AGRI-FOOD APPEAL COMMITTEE DECISION

Transcription

1 AGRI-FOOD APPEAL COMMITTEE DECISION Sofina Foods Inc and Prairie Pride Natural Foods Ltd. v. Chicken Farmers of Saskatchewan Appeal Hearing Held June 10, 2015

2 AGRI-FOOD APPEAL COMMITTEE Sofina Foods Inc. and Prairie Pride Natural Foods Ltd. v. Chicken Farmers of Saskatchewan Appeal Hearing Held June 10, 2015 Room 209, Walter Scott Building 3085 Albert Street, Regina, Saskatchewan I) INTRODUCTION The Agri-Food Appeal Committee (Committee) is established pursuant to section 28 of The Agri-Food Act, 2004 (Act). The Committee is an independent body appointed by the Lieutenant Governor in Council and responsible to the Minister of Agriculture. According to section 29(2) of the Act, any person aggrieved by an act or omission of an agency established under the Act may file an appeal within 90 days following the act or omission. The Appeal Committee may make a decision that does all or any of the following: confirms, varies, disallows or stays a decision of the agency; refers the matter back to the agency for its consideration; substitutes its own decision for that of the agency; or makes any other direction that it considers appropriate. The Appeal Committee shall not make any award of monetary compensation or costs. A decision of the Committee is binding and may be appealed to a judge of the Court of Queen s Bench on a question of law or jurisdiction once a formal decision has been handed down. On March 27, 2015, an appeal against the Chicken Farmers of Saskatchewan ( Board or CFS ) was filed by Sofina Foods Inc. and Prairie Pride Natural Foods Ltd. (Appellants) alleging a breach of Saskatchewan Live Pricing Agreement A-129. On April 20, 2015, an amended appeal was submitted on behalf of the Appellants alleging Saskatchewan Live Pricing Agreement A-130 was also a breach of their agreement. An appeal hearing with respect to the matter was held on June 10, 2015, the decision for which is presented here. The Agri-Food Appeal Committee Page 1 of 20

3 II) GROUNDS FOR THE APPEAL The matter under dispute relates to Saskatchewan Live Pricing Agreement A-129, signed by the Appellants as well as the CFS Chair on December 19, 2014, and a February 23, 2015 decision of the CFS to amend the live price due to changes in live price formula released by the Chicken Farmers of Ontario. The decision to amend the live price for Saskatchewan chicken for production cycles A-129 and subsequently for production cycle A-130, is being appealed. As stated in Section 3 of the amended Appellant s Notice of Appeal dated April 20, 2015, the appeal was filed on the grounds that: (a) (b) (c) (d) (e) (f) The CFS breached the Saskatchewan Live Pricing Agreement A-129 (the Agreement ) dated December 19, 2014 between the Appellants and Respondent. The Agreement stated that for the production cycle A-129 the live pricing schedule shall be 2.50 cents/kg over the Ontario Live price. The base minimum price according to the Agreement should be 2.50 cents/kg over the Ontario weight category of over 1.84 kgs to 1.95 kgs base minimum price of $ The A-129 Price should therefore be $1.601 and not $ Historically and by agreement between the Appellants and CFS the base minimum live chicken pricing in Saskatchewan is to be 2.75 cents/kg for the summer production periods and 2.50 cents/kg for the remainder of the year over the Ontario weight category of over 1.84 kgs to 1.95 kgs, which Ontario price for period A-130 is $1.5686/kg. Production periods A-130, A-131, and A-132 are the summer production periods for The A-130 Price set by the CFS is $1.6148/kg (live). Thus, the A-130 Price is 4.62 cents/kg over the Ontario price. CFS has breached the historical agreement with the Appellants. The CFS failed to consider in the A-129 and A-130 Price that the increase in the price of live chicken will damage the Saskatchewan chicken processing industry and negatively impact processor competitiveness contrary to the objectives of The Chicken Marketing Plan Regulations, including section 5. The CFS failed to consider the interests of the entire industry. The CFS failed to recognize that processors operate in a Canada wide market where the wholesale price is set at a national level. The CFS failed to take into consideration and find that growers are already earning a fair return on their products, which is clearly indicated and evidenced by the fact that quota value has increased significantly in recent years. III) APPEAL TIMELINE At 9 a.m. on April 14, 2015, a teleconference was held by the Committee to discuss the notification of appeal pursuant to subsection 29(5) of the Act. Alan Arthur, Vice-Chair, and Tom Hougham were in attendance, as was the Committee Case Manager. Ian The Agri-Food Appeal Committee Page 2 of 20

4 McPhadden, Chair, was unable to attend the conference call, but contacted the Case Manager to receive an update on the conference call discussion and to provide his own thoughts which were forwarded via to the other committee members. The decision of the Committee was to hold a hearing pursuant to clause 29(5)(a) of the Act. On April 22, 2015, both the Appellants and the Board were notified of the decision of the Committee to hold an appeal hearing and were advised of the hearing date, time and location. The date of the hearing was set for June 3, Documentary evidence was requested to be provided by May 20, 2015 to allow the Committee ten days to review the material as outlined in the Committee s Rules and Procedures. On April 20, 2014, a letter was received from the Appellants indicating that they would like to amend their appeal submission to include the minimum live price for the A-130 production cycle. Both the Appellant and Board submissions were received by May 20, However, the Appellants submission included a notice that they would not be able to meet on June 3, 2015, due to prior commitments and requested an extension. The response of the Committee was that a date change could be accommodated. The Committee responded by letter on May 26, 2015, that the Appeal date would be moved to June 10, The CFS was also notified of the date change. IV) SYNOPSIS OF THE COMMERCIAL CHICKEN INDUSTRY 1) Overview The Canadian chicken industry operates under a supply management framework whereby production, producer live price and national exports and imports are managed by provincial marketing boards in collaboration with the Chicken Farmers of Canada (CFC). In Saskatchewan, as the provincial marketing board, the CFS allocates production to its licensed producers and sets the live price. The CFC ensures that the import/export requirements are maintained as per established trade agreements. The CFS is established pursuant to The Agri-Food Act, 2004 and The Chicken Marketing Plan Regulations (Regulations). As a result of these regulations, the CFS is responsible for controlling the production and marketing of chicken in Saskatchewan. 2) Pricing of Live Chicken in Saskatchewan Under the Subsection 7(bb) of the Regulations, CFS has the power the power to set or determine the price, the maximum price, the minimum price or any combination of the maximum price and minimum price at which chicken or any variety, class or grade of chicken may be bought or offered for sale in Saskatchewan. The Agri-Food Appeal Committee Page 3 of 20

5 CFS sets the live price for Saskatchewan based off of a Cost of Production Formula developed by the Chicken Farmers of Ontario (CFO). This price includes an element of negotiation between the CFO and the Ontario Association of Chicken Processors and is approved by the Ontario Farm Products Marketing Commission. Provinces adopt the CFO formula and typically apply a few of their own variables to create a provincial live price for chicken. This price is in place for a 55 day period or a production cycle. Historically, CFS has worked with the Appellants to negotiate a minimum live price for chicken in Saskatchewan. These negotiations result in a signed agreement covering six production cycles and follow a pattern of Ontario live price plus 2.50 cents per kilogram for production cycles with lower allocations (typically fall and winter months) and Ontario plus 2.75 cents per kilogram for production cycles with higher allocation (typically during the spring and summer months). 3) Minimum Live Price for Chicken (Order No. 52/11) Board Order No. 52/11 was implemented in 2011 and allows for CFS to determine and set a minimum live price for chicken based on the cost of production. Notice of the minimum live price shall be sent two days prior to the beginning of the production cycle and be forwarded to all licensed producers and processors in the province, as well as any other persons the Board deems necessary. The ability to set the minimum live price is integral to the supply managed system as it allows them to ensure a fair return for producers. V) SYNOPSIS OF THE RELEVANT ACTS AND REGULATIONS 1) The Agri-Food Act, 2004 (Act) The purpose of the Act is to provide for the promotion, development, regulation and control of the production and marketing of agricultural products in Saskatchewan. Under the Act, agencies may be established to administer development and marketing plans. 2) The Chicken Marketing Plan Regulations (Regulations) The Regulations are established under the authority of the Act with the purpose of governing the commercial chicken industry in Saskatchewan. The five CFS Board Directors are elected from amongst all registered chicken producers on a regular basis. Both the Board and the staff of the CFS have authorities and responsibilities under the Regulations to ensure the realization of the Regulations stated objectives. The Agri-Food Appeal Committee Page 4 of 20

6 VI) EVENTS LEADING TO THE APPEAL 1) In September 2008, an appeal hearing was held between Prairie Pride Natural Foods Ltd. and Lilydale Inc. v. Chicken Farmers of Saskatchewan due to a disagreement resulting from CFS increasing the minimum live price of chicken over consecutive production cycles. As a result of this appeal, the CFS Board and the Appellants agreed to work together and negotiate pricing agreements for a number of cycles at a time. This would ensure pricing stability for both parties. 2) From November 2008 until February 2014, the Appellants and CFS typically negotiated agreements covering six production cycles at a time. The exception to this was Saskatchewan Live Pricing Agreement A-94 to A-95 which was approved September 29, 2009 and only covered two production cycles. 3) Beginning with the A-94 and A-95 agreement, the negotiated live price would be either 2.50 cents per kilogram over the Ontario live price for low allocation months (fall/winter) or 2.75 cents over the Ontario live price for high allocation months (spring/summer). 4) Prior to the A-129 pricing period, the live price in Ontario was based on a set of margin factors with unknown origins, as well as adjustments for the two main cost of goods sold chick price and feed price. The formulation of the price was a concern to processors and further downstream stakeholders as it was not transparent when considering the margin factor. 5) In 2012, the Chicken Farmers of Ontario (CFO) indicated that it was going through a process to update the existing formula to introduce a formula that was more open and transparent. This process was not completed until February ) Saskatchewan Live Pricing Agreements include wording whereby unforeseen events that occur during the production cycles listed in the agreement, may trigger discussions between the CFS and Appellants. Specific examples are provided that shall trigger discussions; these include but are not limited to an increase in the cost of catching live chicken, and the development of a Western Canadian live pricing proposal. 7) After the CFO indicated they were developing a new cost of production formula, a third trigger was added to all Saskatchewan Live Pricing Agreements. This new clause states that fundamental changes to the Ontario live price formula and/or additions to the existing live price calculation would also trigger discussions between the CFS and Appellants. 8) On December 19, 2014, CFS and the Appellants signed Saskatchewan Live Pricing Agreement A-129. The agreement states: The Agri-Food Appeal Committee Page 5 of 20

7 For the CFC production cycle A-129 live pricing schedule shall be: A cents/kg over Ontario Live 9) The A-129 agreement further states: In the event that unforeseen events occur before this production cycle, discussions between the CFS and processors regarding possible solutions shall be triggered. Such triggers to resume pricing discussions shall include but are not limited to: 1. A change in the cost of catching live chicken where the cost to Saskatchewan producers increases. 2. The development of a Western Canadian live pricing proposal that would result in all four western provinces pricing in a similar manner. 3. Fundamental changes to the Ontario Live price formula and/or additions to the existing live price calculation. 4. The development of a Saskatchewan live price cost of production. During the A-129 production period the margin received by both processors hatcheries shall remain constant, regardless of the change in price set by the Saskatchewan Broiler Hatching Egg Marketing Board. Unless another live price agreement is reached between both parties the above live pricing agreement will remain in effect. 9) On February 18, 2015, the CFO released their live price for A-129 using the new Cost of Production Formula. This resulted in a price lower than CFS anticipated. No further background information or explanation was released by the CFO at this time. 10) Due to the release of the Ontario live price for A-129, the Appellants were contacted and invited to a CFS Board meeting on March 5, 2015, to discuss the live price. 11) On February 20, 2015, CFS did not have enough information to release their live price in advance of the production cycle. CFS contacted the Appellants and notified them the live price would not be set by the expected deadline of February 20, An was also provided to producers notifying them that the price bulleting would be released February 23, ) On February 23, 2015, CFS held a board meeting via conference call to discuss the A-129 live price. More information was provided by the CFO including the weight categories that were used to calculate the price. The Board chose to follow the posted live price for the weight category of 1.95 kg/bird to 2.15 kg/bird which is $1.586/kg. CFS also increased the chick price to better reflect the cost of chicks in The Agri-Food Appeal Committee Page 6 of 20

8 Saskatchewan. As a result, the A-129 minimum live price for Saskatchewan was released at $1.5942/kg plus 2.50 cent/kg, which results in a price of $1.6192/kg. 13) On February 24, 2015, the Appellants notified CFS that they would be sending a letter to producers stating that they will not be paying the increased live price. They indicated they would be holding the difference in price between the A-128 live price and A-129 live price until such a time as they could meet with the CFS Board and discuss the live price. 14) On March 2, 2015, the CFO updated their live price for A-129 and provided more information in their bulletin as to what the price changes involved. 15) On March 5, 2015, the CFS met with the Appellants to discuss pricing. The Appellants stated that the CFS should be following CFO s March 2 nd live price, which shows a price drop of 0.2 cents/kg when comparing the same weight category that was used in the past. The CFS indicated that since the CFO s formula has fundamentally changed, there was a need to adjust the Saskatchewan price. Also, the weight category the CFO priced off of was now changed to a lower priced weight category and not reflective of the average bird weights in Saskatchewan. 16) At the March 5, 2015 Board meeting, CFS indicated that the A-129 price should be revised based on the same weight category that was used in the past and adjust for the current Saskatchewan chick prices. This resulted in a new Saskatchewan live price of $1.6101/kg. This is a 0.71 cent/kg increase over the A-128 posted price. 17) On March 6, 2015, the Appellants sent letters to producers indicating they would be withholding the 0.71 cent/kg increase. 18) On March 27, 2015, a Notice of Appeal was provided to the Committee on behalf of the Appellants. 19) On April 1, 2015, the Committee informed the Appellants and CFS that a Notice of Appeal had been received and would be reviewed to determine if a hearing would be necessary. 20) On April 9, 2015, the CFO published the A-130 live price. 21) On April 10, 2015, the CFS Board had a discussion with processors during a CFS Board meeting to discuss pricing and the difference in chick price between Saskatchewan and Ontario. CFS offered a three-cycle agreement that would take into account 35% of the change of chick price between Saskatchewan and Ontario. 22) On April 14, 2015, the Appellants notified CGS that they would not agree to the proposal brought forward by CFS on April 10, The Agri-Food Appeal Committee Page 7 of 20

9 23) On April 16, 2015, the CFS Board held a conference call and approved a motion to set the A-130 live price for Saskatchewan at $1.6148/kg. The A-130 live price was sent to chicken producers and the Appellants. 24) On April 20, 2015, an Amended Notice of Appeal was provided to the Committee on behalf of the Appellants to include the A-130 live price. 25) On April 22, 2015, the Committee informed the Appellants and the Board in writing that an appeal would be held on June 3, ) On May 20, 2015, a letter was sent on behalf of the Appellants indicating they would not be able to meet on June 3, 2015 due to prior commitments and requested an extension. 27) On May 26, 2015, the Committee notified the Appellant and the Board that they would change the Appeal Hearing date to June 10, VII) ATTENDANCE Attending the hearing on behalf of the Appellants was: Mr. Jeff Grubb, Counsel for the Appellants Ms. Carly Romanow, Counsel for the Appellants Mr. Ron Patterson, CEO, Prairie Pride Natural Foods Ltd. Mr. Bob Kowalchuk, Hatchery Manager, Sofina Foods Inc. Call-in witness for the Appellants: Mr. Mike Terpstra, Executive Director, Association of Ontario Chicken Processors Attending the hearing on behalf of the Board was: Mr. Philip Gallet, Counsel for the Board Mr. Clinton Monchuk, CEO, Chicken Farmers of Saskatchewan Ms. Diane Pastoor, Chair, Chicken Farmers of Saskatchewan Mr. Wally Sloboshan, Director, Chicken Farmers of Saskatchewan Call-in witness for the Board: Mr. James Corpuz, Chicken Farmers of Ontario Observing the appeal hearing was: Mr. Tim Keet, tor, Chicken Farmers of Saskatchewan Sitting on the Agri-Food Appeal Committee for the purpose of this hearing was: Ian McPhadden, Chairperson Allan Arthur, Vice-Chairperson The Agri-Food Appeal Committee Page 8 of 20

10 Tom Hougham, Committee Member Ryan Mulatz, Case Manager VIII) THE HEARING 1) The Process Both the Appellants and the Board were provided the opportunity to make presentations without interruption. Following the presentations, the Committee had questions of clarification for both parties. The Appellant and the Board were only to address the Committee and could not direct questions to each other. Following questions, the Appellant and the Board had an opportunity to provide a rebuttal to what was previously presented. The Committee once again had questions of clarification before adjourning. Observers were allowed to attend the hearing however could not participate or comment. Neither party objected to the conduct of the hearing or the panel, however, Counsel for the Appellants requested that documents provided by their witness, Mr. Terpstra be included for consideration despite not being submitted at least 10 day prior to the hearing to allow the Committee time to review. The Committee felt that Mr. Terpstra would have sufficient time to provide his information via call-in and therefore the additional documents would not be considered. Legal Counsel for both parties disagreed over whether Mr. Tim Keet, Director of Chicken Farmers of Saskatchewan, was attending as a witness or observer. The Committee decided that Mr. Keet would only sit as an observer as the CFS Board was already represented by four other individuals and there would be opportunity during the hearing for breaks where parties can discuss issues amongst themselves. 2) Appellant s Presentation and Salient Points The Appellants submitted the following: a) Summary of Appeal i) The Appellants are appealing changes made to the Saskatchewan price of live chicken for the A-129 and A-130 production cycles. The Appellants signed a Saskatchewan Live Pricing Agreement for A-129 which consists of an agreed upon pricing arrangement of the Ontario live price plus 2.50 cents/kg. The Agri-Food Appeal Committee Page 9 of 20

11 ii) This pricing agreement also states how the agreement should be changed, if it should change. However, CFS decided unilaterally to change the price without first consulting with the Appellants. iii) The Appellants do not believe there has been a substantive change resulting from the new Ontario pricing formula and as such, CFS is not justified in changing the price contrary to Saskatchewan Live Pricing Agreement A-129. b) Changes to Regulation 402/the Ontario Pricing Formula i) The method used to calculate live price in Ontario has changed over time. A survey of grower costs was undertaken in both 1986 and 1990 to develop a weighted average that would determine the Cost of Production ( COP ). These studies identified a number of line items for costs, known as buckets. These buckets include items such as feed and chick costs. ii) In 2002, a decision by the Ontario Farm Products Appeals Tribunal (Tribunal) established starting values for feed and chick costs as well as producer margin. A methodology was also set to measure changes in producer costs but not the level of producer margin. This decision was implemented under Regulation 402. iii) In 2012, the Chicken Farmers of Ontario (CFO) and the Association of Ontario Chicken Processors (AOCP) began work to update the COP formula. This new formula relied on both a producer field survey as well as a weighting for the model farm which would be more efficient. iv) Changes made to the 2012 survey included new buckets ; however, this is mostly a classification issue and not actually new items being considered. For example, contract services and vehicle costs were added in 2012 but would include items already covered in the 1990 survey under labour and overhead. The costs examined are the same, only how they are categorized has changed. v) The CFO and AOCP were able to agree on updates to feed and chick costs, however, there were areas they could now agree on such as labour, return on capital or depreciation costs. As such, the Ontario Farm Products Marketing Commission reviewed the input of both agencies and made a decision to update the COP formula. This was once again implemented via changes to Regulation 402. vi) Annual updates were made to the data in 2013 and 2014 using Statistics Canada indices to account for inflation. vii) New Regulation 402 was put into place in 2015 for the A-129 production cycle. The result of the new formula was a lower price for live chicken. While the The Agri-Food Appeal Committee Page 10 of 20

12 calculations have changed, the price farmers get paid based on the same factors as were previously used. c) History of Pricing Agreements i) Prior to 2008, pricing decisions were made by CFS on a period-by-period basis. ii) Over time, the Appellants were looking for longer term pricing decisions. As such, the CFS used a set margin of 1.5 cents/kg over the Ontario live price. iii) Typically, Ontario surplus tends to move west. As such, freight costs accounted for the main difference in chicken prices from Ontario compared to Saskatchewan. In 2008, CFS increased the Saskatchewan live price to pick up the cost difference compared to Ontario. iv) In September 2008, an appeal was submitted by the Appellants to the Committee alleging this increase put undue costs on processors. v) After the appeal, the Appellants met with CFS to look at costs and agreed to increase the differential spread over 4 periods from 1.5 cents/kg to 2.5 cents/kg in low allocation months and 2.75 cents/kg in high allocation months. They would also sign long-term agreements covering roughly six production cycles at a time to ensure greater price stability and profitability in a national market. vi) When it came time to negotiate a new long-term agreement starting with production cycle A-129, CFS was concerned about the announcement of a new pricing model from Ontario and the parties agreed to sign a one cycle agreement based on the same price spread as previous years. vii) The Appellants intent was to wait for more data from Ontario and then negotiate a new six cycle agreement. viii) When CFS released their pricing bulletin, the 2.50 cent/kg differential was the same however, a new cost for chick prices was added raising the price. This was not agreed to by the Appellants and chick cost is already accounted for in the Ontario COP formula. ix) When CFS released the pricing for the A-130 production cycle, it followed the same principles as A-129. The Appellants had discussions with the CFS regarding the A-130 price; however, there was never an agreement. d) Pricing by Weight Category (i) Other provinces have prices broken down by weight category. Saskatchewan does not. Saskatchewan has always set 1 price for weight as the average bird The Agri-Food Appeal Committee Page 11 of 20

13 weight is between 2.09 and 2.15 kgs. If processors want to get a lower weight bird, a premium is offered as producers are not inclined to grow lighter birds due to lower margins. (ii) Ontario released a live price update on March 3, 2015, stating the price for A-129 would be $1.556/kg. This bulleting also lists the calculations and adjustments used to determine this price. They also provided weight category breakdowns showing a price difference between the kg category and categories in the 2+ range. Normally, these would be the same price. (iii) When CFS initially released their A-129 pricing, it was based on the lower Ontario weight category. The Appellants were already paying a premium for lower weight birds and if Ontario s lower weight pricing was going to be the basis for Saskatchewan s price, that premium would no longer be provided. (iv) Based on Ontario weights, the Saskatchewan price would be 7 cents/kg lower than the previous cycle. However, when it became apparent that the weight ranges were different, the Appellants agreed that a consistent weight category should be used for Saskatchewan. As such, the price for Saskatchewan should drop 5 cents/kg using the weight category the Appellants and CFS agreed to. (v) When CFS released their updated A-129 price, it now accounted for the historical weight category; however, the measurement for chick prices was increased. e) Chick Pricing i) The hatchery will set the chick price that is charged to chicken producers. This is based on a price paid to the Saskatchewan Broiler Hatching Egg Board. Typically, the price hatcheries charge chicken producers is the base price plus a 38% margin. ii) The Saskatchewan Broiler Hatching Egg Board uses an Alberta Cost of Production formula to set the base price for Saskatchewan. iii) The Appellants agree that there is a disconnect between chick prices in the Ontario COP and the Alberta COP and are willing to look at costs and price. f) Processor and Producer Margins i) The Appellants currently pay a set Saskatchewan price based on Cost of Production; however, they must sell their product in a competitive National marketplace. As such, processors must have a stable price to ensure profitability. ii) The market for chicken has become more consolidated and the biggest difference is distance to market. Distribution centers are usually in Alberta, British The Agri-Food Appeal Committee Page 12 of 20

14 Columbia or Ontario. This means increased freight costs for processors in Saskatchewan as chicken is shipped out of province for distribution. iii) It costs roughly 10 cents per kilogram to ship from Saskatchewan to Alberta % of product is shipped out of Saskatchewan to distributors. Some of the product is then distributed back to Saskatchewan. iv) The use of a live price also impacts processors margins and you pay for a whole bird, but only 60-70% is useable. As a result, the cost per useable kilogram is higher. An extra 1 cent increase equates to an increase of approximately 1.5 cents for product. If there is 7 million kilograms of processed product, this increase will result in a $70,000 extra cost for processors. iii) Producer margins previous to the A-129 production cycle were probably cents/kg. without feed discounts. That margin is currently cents/kg in Saskatchewan. The Cost of Production Formula states a fair return is 51 cents/kg which Saskatchewan producers are already achieving. 3) The Board s Presentation and Salient Points The Board submitted the following: a) Changes to Regulation 402/the Ontario Pricing Formula i) The changes made to Regulation 402 is a major overhaul of how chicken is priced in Canada. ii) Previous, pricing mechanisms were based on proxy values and not actual measured costs. The 2002 Tribunal decision only responded to changes in cost but there were still potential ambiguities. Further, the starting values set out by the Tribunal were all taken from different time periods. The quota periods did not align. iii) The new formula in place for A-129 moved from proxy values to an actual Cost of Production formula base. Each component in the formula is now measured. Also, all costs are now anchored to 2012 so pricing now aligns across all components. iv) The new COP formula still contains the three main components chick cost, feed cost and producer margin. However a fourth component has been added which is an annual adjustment. This adjustment looks at feed efficiency, volume adjustment and producer efficiency. These factors will result in an additional price decrease implemented over four years. v) The new COP formula also uses a lower chick conversion ratio of cents instead of the 0.5 cents used previously. The Agri-Food Appeal Committee Page 13 of 20

15 vi) The final result of the new formula is an initial 5.1 cents per kilogram downward adjustment on the Ontario live price. The formula is also designed to further decrease the price over a four year period. vii) The changes to chick price and feed conversion rates are not the only change. The way the rates are being used has also changed due to the annual adjustment factors. Now a constant price reduction is set in the regulations. This will result in an 8.7 cent decrease over time for the producer margin. viii) Some of the changes in the new COP formula initially do not make sense or were difficult to understand. Currently, the feed efficiency measurement is charted as a permanent increase. However, in production there is a rate of diminishing returns. There is a certain amount that chickens need to eat or you will see a negative impact. This is not considered in the new formula. ix) There was also a change to the weight categories. Previously, Ontario used a weight for their pricing. They have changed to a lower weight category. Saskatchewan typically produces lower weight birds on average compared to Ontario. x) The change to chick price will result in a drop of 4.65 cents over time. However, costs for chicks are also based on cost of production which is based on an Alberta formula. xi) This is a fundamental change for producers but is intended to bring more transparency and encourage increased producer efficiency. b) Chick Pricing in Saskatchewan i) The CFS and the Saskatchewan Broiler Hatching Egg Board have had the same CEO since This was done at the recommendation of the Government of Saskatchewan. However, both agencies are completely separate with their own individual boards, regulations, board orders and members. ii) The Broiler Board sets the prices for broilers in Saskatchewan. Hatcheries pay based on the price set by the Board. This amount is based on a COP formula developed by Alberta and applied to Saskatchewan. iii) The price Hatcheries charge to chicken producers is the broiler price plus a set 38% margin. This means that hatcheries are able to pass increased chick prices on to chicken producers. The CFS Board has no control over broiler prices. The Agri-Food Appeal Committee Page 14 of 20

16 iv) If hatcheries do not approve of chick prices being properly accounted for in the chicken live pricing agreements, then they have a right to appeal chick prices set by the Saskatchewan Broiler Hatching Egg Board. v) The CFS Board can meet and discuss this matter with the Broiler Board; however, despite sharing a CEO, CFS has no authority over the actions of the Broiler Board. vi) Allowing the CFS Board to link Saskatchewan chick costs directly to the minimum live price for chicken would put pressure on the Broiler Board and hatcheries to look at own pricing and costs. It would be incentive for the hatcheries, which are owned by the Appellants, to pressure the Broiler Board to lower chick prices instead of just charging a set margin and passing the cost on to chicken producers. c) Pricing Timelines and Agreements i) The CFS Board in December 2014 that changes to the Ontario COP formula were coming soon. The decision was made that the A-129 live pricing agreements would be for one cycle only to ensure that if changes were significant, chicken producers wouldn t take a hit for usual six cycles. ii) While the Board was aware they would be dealing with changes to the pricing formula, they did not know what those changes would be exactly. Further, when the Ontario A-129 price was released on February 20, 2015, there was no information as to how they came to that price or what factors were considered. The price was 5 cents lower than expected. iii) The Board typically meets about 10 times a year. Roughly half of these meetings include the Appellants. When the Ontario price was released, the Board invited the Appellants to their upcoming meeting on March 5, 2015, to discuss the issue. iv) Due to the lack of information, the Board sent an to producers and processors on February 20, 2015, notifying that the Saskatchewan price would be delayed until the following week. v) The Board is required to set the minimum live price for chicken in Saskatchewan for the production cycle. Shipping happens continually and producers need to be able to set the price. The 5 cent decrease from Ontario was a profound change with no explanation. vi) When more information was released by the CFO, the CFS Board made adjustments to the price to take Saskatchewan average weights and chick prices into account. The Agri-Food Appeal Committee Page 15 of 20

17 vii) CFS receives pressure from the Saskatchewan Agri-Food Council to ensure accurate, local prices. In this case, the chick price was increased to capture higher chick costs in Saskatchewan. viii) On March 5, 2015, the Board met with the Appellants to discuss the pricing decision. The Appellants voiced their concerns and the Board decided to reconsider their pricing to take the lower chick conversion rate into account. This resulted in the price decreasing to $1.6101/kg. ix) The newly updated Saskatchewan A-129 price was released on March 5, x) The Board met with the Appellants to discuss pricing moving forward, starting with the A-130 production cycle. The Board was aware an appeal had been filed by the Appellants and wanted to discuss a new pricing agreement that contained a better link between the Ontario COP for chicken and the Alberta COP for chicks. xii) The CFS Board is looking for consistent pricing for producers as there can be large swings in chick prices. The Board made an offer to the Appellants of only 0.3 cent increase to address higher chick costs in Saskatchewan. The Appellants rejected this offer so the board went lower. xiii) This is the first time the issue of chick prices has come into an agreement between CFS and the Appellants. The historical agreement, which dates back to the 2008 decision made by the Committee, was solely regarding catching costs. If chick prices are not properly accounted for, then the costs simply get passed down the chain onto chicken producers. d) Market Overview i) The Ontario COP formula has changed chicken pricing across Canada, as all provinces adjust. Starting with A-129 and following into A-130, all provinces have increased their spread between Ontario live pricing and their historic pricing. ii) The Appellants operate in other provinces. Prairie Pride has operations in British Columbia and Sofina Foods operates in both British Columbia and Alberta. As both these provinces have adjusted their prices as well as Saskatchewan, it is difficult to see how the Appellants are at an unfair advantage in the national marketplace. iii) In Saskatchewan, processors are responsible for both the processing of chicken as well as the hatching of eggs. This means the Appellants have integrated two portions of the supply chain allowing them to profit at two separate points in the value chain. The Agri-Food Appeal Committee Page 16 of 20

18 iv) Hatchery margins in Saskatchewan, as well as the processing margins are very competitive with other provinces. In some cases, Saskatchewan has the highest margin of the provinces. v) Due to these factors, the Appellants are not at a competitive disadvantage due to Saskatchewan s pricing for the A-129 or A-130 production cycles. 4) Committee s Findings The Committee finds as follows: a) The Appellants and the Board meet on a regular basis to discuss matters of importance to the chicken industry. b) The Appellants and the Board have a history of negotiating pricing agreements to ensure a stable price for both processors as well as producers. c) The Live Pricing Agreements signed by the Appellants and the Board contain wording to ensure that should unforeseen events occur before this production cycle, discussions between the CFS and processors regarding possible solutions shall be triggered. d) The Board was already aware that a change to the Ontario COP formula would be coming at some point and as such, one of the unforeseen events that would trigger discussions is Fundamental changes to the Ontario Live price formula and/or additions to the existing live price calculation. e) The Live Pricing Agreement further states that Unless another live pricing agreement is reached between both parties the above live pricing agreement will remain in effect. f) When the Chicken Farmers of Ontario released their live price for the A-129 production cycle on February 20, 2015, it was clear that they were using a new formula to calculate live price. However, there was no further information as to how this new price was calculated. g) On February 23, 2015, the CFS Board released the Saskatchewan pricing for the A-129 production cycle, the price was modified to capture a higher Saskatchewan chick price as well as the proper Saskatchewan weighting. This modification was an addition to the agreed upon formula 2.50 cents/kg over Ontario live. h) CFS met with the Appellants on March 5, 2015 to discuss the change to pricing, however, the two parties did not fully agree on how the new price was calculated. While some concessions were made, the parties disagreed on the inclusion of a The Agri-Food Appeal Committee Page 17 of 20

19 higher chick price in the Saskatchewan pricing. This disagreement carried over into the release of the live price for the A-130 production cycle. IX) THE DECISION The question before the committee was whether the Chicken Farmers of Saskatchewan breached the Saskatchewan Live Pricing Agreement A-129, which was negotiated by both CFS and the Appellants and signed by both parties on December 19, The parties disagreed on whether the changes to the Ontario Cost of Production Formula constituted a fundamental change within the meaning of the Live Pricing Agreement; however, the Committee has concluded that it is not necessary for the Committee to determine whether or not this was a fundamental change as the outcome would be the same. If the changes to the Ontario Cost of Production Formula constituted a fundamental change, as argued by CFS, the Saskatchewan Live Pricing Agreement A-129 would trigger discussions between the CFS and Processors: In the event that unforeseen events occur before this production cycle, discussions between the CFS and processors regarding possible solutions shall be triggered. Such triggers to resume pricing discussions shall include but are not limited to: 3. Fundamental changes to the Ontario Live price formula and/or additions to the existing live price calculation. The CFS Board passed a motion to change the price for A-129 without first conducting discussions with the Processors. This is contrary to the Agreement. Once the Board determined that fundamental changes to the Ontario Live price formula and/or additions to the existing live price calculation had occurred, the next step should have been that pricing discussions between the CFS and processors regarding possible solutions shall be triggered. The agreement further clarifies that such an event will resume pricing discussions between the parties. This did not occur. Even if the subsequent discussions between the parties met the requirements for discussions under the Saskatchewan Live Pricing Agreement A-129, there was no agreement between the parties as to another live pricing agreement. The Saskatchewan Live Pricing Agreement A-129 required an agreement between the parties to change the live price: Unless another live pricing agreement is reached between both parties the above live pricing agreement will remain in effect. The Agri-Food Appeal Committee Page 18 of 20

20 As long as CFS and the Appellants were negotiating a new agreement in good faith, the A-129 price of 2.50 cents/kg over Ontario live should have remained in effect during the A-130 production period or until both parties were able to negotiate, in good faith, a new agreement. Alternatively, if the changes to the Ontario Cost of Production Formula did not constitute a fundamental change, as argued by the Appellants, then the prerequisite triggering events would not have occurred and the price for A-129 should not have changed from the December 19, 2014 agreement unless it was agreed to by both parties. As such, the Committee finds the Board in breach of Saskatchewan Live Pricing Agreement A-129, regardless of whether or not there was a fundamental change. The A-129 agreement between the parties required the use of 2.50 cents/kg over Ontario live to calculate pricing; however, CFS imposed on this formula a modification for higher Saskatchewan chick prices for A-129 and A-130. If there was a fundamental change, the agreement required negotiations and mutual agreement before a new formula could be used, which did not occur. If there was no fundamental change, negotiation clauses in A-129 would not trigger and the formula in A-129 would be used. The Committee finds that the parties came to a partial agreement to change the formula for A-130 by using 2.75 cents/kg over Ontario live rather than 2.50 cents/kg over Ontario live, though there was no agreement regarding the modification for higher Saskatchewan chick prices. Materials submitted by CFS include meeting minutes regarding processor and board discussions of the historic price spread of 2.75 cents/kg over Ontario. In the Appellant s materials, they argued for the use of 2.75 cents/kg over Ontario live based on the historical agreements, which in the Committee s opinion is consistent with the historical pattern for summer production months. Therefore, the Committee finds it is appropriate to use 2.75 cents/kg over Ontario live for the purposes of the A-130 agreement. IX) ORDER Pursuant to Section 31(1)(a) of The Agri-Food Act, 2004, the Committee disallows the Boards decision to change the minimum live price for chicken contrary to the Saskatchewan Live Pricing Agreement A-129 and substitutes a price of 2.50 cents/kg over Ontario live as was required by the A-129 Agreement. Similarly, the Committee disallows the Board s decision to alter the price of 2.50 cents/kg over Ontario live for the A-130 production cycle, as per the Agreement. The Committee substitutes a price of 2.75 cents/kg over Ontario live for the A-130 production cycle. Given the decision outlined above, the Committee declines to address the remaining grounds of appeal (d, e, and f) in the Appellant s notice of appeal. The Agri-Food Appeal Committee Page 19 of 20

21 As required by clause 5(1)(b) of The Agri-Food Regulations, 2004, the $100 application fee submitted by the Appellants will be refunded. X) RECOMMENDATIONS The Committee recommends that the Appellants and the CFS Board work more closely with the Saskatchewan Broiler Hatching Egg Board when developing and negotiating prices for chicks and live chicken in Saskatchewan. If both parties agree that stable pricing is integral to the success of their industry, then more should be done to properly account for Saskatchewan s actual cost of production. A closer link must exist between the costs for Saskatchewan producers and the prices that get passed through the system. Ian McPhadden, Chairperson Ryan Mulatz, Case Manager The Agri-Food Appeal Committee Page 20 of 20