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March 16, 2001

April Fool?

Canadian Softwood
Lumber Agreement is no joke...

By Mike Barnett
Editor

This April Fools Day may prove all too real to all segments of the East Texas timber industry as the U.S.-Canadian Softwood Lumber Agreement expires. The result, spokesmen say, could be devastation of an industry that has a $22 billion impact on the East Texas economy.

Under the agreement, signed five years ago, fee free exports of softwood lumber are allowed for Canada's four leading lumber-producing provinces—Ontario, Quebec, British Columbia and Alberta—and are capped with escalating export fees assessed on amounts in excess of the cap. Without the agreement, East Texas timber producers fear they will face increased imports of subsidized Canadian lumber. And Texas Farm Bureau Forestry Advisory Committee Chairman Bob Currie says the Canadians have no reason to renew the agreement.

"They're not willing to negotiate," he says. "Because under this temporary truce, they've increased what was their market share—27 percent of the U.S. market—to between 37 and 39 percent today. So long as they're gaining like that, who needs another agreement, you know, except us. We have to have some protection.

"The agreement expires March 31," Currie continued. "I think it's ironic. The first day we'll be running without any protection will be April Fools Day."

Subsidized production

At issue is subsidized production of the provincial timber industry by the Canadian government. Currie says timber on government-owned land is made available to Canadian mills at reduced market values so full employment can be maintained in the four provinces.

Instead of advertising a timber sale with metes and bounds and a certain number of board feet, the Canadian government works with forest product corporations to keep mills running.

"The Canadian government negotiates with forest product corporations to build and maintain mills in the four provinces," Currie says. "They don't even put pricing in their contract. The mills get a guaranteed 20 to 30 year contract. In return they assure the Canadian government they will hire Canadian citizens, will maintain full employment, will maintain good job benefits, will treat the Canadian people well and have a strong lumber segment with the Canadian gross domestic product.

"It's not market driven, it's jobs driven," Currie adds. And their purpose is to maintain full employment."

In contrast to the Canadian system, East Texas lumber is generally logged from private land and the price of lumber is set at auction. Currie maintains it's easy to see what happens if the agreement is not resigned and/or renegotiated: "Square one says East Texas timber producers can only grow trees if they get paid for them. We can't compete with people who grow trees and don't have to get paid for them."

Danger signs

Even without a treaty expiration, there are danger signs in East Texas, according to Chris DeMilliano, office manager for Steely Lumber Company in Huntsville. The fear is the agreement will not be reinstated and the Canadians will flood the U.S. market with cheap timber. Timber buyers in this country are holding off in anticipation of the market going down even further after April 1.

"Oh, man, it's going to hurt us," DeMilliano says. "It's just happened recently in New Waverly. A Louisiana-Pacific mill shut down and it just basically shut down a town. That will hurt us here, just the same."

DeMilliano says 70 percent of the total production cost in East Texas goes to purchase of logs. Contrast that with Canadian subsidization and that figure drops to 20 percent and below in Canada.

"Some of the prices in Canada have been as low as 10 to 15 cents per thousand feet," he explains, noting that Steely Lumber has cut back production from five days a week to four. "That's unheard of here. Our board footage is usually $85 to $100 per thousand board feet."

DeMilliano maintains the East Texas timber producer will be hurt the most.

"You're talking about people who have invested their land for their kids, who invested their land for when they retire," he notes. "Those trees that were worth a lot at one time, if this doesn't go through, they're going to be worth practically nothing."

The landowner's view

Nolan Alders of Nacodgoches is one of those landowners.

"You can imagine if we grow trees and we grow them hoping to produce $100 per acre per year off forest lands, when we do a real good job of producing," he says. "And we're talking about coming down and perhaps, making nothing."

But it goes much further than that. Local schools are funded by property taxes. And property taxes for timber land are expensive.

"I pay $5, $6, $7 per acre for my timber lands for school taxes. We're doing that on gatewood prices over a five-year period. And if our gatewood prices at the mill go down, then we're going to be spending less for our schools," Alders says.

It also effects the local economy, according to John Bradley, a timber land owner and logger. In his business, Bradley cuts 400,000 trees a year and plants 1 million. He has up to 17 people working directly for him, and subcontracts an additional 15 to 17 workers. He says there's not many alternative jobs available.

"In our neck of the woods, you've got a few gas stations if you've got somebody to buy gas," says Bradley, who is also Marion County Farm Bureau president. "You can work for the courthouse or the schools, you can drive a school bus. But probably in this part of Northeast Texas, any decent job that's not a professional-type job is going to be in the wood business. These guys make a pretty decent wage for a high school graduate."

No easy solutions

There are no easy solutions to the vexing problem, says Ron Huffard of the Texas Forestry Association. He says the Canadians have no interest in extending the agreement.

"I think it's important that we have something in place because we're already seeing over 14 billion board feet of Canadian lumber that can be sent into this country. Anything in excess they have to pay a tariff on," he says. "By them wanting to drop that is an indication that they're ready to start sending more material into the United States.

Chris DeMilliano agrees: "The actual agreement, as it is now, it doesn't keep them from sending in timber. There's just a tariff over a certain amount. If they don't have that tariff, I don't think there's any stop to how much they can do. That's going to open up four precincts in Canada that are major timber producers. And they're just basically going to flood our market to where it washes us out."

Huffard says already 30 to 35 percent of the wood products in the Beaumont area is Canadian lumber.

"If Canadians can ship in 35 percent into our market area, and beat us on the price, then something is wrong and we're concerned about that. What we're asking is to be placed on a level playing field."

Included in the terms of the agreement five years ago was a provision that the Canadians put in some kind of program to make stumpage fees comparable to fees in the U.S. That hasn't happened, Huffard says.

"We're asking the U.S. trade representative to look into this, get with the Canadian government and say `this is a serious matter,'" he advises. "Let's address this, and if that can't be done, then we need to look at a countervailing duty be placed on their timber until the situation can be rectified. I think that's the only way to get their attention."