Atlantic Forestry September 2021

Fairness, competition, and timber royalties

by David Palmer

We all want to be treated fairly, and we all want a fair price if we are buying or selling something. But just what is a fair price, and how is that determined?

Prices normally fluctuate. They are subject to the law of supply and demand, which says that a good or service that is scarce and in high demand will fetch a higher price, while something that is plentiful and in low demand will be discounted.

Circumstances change rapidly, and often geopolitical forces conspire to upset the supply-demand equation. With the onset of COVID times, there were dwindling supplies of lumber, houses, travel vans, and perennials, so demand rose and prices shot up. The notion of what constituted a “fair” price for a house was shattered – especially as Westerners discovered the great bargains down here in Atlantic Canada, and started scooping up everything on the market. The competition was fierce.

Apart from the increasingly rare demand flare, competition for pulpwood in Atlantic Canada has been virtually non-existent since Bowater, UPM, IP, and Great Northern ceased operations, and Newfoundland-bound pulpwood barges ceased departures from Georgetown, P.E.I., and Pictou, N.S. Competition stopped altogether when Northern Pulp closed in January 2020, leaving only three softwood pulp mills between Cape Breton and the Quebec border. Although Northern Pulp has grand plans to re-open, that won’t happen until at least 2025. (See “New mill rising?” on page 12.)

So, pulpwood over-supply, aggravated and augmented by a flood of Crown timber, will remain a fact of life for the foreseeable future. Companies like J.D. Irving have been very successful in persuading successive governments that pulpwood has very little value and will probably never be worth much – even though without it the company’s mills would not run and be profitable.

In the absence of competition for an abundant product, what is a fair price? In a negotiation session, I once posed that very question to Bob Pinette, vice-president of JDI Woodlands at the time. “Hypothetically,” I inquired, “would it be fair to say that in a poor market pulpwood would be worth about $40 per metric tonne, in a so-so market about $45, and in a good market $50?” Although he agreed with those ballpark figures, we were not successful in getting them into a contract.

Well, today’s market for NBSK (northern bleached softwood kraft) pulp is nothing short of sterling, yet pulpwood prices for woodlot owners are still south of $40/tonne, and the royalty return to the province is pathetic. Reduced to a pittance during a pulp market downturn by then Natural Resources Minister Keith Ashfield more than a decade ago, the price has never been restored.

That returns us once again to the question: In the absence of competition, what is a fair price? Should it always remain low, or should the government step in and regulate the price (as it does for gasoline, diesel, and heating oil)? The question is more salient for pulpwood in New Brunswick, since the market is hugely distorted by the supply that comes from Crown land, which makes up more than 50 percent of the total. The best reasons to regulate are to ensure a fair price for woodlot owners, and to ensure a fair return for the government. I would suggest that the price range previously discussed (i.e., $40-$50/tonne) would be a good starting point, with a $5/tonne premium in today’s hot market.

In the July issue of AFR we devoted considerable space to a discussion of Crown timber royalty rates, which had been much in the news. Critics of rates charged by the New Brunswick government compared them to rates in Alberta, where a market-indexed fee system had pushed the timber royalty up to $166.63 in June (though it fell back to $26.08 by August).

In July, J.D. Irving countered the widely-held perception that New Brunswick, by charging only $31.09/cubic metre for sawlogs, was giving away its timber. The company ran a full-page ad in the Daily Gleaner, stating that during the last five years, ending March 2021, the province had collected $315 million in royalties, whereas under Alberta’s system the amount would have been only $263 million. What the ad neglected to mention was that during that same time period the province shelled out approximately $250 million in management and reforestation fees. The public can be forgiven for being confused, and for not knowing whether New Brunswick’s rate is fair or not.

Any public discussion about the topic of timber royalties takes place under the watchful eye of the U.S. Coalition for Fair Lumber Imports (there is that word “fair” again), an industry lobby group that is alert to any evidence of a competitive advantage for Canadian lumber producers. The Coalition has been tremendously successful in persuading the U.S. Department of Commerce to impose duties on imported Canadian lumber.

The thrust of this group’s argument is that most timber in the U.S. is privately owned, and thus sawmills must compete and pay high stumpage rates to obtain the timber; whereas in most provinces in Canada, the bulk of the timber is owned by the government (under lease or licence to the timber companies), and the stumpage rates (or royalties) have been relatively low.

Every province uses a different system, and sorting them all out would be an appropriate topic for a PhD dissertation (or a U.S. Department of Commerce official). Suffice it to say that each system uses a combination of market index and/or sales of public timber to establish some form of market-based pricing. None of the semi-market-based systems satisfy the well-funded Coalition.

The only pricing system accepted by the Coalition is the one used in the Maritime provinces, where there is a high proportion of private wood – particularly in Nova Scotia. These provinces base Crown royalty rates on private stumpage rates, as established by surveys that are conducted from time to time. The last survey done in New Brunswick was in 2015, and the last one in Nova Scotia was in 2018.

The whole tenuous system, which successfully resulted in an exclusion for all Maritime lumber producers, was predicated on the assumption that there were enough buyers of private wood to create a competitive market for saw material. As sawmills closed, that assumption began to crumble, and in 2005 and 2008 two damaging reports put big holes in New Brunswick’s free-market myth – resulting in the loss of the province’s exemption, and the imposition of damaging tariffs. That left only Nova Scotia deemed a fair and open market by the Coalition. In fact, the Coalition accepted a 2015-2016 stumpage survey and concluded that Nova Scotia reflected an “in-Canada undistorted private price for SPF timber.”

So, if the U.S. Coalition says the price is fair, does that mean it truly is? It might be a good beginning, but it should not be the final word on this matter. The pricing needs to be justifiable not only to the Coalition, but also to the provinces’ tax-paying citizens. While biannual stumpage surveys carried out in a fair and open market are a good indicator of prices, they may lag the ups and downs of the market. It might be beneficial to implement base prices that would be subject to quarterly adjustments, in consideration of unexpected market fluctuations. I’m not suggesting adopting a system like Alberta’s, which is so directly linked to lumber prices, but perhaps a hybrid model consisting of stumpage surveys and market indices.

New Brunswick needs to get this right, because there’s a lot at stake – beyond the obvious trade implications.