By any standard, Andy Senn and his brother-in-law Franz Suter are model Canadian farmers, and businessmen.

Since immigrating from Switzerland in 1989, the pair have built up one of the best dairy farms in the country. They invested heavily in their herd of Holstein cows and the most efficient equipment, earning numerous productivity records for their farm in St.-Bernardin, Ont., 95 kilometres east of Ottawa.

But the farmers' ambitions have run headlong into the contradictory goals of the Dairy Farmers of Ontario, a farmer-owned agency that controls the marketing of all milk in the province.

Story continues below advertisement

Mr. Senn and Mr. Suter represent everything that good public policy should promote – innovation, entrepreneurship, growth and productivity.

In the upside-down world of supply management, they have become renegades.

Eager to grow and eventually pass on the operation on to their children, Mr. Senn and Mr. Suter bought a nearby farm in 2012, along with rights to produce milk from nearly 200 cows. Their plan was to move the cows to their own newer and more efficient farm a few kilometres down the road.

The DFO objected, accusing the farmers of trying to do an end-run around a regulated exchange where farmers buy and sell production quota. Current rules prohibit farmers from moving quota acquired with the purchase of a farm for 5 years, without DFO approval.

The DFO also ordered the two farmers to start producing milk at the acquired farm or risk forfeiting the millions of dollars worth of quota they had already purchased. The decision would force partners to operate two separate farms, along with all the duplicate installations and inefficiencies that entails.

"People like Andy Senn, who want to grow, the only way they can is by buying a second farm," said Alyssa Tomkins of Caza Saikaley LLP, the farmers' lawyer. "What policy goal justifies running two farms instead of one?"

The case is now headed to an Ontario appeals tribunal, with a hearing set to start Monday in Ottawa.

Story continues below advertisement

Their predicament raises constitutional issues, which go to the heart of how Canada's complex supply management system operates.

Just as importantly, the farmers' legal troubles expose the awkward co-existence between the tightly regulated dairy regime and an open free market economy.

Under Canada's supply management regime, dairy production is controlled by quota. Any farmer who wants to produce milk must have quota. In Ontario, the price for one quota, essentially one dairy cow, has been capped at $25,000 since 2009, creating a chronic and artificial shortage.

Mr. Senn and Mr. Suter argue that the DFO acted illegally, exceeding its powers and violating the farmers' right to do business and engage in competition, according to a notice of appeal, filed with Ontario's Agriculture, Food and Rural Affairs Appeal Tribunal.

"Our case is not anti-supply management," Ms. Tomkins insisted. "But supply management should be providing for efficient producers. To the extent that current policies are against that, we say they are illegal."

The system leaves farmers too few good options to grow their business. Mr. Senn and Mr. Suter, for example, would need at least 50 years to acquire the quota they want through the DFO's quota exchange, which distributes available quota in tiny equal parcels to the large number of bidders across the province.

Story continues below advertisement

The Dairy Farmers insist, however, that the "vast majority" of farmers support the current rules – restrictions that Mr. Senn and Mr. Suter knew when they bought their new farm. "Selling available quota through an open exchange is by far the most fair and equitable way to grow operations," DFO general counsel Graham Lloyd explained.

The system wasn't always this dysfunctional. Until the mid-2000s, quota was more widely available in the province. Inefficient farmers would leave the business, selling out to more productive ones.

Worried that speculators were getting into the market, regulators intervened in 2006 and again in 2009 to control the rapidly escalating value of dairy quota. Fixing the quota price distorted the market, creating excessive demand for scarce quota. It also exacerbated a boom in farm real estate as expansion-minded dairy farmers put their capital into land instead of milk production.

It also leaves Canada wedded to a system that thwarts the larger and more efficient farms it will need to compete in a future without protectionist walls.