Atlantic Forestry September 2023
/“A bone picked clean”
by David Palmer
The near halving of New Brunswick’s Crown softwood royalty rates, as recently announced, has left a lot of people shaking their heads. With one stroke of the pen, the government not only reduced revenues from the public forest by about $45 million annually, but also devalued private woodlots in the province, wiping more than $1.5 billion off landowners’ collective balance sheet.
For example, if you, as a private woodlot owner in New Brunswick, have 100 acres of mixed woods, the standing timber on it would have been worth between $960 and $1,200 per acre prior to July 2023. Your new valuation will be between $600 and $750 per acre – a drop of between $360 and $450 per acre. In other words, you will have suffered a paper loss of $36,000 to $45,000. On a collective basis, private woodlots in the province, which constitute about 4.7 million acres, have experienced a government-orchestrated devaluation of between $1.69 billion and $2.11 billion. That’s not chump change.
Many woodlot owners are nearing retirement, and are in a state that is referred to as “land poor,” meaning they are in need of ready money, while owning considerable acreage. As they approach their so-called golden years, they regard their woodlot as a potential vehicle to help secure a comfortable retirement and perhaps to transition them from that old high-maintenance country farmhouse to a more commodious urban dwelling.
Most woodlot owners are probably not even aware that this has happened, and they would have trouble understanding how or why. The rationale behind what governments charge forestry companies for cutting timber from public forests is always mystifying. Deals have often been worked out behind closed doors, as in the case of the infamous 2014 Forestry Plan, which allocated a whole bunch of extra softwood timber that was not even available in the wood supply analysis of the day. Governments generally do not share details or tell the whole story, as they are sensitive to criticism from the public, and from the U.S. Coalition for Fair Lumber Imports. The coalition is an association of U.S. sawmill companies that keep a hawk-like watch on the actions of Canadian provinces on the forestry file, and use their considerable influence with the U.S. Department of Commerce to slap tariffs on Canadian lumber.
The latest changes introduced by New Brunswick may not (yet) have caught the attention of the coalition, but they sure have stirred up the province’s Federation of Woodlot Owners. In comments to CBC, Rick Doucett, the group’s normally reserved and diplomatic president, expressed frustration about the announcement. “It feels like we discussed a ham dinner, and now we are presented with a bone picked clean by vultures,” he said.
This was a marked deviation from Doucett’s previous supportive comments regarding upcoming changes to the private woodlot sector – in particular, the Private Woodlot Sustainability Fund, which promised to invest millions of dollars in extra funding annually to make up the silviculture gap on woodlots, in addition to dedicating money for management plans, and re-establishing a forest extension service. Although the new initiatives fail to address the age-old lack of a fair negotiating system, there were enough positive measures in the package that it could potentially herald a new era of woodlot prosperity and engagement – so the federation continued to be optimistic, and provided conditional support.
That support evaporated once the draft regulations were released. “We had high hopes that this time around things would be different,” wrote Doucett, in an Aug. 5 blog post on the federation’s website. “Our talks regarding the situation on private woodlots … led to some ideas for the future that will not address the market issues here in the province, but they still held the promise of improvements.”
There were two key elements to be determined by the upcoming regulation: a new market-based system to determine Crown royalties that would look beyond New Brunswick’s borders to include Nova Scotia, Maine, P.E.I., and Quebec; and a commodity price-based formula that would adjust the base royalty rates using various product indices, such as Madison’s Lumber exchange – with the top-up money from the adjustments flowing into the Private Woodlot Sustainability Fund.
When the new regulations were finally announced, there was shock and disappointment among woodlot owners. The new base royalty rate for spruce-fir logs was cut nearly in half, falling from $40.60 per cubic metre and crashing through the $31.09 rate that had been in place for a number of years, to settle at $21.83. Softwood pulp remained at $3.43 per cubic metre, although hardwood pulp increased from $8.07 to $10.84.
New rates with significantly higher costs for softwood timber had just been announced a year previously, in July of 2022. Had they been in place for the entire operating year (April 1 to March 31), the new rates would have generated roughly $120 million a year to the government in gross timber royalties, up from approximately $90 million annually. The July 2023 rates (not including adjustments) will knock revenues back to about $75 million annually – a decline of roughly $45 million (which is enough to build one new school or bridge every year).
Instead of exploring more robust regional rates, the government opted to revert to private woodlot stumpage rates published annually by the New Brunswick Forest Products Commission (the commission) for the base rate. These rates are determined by surveying private woodlot owners, contractors, and marketing boards. At one time, they represented fair market value (FMV), but that changed as mills closed and competition dwindled. Michael Ferguson, then New Brunswick’s auditor general, found the system to be fundamentally flawed. “There is a built-in incentive for the mills to try to keep the prices for landowners lower, because it would mean the royalties they pay for timber from Crown land would be lower,” he wrote in his controversial 2008 report.
That report rocked the forest industry, and ultimately led to the loss of New Brunswick’s exemption from softwood tariffs. The coalition parlayed that point in its brief to the Department of Commerce, stating: “The fact that the mills directly or indirectly control so much of the source of timber supply in New Brunswick means that the market is not truly an open market.”
In an updated October 2020 report requested by the provincial government, Kim Adair-MacPherson, who was then auditor general, said the government had made “significant improvements” to the process for setting timber royalties. She said that a lot had changed over the previous 12 years, and that “private woodlot stumpage prices can (emphasis mine) represent the fair value of transactions in the New Brunswick private wood market.” She referenced the report of a consultant who had differed with the 2008 AG report, and noted that the Act “fails to define what fair market value means.”
When I raised these points with Mike Holland, the minister of Natural Resources and Energy Development, following his announcement of the new Forest Strategy in late August (see page 8), he said, “We can stand here and debate fair market value all day long.” Well, that seems like a debate worth having.
If one accepts that the methodology for determining FMV is sound, then using private woodlot values to set base timber royalty rates is a logical starting point. If, however, one believes that the 2008 AG report findings are still valid, then a new methodology should be implemented – such as a broader regional survey, or using finished goods indices to make more frequent adjustments. (Incidentally, the latter option was one of the four key recommendations made in the 2008 AG report.)
Under the royalty adjustment formula, rates will be adjusted upwards monthly from the base, depending on market conditions, when certain thresholds are met. If the threshold to trigger a market-induced adjustment is not reached, the adjustment defaults to $0.75 per cubic metre. The adjustment is capped at 100 percent of the base rate. So the maximum adjusted rate for softwood pulp would be $6.86 per cubic metre; for softwood logs it would be $43.66; and for hardwood pulp, $21.68. At the end of August 2023, the adjusted rates for hardwood pulp and cedar were at their maximum, while those for softwood logs and studwood were below the threshold. A premium for sawlogs and studwood won’t kick in until the price of lumber reaches $637 per thousand board feet (mfbm).
Based on an analysis of the past 20 years of commodity prices, the government expects to generate an extra $7 million to $10 million annually, which is earmarked for the Private Woodlot Sustainability Fund. The marketing boards have already been advised that there will be an extra $3 million in their silviculture budget for 2024. If markets are bad, and none of the thresholds are reached in a given year, the revenues generated would be approximately $4 million.
The New Brunswick Federation of Woodlot Owners had no input into devising the formula. The group’s leadership questions how the formula was conceived, how many meetings took place to hammer it out, and who was involved. Was it developed in-house by the Department of Natural Resources and Energy Development? Was it contracted out to a third party? Or was it prepared, at least in part, by elements of the forest industry?