Money in the trees

Terence Corcoran
National Post
March 26, 2002

With six weeks to go before the United States actually imposes a 29% tariff on Canadian softwood lumber, there’s still time for the politicians to work out a compromise. Trade Minister Pierre Pettigrew obviously had that in mind yesterday when he tempered his rhetoric and urged the provinces to sit tight and wait for the negotiation process to run its course. He particularly resisted calls for retaliation. We don’t need an escalating trade war.

What we do need, however, is forest reform, whatever the tariff. Canadian forest policy is a tangled mess of incentives, distortions and regulations. One of the biggest problems overhanging the economics of forest operation is the B.C. government’s ownership of more than 90% of the province’s forests. Residents of British Columbia, along with most Canadians, cling to public ownership as a sacred core of Canadian policy. Forestry is a social program, managed by the government to create community stability and maximize employment rather than return on investment.

The case for privatization, however, grows by the day. The benefits of privatization might soon register with Gordon Campbell’s new Liberal government, which is strapped for cash and running up fresh debt. A rough estimate by one industry expert is that the province could sell a third of its forest for maybe up to US$7-billion, roughly equivalent to the deficits the government is expected to run up over the next few years.

The numbers come from Clark Binkley, former dean of forestry at the University of British Columbia and now chief investment officer at Hancock Timber Resource Group in Boston, a company that puts together forest privatization deals for institutional investors. Contacted yesterday, Mr. Binkley recalled calculations he made about a year ago. “I don’t have the numbers with me, so I’m going from memory here. But if you privatized 20 million hectares in total, which would be about a third of the commercial forest land in B.C., there would be about 3-million hectares on the coast that’s worth about $1,000 a hectare at least, or about $3-billion. The remaining 17-million hectares in the interior would be worth $300 a hectare or about $5-billion. And $300 a hectare is a very low number.”

The point is not in the precision of the numbers but in the impact of privatization on forest management and the trade dispute. An accompanying reform that removed the Canadian export ban on logs would transform B.C. forests into a healthier, and competitive resource, probably with lower timber cuts but at higher prices.

Privatized forests would also have an environmental benefit. Government ownership tends to create perverse incentives that artificially stimulate forestry at the expense of other interests. Sometimes government policy prohibits other use. Lawrence Solomon, in his article on this page, paints one picture of the impact of private ownership on forest development. He sees a dramatic increase in recreational and tourist use as entrepreneurs are free to compete for land ownership. Frankly, his outlook looks a little over-optimistic from a Green perspective. But who can say with certainty? A market for forest land use will be a much better determinant of healthy development than the current system.

A transparent, privately owned forest system, where prices and supply are determined by demand rather than policy, would certainly put an end to the endless political bickering over subsidies and stumpage. If the market sets the stumpage, there would be no subsidy to uncover before the WTO.

As we’ve argued here in the past, private ownership would add economic value in Canada. Market-driven pricing, from logging through to distribution, would improve the allocation of logs among different markets and uses. It would bring fresh capital investment to Canada’s forest sector.

The statistics on forest use in Canada and the United States are mind-numbing and, ultimately, inconclusive. But consider this isolated fact: Recent stumpage (the amount of money charged by the forest owner for each thousand board feet of lumber) in the B.C. interior is US$47. The stumpage on the same quantity of wood from a competitive private landlord in the southern United States is $145. This does not necessarily imply a subsidy. Indeed, Russ Taylor, publisher of the International Monthly Solid Wood Report in Vancouver, says the high U.S. stumpage fee is a function of “greedy [private] landlords” who are sticking it to the U.S. sawmill industry. Whatever the case, the discrepancy in stumpage rates might get resolved if Canada had a private forest management system.

In the meantime, the short-term outlook for the Canadian forest industry may not be as grim as it seems. Mr. Taylor predicts a booming market. One bell-weather lumber price is at a high of US$300. A 29% U.S. tariff would give $90 of that $300 to the U.S. government. But Canadian exporters would still get $210, a price that would allow most Canadians to break even or profit. At a tariff of 15%, Canadian companies would do even better. Over the long run, however, the trade dispute can only be resolved through private ownership and reform.

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