Wednesday, July 12, 2006

"we have sold the stumps, plus a long-term support contract"

Babble on.

In the comments to this post, Deaner lays out the best argument I've yet seen justifying low Canadian stumpage fees. It really deserved its own post:

...there is a given value in standing timber (or oil, gas, gold in the ground, etc). The province, deliberately or otherwise, said: "whoever develops this resource has to do so under these conditions" - and set an industry structure that emphasised continued employment, high levels of unionization and high tax rates. These are all policy choices that governments are free to make - whether we like them or not, I think we agree that they are within the purview of a sovereign government. In respnse, the industry placed a low cash value on the standing timber - the government had already extracted the value in the conditions of development. How is that a subsidy? - the owner of the resource extracts the same value (in their mind) - it just comes in the form of high wage employment and a high tax rate - and the buyer gets no more value; they just write the cheques to different people.

If you quote a customer for a job and don't extract immediate top dollar because you insist on value (for you) in other ways, like relaxed delivery schedules or an extended support contract that you and the customer know is inflated, you have not subsidized the customer - you have just structured the deal in a way that meets your needs, and presumably those of your customer. That's what the Province and the industry have done - we have sold the stumps, plus a long-term support contract, because the Province saw more value in that long-term cash flow (via mill employment) than in a higher stumpage fee. We are free to argue whether that is the right trade-off for the province. The Yankees are not free to argue that the Privince is not entitled to make that trade-off; but that is exactly the Coalition's line of attack.

The Coalition's position (which is common for Americans in trade deals) is that any deal structure that doesn't match the structures used in the USofA is prima facie a "subsidy." After all, the US does things perfectly, so the only reason to deviate would be to cheat somehow. (Babbler's bold)

As regular readers (enough to field two competitive curling teams!) already know, I'm no expert on the softwood lumber file. But the idea that the provinces extract full value from producers for the resource by means other than stumpage fees is the first argument for the Canadian position that makes sense to me.

Babble off.


At 12:34 p.m., Blogger Dr. Strangelove said...

But the idea that the provinces extract full value from producers for the resource by means other than stumpage fees is the first argument for the Canadian position that makes sense to me

What it is is squishy feel-good left-coast over-regulation. The very notion that the government is in a position to know what exactly is full value is frankly scary.

I have a better idea. Charge fair market value for the trees, use the excess royaties to cut taxes and stimulate the economy for the benefit of everyone.

It should also be pointed out that this is BC's practice and is not necessarily practiced in the other provinces.

At 12:45 p.m., Blogger Anne (happier in Ontario) said...

Just how am I supposed to refute deaners well written and reasoned position?? ;-)

Do you believe in a "green logger"? One who fully supports strong renewable practices and investment, cleaning up all the waste? One who knows that the money collected (when it is) is not going where is should be and is woefully mismanaged? How about many mills who "nudge-nudge, wink-wink" don't actually pay these fees (when not deducted from a supplier) but have them frequently "forgiven", a very common practice. How about they should be forced to modernize and utilize everything instead of being subsidized in one form or another to continue their bad practices? It's disgusting.

I am not that good at expressing my thoughts but having been in this business for 24 years, there is plenty going on behind the curtains which amounts to subsidizing.

Yes, most mills are unionized and you can start at $20 per hour with more benefits then you could possibly ever use just by sweeping the floor, definitely attractive.

What is not accounted for is the raw material arriving at any of these mills and the fact almost none of these suppliers are unionized or their workers but they are paying these fees. This is the REAL forestry part of the industry, not some union floor sweeper.

For example, we negotiate prices in our contracts which include the cost of stumpage/forest renewal/silvaculture but the mill actually receives the MNR bill and pays it for us - we used to pay it directly until about six years ago, this was meant to streamline and simplify the collection process. It does not actually cost the mill anything other than administration of it for suppliers like us.

Now, here is a real kick in the ass. When the tariffs hit the mills (around here at least) they made the suppliers like us pay it through price negotiation, we were paid less to accommodate it. We were hamstrung by legislation a number of years ago by a law which says we could NOT go to another mill who may be willing to pay more for the same product. We used to have that leverage because we OWN the wood but now we have no choice and the mill uses this against us. This legislation was meant to have stability for the mills when they have guaranteed suppliers who cannot leave. Having dealt with this mill for 24 years, exclusively the last six, we have only received a raise TWICE despite how much costs have increased in the industry. Just imagine your fuel costs for one month going from $5000 to over $9000 in the last two years alone and don't get me started on other costs.

Now that it seems that 80% of the money is to be returned by the Americans we had our meetings with the mill over this. Hey, we paid for it through the price we were paid, that was their excuse for no raise the past several years. We wanted to know if we could expect something from this (many are living off credit, loans, etc. just hanging on for the dispute to end) plus what about a raise? There were several suppliers there and we were laughed right out of the office, especially about expecting any of the returned tariffs to be shared - NOTHING! They will be getting all of this money, not us. Hey, the union of mill workers usually get their wages increased every two or three years plus management gets hefty bonuses, should be a great christmas for them this year.

When all the hand outs came for forestry via provincial and federal coffers how much money do you think people like us saw? ZERO, not a penny. The unions jumped up and it was all divided pretty quickly through wages at the mills, a site to behold indeed. Those hand outs were a form of subsidization and tallied up across Canada easily exceeded one billion dollars. If this deal falls apart you can expect that the Americans will be using this against us in further proceedings, we will end up with the same deal - five years from now. Wonder who will be in business to care?

Do I pity the mills only getting 80% back? Not really, alot of it isn't theirs and the hand-outs went to them, I wish the average Canadian knew that. I can only hope that this money is reinvested to make many of these very inefficient mills better, the waste would blow your mind.

Sorry about the rant, just really want to give some "inside" perspective. You can choose to dismiss me if you like but this is our life every day, I do know how it really works. This is a good deal despite what some critics are saying. Many, like us, just want to stay in business and work, keep their employees and families from losing income. If we stop supplying then those mills will have a new set of problems and those union employees won't be so happy, will they? It might come to that this fall, we shall see.

At 1:51 p.m., Blogger Babbling Brooks said...

Dr. Strangelove, with respect, you're missing the point. I agree with you that government isn't in a position to know what full value is. But they can say that they, as representatives of the resource owner (province's population), are getting more than just the stumpage fees as value out of the resource, and that as such, the producers aren't being subsidized.

Whether or not this is good policy is a completely different ball of yarn.

Anne (happier in ontario), your perspective is a welcome glimpse into the front-line realities of this industry. I have no doubt that some of the structural problems built into the regulation of Canadian forestry amount to subsidization of one aspect of it over another. But that's not the American argument. And if these abuses happen up here, do you not think similar or equivalent ones happen south of the border? Neither side has a monopoly on manipulation of the system.

At 2:48 p.m., Blogger Anne (happier in Ontario) said...

I have absolutely no doubt that abuses happen on both sides but that doesn't mean we shouldn't clamp down on it and become the leader in this. 90% of all our wood goes to the U.S., they need us as much as we need them.

We fully support all the stumpage/forest renewal and silvaculture fees being charged, we believe in sustainability for the long term. Half the mills shouldn't even be in business they are so wasteful. How about they become more efficient with what they have in order to turn a profit? We had to. Giving them hand outs and cutting slack on the fees just encourages their stagnant position.

As I mentioned in the one example, there were several cases of mills being invoiced for the "full and right amount" but then these fees would quietly be "written off", little to nothing would be paid at all. That is subsidization and we are against that. Pay up or get out of the business, I have no pity for those who only wish to meet the bottom line and to hell with putting back into what you take. This is what gives logging a bad name and environmentalists something to beat us with.

I would like to think that if the Americans are too stupid or short sighted to take care of their resources in the long term then they will need us even more in the future.

At 2:56 p.m., Blogger Dr. Strangelove said...

What's worse than that, Anne, is that 80% now in real US dollars is what it is. In five years, and at the rate the US dollar is in decline, it is significantly less.

Finally BB, I am not missing Deaner's point at all. Like so many trumped up left wing ideas, it has all the hallmarks of feelgoodism. But part of its impact is to subsidize higher wages for unionized employees and immediately calls into question the motivation for its existence in the first place. So who is benefitting? The owners, or the representatives of the owners.

It is a nebulous arrangement that is distortive and is easily vulnerable to challenges.

Having said all of that, I'm rather confident a deal will get done. Much of this fooferaw is media generated. The divisions don't appear to be as cavernous as is being portrayed. This industry will never be happy on either side of the border until it consolidates in Canada's ownership favour and, by definition, the US lobby grows weaker. I think this is a last ditch effort by the lawyers who are compensated by furthering the arguement. Business people are more pragmatic and their better judgement will prevail.

At 3:02 p.m., Blogger Anne (happier in Ontario) said...

Yeah, the lower value of the U.S. dollar, not good.

At 3:45 p.m., Blogger Babbling Brooks said...

Like so many trumped up left wing ideas, it has all the hallmarks of feelgoodism.

Dr. S, you're still not addressing Deaner's core argument: that the structure of the industry in Canada means that producers pay for the resource in ways that go well beyond stumpage fees. Deaner and I are not left-wingers, and we're not arguing that the way the industry is regulated and structured is good policy. All that we're saying is that looking at stumpage fees alone and screaming "SUBSIDY!" is only considering part of the picture, and that the American argument is flawed on that count.

I welcome your input, but if you're going to insist we're wrong, I'm going to insist you actually support your assertion instead of spouting meaningless jargon like left-wing feelgoodism.

At 4:48 p.m., Blogger Anne (happier in Ontario) said...

BB, I guess I not addressing it either and lack the ability to fully articulate much further.

Full disclosure - I grew up an inner city tree hugger who married an educated knuckle dragger, was quite the union!

The Americans arguement might be flawed to an extent but I can't say that I disagree with it. Forestry is quickly turning into a money pit for taxpayers when it doesn't have to be. What goes on is corporate welfare Bombardier style and it has to stop, unions be damned.

Ontario has been very proactive in changing this, we have come a long way. When it looked as if an opportunity might open up for Ontario to strike their own deal with the Americans we were ready to do it but it became scuttled due in large part to national organizations, complicated stuff.

BC has been the pimple on fortry's ass for years, they still continue to be - too many NDP govenments? No more grants, interest free loans, aid packages, tax breaks/credits or any other form of help. The nature of evolution is change or die, time to change.

Oh, for the few that keep saying we can always sell our wood elsewhere, like China, maybe in the past but not now. Eastern Europe is going into forestry big time where the cost of production is a joke and they are currently flooding the market, there is no way for us to compete with that.

We could have moved everything to Russia a few years back and made out like bandits, several did. I would not be able to sleep at night knowing how they operate, they are going to be very sorry in the future for their actions now.

At 5:17 p.m., Blogger Dr. Strangelove said...

I'm sure American grievances are far more numerous and complex than simply yelling 'subsidy' in the face of BC's complex pricing structure. And my assertion is that by structuring their industry in this fashion they are sceaming to be f'd with by a society that's far more inclined towards free-market practices.

BC can say, "we're looking out for organized labour." Well you know what? There's labour laws for that. You don't need to impose a pricing mechanism to abet the organization and enrichment of labour unions. And exactly how do you quantify those costs and equate them back to stumpage? And that's just one of the haircutting measures related to the reduction in stumpage.

But helping the little guy sounds great for sure. Particularly to a province with a rich NDP history. Thus my suspicion that this aspect of the pricing structure is meant to subsidize votes for labour-friendy politicos. They gain. Labour gains. It's a win win for everyone. Well except for everyone else in BC. But I digress.

I'm a free-market guy. I don't always claim it's a perfect system but it's the closest one can get to pricing purity. So please don't try to tell me that all these measures intruding into the pricing of stumpage in BC is not distortive and invitive of suspicion and objection. And when you chose to orchestrate it like this, the burdon of proof is on you to show why detracting form the relative simplicity of the free-market is fair. Deaner explained why it's done. But ironically he has not illustrated how it is not a subsidy.

I believe I have illustrated one example. American lawyers and lobbyist have far more resources and brainpower behind them to exploit the finest minutae (we all know, for example, that "is" may mean either "is" or "is" depending on the state of undress).

On the overall fairness scale as to who's right and who's wrong between the two nations, I humbly abstain. I know the yanks or more than capable of throwing their weight around and of unfair trade practices. But Canadian sanctimony often knows no bounds. And when one can be so abruptly dismissive of subsidization with a "bullshit" after articulating a scheme so far removed from free-market forces, and if this is symptomatic of the back and forth on this file over so many years, about the only thing I can come away with is that it is time to move beyond all the self-absorbtion and just shake hands on the deal.

By the way, I know you are not left of centre and if the deaner who rebutted me is the same one I've read on other blogs, I know he is certainly no lightweight. If anything, I'd say he sounds like he's being defensive of his home province for better or for worse. Power to him.

Speaking for myself, I don't know how often I've read something I've posted only to tell myself to lighten up in future. Probably happen after I hit 'publish'. Here we go...

At 5:33 p.m., Blogger Babbling Brooks said...

Thus my suspicion that this aspect of the pricing structure is meant to subsidize votes for labour-friendy politicos.

And my assertion is that by structuring their industry in this fashion they are sceaming to be f'd with by a society that's far more inclined towards free-market practices.

I'd say you've hit the nail on the head there, with both statements.

It would be much easier to cut out the social-engineering aspect of the industry structure and price stumpage higher. I suspect it would also eliminate some of the opportunity for abuse of the system that Anne describes.

But the bottom line for me is that Canadian lumber companies pay for timber in more ways than just stumpage. Their costs are higher than they otherwise would be because of government regulation.

Put it this way: if we raised our stumpage fees to American levels, but kept our labour laws, our industry regulation, etc. the same, would we really be creating the level playing field the Americans say they want?

No, the arguments from the other side of the border that our stumpage fees are too low don't hold as much water for me as they did a few days ago.

At 9:11 p.m., Blogger deaner said...

Boy - too many comments have piled up (in 18 hours!) to respond to them individually.

Anne (Happier in...) - I agree that past government practice in BC (stumpage rates and cutting requirements in particular) did not provide incentives (or the right incentives) for long-term sustainable forest management. That is changing (albeit slowly) and I will be happy to see better policies take hold. I don't in any way dismiss your experiences - I think the industry has a real problem with the vertical structure (in BC, following the break up of some of the integrated forest companies) and the opportunity for abuse within the supply chain.

Dr S:
"Charge fair market value for the trees, use the excess royaties to cut taxes..."
Or to pay unemployment insurance to the loggers and mill workers during off-season or cyclical shut downs. Six of one, half dozen of the other; except by requiring the mills to operate you "harness the creativity of the private sector" to come up with ways to be profitable (or at least, less unprofitable) through the whole cycle. In other words, you throw the burden of a cyclical commodity onto the economic actor who is exploiting the resource, instead of the public at large - absorbing that cost doesn't detract from the value of the resource - it merely illustrates that the value may not be as high as otherwise thought. It is not clear to me that this is the wrong trade-off.

One of the (justified) complaints about the Atlantic fishery is the reliance on EI as an ongoing support mechanism. The argument is that having the general taxpayer pay the fishermen for most of the year represents a subsidy to the fishing industry: if you can't extract enough value from the resource to fund a year-round employee (or private operator) that is the economy's way of telling you that exploitation of the resource is uneconomic. The rational response would either be to reduce the number of workers (which may mean increasing the capital investment) until the value extracted is sufficient to support the workforce required, or to find a counter-seasonal industry (or industries) such that the value extracted from the two (or more) resources can support their combined (and overlapping) workforces. In effect, that's what the BC "cut it or lose it" policy did.

"I'm sure American grievances are far more numerous and complex than simply yelling 'subsidy' in the face of BC's complex pricing structure."
Not really.

"And my assertion is that by structuring their industry in this fashion they are sceaming to be f'd with by a society that's far more inclined towards free-market practices."
But the US practice is to absorb the costs of fluctuating employment either by welfare or EI equivalents - I don't see that as a free-market practice.

If you had a resource that was incredibly valuable and is expected to be long-lasting, but of very short annual duration - say like diamond mining in the arctic, where it can only be done for part of the year - which is more of a "free-market" policy, and which one is more of a subsidy:
1) Mining licensees must pay a full year's salary to all employees;
2) The government will pay EI to employees during down time.

In any event, as Damian pointed out - the real issue is not whether these are good or bad policies; it is whether they are policies that each political subdivision can rightfully determine for themselves.

At 11:52 p.m., Blogger deaner said...

Sorry: Lance asked a question in the last thread that I have not responded to: "Are the Canadian companies selling 'below market' - and if so, why in the name of everything holy are they doing so?" ...or words to that effect.

That's a very good question. In part, it is probably to maintain market share - both vis a vis each other, and their non-Canadian competitors. They may also feel that if they are able to sell below the Coalition members' prices that this will encourage others (like the National Homebuilders Association, who were vocal -if ineffective- supporters of the Canadian industry) to see the value in Canadian supply and rally to the cause. Other than that, I really don't know - and I am not sure, if I were the VP of Marketing for one of these guys, that I would find either of these arguments persuasive enough to deliberately leave any money on the table.

In response to another post above, I am the same person who posts as Deaner or DCardno - it depends on which computer I am posting from. When I notice, I try to conform them - but not always; neither one is intended to be a sock-puppet for the other!

At 12:48 a.m., Blogger lance said...

That's what this all comes down to. Companies are selling below market price.

Given your statements about BC's royalty agreements then the companies are paying out to a value that is _surmised_ to be equivalent to fair market value. I don't believe it's even close as I'll explain.

Market prices tend to stabilize at a point where efficiency, profitability and price co-exist so that one doesn't tip over the triangle.

As a contract admin, I can _ask_ for $150 bucks an hour, but I won't get it . . . so I have to find a price point or alternatives that will get me enough work to keep busy enough that I can still afford to live.

You used the concept of a service contract in your comment earlier / this post. I completely agree with that. The problem is that equivalents also require outputs from the company and in every extended contract I've ever seen client A and supplier B always hover near or at the equivalent of fair market value.

Yeah, I can fix your machine in a night . . . but it might just cost $150 an hour. I'll lose the gain on that when I sleep in tomorrow though. It averages out.

Given that, _how_ can any company sell below fair market value? The _only_ way is a difference in the price points between two markets.

Wages? Nope. Transportation and mill-rates? Nope. Access? Definitely not.

That _only_ leaves the cost of the material.

You said: "I am not sure, if I were the VP of Marketing for one of these guys, that I would find either of these arguments persuasive enough to deliberately leave any money on the table."

You are right. These aren't stupid people, they are buisness and finance grads. They _do_ understand economics. If they can make a profit by underselling then they will to capture market. If they are making a profit then the cost of doing business is less. If it is less then as their supplier is gov't their supplier is _subsidizing_ the product.

At 1:27 a.m., Blogger deaner said...

"Given that, _how_ can any company sell below fair market value? The _only_ way is a difference in the price points between two markets."

That wasn't what you asked (or what I thought you asked) originally: we weren't talking about "fair market value" but "market value." The difference is important - no one has any idea what the "fair market value" of lumber is, other than the price at the moment a transaction is struck; presumably that price is "fair" to both parties, or the deal would not be reached. More importantly, your comment implies that every compnay that obtains services from a government (and that means every compnay, since they all get municipal services, as well as security services via police, fire department, National Defense, etc) is subsidized - they can't sell above "fair market price" - nobody will buy; but if they sell below that price their government has subsidized them by failing to suck all the value out of their operations....

The Canadian companies are beating the Coalition members on price - they are deliberately selling at a price below at least one segment of the competition: "below market" if you like. This is no different than -say- California wine makers beating BC vinyards on price here in BC, although there is much more product differentiation in wine than lumber. The question I thought you were asking is whether it is economically rational for the Candian producers to be doing so. In part, due to longer supply lines, they have to: they can't offer as tight a JIT shipping operation, so they have to discount the price. I mentioned some of the other factors in the last post. I don't know - but as you say, these companies are run by some sharp guys; I am sure they think they are serving long-run profit maximization...

At 6:31 a.m., Blogger TrustOnlyMulder said...

This theory stifles innovation. if the value of the stump is that low that the taxation or unions or whatever are such a large proportion of the total, it leaves little or no room to "Build a Better Mousetrap" and be an industry leader.

I think the industry really needs to relook at itself and determine if all the subsidization is just a makework program. If Canadian timber can't succeed in the global market at fair comparisons, then perhaps people should move a province over and dig for some oil or get one of them $200,000/year drywalling jobs or $20/hr grocery clerk jobs.

This is not an issue of supply and demand for lumber but of oversupply of workers in the lumber industry.


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