Is this the last report

The following is a report that was commissioned by the Minister of Ag and was just released. The minister has stated that the recommendations in this report will be carried out. Let’s hope that it is true. If you have any comments on the following please make them and I will try to answer them as best I can.

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Recommendations
for
Managing Specialty Agri-Food Products
in
B.C.’s Supply Managed System
Prepared for
Minister of Agriculture Food and Fisheries
Prepared by
George Leroux
Dec. 20th, 2004.
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Table of Contents
1 Executive Summary.............................................................................................................. 3
2 Background ........................................................................................................................... 4
2.1. This Specialty Product Review..................................................................................................... 4
2.2. Qualifiers & Assumptions............................................................................................................. 5
2.3. Definitions ................................................................................................................................... 7
3 Discussion & Analysis ....................................................................................................... 12
3.1. The Specialty Opportunity.......................................................................................................... 12
3.2. Meeting the Requirements of Changing Markets....................................................................... 13
3.3. Government Policy..................................................................................................................... 16
3.4. Supply Management .................................................................................................................. 19
3.5. Regulating all Classes of Product .............................................................................................. 22
3.6. Organizing, Administering & Governing..................................................................................... 29
4 Recommended Specialty Product Policy Framework..................................................... 34
4.1. Definitions ................................................................................................................................. 34
4.2. Quota & Permits........................................................................................................................ 34
4.3. Exemptions ............................................................................................................................... 38
4.4. Marketing Requirements............................................................................................................ 38
4.5. Production Requirements – All Classes..................................................................................... 40
4.6. Production Allocation ................................................................................................................. 40
4.7. Levies & Fees ............................................................................................................................ 42
4.8. Eligibility.................................................................................................................................... 42
4.9. Organization & Supervision ....................................................................................................... 44
4.10. Transitional Matters ................................................................................................................... 45
5 New Entrants - Mainstream................................................................................................ 47
6 Exhibits ............................................................................................................................... 50
6.1. Contacts.................................................................................................................................... 50
6.2. BCMAFF Regulated Marketing Economic Policy....................................................................... 51
6.3. Letter from FIRB to Boards – September 2003.......................................................................... 52
6.4. FIRB Principles for Specialty Production ................................................................................... 53
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1 Executive Summary
The Ministry of Agriculture Food and Fisheries (Ministry) commissioned this study to develop
recommendations to better integrate specialty production in the supply managed sectors in B.C.
The recommendations put forward herein were developed in accordance with the Ministry’s
Regulated Marketing Economic Policy and the Farm Industry Review Board’s (FIRB) draft
principles for specialty production and marketing, and are intended to provide a framework to help
the parties communicate and focus on growing the supply managed industries in B.C.
The recommended framework includes the following:
1. All producers of milk, eggs, chicken, turkey and broiler hatching eggs, regardless of size
or class of product, should be registered with the Boards.
2. Specialty product definitions should reflect substantive farm level differentiation, 3rd party
certification, and identity preservation through to the consumer.
3. Specialty production and marketing should be managed using a distinct and restricted
class of quota.
4. Allocation procedures should ensure fair treatment of both specialty and mainstream
producers, and Board allocation decisions should require prior approval of the FIRB.
5. Small producer exemption levels should be increased.
6. A phased permit system should be developed to foster innovation and to progressively
advance specialty producers to become holders of specialty quota.
7. Levies should reflect services provided. There should be no extra fees for specialty
permits or quota, such as “quota lease fees”, that are not service-based.
8. Specialty producers should have Board representation, and Specialty Product Advisory
Committees should be established.
9. New entrant programs should be revised to include clear financial commitment and
permit issuance criteria, and incentive amounts issued should be non-transferable.
10. New entrant programs should be funded, in part, by a minimum 5% assessment on all
transfers of quota.
It is further recommended that Boards be required to submit for approval detailed specialty
product plans to the FIRB by March 31st, 2005, and to plan for full implementation by June 30th,
2005.
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2 Background
2.1. This Specialty Product Review
2.1.1 History
Specialty producers and the Marketing Boards and Commissions (Boards) have been at odds
with one another for several years. Their disputes have become increasingly legalistic and costly.
In September 2003, the Farm Industry Review Board (FIRB) directed all five (5) supply managed
Boards to review their programs for specialty production (see Exhibit at Section 6.3).
The Boards undertook to review their specialty programs, including new entrant programs, and
submitted reports in the 1st Quarter of 2004. The avian influenza crisis re-directed the FIRB’s and
the Boards’ attention to more urgent and immediately important matters, and assessment of the
Reviews submitted was set aside until the 3rd Quarter.
In July 2004 the Ministry released its “Regulated Marketing Economic Policy” Statement (see
Exhibit at Section 6.2). This policy provided a framework by which regulated marketing was
intended to function. It clearly envisioned specialty products being managed within the regulated
system.
In August 2004 the FIRB suspended its Review in favour of working together with the B.C.
Ministry of Agriculture Food and Fisheries (Ministry) to address the issues. The FIRB provided a
draft set of “Principles for Consideration in Support of Specialty Production and Marketing in the
British Columbia Supply Managed System” to assist move the matter forward. A copy of these
draft principles is included at Exhibit 6.4.
2.1.2 Commissioning this Review
In October 2004, the Ministry commissioned a review of the specialty program submissions made
by the Boards to:
“…have clear recommendations for the inclusion of specialty products in the regulated
systems for supply managed products so as to give clear direction to the FIRB and the
Boards that is in accordance with the Regulated Marketing Economic Policy statement -
Principles for B.C.’s Regulated Marketing System.”1
The review and analysis were intended to:
1. Understand the trends in, and position of, supply managed specialty production and
marketing in B.C.;
1 Source – Request for Proposals (RFP) – Setting Policy Direction for the Management of Specialty Agrifood
Products in the Supply Managed Commodities of British Columbia, September 7th, 2004.
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2. Incorporate the principles enunciated in the Economic Policy Statement and the FIRB’s
draft principles;
3. Understand and assess the existing and proposed specialty programs offered by the
Boards; and,
4. Develop and “recommend workable solutions for the management of specialty production
within the supply managed sectors.”2
The question is how, not if, specialty products should be regulated in the supply managed
sectors. Accordingly, this analysis examines ways to develop and grow specialty production
within the regulated systems.
2.1.3 Review Process
This Review of specialty production and marketing included the following:
- Review of Submissions from the Boards and COABCⁱ to the FIRB;
- Review of Appeal, Hearing and Court decisions concerning specialty production;
- Discussions with Board Managers and the COABC lead concerning both how the existing
systems work and how their proposals were intended to work;
- Discussions with several specialty producers;
- Discussions with Ministry and FIRB staff;
- Analysis of information obtained in the preceding; and,
- Development of a framework for managing production and marketing of specialty
products in B.C.
2.2. Qualifiers & Assumptions
This section states certain assumptions made by the author. It is intended to assist the reader
understand the perspective from which the specialty product question has been viewed.
2.2.1 Specialty Products within the Supply Managed System
This review examines ways in which specialty products can be better accommodated within the
supply managed systems: it does not examine whether they should be regulated within the
supply managed systems.
2.2.2 Price
This review takes the perspective that competing on price alone is a recipe for commoditization
and low margins, and will lead to missed opportunities when certain less price sensitive segments
of the market are ignored. It can also lead to higher earnings volatility, offset in supply
management by the regulatory framework and tariff protection.
2 Source – RFP.
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Consumers have a vast array of needs and demands. Sometimes they seek the lowest price,
while other times price is not a leading purchase criteria. For instance, a consumer may drive
across town to shop at a large discount food retailer for the bulk of their groceries: they purchase
volume. They then go out of their way to stop at a small high-end specialty shop to purchase
certain goods which are much higher priced for the same class of product compared to the large
retailer. Consumers are prepared to pay more for higher perceived service, quality and
performance.
The Label Rouge chicken system in France is an example of how differentiation at the farm level
is kept intact and certified to the end consumer, and where the product commands higher prices.
This specialty production program, which involves cooperation of parties at all stages of the value
chain, produces chicken that retails for twice the price of regular chicken and commands a
significant market share3. Consumers obviously perceive higher value for Label Rouge chicken,
and are prepared to consistently pay higher prices than for “industrially” produced chicken4.
2.2.3 Board Authority
This review takes the position that Boards, by virtue of their authorities and accountability, are
instruments of government.
The Supply Management System provides certain rights to producers to manage the production
(supply) and marketing (ultimately price) of the regulated product. These authorities are
accompanied by a responsibility to operate in accordance with the rules, including their spirit and
intent, and a responsibility to service and supply all segments of the market.
The System’s regulatory framework includes Federal and Provincial Regulation. The provincial
Acts of principal importance to supply management today are:
- The Natural Products Marketing Act (NPMA), and the Schemes established for each
sector under this Act;
- The Agri-food Choice and Quality Act (AFCQA), and regulations which provide for
certification; and,
- The Food Safety Act, and meat inspection regulations being introduced pursuant to this
Act.
In simple terms:
- The public elects the Legislature which passes Acts such as the NPMA and the AFCQA.
- The NPMA provides for Schemes, or regulations, for the production and marketing of
each regulated commodity.
3 Market share is estimated to be 36% of the total market, and 64% of the whole bird market.
4 The term industrially produced chicken is taken from the Label Rouge nomenclature.
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- Schemes are approved by Cabinet under authority from the Legislature (i.e. the public).
- Schemes provide, among other things, for the election or appointment of boards of
directors to govern implementation of the Schemes in each sector.
- Boards are authorized to develop Orders which are the operating rules by which the
regulated products must be produced and marketed.
- Boards establish management organizations to which they delegate authority to develop
and implement procedures to manage the industry in accordance with the Orders.
- The FIRB supervises the Boards, including approving the Orders developed by the
Boards and hearing appeals of Board decisions.
2.2.4 Merits of Supply Management
The review takes the position that supply management is the law today.
This review takes no position regarding the merits of supply management. There are many
arguments put forward both for and against the supply management system. It is not the purpose
of this review to assess the merits of the supply management system.
2.2.5 Regulations are Subject to Change
Notwithstanding that Supply Management is the law, Acts, Schemes, and Orders are subject to
change by the Legislature, Cabinet and the Boards.
This review takes the position that regulation should be reviewed and amended as required from
time to time.
2.2.6 Business Review
This review takes a business perspective: it is not intended to be a legal review. It examines the
management of specialty production and marketing as business activities which are subject to
regulation.
The supply managed sectors are accepted as being legally constituted. This review does not
attempt a detailed review of the many cases argued before the FIRB and the courts.
2.3. Definitions
In this section definitions are developed to provide understanding concerning how different terms
are used in this Review.
2.3.1 Commodity
A commodity is a product with broadly recognized and accepted standards where the supplier or
brand is irrelevant to the buyer.
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2.3.2 Differentiation
Differentiation is the creation of sufficiently meaningful product or service differences such that
the unique product or service attributes are distinguishable and valued by others. Differentiation
can be achieved by price, image, service support, quality (eg - reliability, durability, performance),
and/or design.
In terms of specialty products, design is the primary dimension of differentiation whereby the
producer and marketer seek to separate their products from the mainstream by utilizing some
combination of unique genetics, nutrition, facilities and management on the farm.
2.3.3 Directors
In this report the term directors is synonymous with Board members.
2.3.4 Lifestyle Farming
Lifestyle farms are defined herein as small farms managed by families who either earn the
majority of their family income from off-farm sources or who would be classified as low income
families.
A significant percentage of specialty producers are presumed to fall into the Lifestyle category,
with a smaller percentage of specialty product farms either currently or intending to become selfsustaining
agri-business enterprises.
Some might legitimately argue that farming is a lifestyle regardless of size of operation. The
purpose of distinguishing lifestyle farmers from agri-business enterprises is simply to provide an
analytic tool to understand the demographic composition of specialty producers.
2.3.5 Mainstream Products
In this review, products that are mature and undifferentiated on the basis of on-farm production
practices are referred to as mainstream products. The mainstream product market is typified by
relatively slow growth, generally reflecting population growth and/or temporal changes in demand
caused by consumers switching between proteins.
Mainstream products may well be differentiated on the basis of processing or distribution, but the
source of the raw material is irrelevant to the processor so long as it meets certain minimum
standards. Presently, mainstream products comprise the majority of production of regulated
products, and they are controlled by well established supply setting and market coordinating
mechanisms.
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2.3.6 New Entrant
A new entrant is a person or entity that is not presently involved through direct investment in the
production of a regulated product.
New entrants can fall on a continuum from never having been involved in primary production
agriculture to a new firm under common ownership as outlined below:
- New to the agricultural sector – have never operated a farming business;
- New to supply management system – have been involved in farming, but have never
produced supply managed products;
- New to a specific supply managed sector – have produced supply managed products in
past, but not the product in consideration; and,
- New production entity – have produced the regulated commodity in the past, either on
their own account or through affiliated business and / or family interests, but have been
disinvested for some period of time.
Specialty or mainstream production can fall into each category depending on individual
circumstances.
2.3.7 Niche
The concept of a niche focuses on serving the needs of a particular group or category of
customers. Marketers segment a population of consumers into groups with similar defined
purchase criteria. They design their product and service offerings to target and penetrate specific
segments.
When a firm or group of firms targets a single, clearly defined segment, they are pursuing a niche
strategy. Accordingly, a niche strategy may target consumers of standardized products through
non-standard or regional market channels, or it may distribute specialized products through
mainstream retail and foodservice channels.
2.3.8 Organic
Use of the word organic is subject to interpretation. Various standards and certification practices
have been established. From a consumer perspective, the most distinguishing attribute of
organic products is production absent synthetic inputs. Other attributes such as facility and
management practices may or may not be considered part of the “organic” nature of the product.
Organic is defined by the COABC as:
“Organic” describes a process of food production that avoids the use of synthetic inputs
such as chemical fertilizers, chemical pesticides, chemical growth regulators/hormones
and antibiotics. Organic production is based on a system of farming that uses production
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methods which minimize the impact on the environment. The primary focus is to maintain a
healthy soil and develop a balanced farm ecosystem that is environmentally sustainable.
By its very nature, organic agriculture promotes scale-appropriate mixed farming
operations5.
In B.C., there is one organic certification standard recognized by Regulation and that is the B.C.
Certified Organic symbol or phrase which provides certification to the consumer that the product
has met the standards set down in the British Columbia Certified Organic Production Operation
Policies and Management Standards.6
At the same time, there are other certified organic products offered in the market where
certification is provided by agencies other than those certified by the COABC.
2.3.9 Quota Rights
Quota is the right to produce and market, and the obligation to responsibly service the market for,
a regulated farm product. It is issued by a Board to registered producers.
Boards determine from time to time the amount of the regulated product that can be produced,
and they distribute this planned volume of production amongst registered producers, primarily
pro-rata to quota holdings.7
Registered producers, through their Boards and under powers provided to them by the NPMA
and the Schemes, have rights to license participants, determine production volumes, determine
marketing practices, set or negotiate prices collectively, and set levies.
Notwithstanding the distribution of certain rights to producers, quota is the property of the Board
and therefore of government.
2.3.10 Specialty Products
For the purposes of this report, specialty products are defined as follows:
Specialty products have unique farm-based attributes which are identity
preserved through processing, marketing and distribution to the final consumer.
Differentiating attributes may include some or all of unique genetics, specialized
nutritional programs, and unique facility and management requirements. The
differentiating attributes are 3rd party certified to the final consumer.
5 Source – COABC Organic Chicken Draft, June 21st, 2004.
6
See Section 3.5.1 of the Organic Agricultural Products Certification Regulation of the Agri-Food Choice
and Quality Act.
7 Quota – there may be various technical interpretations concerning the definition of quota. For the
purposes of this review, quota is simply a right to produce a certain volume of a regulated product
howsoever licensed, permitted or authorized.
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One of the difficulties with the phrase “specialty products” is its diverse and temporal nature,
which gives rise to a wide range of interpretations concerning what is “specialty.”
Specialty products are conferred a range of definitions and interpretations by the Boards. With
the exception of “certified” products (eg. certified organic, SPCA, CFIA approved) or branded
products, the consumer has little guarantee that they are getting a truly specialty product due to
the looseness of definition and the lack of appropriate certification bodies (eg free range, free run,
grain fed).
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3 Discussion & Analysis
This section first overviews the specialty marketing opportunity and the product life cycle.
Secondly, it examines government policy and some underpinnings of the Supply Management
System. And thirdly, it discusses certain aspects of regulating and administering specialty
production and marketing.
3.1. The Specialty Opportunity
Two divergent trends are observed in the agri-food system today. On the one hand, there is
greater market segmentation driven by growing consumer awareness of the food attributes they
buy and a corresponding demand for specific assurances. On the other hand, to most effectively
leverage the increasing consolidation of buying power in the hands of large mega-retailers and
processors, there is a trend towards more standardization with less brand diversity.
These trends provide an opportunity for the B.C. producers and processors. It is likely that B.C.
supply managed industries are higher cost producers compared to other regions producing
equivalent standardized, commoditized dairy and poultry products for national and international
retailers and distributors. However, B.C. industries can likely compete very well in the market
segments looking for specialty food products.
Specialty products are targeted to defined market niches. The niches may be emerging, well
established, growing or shrinking. They may be premium priced, regional (local), or outside the
mainstream distribution channels (farm markets, roadside sales, high end specialty stores).
Nevertheless, specialty products are clearly differentiated from mainstream products.
Specialty producers seek to differentiate themselves from the mainstream either for lifestyle or
economic reasons. In doing so, they may need to establish supply chain relationships
independently and outside the mainstream market access channels. Boards are oriented to
managing the mainstream supply chain relationships and have well established rules for the farm
gate transaction. Many specialty producers, on the other hand, have developed individual
relationships with processors, distributors and consumers.
Specialty producers span a spectrum from those not wishing to be part of the regulated
production and marketing framework to those producers who may be attempting to use specialty
production as an entry into the quota system at a lower cost than buying quota.
Specialty products often require additional costs to produce and market compared to
conventional, mainstream products. When the specialty product selling price is regulated by a
Board, the price established may or may not appropriately compensate the producers. To the
extent that the regulated price for a specialty product does not cover the increased costs of
production, a lower margin is realized. This would have the impact of making quota purchase
less attractive for a specialty grower than a mainstream grower.
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The opportunity facing Government and the Boards is how to better accommodate specialty
production in the regulated systems. Accommodation needs to be in a manner that meets
emerging, developing and developed specialty product market demands, recognizes established
participants’ interests, and promotes increased economic activity in the province.
3.2. Meeting the Requirements of Changing Markets
Market requirements and needs change over time. Consumer demand in B.C. for food products
is neither uniform nor static.
3.2.1 Supply & Demand
The market for mainstream dairy, poultry and egg products can be classified as a mature market.
Growth in demand is largely tied to population growth. New products may increase aggregate
demand by small incremental amounts. Market acceptance and sales volume growth of new
products may or may not be at the expense of existing products (substitution).
A fundamental tenet of supply management is to produce sufficient volume to supply the market
at a price which provides a “fair” return to producers. If the management of the system allocates
too much production, prices can be pressured down with the accompanying impact on producer
returns. In some cases, such as dairy and eggs, where farm gate pricing is based largely on cost
of production formulae, supply can be pressured down if returns to processors or graders are
reduced due to small amounts of “surplus” production. Accordingly, the incentive is to manage
the system very tightly.
Boards take the position that the system’s benefits include a steady reliable supply of products
and stable pricing for consumers, together with stable returns for producers. These same issues
apply to specialty production and marketing.
3.2.2 Supply Chains
The development of highly efficient supply chains and the growth of large national and multinational
retail and foodservice distributors have impacted the regulated sectors over the past
decade. At the same time, these consolidated market access channels may be an opportunity for
smaller regional supply chains.
Consumers seek an array of product attributes in their food products. Some are interested to
know where and how their food was produced, and they are prepared to pay a premium for this
knowledge. Hence the emergence of identity preservation and certification systems to assure the
consumer that the attributes they value are reliably provided.
The current management of the supply management system is primarily oriented toward volume
production to serve the larger supply chains. This is a sound business practice. However, it does
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not preclude satisfying those market segments that are of lesser volume due to highly focused
regional, production, or product attributes.
Existing producers may or may not wish to embrace new production and marketing protocols to
meet consumer demands in small and emerging market segments. Their existing business
processes have adapted to and are well established to serve the larger supply chains. But, are
these same systems capable of efficiently and effectively serving the more narrowly targeted
specialty production?
The essence of the specialty product question in terms of supply chains is that the innovators
may be found inside and outside the existing system. They see opportunity and take risks by
developing new production protocols, testing new markets, and then developing the market.
Once volumes reach certain levels, existing mainstream producers, processors and distributors
may see either opportunities for higher margins or a threat of lost volume as consumers switch.
This may cause mainstream producers to convert some or all of their operations to the new
product/market category, thereby capitalizing on the risks taken by others in developing the
specialty market.
3.2.3 The Product Life Cycle
The product life cycle is a well established concept that defines the expected stages in the
evolution of a product in the marketplace. A stylized representation of the product life cycle is
illustrated in the chart below.
For the purposes of this review, consider specialty products as having four (4) stages as follows:
Innovation A new product is proposed to be offered to the market. The product is
test marketed. There may or may not be any consumer demand:
demand is created rather than filled. Production costs are usually high
due to new processes and small scale. Distribution is through limited
New Product Development
Time
Volume
Phase 1
Phase 2
Phase 3
Mainstream
(Maturity)
Innovation
(2 yrs)
Market Development
(3 - 4 yrs)
Market Production
(3 - 4 yrs)
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test market channels.
Establishment Test market results indicate consumer acceptance. Consumers are
seeking the product and are prepared to pay a premium. Repeat
purchasing develops. Production expands to capture developing
demand. Distribution begins to expand beyond test markets.
Growth Demand continues to expand. Distributors are seeking to list the product
to meet consumer demand. Production continues to expand and
production processes increasingly focus on cost efficiencies. Price
premiums begin to decline, and price volatility emerges.
Mainstream Demand is well established. Growth rates slow. Premiums continue to
decline and price volatility is normal course8. Distributors regularly list
the product. Production costs continue to decline.
New ideas, be they product or market, tend to follow a predictable life cycle. Innovation, research
and development are followed by market growth which eventually leads to market saturation or
maturity. The process may take many years. Initially a few players take the risk to develop the
product or market. If they are successful, they begin to capture returns as the market grows. At
the same time, however, others will observe the market growth and the higher prices (and
presumably higher margins) and seek to get on the train.
As a product moves through the life cycle, the essential elements of production change. Initially
costs per unit tend to be high as infrastructure and procedures must be developed. As volumes
increase, scale economies are achieved, costs per unit tend to decline and price competition
intensifies. This usually leads to tighter margins requiring aggressive cost management
strategies to overshadow innovation (differentiation) strategies as the market matures. While
some argue that supply management volume setting and pricing practices distort competition in
the mature market segments, this is not a situation that requires analysis concerning the specialty
product question.
3.2.4 Differentiation
An essential element of competition is finding ways to distinguish the business and separate it
from other suppliers to capture and sustain market share. Participants seek to differentiate
themselves from one another. To do so they innovate.
Production and marketing of specialty products is the pursuit of differentiation. Initial costs are
usually higher than for the mainstream products and markets. If consumers value the different
attributes provided they will be prepared to pay higher prices which compensate innovators and
encourage them to expand their offering. There is typically little experience or information
8 Volatility – In supply managed sectors an underlying intent of managing the system is to limit volatility and
provide producers, and by extension processors, stable pricing.
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concerning the size of the market or the volumes required to fill market demand: it is a
developing market which may or may not survive.
One of the difficulties with the term “specialty” is the range of products that can be purported to be
differentiated from regular or mainstream products. What starts out as a specialty product due to
some innovation can, if successfully adopted by consumers, become mainstream. For instance,
the B.C. Egg Marketing Board (BCEP) terms brown eggs as “specialty.” While these eggs are
not white, and they command a price premium, are they sufficiently differentiated to any longer be
termed specialty?
3.3. Government Policy
3.3.1 Government Economic Policy Statement
The Minister has established a Regulated Marketing Economic Policy (see Exhibit 6.2). The
underlying intent of the Policy is to promote economic development that capitalizes on B.C.’s
advantages such as a diverse market, isolated production regions, and a temperate climate.
The Minister intends that this be accomplished in accordance with the following guidelines:
Public Interest - the systems must be responsive to the needs of B.C. stakeholders.

National systems - while operating within the national systems, the B.C. systems must
facilitate growth and prosperity of B.C.’s agri-food sector, including
providing opportunities for specialty production
Serving B.C.
demand
- the systems must meet B.C. market demands, including specifically
meeting demand for specialty products, and they should also
facilitate growth in markets outside B.C.
New entrants - the systems must facilitate new entrants for both existing and new
markets.
Efficiency - the systems must facilitate efficiency along the value chain.
Safety and quality - the systems must encourage high quality and superior food safety.
Recognition of
Standards
- the systems must recognize and encourage participation in
production standards programs (eg. The Agri-food Choice and
Quality Act).
Regional
development
- the systems must serve all regions of the province, including
accommodation of regions seeking to capitalize on unique location
or production attributes.
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The Government’s policy is clear that innovation, renewal, and economic growth, as represented
by specialty products, must be fostered. Accordingly, all specialty programs developed and
implemented by the Boards must foster innovation to fulfill their responsibility to serve diverse
market requirements and capture new market opportunities.
3.3.2 The FIRB’s Principles for Specialty Production & Marketing
In August the FIRB prepared a set of eight (8) principles believed necessary for the inclusion of
specialty production in the supply managed systems. These principles are summarized below.
Clarity in Definition - definitions of specialty production must be clear, specific and
objective.
National systems - production for specialty production should be within national
allocations, and B.C. should seek increased allocations.
Public Interest - priority should be given to producers who have not previously
produced commodities under quota.
Affordability - permits used to regulate specialty products must be cost effective.
Transferability - clear rules must be established for the transfer of specialty
production permits.
Administration - procedures and management must be fair, transparent, effective,
accountable, flexible and timely.
Accountability - producers of specialty products must be subject to compliance with
regulations established for specialty production.
Sustainability - allocations for specialty production must be linked to demand for
that production.
3.3.3 Fostering Innovation
To foster innovation by way of specialty production and marketing in the supply management
systems may well require different administrative procedures.
Supply determination procedures are well established for mainstream products. They rely on
historic production statistics and changes in inventory stocks. Likewise, pricing procedures are
well established, and they rely on historic prices, changes in commodity input costs, storage stock
levels, imports and market disappearance.
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However, historic records for new products do not exist. Forcing innovators to comply within the
existing supply setting and pricing procedures used for mainstream products which rely on years
of experience and historic data will not likely be effective or efficient, and it may well constrain
innovation.
But who innovates? Innovators often operate outside established systems9. They think outside
the box. They may be new entrants who challenge the status quo and the establishment. They
seek new ways to do things. They are risk takers. Sometimes they are successful, and
sometimes they are not.
On the other hand, the well established, mature systems that administer the supply management
system will have a natural tendency to change slowly. They will examine every new idea in detail
based on a well established culture and years of experience. They will see the reasons why a
new idea will not work quicker than why it will work. This is normal and expected in large,
established administrative systems. However, it can lead to tension between the innovators and
the establishment.
Sustainability requires adaptability and innovation. As consumer demands and markets change
over time, so to must production change. Change requires that things be done differently than in
the past, and often this requires a producer to innovate. In a mature market, failure to pursue
cost efficiency can lead to the demise of a business as other firms innovate, reduce costs, and
generate equal or better margins at lower selling prices. As new market segments emerge or are
developed, producers innovate with different production and marketing practices and sustain or
capture new market share.
Boards need to ensure their practices are encouraging innovation in order for their systems to be
sustainable.
3.3.4 Food Safety & Biosecurity
The regulated systems must manage risk and adapt to change in order to be sustainable. For
any agri-food sector to be sustainable it must assure appropriate biosecurity standards and the
provision of safe food.
Product risk for the regulated commodities can be first measured in terms of food safety. If there
is a breakdown in the real or perceived safety of a food product, demand will drop precipitously.
Many producers may be harmed as a result of the improper actions of one or a few producers,
processors or distributors.
The provision of safe food to consumers is non-negotiable. Any firm that fails to provide safe
food will quickly be out of business. Producers have a responsibility to do their part in the
production of safe food. It is incumbent upon all producers, mainstream and specialty, and
including exempt producers, to ensure their programs meet the minimum provincial and federal
9 Innovators – this is not to say there are not innovators inside the system today.
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food safety standards. Whether Boards need to be the deliverers of on farm food safety
inspection for all producers is subject to decision: ensuring safe food farm practices is not.
Mitigating off-farm risks such as disease is probably best captured in the concept of biosecurity.
Boards are responsible to ensure that the market is supplied, and that all registered producers
have the opportunity to serve the market. If the actions of some producers put others at undue
risk, as through a breakdown in disease management practices, then it can be argued that
someone has a responsibility to take action and implement steps to limit the risk to the industry.
Provincial and Federal authorities, together with market access requirements established by
processors and distributors, have developed, and will continue to develop, standards of
biosecurity and food safety. Boards have a role to play in the areas of food safety and biosecurity
since they have the authorities delegated to them by Regulation to register and regulate all
production. Nevertheless, Government also has a role to play in establishing policies and
procedures in these areas, and delegating authority to responsible entities to implement the
policies. Clarification is required for each sector as to whether the Boards, Government or 3rd
parties will deliver food safety and/or disease surveillance programs.
3.4. Supply Management
In this section some of the underpinnings of supply management are considered to position the
issue of specialty production.
3.4.1 Accountability
The supply management systems have a responsibility to serve and satisfy the market. Specialty
products target defined niches and therefore the Boards should have effective systems for
regulating the production and marketing of these product classes.
In some cases specialty products will be new and innovative while in others the product class
may have sustainable and growing market penetration. The Boards’ regulations and operations
should embrace all classes of product and producer, however differentiated. The Boards should,
therefore, bring the specialty producers into the systems at a market responsive level, and then
manage the systems to recognize new entrants and existing producers equivalently. At the same
time, producers of specialty products need to recognize the existing laws associated with the
production of regulated products, and work to develop their businesses and markets respecting
the law.
Some specialty producers argue that the supply managed systems are fundamentally unable to
accommodate differentiation. They base this argument largely on the observation that the vast
majority of regulated production is sold to processors with little concern for its eventual
disposition, together with their experience trying to work with the Boards over the past years.
Boards argue that they have created programs for specialty producers, some existing producers
have begun to produce specialty products using quota, and specialty producers have the option
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to purchase quota to expand their businesses. Specialty producers usually incur higher
production and marketing costs and, in many cases, do not hold production quota. They feel that
quota holders maximize their returns by focusing on higher volume, lower cost operating
strategies and supply strategies focused on investment returns.10
Both positions converge around quota administration. The Schemes provide that quota is the
property of the Board, and therefore the Province. Notwithstanding that quota is public property,
holders of quota clearly view quota as their rightful property, and they have grown to expect prorata
shares of all growth and continuing value appreciation of “their” quota.
The current price of quota is a significant financial barrier to entry for specialty producers. Most
informed participants agree that current quota prices are not based solely on current and
expected production margins. Quota trades thinly, and prices are driven, in large part, by
demand from existing producers. Issuing quota to specialty producers is seen by the Boards as a
significant financial benefit to the recipient at a cost to existing quota holders.
Boards are accountable to Government to act in the public interest. They administer a system
where the value of an intangible asset (i.e. quota), which is owned by the Board, has become a
material contributor to the equity on individual firms’ balance sheets. Boards need to be careful
with the administration of the system when it might appear to some that the Board is preeminently
concerned with protecting and enhancing private sector equity interests based on asset
which, in theory at least, has no value.
3.4.2 Setting Supply
Boards, together with their National Agencies, have the authority and responsibility to set supply
and produce at a level that will meet market demand. In practical terms, supply is generally
established to be less than or equal to demand rather than greater than demand. If supply was
set above demand, the marginal supply could only be cleared on the market at depressed prices.
These lower prices could then become the floor price against which buyers would compare all
other prices, and selling prices could trend lower. The purpose of setting supply less than or
equal to demand is to ensure that prices are stable, or orderly, for consumers, processors and
producers.
3.4.3 Setting Price
Boards have the authority to set price. In some cases this involves a degree of direct negotiation
with 1st receivers, while in others the Board simply considers the representations of demand
groups and then sets a price.
10 Size of Operations – it can be argued that the size of B.C.’s production units is small compared to that
found in differently regulated areas such as the U.S. Nevertheless, mainstream producing operations in
B.C. are substantially larger than existing specialty operations in B.C.
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Boards have a responsibility to ensure the price they establish is “fair.” The underlying intent is to
provide producers with a stable, fair return for their effort and investment. Boards establish price
on the basis of cost of production and market conditions. In some cases (eggs and milk), price is
set based on the cost of production and targeted returns, while in chicken and turkey the price is
negotiated based on margins over feed and chick together with market conditions.
In B.C., pricing is set, for the most part, based on prices established by Boards in Ontario.
3.4.4 Satisfying Provincial Markets
One of the underlying intentions of national supply management has been that each province
produces first to meet its own market demand for the product, and then to fill demands in other
provinces. Historically, exporting has not been a central ambition of the supply managed sectors,
although in the past decade some sectors have increasingly focused on export markets to grow
their production base.
It is generally accepted that B.C. does not produce sufficient quantities to meet provincial
consumption in the supply managed commodities. The reasons for this lie in the allocation
practices of the National Agencies.
3.4.5 Quota Value
The official stance is that quota is “owned” by the province and does not have value. In fact, the
Schemes clearly state that quota remains the property of the Board. Boards have reflected this
principle in their Orders. For instance, the BC Egg Producers Orders state that “Quotas and
Permits remain at all times the property of the Board.” 11 The B.C. Chicken Marketing Board
General Orders state that “quotas shall remain at all times within the exclusive control of the
Board.” 12
Quota has an economic value. It is traded between producers and the quota rights are
transferred between producers by the Boards. This administration has created a market through
which quota rights are traded between producers for monetary consideration. In fact, several
boards administer quota exchanges and have Standing Orders outlining the rules by which quota
can be provided as security by producers to lending institutions. Lending institutions provide
credit secured against production facilities, including the quota held by that producer or facility.
Quota is valued by buyers on the basis of the potential for positive cash flows from production
and the expectation that the asset value will hold or appreciate in the future13. Quota values have
11 Source – BCEP Standing Order, revised Nov 2002.
1
2 Source – BCCMB General Orders, Part 21, June 2004.
1
3 Quota price increases are often attributed to demand being greater than supply, with one driver of
demand being farmers increasing their holdings to become larger. These purchasers use a combination of
debt and equity to finance incremental quota purchases, with equity or security sometimes being in the form
of increasing quota value on existing quota holdings.
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reached levels that are far in excess of the values that would be reasonably expected on the
basis of anticipated gross, contribution or operating margins. Quota values, in most instances,
exceed the value of buildings and equipment required to produce the regulated product. It is also
interesting that quota values have generally increased over time, and in the case of most
regulated products in B.C. have doubled in the past 5 – 7 years.
Arguments are sometimes put forward that, in the beginning, quota was provided to producers at
no cost to them and therefore they are not entirely legitimate in their demands that any new
entrants, whether for mainstream or specialty production, must pay current quota prices. This is
countered by arguments that participation in the industry was required at the time of initial
issuance, many current participants have paid for their quota, and quota holders have invested in
marketing and research to grow the industry through the years.
This review recognizes that quota value is an integral part of the System and that it is traded
today for financial consideration: it does not assess whether these values are reasonable from
either a business economic or public interest perspective.
3.5. Regulating all Classes of Product
It is fundamental to government policy and supply management that the systems must meet
market demand and foster increased economic activity in the province. Since differentiated
products are in demand14, it is a responsibility of the Boards, the FIRB, and Government to
ensure the systems facilitate and encourage specialty production.
3.5.1 Enforcement
Boards have a responsibility to enforce their regulations. They sometimes find themselves in
difficult situations where there are political and/or public image problems with enforcement
actions. Boards have also made decisions that seem to some to be unfair, lacking in
transparency, and simply unreasonable. This has led to allegations of bias and conflict of interest
in decision making.
From discussions with both Board managers and specialty producers, it appears Boards can
make improvements to their enforcement practices. This likely involves a combination of having
sensible Orders and rules, providing for exemptions where reasonable, and ensuring that
decision making practices and administration are in accordance with the principles of natural
justice. Boards also need to remember they are government and must operate in the public
interest taking into account a wide range of stakeholders: they are not private industry with a
14 Differentiated product demand – it could be argued that product demand has not been demonstrated.
This can easily become a circular argument. If a producer / innovator is restricted from testing a new idea,
they cannot demonstrate a demand since they were innovating to create new demand whether by
generating new aggregate demand or substituting existing mature products. Limited specialty market size
information is available, likely since these are emerging segments. At the same time, those currently
capitalizing on the growing segments are going to be slow to provide much information so as to protect their
competitive positions. Over time information will be developed as the specialty niches develop and mature.
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primarily profit seeking mandate. Specialty producers need to accept that the regulated System
is the law, and therefore they are subject to the rules established by the Boards.
3.5.2 Regulatory Scheme
This review accepts that supply management regulations are the law, and that the Schemes
provide the Boards the authority to regulate the poultry, egg and dairy sectors.
3.5.3 Exemptions
Schemes provide the authority for Boards to exempt certain classes of production and/or
producers. Boards currently provide exemptions from the regulated framework for small amounts
of production, and they have the authority to exempt entire classes should they wish to so. One
of the original intentions of exemptions was that individuals producing for their own use would not
be required to hold quota.
There are material economic differences between small backyard and lifestyle producers
compared with mainstream agri-business producers. Backyard production can be for own use
and small sales to friends and neighbours. Lifestyle operations include production on hobby and
alternative farms where the leading purpose is often other than economic activity. Mainstream
agri-business production has as its leading purpose economic returns.
Exemptions provide a tool for the Boards which allow them to fulfill their mandate to regulate all
production and marketing of regulated products while at the same time accommodating the
smaller operations. Operations which are clearly oriented to maximizing profit, such as the case
with mainstream agri-businesses, comprise the majority of production volume in the regulated
sectors. They will tend to be larger enterprises where larger volumes are required to drive
efficiency and cost reduction, and they will tend to distribute through mainstream processors and
food distributors. Operations with primarily lifestyle and community purposes will be less focused
on costs and efficiency, will tend to be smaller organizations, and will not normally distribute
through the mainstream market channels. Supply Management regulations, and particularly the
requirements around quota, can be unnecessarily restrictive and even prohibitive to smaller
operations with pre-eminently community and lifestyle mandates.
Exemption levels vary between provinces as illustrated in the Table below. For broiler chickens,
turkeys and layers, B.C. has amongst the lowest exemption levels. The BCMMB does not
provide exemptions as it takes the position that all milk entering the off-farm fluid chain must be
processed through a registered dairy.15
15 Dairy exemptions – the argument that milk entering a registered dairy and the pool cannot be exempted
is not, in itself, sufficient reason to preclude exemption. There may be regions, small lifestyle producers or
cottage operations that could be exempted if the Board saw fit to provide an exemption.
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Table. Annual Exemption Levels16
Supply Management Commodity “Home Use” Exemption Levels
Broilers
# of birds
Turkeys
# of birds
Layers
# of birds
Dairy
litres
Province
Less than
Less than Less than Less than
British Columbia 200 25 100 none
Alberta 2,000 300 300 50
Saskatchewan 1,000 100 300 none
Manitoba 1,000 100 100 none
Ontario 300 50 100 none
Quebec 100 50 light or
25 heavy 100 none
Nova Scotia 50 25 100 none
New Brunswick 200 25 200 none
P.E.I. 500 Unregulated 300 none
Newfoundland 100 Unregulated 100 none
Note 1: Both Ontario (prior to January 4, 1983) and British Columbia (prior to August 1, 1983) have some
“home use” broiler producers grand fathered at less than 500 birds.
Note 2: Ontario has a minimum commercial quota threshold of 14,000 broilers but accepts applications for
less than the minimum on a case by case basis with each case considered on its own merits. Two such
applications were received and approved in 2003.
Note 3: Manitoba has egg layer grand fathered at less than 500 birds for those in production prior to Feb 27,
1985. Ontario has egg layers prior to January 4, 1983 grand fathered at 500 birds. Quebec has egg layers
prior to January 1, 1994 grand fathered at 250 birds. Newfoundland has egg layers prior to June 19, 1992
grand fathered at 500 birds. Nova Scotia has egg layers prior to July 25, 1984 grand fathered at 500 birds.
Note 4: In Alberta, a communal group with a communal group production quota is exempt at 6,000 birds per
year.
Revising exemption levels in B.C. to equal or exceed the minima found in other jurisdictions
would likely provide relief from the regulatory controls on production (supply levels) and marketing
(pricing and selling through a licensed market channel) for many of the home-use and lifestyle
specialty producers. It would also provide Boards relief from costly enforcement actions having
the potential for poor public image and community relations.
Raising the exemption levels would not address the commercial specialty operations where
individuals or businesses have deliberate differentiation strategies aimed at niches outside the
mainstream industrial / commercial market segments. These need to be accommodated within
the regulations in some manner other than exemptions.
16 Source – Treatment of Organics and Other Niche Markets in the Regulated Marketing Sectors of Other
Jurisdictions, W. Lohr, July 2004.
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3.5.4 Certification
Certification conveys endorsement of a particular protocol as delivering a specific outcome.
Although the endorsement in the fine print may provide only statistical assurance of the outcome,
based on sampling procedures, “such as 19 times out of 20 we guarantee …,” consumers are
likely to interpret the certification as absolute.
Four trends which make certification important to producers are:
- Consumer demands for specific product attributes;
- Large retailers and food service distributors seeking specific product requirements for
food safety or brand purposes;
- Offloading of service delivery programs by government; and,
- Increasing requirements that on-farm food safety practices be implemented.
Certification requires a certain level of scientific competency and testing rigour. It is essentially
judging the validity of a particular protocol to assure a specific outcome or assuring that a
particular product was produced in accordance with certain standards. Certification implies
endorsement for a system. It implies that scientific principles have been involved in the testing of
key control points, and that testing procedures are sufficient to assure the results desired.
Certification requires greater technical and scientific expertise than verification. 17
Consumers are increasingly aware of specific attributes of the food products they purchase.
Among the areas where farm-based food attributes are gaining importance are:
- Concerns with animal welfare (eg. cage size and barn density);
- Assurance of certified organic (eg. absence of synthetic chemicals and hormones);
- Assurance of non-GMOⁱ (could be correlated to concerns over allerginicity); and,
- Assurance that farm practices are environmentally sustainable.
To provide consumers with assurances concerning the attributes of the food products they
purchase, a credible certification / verification system is necessary. The attribute could be an
assurance that is authorized by regulation, such as “certified organic,” or it could be an assurance
that is related to a private or not for profit brand identity. Assurances usually begin with what
occurs on the farm and therefore the assurance system must be able to validate identity
preservation throughout the supply chain.
To the extent that certification is used to differentiate a regulated product some consideration
needs to be given to the purpose and extent of the certification. The question to ask is whether
the certification is required by the food chain in general, as in the case of food safety, or is it
17 Certification is more rigourous than verification. Verification takes a system or protocol already
developed and performs a series of tests to provide reasonable assurance that the system was being
followed as intended. Verification procedures might include testing key control points in a process or
random sampling of products to determine if they meet the required specifications.
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clearly a different product targeted for a certain market segment, as in the case of organic
products.
It is possible to envision a situation where certain producers, seeking a way to access the
regulated system, could propose that some production protocol is different, can be certified, and
therefore should be considered separately from other products. For instance, free range, free run
or grain fed poultry, without any other differentiating factors, might be represented as different.
But are they significantly different?
For the purposes of using differentiation for regulated specialty products it is likely best to think of
agri-food production systems as opposed to single agricultural production input variables. In B.C.
today, there are 3 production systems that could generally be recognized as differentiating – the
certified organic, SPCA certified and Asian specialty chickens. Other farm-based specialty
production systems will need to demonstrate that they have established clear definitions and
criteria, identified unique market niches, and established assurance systems for identity
preservation.
3.5.5 Production Rights – Quota and Permits
Quota, together with a variety of temporary permits, are the tools by which production rights are
distributed amongst all eligible producers, including specialty producers.
There are criticisms leveled against the Boards concerning the administration of the permit
systems, including lack of transparency, inconsistent application, unfair and inequitable treatment,
favouritism, arbitrary changing of the rules, and excessive fees disconnected from services
provided. Many specialty producers do not trust the regulated system as a result of the Boards
real or perceived permit administration and enforcement actions in the past.
Permits are used as “training wheels” for producers seeking to enter and / or do something
different without having to purchase and own quota. Holders of quota guard the system to ensure
that current and proposed programs do not materially impair the benefits they expect from their
quota.
When permit programs are used they should be viewed in the same light as quota. The only
material difference between permi