A publication asked me to provide some comments, anonymously about the pending Softwood Lumber agreement between the US and Canada. I include what I provided, and I’m going to add some of my ideas that might make a better solution than anything I hear from other sources. I hope this helps enlighten some people on the subject.
Vaagen Bros Lumber has production facilities on both sides of the border with mills in Colville and Usk Washington as well as Midway BC, Canada. The reason this issue is complicated is due to the raw material: Logs. Even though the Canadian process is more open and competitive than ever when it comes to logs, Canadian producers still have an advantage over most of the US producers. That advantage is that the Canadian government continues to manage its forests through up and down markets. The price for those logs follows the market up and down, but for the most part, the flow of logs is maintained.
Contrast that with the US Federal Government that barely manages its forests. This leaves State lands, Tribal lands, and private lands for the remaining supply. If a company doesn’t have enough of its own lands to supply its mills, they must rely on other sources. In many cases, that’s private lands. The issue is the consistency of management. Many of these private landowners are managing for returns. When the market drops the landowners can just wait until the prices return. This puts mills in a very difficult spot because reducing production raises costs, just when the companies can least afford it. Therefore, there are so few privately held mills left in the US.
Another main issue with the Softwood Lumber Agreement is currency. That was never factored into prior agreements. Here’s the issue. Today the exchange rate is $1 USD = $1.33 CND and the price for lumber is $349/mbf (thousand board feet) USD according to Random Lengths. That means the price of lumber is $465/mbf in CND. Compare that to December 2012: Random Lengths Composite Average was $370/mbf USD. The exchange rate was $1 USD = $1 CND. That means that a mill in Canada is doing 25% better today than it was in 2012 while a mill in the US is doing 6% worse. These are not insignificant swings.
The impact is much more pronounced when the market drops. No one cares when the prices are high because companies are making money, but when prices are below break-even in the US, Canadian mills can still make money shipping into the same market. If prices were at $270/mbf right now, Canadian mills would be seeing prices at $359/mbf CND. These are the scenarios that must be addressed because at the end of the day the goal isn’t to put people out of work. When these mills go away, on either side of the border, jobs, communities, and families are destroyed. That is what is at stake here. That goes much deeper than shareholder returns.
So, those were my comments. After I read them again, I think they are right. Of course, there are other factors to consider, but trying to fix this without the consideration of currency is like playing hockey or football without pads. It’s a critical part of the system. I happen to like the Canadian producers. They are good people in good Canadian towns. I don’t want an agreement to put jobs and livelihoods at risk on either side of the border. If we are going to have incentives to keep shipments from driving down lumber prices in the US we need to have currency in the calculation. If the dollar is at par, there shouldn’t be a duty, even at low prices because everyone is feeling similar pain. Isn’t there a way we can use an index that tracks prices and currency to impose duties when they make the most sense? If the market is working for all parties then there shouldn’t be a duty, however, if Canadian mills have a distinct advantage with profitability while mills in the US are forced into bankruptcy, then we have a problem.
The last graduated duty system for the west seemed to work well. There were times when prices were down, yet because of the difference in currency Canadian mills continued to ship. I recall discussions between American business people wondering why the Canadians continued to ship lumber into the US while the prices were so low. It didn’t take long to see that the exchange rate clearly gave those companies plenty of profit opportunity. Of course, they would continue to sell and ship product. The Americans would do the same if the roles were reversed.
The trick here is creating a system that provides a smoothing effect on pricing. We need a process that can identify when the combination of product pricing and currency put one side at a significant advantage to the other. Once a combination of these indicators are met, then duties should be enforced to encourage prudent market decisions. Supply and demand should fuel the price, not by increased supply due to currency fluctuations. The goal should be to attain market pricing that works for everyone, including the consumer. Once prices get into a traditional trading range, then all producers should compete on their merits. That should be the goal of the system. Not to create winners and losers, but to create favorable and stable market conditions for the entire forest industry.