Log Exports

BC Log Export Restrictions To Blame For Significant Portion of Softwood Tariff

“Buried in the 124 pages of the U.S. trade case against Canadian lumber is a surprising revelation about how the Trump administration tallied its duties.”, reads the opening sentence of the May 7, 2017 Globe and Mail article by Barrie McKenna.

Mr. McKenna’s article brings to light the revelation that British Columbia log exports are to blame for a significant portion of the penalty applied by the US to Canadian softwood.

Best explained by the author himself, here’s an excerpt of the story about the impact of British Columbia log export restrictions on Canadian softwood duties.

Barrie McKenna: Angry about U.S. duties on Canadian lumber? Blame B.C.

[…] The prevailing narrative is that the U.S. hit Canada with duties of up to 24 per cent because the provinces are selling their timber too cheaply to lumber companies – thus, a subsidy, so the Americans say.

That’s only part of the story. A significant chunk of the penalty is due to log export restrictions that exist only in British Columbia.

The bizarre, and arguably unfair, result is that lumber producers across the country are being punished for the forest policies of one province.

Absent of B.C.’s export controls, Canada’s lumber industry would be facing something closer to a nuisance tax today, rather than a punishing throttle on its exports. And it could wind up costing lumber companies hundreds of millions of dollars per year, and valuable market share in the United States.

The U.S. Commerce department investigated five companies – three in B.C., one in Quebec and another in New Brunswick. It calculated the alleged subsidies each receives and then applied unique rates. Outside of B.C., the duties are relatively low – about 3 per cent for St. John-based J.D. Irving Ltd. and 13 per cent for Montreal-based Resolute Forest Products Inc. Inside B.C., the rates are much higher – 24 per cent for West Fraser Timber Co. Ltd., 20 per cent for Canfor Corp. and 19.5 per cent for Tolko Industries Ltd.

Every other lumber exporter in Canada is now paying a weighted average of those five rates, or 20 per cent. As much as a third of the nationwide duty reflects the effect of federal and provincial restrictions on B.C. log exports.

Those restrictions, in place since the 1880s, are an aberration in Canada’s generally open economy. Indeed, logging is a rare example where governments dictate to private interests what they can export, for reasons other than national security.

Federal and B.C. officials should have seen this coming. Economists in Canada have warned for years that the policy lessens competition for logs, increases the supply of timber available to mills in B.C. and suppresses prices by up to 50 per cent. And that lowers the cost of finished lumber, such as two-by-fours, destined for the U.S. market.

The Commerce department agreed. It calculated that a quarter to a third of the total duties imposed on the three targeted B.C. companies is directly attributable to log export rules, which are applied by both Ottawa and B.C.

The United States isn’t alone in raising objections. Japan, China and South Korea have also complained about Canadian log-export restraints. Japan and China almost certainly will raise the issue in free-trade talks with Ottawa.

It’s still unclear whether the United States will be able to make its case stick. Canadian lumber has been targeted four previous times since the 1980s, successfully fighting off the duties each time through litigation.

Follow the link to the full article.

Log Export Restrictions Don’t Improve Economic Performance

“Log export restrictions do not improve economic performance”, reads the subheading of a recent Financial Post article by Jack Mintz.

Mr. Mintz’s article highlights the Trans-Pacific Partnership (TPP) as an opportunity to wipe out protectionist policies in the forestry sector. He doesn’t mince words (we couldn’t resist) when he says, “log export restrictions should be on the hit list”.

Here at the PFLA blog, we often write about log export policy because it directly and significantly impacts our members.

Because the article does a nice job of articulating the situation in British Columbia we’ve included a portion of the text below, for your interest.

Jack M. Mintz: TPP should raze forest protectionism

[…] Supply management is not the only issue that the TPP could address to Canada’s benefit. We have engaged in other trade-distorting policies that have diminished our standard of living. Federal and British Columbian policies that restrict log exports are another example.

With the advent of another round of softwood lumber negotiations with the Americans this fall, Canada could use TPP as an opportunity to rid itself of a policy that restrict exports. The current system has federal and BC governments in cahoots with each other to restrict log exports so that logs are sold to BC wood producers at a discounted price.

The federal government restricts log exports from federal lands, including Aboriginal holdings and private land granted before March 12, 1906. The BC government regulates Provincial Crown Land and private land granted after March 12, 1906. Currently, most log exports come from the BC coastal region.

Log exports are restricted by a “surplus test,” which applies in British Columbia and not other provinces (the federal government has a memorandum of understanding with BC). An exporter advertises logs on a bi-weekly notification to give opportunities for log processors to offer a domestic price for the logs. If no offer is made, the logs are determined to be surplus and could be sold to the international market. BC further restricts exports from its land by applying an export tax that is 12 to 16 per cent of the domestic selling price.

Logs are not auctioned off to processors. Instead, a government-appointed committee determines whether an offer is “fair.” This Soviet-type approach to price determination is largely based on historical prices and is advantageous to the processors.

For some forest companies, domestic sales are below cost today – they make money only on exported logs. Chinese landed prices in Vancouver have been twice domestic prices in the past three years. Both federal and BC export restrictions have therefore imposed a large “tax” on value-added that would accrue to workers and owners of BC forestlands.

An argument in favour of restricting log exports is that it subsidizes the forest processing industries and employment. However, Peter Pearse, who headed a Royal Commission on forest industry, argued in 2006 testimony that log export restrictions do not improve economic performance. As he states, “in a predominantly market economy, you cannot get more value out of something by restricting the market for it.”

My colleague, Trevor Tombe at the University of Calgary Economics, made a similar observation in a must-read 2015 paper on “value-added jobs.” Some of the lowest value-added industries in Canada are wood products and paper (forest and logging actually has higher value-added per dollar of output despite the BC trade distortion). These processing industries also produce less value-added per job than the national average. Providing these processing industries with “subsidized” logs is shooting the BC economy in the foot by shifting production from higher to lower value-added jobs.

Such clear thinking by Peter Pearse and other economists will not be found at the table of committees determining fair prices for logs sold to domestic processors. Restricting log exports by both federal and BC governments is as nonsensical as supply management policies.

A TPP agreement should do away with these trade-distorting policies used by Canada and our treaty partners that encourage processing, whether forestry, mining or oil and gas. For example, some U.S. states impose regulations requiring forest companies to sell to domestic processors first, similar to federal and provincial rules in BC.

If TPP cannot be employed to rid us of these trade distortions in BC forest products, perhaps some changes consistent with U.S. policy could be used. If BC had a regime similar to that in the United States, the Canada-U.S. Softwood Lumber Agreement expiring October 2015 could be easily settled in Canada’s interests (as opposed to the interests of the BC wood processors).

Unlike Pacific Northwest states, the U.S. federal government does not impose restrictions on private timberland log exports. Canada could mimic the U.S. regime by the federal government eliminating its limitations on log exports, which would primarily assist companies operating on private lands. If BC decides to maintain its value-added reduction scheme, so be it. At least the federal government does not need to participate in a trade-restricting regime.

TPP provides an opportunity to improve trade opportunities for Canada. Canada also can rid itself of some of its worse trade distortions. Log export restrictions should be on the hit list.

Follow the link to the full article.

What Can Ducks Teach us About B.C.’s Subsidized Log Markets?

a duck walking on the beach

Image of a duck walking and talking like a duck.

You’ve all heard the phrase, “If it walks like a duck and talks like a duck, well, it’s probably a duck.”

Because turkeys proved so helpful in understanding B.C. timber supply complaints, we’re optimistic ducks can help explain why we use the word subsidy to describe current log markets in coastal British Columbia.

PFLA recently received feedback from other stakeholders in the coastal forest industry; specifically, a suggestion to tone down the use of the word subsidy in our communication efforts around Federal Notice to Exporters 102 and log export restrictions.

Mortified at the thought of being misunderstood, we set aside some time to explain our word choice.

What is a Subsidy Anyway?

In the spirit of ongoing cooperation, open dialogue and healthy discourse, a definition seems like a good place to start. Here are a few definitions we gleaned from various sources to help explain our understanding of the word subsidy.

  • A direct pecuniary aid furnished by a government to a private industrial undertaking, a charity organization, or the like. (dictionary.com)
  • A subsidy is a form of financial aid or support extended to an economic sector (or institution, business, or individual) generally with the aim of promoting economic and social policy. (wikipedia.org)
  • Money that is paid usually by a government to keep the price of a product or service low or to help a business or organization to continue to function (merriam-webster.com)

Why the word subsidy accurately describes the situation in B.C.

Mill #1 is located in coastal British Columbia. Thanks to government policy (Notice to Exporters 102) this mill owner is able to buy logs at suppressed domestic prices ($70 per cubic meter).*

Mill #2 is located in western Washington. This mill owner has to pay international prices for logs ($100 per cubic meter).*

Admittedly, this is a simplified scenario; however, based on the definitions above, it seems fair to say mill #1 is being subsidized.

Is the coastal log market the best example of a subsidy?

No, it’s not the best example. A better example is something like the auto sector in Ontario. In that case, government used public funds to subsidize the auto industry. We’re not opposed to the use of public funds to subsidize industry. In fact, it’s a better example of how people generally understand subsidies to work.

Nonetheless, in the example of coastal log markets, government intervention affords coastal mills an advantage. Unfortunately, it’s private forest owners, and not public funds, that shoulder the burden of the “pecuniary benefits” bestowed by government policy.

Why other stakeholders might not understand our use of the word subsidy

The stakeholders who suggest we minimize our use of the word subsidy don’t pay the subsidy. We do. Because we’re the people who pay the subsidy, we have a personal, daily experience of what that means.

When you’re in a position to lose 45 million dollars annually, and spend your time managing, on a daily basis, reduced revenues, economic uncertainty and increased costs, you start to feel like you can speak with some authority on the subject of what is and isn’t a subsidy.

So, while we’d love to use other words to describe the situation—words like functional market, open competition and international prices—we’ll continue to use the word subsidy because if it walks like a duck and talks like a duck, it probably is a duck.

*Please note, above quoted prices are for fir gang logs, typically used for lumber, and based on mid-March 2015 market prices.

Top 5 Lame Excuses For Restricting Private Land Log Exports

No-ExcusesIf you’re a forest owner, a tree grower or a land manager you know it takes significant investment and decades of careful stewardship to grow a commercially valuable timber crop. Getting the best value for your harvested timber is essential for sustainable forest management, economic stability, re-investment in your land and future crops.

In British Columbia (and only British Columbia), private landowners are subject to log export restrictions that restrict our ability to get the best value for our crops; specifically, Federal Notice to Exporters 102.

The graph below illustrates the price difference between international, domestic U.S. and domestic B.C. markets for a specific grade of Douglas fir logs (‘J’ Grade, 8” to 11” top diameter).

You can see a close relationship between the international and Washington state lines on the graph in both price and responsiveness to market changes. In contrast, the green line, representing B.C. domestic prices, shows less responsiveness to market changes and significantly lower prices.

A graph showing price difference for J grade Douglas fir logs

The surplus test under Federal Notice to Exporters 102 is the reason for the price gap.

The federal surplus test is where government subverts competition and substitutes real international log prices by encouraging mills to offer artificial, made-up ‘domestic’ (much lower) prices to block export permit applications from private timber growers.

This is a problem for B.C.’s forest owners. Unfortunately, it’s not a new problem. This year marks PFLA’s 20th anniversary. That’s 20 years of working diligently for access to fair timber prices for our crops.

Here’s some context. When we first started thinking about this policy file Bill Clinton was president, DVDs were just invented, Braveheart won best picture, and POGs were all the rage.*

A lot can change in twenty years (see above paragraph), but one thing that hasn’t changed much is the list of lame excuses for maintaining log export restrictions on private land.

Here it is: the top five lame excuses for maintaining N102 (in no particular order).

1. Log Shortage (Despite a Significant Surplus of Logs on the B.C. Coast)

The rationale for the most recent (1998) iteration of the federal log export restrictions was fear of a shortage of available logs for processing on the coast of British Columbia.

The numbers speak for themselves. In 2013, harvested timber volume exceeded coastal mill consumption by 6.6 million cubic meters.

In other words, there is no log shortage and this is a lame excuse.

Under these circumstances, the sole purpose for maintaining a surplus test, using domestic log prices as the measure, is to suppress log prices and provide a direct subsidy to domestic mills.

2. A Bargaining Chip in the Softwood Lumber Negotiations

Historically, the U.S. cites log export restrictions as in irritant in the Softwood Lumber Agreement (SLA), pointing to log export restrictions as evidence of a subsidy-based model in Canada.

When forest owners approach the federal or provincial government and request the removal of log export restrictions from private land, typically, one of the responses we hear goes something like this:

“Well, you know, we’ve got the softwood lumber discussions coming up and this could potentially be an important and valuable tool for us in our SLA negotiations.”

This isn’t our first rodeo. U.S. trading partners have tabled log export restrictions from private land as an issue during SLA negotiations for decades now, and not one inch of progress has been made.

3. Log Export Restrictions are Necessary to Protect Canadian Mill Jobs

The excuse that log export restrictions are necessary to protect Canadian mill jobs is lame because it’s not true. Log export restrictions have not protected Canadian mill jobs. A lack of fibre is not the reason mills are closing. (See lame excuse #1 re: log surplus.)

The virtual collapse of the coastal processing sector, and the lack of globally competitive processing facilities on the B.C. coast, is proof enough that artificially suppressed log prices are not the solution.

If you’re serious about reducing log exports you need to create a competitive processing sector — the inability to compete is why mills have closed and why they will continue to close.

4. Log Export Restrictions Encourage Investment (in other countries)

There has been no significant or meaningful investment in coastal B.C. mills for some time now. Log export restrictions have not encouraged investment in the processing sector, or rather, they have, but in other countries.

Canadian lumber companies aren’t investing in Canada, they’re investing in Washington where, notably, no private land log export restrictions exist.

5. It’s Politically Risky

For twenty years now we’ve heard the same lame excuse, from both provincial and federal governments, about how politically risky it is to remove log export restrictions from private land.

Like we mentioned earlier, a lot can change in 20 years. When we first started arguing for the removal of log export restrictions (back when POGs were cool and Chretien was prime minister) log export volumes were about 300, 000 cubic metres and almost entirely from private land.

Today, log export volumes have increased significantly and the majority of B.C.’s log exports are from provincial Crown land.

Between 2007 and 2014, B.C.’s log export volumes doubled from 3.1 million m3 to 6.3 million m3. During that same period, private land log exports were down by about 3%, while Crown land log exports increased by about 606%.

Maybe the issue of log exports isn’t so politically risky after all?

Why List the Top 5 Lame Excuses?

In case it’s not obvious. The point in listing the top 5 lame excuses is to illustrate there is no defensible policy rationale for maintaining log export restrictions on private land anymore.

Twenty years is a long time to push for change. In the words of one founding PFLA member:

“[…] How can we encourage owners of forested land to look after their forest and treat it as an asset when it is all too clear that the provincial and federal governments will see to it that a profitable operation is impossible? What I find even more disappointing though is the fact that after 20 years of banging our heads at a brick wall with only sore heads and empty pockets to show for it, we are now in essence being urged to bang harder.”

(from the comment section of an earlier post)

* Thanks to astute readers of an earlier version for noticing our contextual references were off by a decade.

Why Fair Timber Pricing is a Top Priority in 2015

priorityFair timber pricing is a top priority for PFLA in 2015 because not only are we continuing to see negative impacts from harmful and outdated policies, but on-the-ground impacts are also getting worse.

In 2014, forest owners lost over 45 million dollars as a result of log export restrictions. That’s 45 million dollars directly transferred from the people who grew the trees to the people who bought the trees at a discount.

PFLA members are committed stewards and reliable forest owners who take seriously our responsibilities to customers, suppliers, employees, neighbours, communities, governments and the environment. We value the principles of equity, fairness and justice and the role they play in encouraging long-term investment in future crops.

Because we’re tired of spending decades to grow the best trees we can, only to be ripped off by an artificially low domestic log market, PFLA’s key goals for 2015 include:

  • Access to international pricing for forest owners
  • Eliminate unnecessary process, delays, uncertainty and administrative costs
  • Ensure B.C.’s private forest owners have input into any policy decision
  • Support transitional measures necessary to accomplish these broader goals

We’re turning up the heat and look forward to cooking up some interesting articles we hope will contribute to enriched discussion, informed debate and positive change for tree growers in B.C.

Here are just a few of the upcoming stories we’re working on so far.

Land of Plenty: Log Supply on the B.C. Coast

A scintillating look at the connection between fibre supply and consumption on the coast of British Columbia, this article aims to debunk long-held assumptions and reiterate the importance of recognizing this is an economic problem, not a fibre supply problem.

In 2013, the coastal harvest was 20.8 million m3 and coastal mills processed 12 million m3. In other words, a huge log surplus exists.

The Top 5 Lame Excuses For Maintaining N102

With an overwhelming supply of lame excuses, the competition for this article is above average. We’ll do our best to narrow the options down to five and look forward to providing readers with a detailed look at just how lame some of the excuses for not rescinding Federal Notice to Exporters 102 are.

Why Suck and Blow is Bad For British Columbia

Not to be confused with the drinking game, the term suck and blow is a colloquialism used to describe a policy change being advocated by a handful of licensees in B.C. who also own processing facilities.

The current surplus test policy allows owners of processing facilities to block export permit applications; however, if you have a processing facility and you’re exporting logs, there’s a rule which prohibits you from blocking others for ninety days after you’ve exported your logs. Suck and blow proponents are advocating for the removal of the ninety-day rule.

This might also be referred to as having your cake and eating it too. We look forward to elaborating on this concept and illustrating just why it’s a bad idea for B.C.

13 Reasons Why it’s Better to Grow a Tree in Washington than B.C.

A tale of two trees, this article traces the details of the life of a tree grown on private forest land in British Columbia, as compared to the life of the same tree species grown from the same seed orchard and harvested just a short distance over the 49th parallel in Washington state.

A poignant tale of growth, strength and adversity the article illustrates how trees grown in Washington receive more respect, higher value, and arguably, a better life.

Dysfunctional Relationships: What Log and Lumber Prices on the B.C. Coast Can Teach You About Your Own Life

A thoughtful analysis of the relationship between log and lumber prices on the B.C. coast, this article offers readers a rare opportunity to reflect on the significance of maintaining connected relationships in their own lives.

Using graphics to illustrate the disconnect between lumber and log prices, this cutting-edge look argues that the distance, disrespect and disharmony demonstrated by log and lumber prices can have devastating implications for relationships, families and communities.

A couple of other working titles, slightly less developed, but equally important, include:

  • How Cheap Stumpage and LERs Stimulate Sawmill Investment (in other countries)
  • The Haida Gwaii Surplus Declaration: Huh?

As always, thanks for your interest and your patience. Please stay tuned as we work hard to pull these articles together.

Turkeys, Tasmania and the Softwood Lumber Dispute

logs and lumberIn a recent post, What Turkeys Can Teach Us About B.C. Timber Supply Complaints, PFLA summarized some observations and complaints gleaned from our participation in a number of public and industry forums with both the business community and the forest industry about the future of forests and fibre supply availability in British Columbia.

Interestingly enough, at about the same time, on the other side of the world, the Tasmanian Blackwood Growers Society was writing about their amazement at the echoes a recent softwood lumber dispute story published in the Financial Post has for their country.

“It seems the forest industry has the same problems around the world,” begins Gordon Bradbury before providing a brief analysis of the parallels between the Canadian and Tasmanian situations. He concludes, “and here we are in Tasmania with exactly the same problem, but we don’t have a trade partner like the USA to kick our stupid butt!”

To read the complete article, Canada–United States softwood lumber dispute, please follow the link.

What Turkeys Can Teach Us About B.C. Timber Supply Complaints

three turkeys Over the past few months, PFLA has been involved in a number of public and industry forums with both the business community and the forest industry—actively engaged and advocating on behalf of private forest owners.

In late October, we were invited to participate in a forestry seminar “Trends, Issues & Opportunities for Wood in the 21st Century“ at the Vancouver Island Economic Alliance’s annual summit. Other panel speakers included Tim Caldecott from FP Innovations and Peter Moonen from WoodWORKS! BC.

The session examined the market, social, technical and regulatory trends impacting wood products, and asked the question “What does the future hold for forests and wood in the 21st Century?”

We also participated in the inaugural “Workshop of Wood Fibre Availability Forum” hosted by UBC in mid-September and attended by a wide range of stakeholders from the coastal forest industry, government, First Nations, and academia.

Throughout this process we’ve noticed some recurring themes:

  1. Getting the coastal log processing industry together and asking them to think about changing what they’re doing to better face the global market is a lot like getting the turkeys together and asking them to plan Thanksgiving dinner — nobody wants to put turkey on the menu.
  1. The coastal processing sector chose to build subsidized logs into their business model and lumber, veneer, pulp, paper and bioenergy sectors are unwilling to consider paying international prices for logs or wood fibre.
  1. This is an economic problem, not a fibre supply problem, but nobody in the room is willing to talk about economics. The 2013 harvest was 20.8 million m3 and coastal mills processed 12 million m3, which means there is a huge log surplus. Participants want to blame the government, stumpage rates, other licencees, the tenure system, the stumpage system and log exports, but nobody wants to address economics.
  1. As long as our governments continue to create the situation where mills can acquire wood below the international price, mills are going to continue to drive the price down and distort the market rather than focus on running globally competitive businesses.
  1. If you’re serious about reducing log exports you need to create a competitive processing sector — the inability to compete is why mills have closed and why they will continue to close.

What does it mean for private forest owners?

Private forest owners face major challenges when it comes to getting international prices for our wood:

  • The costs associated with the surplus test process
  • The economic impact if we’re forced to sell our logs domestically
  • For every log we’re able to export we incur significant administrative, delay and handling costs

The sad thing is low stumpage rates and cheap log policies don’t actually work — mills continue to close. There hasn’t been any real investment or innovation in coastal mills for decades, despite access to the cheapest logs on earth.

The processing sectors’ inability, or reluctance, to pay competitive log prices indicates the lack of modern, world-class, globally competitive, large-scale log processing plants on the B.C. coast. This is bad for everyone. If B.C.’s tree growers were offered competitive log prices from local mills we wouldn’t need to export any logs.

What does is mean for the Canadian lumber industry?

As we approach the next round of Softwood Lumber Agreement (SLA) negotiations, American interests are looking closely at policies and practices in B.C. that reduce domestic log costs. A review of the US Pacific North West price data illustrates how dramatically low B.C. log prices and stumpage rates are in comparison.

B.C.’s failure to embrace international pricing and meaningful competition for logs directly subsidizes domestic mills and puts the entire Canadian lumber industry in a vulnerable position at the negotiating table.

The risk in continuing to allow market manipulations to occur is that it leaves no time period for industry to adjust when the government of Canada is eventually forced to make changes (by the courts, an international body or an international trade agreement); the consequences, in terms of mill closures, could be dramatic.

A sign of strong leadership and vision, to the benefit of all Canadians, is for government and industry to start making changes now to build a healthy, globally competitive business based on international pricing.