September 2000 - Logging and Sawmilling Journal

" It is clear that the (Canada US softwood lumber export) agreement failed miserably to accomplish its main goal: to restrict the volume of lumber on the US market in order to maintain and boost lumber prices. In spite of the fact that US softwood lumber consumption skyrocketed by 5.4 billion board feet from 1996 to a new super high of 55 billion board feet in 1999, prices were soft throughout most of 1997 and 1998. Council will say against those who expect the deal to be renegotiated. The council has led a buildup of resentment against any kind of new lumber deal.

The 384page Smyth report is so wide-ranging and comprehensive that it may move the debate beyond a point of no return, to an end of managed trade. Throughout the first four years of the agreement, the US market has been flooded with softwood from several sources, internal and external. The tight supply, which the American lumber producers expected would keep prices up, never materialized.

"The reason for the inconsistent results," writes Smyth, chief economist of the Industrial, Wood and Allied Workers Union, "is that the quota agreement failed to control sharp increases in supplies from other sources-from other countries, the Canadian Maritime provinces and US wood redirected from (exports to) Japan." Nova Scotia and New Brunswick were big winners on the Canadian side.

Exempted from the agreement, they took advantage of a porous border to boost shipments to the US by a staggering 1.1 billion board feet between 1996 and 1999-21 per cent of the 5.4 billion board feet jump in US consumption. That was lumber that might have gone to the booming housing market in Ontario. Into that vacuum moved large volumes of Quebec lumber. The Maritimes, Ontario and Quebec together increased production by 2.216 billion board feet in the three years up to 1999. Production on the Prairies also rose by 468 million board feet in the same period. But British Columbia, still the largest shipper to the US, suffered a net drop of 355 million board feet.

A federal government official has said that in the real world the choice is between a negotiated solution, another deal, and defending against another countervail, which would be very expensive

The reduction of 578 million board feet in the BC coast sector was partially made up by an increase of more than 222 million board feet in the Interior of the province. US production itself went up by almost four billion board feet. Seven hundred million board feet of that came from logs that normally would have gone to Japan if it hadn't been for the Asian economic meltdown of 1997 and 1998. But much of it also came from enhanced recovery from lesser quality timber, including curved wood capable of being sawn by new state of the art milling equipment.

The US South, too, benefited considerably from new techniques and tight markets, raising output by four billion board feet in the decade to 1999. Smyth estimates, however, that that area will go into decline by 2005. A dramatic rise in log exports from BC and Alberta (normally restricted in BC) accounted for 10 per cent of the western US states' 895 million board feet of increased production between 1998 and 1999 and 10 per cent of a 1.24 billion board feet surge in western US production last year.

The western states had a double advantage bidding for logs from BC. After the BC government unilaterally cut its stumpage rates to give producers a break on costs in 1998, increased penalties were negotiated with the US for lumber shipped over quota limits. A BC sawmiller, bidding the same price as an American for logs in BC, always loses because of those over quota penalties. He simply can't compete with the Americans.

To Canadians this is just another anomaly, not written directly into the agreement but flowing from it. It's compounded by the American insistence on reclassifying lumber originally exempted- predrilled and notched studs and rougher headed lumber, for example- and including it in the quotas. "It is clear," writes Smyth, "that to generate those sharp jumps in output western Oregon and Washington sawmillers were desperate enough to pay high transportation costs to obtain that lumber.

"That demonstrates beyond question that local and regional saw timber supplies from public and private (timberland) sources were inadequate to satisfy the wood requirements of those companies." The production numbers in the Maritimes, Quebec and Ontario underline a fundamental shift taking place in the Canadian industry, courtesy largely of the export agreement. From 1996 to 1999 Quebec raised production by 1.02 billion board feet, 46 per cent of the total increase in Eastern Canada and 44 per cent the corresponding national figure.

Over the 1992 to 1999 period Quebec production alone jumped 3.1 billion board feet, an average 443 million board feet per year. Quebec has a vital advantage over BC in the scramble for markets under managed trade. As of January, stumpage rates were an average $26.60 per cubic metre in BC, $12.44 in Quebec, $7.25 in Ontario and $10.98 in Alberta. With costs like those, Quebec has been able to develop some of the most efficient sawmills in North America and move production from pulpwood chips to lumber. (Some of those mills were in development as the softwood agreement was being negotiated. New entrants reserve regulations under the federal Export Import Control Bureau gave Quebec a higher share of the overall 14.7 billion board feet export limit, effectively a shift in quota from BC.)

Smyth claims the playing field between different log sizes and quality in BC and Quebec has been substantially leveled in the late 1990s. "Therefore," he writes, "those differences no longer provide justification for such a large difference between the BC Interior and Quebec average stumpage rates." The Quebec advantage is even larger when silviculture is taken into account. In BC it adds $4 to $5 a cubic metre to saw wood costs because they're not included in stumpage, as they are in Quebec. "Although there are other causes, the softwood lumber agreement was a direct and indirect factor in a one billion board foot drop in BC production between 1996 and 1998," writes Smyth.

As for the remaining time in the agreement, Smyth has projected US demand at only slightly less than the super record high of 55 billion board feet, thanks to vigorous home building and nonresidential construction. He says straight out that the agreement will be allowed to die next March. He acknowledges a political dimension in the issue, however, when he says "US consumer groups have enough political clout to block renewal of any such agreement which is unpopular with most of the Canadian sawmilling industry."

But of course the US Coalition for Fair Lumber Imports has friends too, among them the increasingly influential environmental lobbies, which see the agreement helping to constrain old growth logging in Canada. Those lobbies now operate across the Canada US border. John Ragosta, the Coalition's chief counsel, insists that negotiations can't begin until there's a clear consensus in Canada, which there isn't yet.

Nova Scotia and New Brunswick were big winners on the Canadian side. Exempted from the agreement, they took advantage of a porous border to boost shipments to the US by a staggering 1.1 billion board feet

He insists that the US industry will never sit back and let Canada take 40 per cent of the US market, currently 34 per cent but easily capable of reaching higher volumes. So with powerful friends in Congress still supporting it, the Coalition shows no sign of abandoning its argument that the Canadian stumpage system subsidizes Canadian producers and must be changed. Quebec and Ontario are resisting reform in return for free trade. BC and Alberta are still consulting their industries.

But a federal government official, judiciously unnamed, has said that in the real world the choice is between a negotiated solution-another deal-and defending against another countervail, which would be very expensive. Whatever the numbers in Smyth's exhaustive study, the Coalition still insists on open and competitive log markets in the 95 per cent of the timber resource that is on Crown lands. Without competitive bidding, it will want managed trade. But how will those distortions be eliminated or even lessened in any new deal? Stay tuned.

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Price Failure

A new study makes it abundantly clear how the Softwood Lumber Agreement has failed to boost lumber prices in the United States.

By John Clarke