October 1st, 2012
Is anyone else delighted by how greek yogurt has taken off in Canada in recent years? The fast growing market is the site of fierce competition between producers. In a recent federal court case, the big cheeses of Canadian yogurt production challenged the Minister International Trade’s decision to issue a supplementary import permit to American new comer Chobani.
In Ultima Foods Inc v Canada (Attorney General), Canadian yogurt titans Yoplait and Danone challenged the Minister’s decision to issue two supplementary import permits to popular American Greek yogurt producer Chobani. The permits authorize Chobani to import its product for sale in the GTA for an initial test period, followed by a bridging period during which Chobani will establish a production facility in Ontario.
Canada’s Dairy Supply Management System
The permits enable Chobani to circumvent Canada’s arcane and difficult supply management system. The system relies on a protectionist quota for the importation of dairy products into Canada. Without these permits, imports in excess of the small quota (as Chobani imports are) are subject to prohibitive 237% duty.
The supply management system also sets production quotas for farmers, which limit the supply of raw milk. Canadian dairy farmers can not simply produce as much milk as they want; they are limited by the amount authorized by their quota. All milk is sold to a provincial milk supply management board, which markets and sells it to producers at a price controlled rate. The system is intended to support the Canadian dairy industry by ensuring dairy farmers get a reasonable return on their investment and labour.
The effect of the supply management system on Canadian dairy producers is twofold. Firstly, they must buy raw milk from supply management boards at higher prices than foreign competitors. For example, yogurt producers in Quebec pay 79% more for raw milk than their competitors in New York state, where subsidies are paid directly to the dairy farmer and there is no supply management system. Canadian dairy producers are protected from the competitive disadvantage of this disparity by the import quota.
Secondly, Canadian dairy producers must compete with each other for limited supplies of raw milk. Assuming production quotas remain the same, the arrival of a new yogurt producer in Canada will mean less raw milk available for the established producers.
The permits granted to Chobani allow the American producer to access Canadian markets without paying either the high prices set by supply management boards or the 237% duty set by the Import Control List. Additionally, once Chobani’s Ontario production facility is established it will compete against established yogurt producers for the limited supplies of raw milk available from the supply management boards. Is it any wonder that Yoplait and Danone are up in arms about the Chobani permits?
The Decision of the Minister
The decision to issue the supplementary permits was made by the Minister pursuant to subsection 8.3(3) of the Export and Import Permits Act on a discretionary basis. The act provides no guidance on when supplementary permits should be issued,. DFAIT has released guidelines which indicate that a supplementary import permit will be granted for a product already produced in Canada where a unique production process is used and investment is planned.
It is clear that the decision was motivated by the investment promised by Chobani and the jobs which will be created to staff Chobani’s promised production centre in Ontario.
The Parties’ Positions
The applicants complained that in making the decision the Minister improperly considered job creation and investment. In their submission, the Minister
has no authority to issue a supplementary permit where the effect would be to undermine the supply management system. They further agued that their right to procedural fairness was breached when the Minister did not allow them an opportunity to express their concerns about Chobani’s application before the decision was made.
The Attorney General responded by stating that although the Minister must consider the objectives of supply management and the impact of Permits on the Canadian dairy industry, he may also consider other policy objectives including job creation and foreign investment. In deciding to issue the permits, the Minister was aware that by granting the permits the demand for Canadian milk would increase once Chobani’s Ontario plant was established. The Attorney General further submitted that the protection of processors from competition is not a stated objective of supply management.
Agro-Farma (the corporation which produces Chobani greek yogurt) agreed that the Minister’s discretion could be exercised in furtherance of the general objects of the Minister, and not only those of supply management. It pointed out that although permits are inherently discriminatory, they are authorized by statute and thus not problematic simply for that reason.
The Court’s Decision
The court found that the Minister had properly considered the impact of the permits on supply management and reasonably concluded that granting the permits would be a long term benefit to the Canadian dairy industry. Having properly considered this, the Minister was free to consider other objectives including investment and job creation.
Justice Simpson noted that all supplementary permits will have a negative effect on supply management in the short term. If the applicants were correct and the Minister could only issue permits in support of supply management, not permits would ever be issued. This result is clearly contrary to the intention of the Export and Import Permits Act.
The court also noted that dairy processors such as Yoplait and Danone are not explicitly protected by the Canadian Dairy Commission Act, which creates the supply management system. Supply management is intended to benefit dairy farmers; any change in competitive landscape of dairy processors has not impact on the integrity of the system.
On the issue of procedural fairness, the Minister had no duty to hear the applicant’s views in considering Chobani’s application. Given the Minister’s broad discretion, there is only a minimal duty of fairness owed. As the permit application process has historically been confidential, the applicants would ordinarily have any opportunity to make submissions. The Minister’s failure to provide them with a formal opportunity to voice their objections did not breach their rights to procedural fairness.
Ultimately, the court found that the applicants did not have standing under subsection 18.1(1) of the Federal Courts Act to protest the decision. The Decision to grant the Chobani permits did not directly affect their legal rights or obligations in any way, and they will not experience a direct prejudice as a result of them. The court noted that the Canadian Dairy Commission, which administers the supply management system for milk, or groups of dairy farmers would have standing but had apparently chosen not to protest the decision.
[filed: List of cases]