control production in relation to slaughter capacity, prohibiting support for hogs destined for export from the province, maintaining a cost of production floor price, protecting smaller players who are much more vulnerable than larger producers. He has received general support for his ideas, and wants to bring them forward to Ontario Pork for further consideration. He points to Quebec as a province with a plan to match production with slaughter capacity, a strong board, single desk selling power, formula pricing, an arbitration system for disputes, and a round table for industry discussion. Mr. Nyenhuis has taken on this consensus building process because after almost 30 years of farming he has seen his equity disappear over the last four years. He sees conditions deteriorating, with six month contracts replacing two year contracts, with prices falling, seeing his neighbours' farms failing, and feeling that there is no future for his children in farming despite their desire to be farmers. There is no future as the situation sits now, and this is the only way he can see to save his farm. Mr. Vander Burgt of Huron County examined Mr. Nyenhuis. Mr. Nyenhuis stated that if the Commission's Decision was implemented, no recovery plan of any kind could be implemented. He said that in the US, there are big players only, and family farms have become contract barns for wages. This approach also makes family farms deteriorate, as there is no balance or diversity on farms and opportunities are reduced. There is in his view no example of open marketing that has lead to a successful farm industry in those products. All non-supply managed commodities should have a level playing field, and without it Quebec will be a threat to all industries. The recovery plan would require all participants in the industry to hash out their differences in one forum, and the process should be mandated by the FPMC, with an arbitration board to determine any outstanding issues. Mr. Foran through cross-examination clarified that Mr. Nyenhuis understood that there is currently no regulatory authority in Ontario Pork to manage supply or control production. Mr. Nyenhuis is of the view that Ontario Pork should have that authority. Mr. Cohoe's cross-examination focused on the challenges in managing production. Mr. Nyenhuis conceded that legislative changes would be required and control of export markets could be challengeable. He stated however, that if there are no changes then it is likely that the industry will be in such poor shape that reductions in production will occur as producers go out of business. He also conceded that unless retailers are somehow involved (for example, in Japan certain percentages of product on retail shelves are required to be of domestic origin), supply management alone would not solve the problems in the industry. Mr. Nyenhuis conceded that in Ontario price changes are market driven because of local and international competition for processed product. Synergy's cross-examination focused on recognition that processing capacity is not subject to production limits and need not remain in the province, a statement which Mr. Nyenhuis agreed with. Mr. Nyenhuis clarified that he was not suggesting supply management in the form that the dairy or chicken industries use. He also suggested that developing an Ontario label for pork products should be a priority in order to reduce the risk of foreign products taking market share. He indicated that with the financial support given in Quebec that unless Ontario is prepared to offer similar support, legislation is needed to level the playing field. In response to Conestoga's questions, Mr. Nyenhuis reiterated that Ontario Pork would need to be given authority to do that. He indicated he thought such controls should be in place for other commodities as well, and the Risk Management Plan in place for seeds and oilseeds should also be pursued for pork. He suggested a market driven price should have insurance to make up differences when the price falls below a specified base. The retailer share of consumer dollars is higher in Canada than elsewhere, and the Quebec roundtable approach has meant no higher prices but a more stable industry. Mr. Ben Dekker gave evidence next. He is a small producer of between 500 and 1000 hogs per year. He has been a Lambton Pork councilor for 10 years and on the resolutions committee for many years. He wanted to point out his understanding of production in Iowa, which is free market and in his experience often pits neighbour against neighbour. There is a lot of difficulty establishing price, and there are huge scale operations. He feels that there is little opportunity for a small producer in such a system, as using a private agent to market often results in a lower price as well as additional bother. Ontario Pork provides better and more equitable market access, in his view, and reasonable prospects for smaller players. In his view, the discussions held about moving the industry forward were inadequate and left many feeling muzzled, as limited options were discussed and timing was limited. In cross examination, he provided further detail about his Iowa experience, indicating that in Ontario farming was still based on a land occupying farmer creating income and building equity, while in Iowa individuals buy shares in operations and are removed from it. Rita Felder was the next witness. Her operation sends about 250 sows to market per week, and she grows specialty crops, including GMO free crops for other countries in Europe and for Australia, for examples. She had experience in Sweden, which has an open marketing system. Although originally an appellant, and feeling strongly that marketing power should stay with Ontario Pork, she can't afford full participation in the hearing process, and therefore appeared as a witness in support of Mr. Minnema, with whose position she concurs. In her view, an industry with about 3000 producers and about 5 buyers needs mechanisms to make participation fair. In her view, a single desk authority is necessary in order to equalize bargaining power, and the Commission's decision needs to be reconsidered. Equal selling power is necessary because hogs are a perishable commodity: there is only about 10 days leeway after finishing before they have to be delivered for slaughter. Transport options are limited, and the costs of freight or maintenance make sellers vulnerable. With fewer big plants in operation, options are even more limited. Ontario Pork has in her view done a decent job of marketing, reducing worry and the risk of financial losses. While not guaranteed, payments are less of a problem with single desk selling and centralized information; otherwise, she thinks that expensive accounts receivable insurance would be needed. Ontario Pork provides effective centralized industry support for incidents like the countervail dispute, a combined legal support system, and good information on pricing, market conditions and similar issues. Should the Commission decision be implemented, she anticipates lower prices as producers compete against each other, and family farming would suffer, with many leaving the industry. Since hog production is a 24-month commitment, without an organized system and proper commitments the risk is very high for producers. There is definitely room for improvement, such as more effective branding, consumer and food safety programs and product differentiation; other issues like the label of origin, traceability, the ASRA program, and price hedging systems should also be addressed, but on balance, based on experience in Canada and Sweden, her view is that single desk marketing and a collective system would work best to address concerns. Finally, in her view a producer expression of opinion should be gathered and results reviewed before giving up the collective marketing power. Mr. Vander Burgt's examination sought clarification of Ms. Felder's view that every one who produces should have a vote in a review process. In cross-examination on behalf of Quality Meats by Mr. Cohoe, Ms. Felder conceded that single desk marketing was not necessary to provide information if information sharing was mandatory, but Ms. Felder noted that services would be harder to implement if power was divided. Mr. Grant Robertson was the last witness appearing on behalf of Mr. Minnema. In his role as Ontario co-ordinator of the National Farmer's Union in Ontario, he reviewed the results of a meeting in which the unanimous passage of a resolution seeking re-affirmation of the historic balance of power in the market place through collective marketing by producers. He indicated that through the long-term ebb and flow of markets farmers have not benefited when marketing power was lost, and maintenance of this power is necessary for the long-term support of the industry as a whole. In cross-examination by Mr. MacDougall of Synergy, he indicated that in his view that the loss of single desk marketing in western Canada had harmed the industry. Huron County Pork Producers presented their case through Mr. Grant Love. He has been President of that Association for two years. He operates a 325 farrow to finish operation on his family farm, as well as cash cropping some of his acreage. His family, including his brother, father and grandfather have all been involved in the Huron County Association; in fact, his grandfather helped to found it. He reviewed the submission made to the Commission, which had been written by the executive of the Huron County Producers; the main thrust of this submission was the need to preserve sole authority over marketing. Huron County representatives did not attend in person because they understood that written submissions would be given the same weight as submissions made in person. In examination by Mr. Van Donkersgoed, agent for Mr. Minnema, Mr. Love indicated that he had never imagined the conclusion of the hearing might be voluntary marketing, but that there could be other marketing options within the current system. He also discussed the difficulty in accurately defining a family farm, and reviewed Ontario Pork meeting resolutions that had been defeated and in his view demonstrated that Ontario Pork in expanding marketing options was not bringing forward what producers wanted. He indicated that Huron County supported changes to marketing as needed, but not without getting a serious review from other councilors, who in his view have moved more strongly over the last two years to supporting maintaining marketing authority in Ontario Pork. In cross-examination by Mr. Reesor on behalf of Synergy, Mr. Love acknowledged that the votes on resolutions had not been unanimous and it had not been a recorded vote. He also acknowledged the difficulty in defining a family farm, but generally indicated that he did not consider contract hog production through investors to be a family farming operation. He also acknowledged that there are no guarantees that packers would always operate in Ontario, and that producers needed to be careful in how they exercised power under the legislation. He also conceded that producers do not have power to control borders either domestically or internationally whether through Ontario Pork or not. In response to questions from Conestoga, he indicated that since Huron County's submission was not referred to at all in the Commission Decision, it did not appear to have been given weight. Mr. Love also reaffirmed that in his view no matter what size, producers should have a say in the outcome of discussions about changes to the marketing system. Ms. Teresa De Wetering, although an intervenor, appeared during Huron County's presentation. She also provided a written submission at a later point in the hearing. She indicated she was a beginning producer who with her husband had started by buying a contract barn in 2005, but had found it too constraining, so they had decided to raise their own hogs instead. She felt that Ontario Pork had left out beginning farmers, so she had worked on a Beginning Farmers Group, all independent family farms with less then 10 years experience. She made submissions to the Commission indicating that it was important to maintain marketing power in Ontario Pork, as it was not the rules themselves, but the way they had been used, that had created problems. She acknowledged some might not feel they received full value from Ontario Pork, but there was an opportunity to make improvements without changing the underlying rules. In examination by Mr. Van Donkersgoed, she indicated she felt let down
by how Ontario Pork had handled marketing at times, particularly because
as a small producer she suffers without recourse when faced with contract
issues such as short loads or refusal to take pigs, both of which have
happened despite contracts. In her view, there is no sharing of market
risks in the current contracting environment: the packer does not take
any risk. Mr. Russ Danbrook was the next witness; he too is an experienced farmer, having raised pigs since the age of 11 and having operated a farrow to finish operation for many years. Currently, he has no pigs, but is still a Director of the local association. He has been president of it twice, and also was on environmental and nutrient management committees. In his view, marketing power should remain with Ontario Pork, even if there are changes to the system through use of agents or through exemptions. He indicated general support for a comprehensive plan, either a Recovery Plan as envisioned by Mr. Nyenhuis or the Risk Management Plan to provide sustainable pricing. In questioning by Mr. Van Donkersgoed, Mr. Danbrook indicated that Perth County producers had taken a position similar to Huron County regarding the need to maintain power in Ontario Pork to have a fair and equitable marketing system. He also felt the consultation process had been inadequate, and that all ideas should be considered to deal comprehensively with the market problems. In cross-examination by Mr. Cohoe, Mr. Danbrook conceded that Regulation 419 was not effective to manage production or supply. However, he contended without power there would be no capacity to speak on behalf of producers except on so called "universal" functions, and even there little power to implement any changes. Mr. Yungblut of Synergy cross-examined Mr. Danbrook as well. Mr. Danbrook conceded that producers are not always "innocent" in dealing with contracts. Regardless, however, someone in Mr. Danbrook's view will need to have the power to manage production in some way, although he conceded no plan he knows of is comprehensive or complete. Hog producers are losing money everywhere in North America, so some kind of plan is necessary. In re-examination, Mr. Danbrook indicated that he favoured individual rather than blanket exemptions, and that creating a level playing field would be a significant first step in addressing a number of issues. Ontario Pork's case was presented through Mr. Gary Metzger and Ms. Mary Ann Hendrikx. Mr. Metzger is responsible for traceability, which allows tracking in both directions--to market and back to the farm-to support product quality markers, and in case of health and safety or foreign animal disease emergencies. He reviewed the purpose and elements of the programs, and indicated that in the case of a Foreign Animal Disease outbreak the assumption is that Ontario Pork would be responsible for managing marketing issues outside of a control area administered by the Canadian Food Inspection Agency. Likely there would be a rapid problem with marketing as there would be border closures and inventories would build up. Control of marketing would be necessary to manage these issues. Mr. Metzger was cross-examined by Mr. Richter on behalf of Zantingh, and indicated that safeguards would be put in place to ensure data would not be shared in a way that would compromise market information for competitors. In response to questions from Mr. Yungblut for Synergy, Mr. Metzger indicated that the significant issue was preparedness, not responsiveness, so that even though a specific bio-security role was not specified for Ontario Pork, it would be able to respond appropriately. Mr. Hunsberger for Conestoga sought assurances that an emergency that would trigger use of the marketing powers would not include simple oversupply, and that exemptions could not be cancelled arbitrarily. Mr. Metzger indicated that protocols and criteria would have to be developed and exercised by a body such as HIAC; this would require a rewrite of the Regulations to accomplish. In cross examination by Mr. Van Donkersgoed, Mr. Metzger confirmed that marketing and traceability are not necessarily related and that some of the steps in Ontario Pork's plan are assumptions about what steps would be taken at the national level, but without power to direct marketing, there would be no way to implement plans. Mary Ann Hendrikx spoke to Ontario Pork's strategic planning and governance issues. She has been a director since 1999, and Vice Chair of Ontario Pork since April 2009. She has been involved with raising pigs since her childhood on her parents' farm, and has continued this work with her husband and three children who are also in production. The strategic planning process included surveys and opinion and research work with input from stakeholders, culminating in a June 2008 strategic direction discussion paper. This document listed several must haves, the most critical of which for the purposes of this hearing include maintenance of regulatory authority. The strategic planning process was interrupted by the hearing by the Commission, in that Ontario Pork felt it unwise to commit resources if the hearing would cover the same subjects; the hearing has basically created a new strategic direction to which Ontario Pork has had to respond. Ms. Hendrikx reviewed Ontario Pork's services: selling, settlement, logistics, consumer marketing, and producer services: communications, governance structure, county associations, lobbying, advocacy, animal welfare, environmental management and research. Ontario Pork collects a $1.65 service fee for every hog to finance these services, most of which benefit all producers. An example of the service that Ontario Pork provides was to co-ordinate and respond to a countervailing duty imposed by the US because of accusations by US producers of product dumping. However, though hogs and weaners benefited from this work, under the current regulations only hog producers could be charged to pay for the trade action defense. Ontario Pork supports the deletion of the exemption from fees for hogs not intended for slaughter, so that all producers can be charged for services, which benefit all producers. With regard to HIAC, Ms. Hendrikx explained that once the Decision was appealed, it felt that implementation of a new HIAC structure would have to wait until the appeal was heard, and in any event the Regulation has not been amended to allow a different structure for HIAC. The current governance structure of Ontario Pork was explained: County or Regional councilors are elected as delegates to Ontario Pork. There are 12 districts, with each electing a board member to Ontario Pork; there are also zone directors at large. The number of producers and the amount of production determine the number of Councilors: there are currently 214. Since 2001, Ontario Pork has been working on a plan to revise the governance structure to be more reflective of current conditions. Ontario Pork produced a white paper on reform and a proposed model that would result in a much smaller Board (9 instead of 14) and fewer councilors, to be called delegates (80 -100, rather than 200). This work was reviewed at the November Policy day, and will be considered at the Annual General Meeting in March 2010. Ms. Hendrikx also set out Ontario Pork's proposed approach to dealing with an emergency using section 419. First, the power would not be used unless a third party, such as a municipality, or HIAC (if properly constituted, adequately representative of the industry, and subject to clear criteria) had declared an emergency. However, Ontario Pork would be prepared to work with the existing structure of HIAC. Mr. Hunsberger's questions on behalf of Conestoga asked whether revoking exemptions were part of the "must have" regulatory powers. Ms. Hendrikx replied that the blanket exemption issue and revocations were not really a discussion point until the Commission hearing and Decision. As for HIAC, it met intermittently for some years, and the number of people at its meetings often did not reflect its formal structure. She also confirmed that the March 2010 expression of opinion on governance would not be binding on Ontario Pork. Mr. Van Donkersgoed asked a number of questions to clarify the proposed governance structure; Ms. Hendrikx suggested that the Board tasks will remain similar to those it undertakes now: leadership for staff, monitoring implementation, prioritizing and strategic planning. She also clarified the need to change the regulations to allow licensing of other classes of production, to develop a code of conduct for agents, and to license selling agents. Ms. Hendrikx indicated that if marketing sales do not go through Ontario Pork there is no link and could not be the level of payment assurance that Ontario Pork could otherwise provide. Also, blanket exemptions from marketing control are preferable in order to be able to have effective ways to operate when necessary. Ms. Hendrikx felt that representation at the November policy day had been fairly representative of the industry, as only very small counties had not been represented. Finally, she indicated that removing the non-market hog exemption was in order not to have duplicate or unfair service fee arrangements, but that the significance of this issue was variable over time. In cross examination by Mr. Vander Burgt, Ms Hendrikx confirmed that the proposed blanket exemption method was not anticipated before the hearing, and that choices in marketing do exist today. She also confirmed that the Commission Decision established very aggressive timelines to complete the planning process. She also confirmed the non-binding nature of the resolution process. In re-examination, Ms. Hendrikx confirmed that Ontario Pork would continue to offer marketing services to those who want them. She also clarified that the governance white paper had been circulated for advance discussion prior to the meeting. She also confirmed that producers and processors couldn't contract without an exemption under the existing legislation (i.e., prior to modification by Decision). The next party to call it case was Conestoga, as Open Marketing Group withdrew from the hearing at this point. Conestoga called Mr. Kevin Grier, who was qualified as a market expert in the pork industry in North America. Mr. Grier gave some background information about the Quebec hog industry, indicating it was the only jurisdiction in which a marketing board has full control, mainly by virtue of using a subsidy program to ensure compliance. Quebec is the most vertically integrated industry in Canada and also has subsidies of some $400 million dollars. Quebec has a Roundtable industry forum similar to HIAC in some ways. Mr. Grier indicated it was not feasible in his view to try to restrict trade either in or out of Ontario to manage production issues, as about half of the industry depends on trade to survive; he indicated he knows of no mechanism to do that anyway, and it can't be done in compliance with trade rules. In Mr. Grier's view, marketing boards "get in the way" of "value chain management", as they have the goal of preserving income for producers. In his view, an open market would be more effective at creating common goals in the value chain. By determining how to generate more income, and learning what is required to fill niches in the market, producers could be rewarded and processors' value enhanced. In response to questions by Synergy, Mr. Grier indicated that restricting and trying to supply our own market would lead to a painful and significant contraction in the industry. He had no comment on service fee levels in relation to the rest of the country. In cross-examination, Mr. Grier reiterated that Boards have in his view been a hindrance to parties working together, and that regulated marketing was used to increase leverage with processors. Supply management creates success by restricting imports, although there are various levels of supply management. In his view Ontario Pork is largely redundant. Finally, he does not view a roundtable as a method of coming up with better pricing systems, as it is not an effective vehicle to deal with market goals. Also, in his view hog production occurs in a North American market, and prices on an export basis are always lower than US prices. Mr. Robert Hunsberger appeared on behalf of Conestoga/ 3P. He described Conestoga as a new generation co-operative. Hog farmers buy a membership share and shipping shares to supply hogs to the packing plant. The plant is a wholly owned subsidiary of the producer co-op. 3P purchased the plant in 2001. 3P had supplied Thorn Apply Valley until it closed, then entered into a bulk contract with Maple Leaf as it transitioned to its own plant. Conestoga in order to maintain capital and operating requirements operates on a 6-day payment cycle. Although this description merely summarizes the steps of the pricing process, payment is based on meat sales, rather than hog sales. Hunsberger recounted various problems he said arose because this model did not fit into Ontario Pork's view of how hogs should be marketed. Ontario Pork's suspicion about the pricing model and refusal at first to grant an exemption to allow Conestoga to operate in the only way it could survive created significant tension. Exemptions have now been granted on a six-month basis. Conestoga considers Ontario Pork's authority to market as a significant danger to its operations because if the exemption were withdrawn Conestoga would not be able to operate effectively, if at all. Mr. Hunsberger also reviewed his experience of HIAC after the Decision. He thought it a more representative body as reconstituted, and noted that in his view its mandate was not to debate issues but to make recommendations on how to implement the Commission Decision; however, HIAC did not have decision making authority. He disputed the suggestion that only large producers were represented. In response to questions from Mr. Richter, Mr. Hunsberger stated that in his view the unregulated portions of the market were working well in finding sales for sows and boars. Mr. Hunsberger in cross-examination indicated that he saw no option other than removal of the mandatory marketing power because in his view it had been a barrier to innovation and development in the industry, and would continue to be. While it had not been Conestoga's first choice, the experience with Ontario Pork had made it clear to him that Conestoga could not risk being subject to arbitrary decisions about marketing control. Mr. Cohoe appeared as the witness for Quality Meats. Quality Meats processes about one-third of Ontario's hog production. He indicated that Ontario Pork's approach to marketing is inadequate because the relationship with producers is too indirect to manage the many quality requirements and specifications needed to sell meat in today's retail marketplace. He recounted the processing requirements for organic hogs as an example, noting the very detailed contract terms and conditions, handling and processing needs and thus the high level of communication and commitment that is required. He also noted that there are long entry and exit periods to such contracts because of the production specifications, and these contracts command substantial premiums. He indicated his concern with Ontario Pork's method of dealing with contract terms, and in particular specific terms that should have been uncontroversial taking far too long to adjust, and Ontario Pork then threatened to impose terms and ignored the Procedures and Protocols document that had been agreed to by the industry. Mr. Cohoe then expanded on the concept of the "value chain" as a method of matching customer needs with processor and producer ability to enhance overall return. In his view, this value chain approach allows innovation and improvement and participation by choice. However, in his view Ontario is not accomplishing this goal. He indicated that processors are in a "box with one way doors" when it comes to procurement. Supply is not generally available from other jurisdictions, and Quebec tends to preserve supply for local processing. Therefore, processors want and need a long term stable supply, and in his view these conditions can lead to a supply driven, rather than market driven situation; processors need to operate even in times of poor margins and high costs. This situation is worsened by pool auctions. Vertical integration is encouraged in these conditions because if a processor is vertically integrated, supply is secured and contract terms are not subject to dispute. He indicated processors need more flexible terms and contracting or they will gradually disappear or vertically integrate. Mr. Cohoe then gave a detailed review of Ontario standard pricing; by doing so, he demonstrated that pricing is market driven and changes in pricing in Ontario in the past several years mirror market price changes in other jurisdictions. He also demonstrated with examples the challenges faced in scheduling, logistics and pricing when the relationship between producer and processor is not direct. He showed that alternate sources of information are available, even if marketing is not administered by Ontario Pork, and in ways that will protect competitively sensitive information. Mr. Foran's questions clarified the Country of Origin labeling requirements that have reduced the export opportunities for producers and processors seeking to sell in the US. These requirements have affected production and depressed US bound hog prices. Mr. Cohoe also gave more details regarding the dispute over contract terms, and specifically Ontario Pork's proposed term that Ontario Pork could trigger arbitration on a contract even if the producer who had entered into the contract did not want to. Mr. Cohoe also gave more details under cross-examination of the difficulties faced by the industry generally, but indicated he is not suggesting Ontario take on the models of other jurisdictions, just that "we have to live in the world we have, and adapt". In his view, contracting does not have any significant impact on price, but it provides the level of flexibility that is needed to adapt as conditions change. He also indicated, Conestoga's approach to price calculation has no impact on Quality Meats. On cross-examination by Mr. Vander Burgt, Mr. Cohoe acknowledged that an ideal system would try to create equal opportunities for producers to sell, but that a packer could seek an alternative producer if a contracted producer challenged terms in a contract. Mr. Reesor appeared as a witness for and is one of the principals of Synergy. He indicated that Synergy was not intending to challenge Ontario Pork as a whole, but only to support the elimination of mandatory marketing powers. He noted that Ontario has a limited number of processors, and 95% of production is under contract. He prefers to work directly with his customers, as it is the best way in his view to build value over time. He has used Ontario Pork marketing mechanisms, and supports voluntary marketing and co-operation. He indicated that in his view niche markets can be very large, and that "commodity" pork does not really exist: every product has some characteristic important to the processor. In his view, pooled marketing is a higher risk way of organizing his business because he cannot control the product, and negative product issues affect his business and customer relationships, even if he did not cause the issue. He reiterated this point under cross-examination, adding that poor producers can hide behind the pool, and it is very difficult to develop specialized markets. Mr. Reesor indicated Synergy was pleased with the Commissions Decision, in that it recognized the need for choice and change. He noted that there is always a great deal of diversity in views, and that in his view the Regulations are not congruent or consistent, and the risk of exercising power in arbitrary ways are high. Decisions made within properly limited powers may be disagreed with, but when the powers are too broad it is difficult to create constructive change. He was happy with the reconstituted HIAC meetings after the Decision, in that there was he felt a sincere effort to address many issues; however, its mandate was to implement the Decision, not debate its merits. He acknowledged that while it may be possible to grant exemptions, at a practical level the approach is not workable. Mr. Reesor's main point is that in the context of an uncontrolled border, adjoining competitive markets, Ontario Pork's former approach will never be sufficiently flexible or adaptable to be successful. Under cross examination, he admitted that he had invested in Ontario under the current regime but saw contracting as a way to mitigate the risk of that investment and put his business more in his own control. Mr. Davidson, representing the intervenor Maple Leaf Foods Ltd. was the
last to make a statement. He has more than 35 years experience in the
industry, 32 years in pork and 28 of those years in Ontario. He was manager
at one time of the Burlington plant that processes about 50% of Ontario's
production. He has held numerous senior positions in Maple Leaf and is
intimately familiar with marketing, procurement, and industry issues,
including attending the hearings in 1996 and 2008. He recounted his frustration
regarding developing contracts with Ontario Pork and indicated that in
his view the Commission Decision was correct and reflects the situation
in other jurisdictions. He believes it would be positive to have more
open markets from the point of view of investment in the processing industry. Findings and AnalysisIntroduction First, as the hearing procedure, evidence, and argument made clear, adversarial style hearings are a poor way to make policy decisions, especially such potentially far-reaching and significant ones. From our perspective as tribunal members, the information provided by the parties seeking to confirm or reverse the decision was generally insufficient to support their requests. For example, there was not a comprehensive review of data about the industry as a whole from anyone: each party's presentation was based on its own particular goals rather than an effective structure for the industry. Many who will be affected by this decision did or could not participate and were not sought out for their views. At the end of the hearing there were many gaps in information, gaps that create enormous uncertainty about the impact of requested changes and the rationale for positions taken by parties. These comments are not a criticism of the parties, but a reflection of the necessities of the hearing process that make adversarial hearings a poor way to establish policy. Evidence, especially from producers on both sides of the appeal, was anecdotal at best and generally unsupported by reliable data. The only documented technical information on pricing came from a processor, who could speak only to reported transactions and to certain aspects of contracts entered into by the company for which he works. Except to say that there were two major camps, one on each side of the question, the views of the majority of producers (majority defined in any way) on matters relating to this hearing were not clear. We do not find the results of voting on the Ontario Pork Meeting Resolutions on their own a reliable way of assessing producer views on many of the questions raised by the hearing. Similarly, we do not find the anecdotal and hearsay data from the respondents or appellants about conversations with other producers sufficient to make a finding about the views of producers in general. The testimony of most parties was not only factually weak, but also provided opinions and evaluations that were unsupported by factual information. Mr. Minimaa and Mr. Vanderbas offered many conclusions based on suppositions and hearsay views without any data. Expert testimony was very limited. Mr. Kevin Grier was not retained to do independent research, but was asked to respond to a philosophical view about the impact of marketing boards in a free market; he did not and was not asked to address the purposes of the marketing board structure or how it has achieved or not achieved its purposes in the hog industry, regardless of his opinion on the merits of such an approach. This is not a criticism of Mr. Grier, but a criticism of the scope of his retainer and the questions put to him, which were aimed at proving the appellant's case rather than having Mr. Grier as an independent expert provide objective information and opinions to assist the Tribunal to come to a good decision based on principles set out in the legislation. In summary, most of what the Tribunal heard was argument rather than
evidence, even during the evidentiary phase of the hearing. The Legislative Principles In our view, the Farm Products Marketing Act (FPMA) and Regulations do have first principles that must be respected. In particular the relevant clauses relating to the purpose of local boards and the scope of powers are an expression by the Legislature of the Province that is not subject to review or change by a Commission or Tribunal, and decisions inconsistent with those purposes should not be supported. The way to change these purposes is by direct legislative amendment, not by indirect change to the regulations. In a similar vein, the regulations implement the purpose of the legislation, and should not be re-drafted or amended in such a way as to negate or limit that purpose. In our view the Commission decision does not respect the Legislative principles of the FPMA; it effectively negates the legislation by placing the control of marketing outside of the local board, without establishing an alternative plan or having any entity responsible for the control and regulation of hog marketing. As a result, not only are the fundamental problems of the industry not solved, there is no mechanism or control in place for the producers to develop a consensus, or to exercise power in accordance with a consensus if one can be developed. In addition, the current regulations have the tools to shift marketing methods without changing the fundamental structure of the regulations, so there is no need to amend the Regulations themselves. For these basic reasons, certain aspects of the appeal will be granted, as set out below. The first principles are set out in the definitions and Section 2 of
the FPMA:
Section 1 defines "marketing":
The purpose of establishing a local board is therefore to control and regulate through an approved plan the marketing of the product in question. The methods of doing so may be varied, and according to the circumstances of the market and product in question may be less or more specific and technical. They may also change over time in radical ways if the underlying situation changes fundamentally. In the Tribunal's view, the decision of the Commission does not adequately address the legislative principles set out in the FPMA, nor does it establish an effective framework for responsible decision making for the good of the producers in the industry as a whole. By revoking Section 5(j) and 9, the Decision takes a fundamental power away from Ontario Pork, but the Commission has no comprehensive plan or management structure to take its place, and the industry as a whole would thus revert to a fully market driven approach that negates the underlying principles of farm product regulation and marketing: to establish a power to control production and marketing in a collective manner for the benefit of producers as a whole. This is not the only purpose of course, but the legislation would not be necessary if this legislative goal was not primary. The solution is not to make an amendment to the Regulation that in our view changes the fundamental purpose of the Legislation, but to provide an interim balancing of the various producer interests and current circumstances. This interim balance will give Ontario Pork an opportunity to complete its consultation with its members far more comprehensively than it has been able to do to date, and to address the fundamental challenges the hog industry faces in a way that will be acceptable and equitable to the greatest possible number of Ontario producers, as well as healthy for the processing industry on which the producers depend. To be effective, Ontario Pork must have the power to implement these decisions once consensus (not unanimity) has been achieved, and the power to manage situations in the industry as a whole. Using the Commission to undertake this type of role is in our view not appropriate, and no other entity than Ontario Pork currently exists to take this role. By revoking Sections 5(j) and 9 of the Regulation, the Commission in our view undermines the ability of Ontario Pork to act in the way the Commission wishes it to in paragraphs 10, 11 and 13 of its Decision, and it would require another crisis of similar proportions, another Commission hearing, and another regulatory amendment to reverse the situation. We think a comprehensive plan should be in the hands of the industry to develop, and they should have both hands free while the plan is worked out. The task is difficult enough, but a foregone conclusion both reduces the pressure for people to participate, and entrenches antagonism and divided camps. We acknowledge that from the perspective of many participants in the industry Ontario Pork was not responding effectively to market conditions, was not supporting alternative approaches to dealing with the crisis, was not creating or supporting good relationships with processors, and was seeking to maintain a particular way of handling hog sales that did not respond to the opportunities and challenges that some in the industry wanted to pursue. However, we must also acknowledge that for a significant number of hog producers Ontario Pork's actions were seen as protecting a hard fought and significant balancing of powers that in their view needed to be maintained, regardless of the ups and downs of market conditions and prices over the years. The Tribunal will therefore order that section 5(j) and 9 of Regulation
419 remain in force, but will provide a minimum eighteen-month exemption
for all producers who wish to be exempted. While we dislike the negative
option, in the circumstances we think the practical approach will be to
exempt all producers and then for Ontario Pork to provide a mechanism
such that those who wish to market through Ontario Pork will be required
to waive the exemption and will be required to market through Ontario
Pork for a minimum period of 18 months. This step will, we hope, accomplish
several objectives:
In this eighteen-month exemption period, Ontario Pork will be required to complete its strategic planning and governance reform processes, to develop a new vision for its operations and to provide a structure to implement this vision. Ontario Pork will be required to consult and to provide a plebiscite or similar mechanism to ensure its recommendations have support in the industry. In the event that Ontario Pork is unable to accomplish these goals, exempt producers will have six-month renewals of their exemptions. We are not concerned, given the history of this appeal and the industry over the last few years, that Ontario Pork would exercise the exemption authority capriciously, in bad faith, or arbitrarily, and are of the view that after operating under and exemption for eighteen months it would be difficult to support a change in exemption status unless the exempt producer requested it. We do not wish to pre-judge the outcome of the strategic planning, and so we have provided through this decision we hope a balanced set of conditions for a specific period of time, allowing those who wish to market independently to do so, but also allowing for changes up to and including an entirely new structure to be designed and assessed before changing fundamental elements of the existing one. The strategic planning process may for instance, conclude that using producers as licensed agents in a mandatory structure would be an acceptable way for all involved to market. Alternatively, open marketing including a right to an exemption if requested may be the structure that can bring the industry together. What we do know from the evidence referred to in the Commission's Decision, the Decision itself, and from the evidence and the arguments brought to the Tribunal, that no fully comprehensive consultative process including a direct consideration by all producers has been completed, that the divisions between philosophies, perspectives, and prognoses are radical, and that the entity now best suited and making the most comprehensive effort to develop a consensus is Ontario Pork. We think Ontario Pork should have the time and opportunity to do so; we hope it will create the mechanisms to ensure that all sectors, producers, processors and industry stakeholders will be able to participate effectively with a common goal--creating and maintaining a healthy hog production industry and providing an opportunity for a healthy processing industry-to be realized. Order of the TribunalTherefore, the Tribunal grants the appeal of some aspects of the Decision and orders as follows:
For more information: Toll Free: 1-888-466-2372 ext. 63433 Local: 519-826-3433 E-mail: appeals.tribunal.omafra@ontario.ca
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