Forestry Ink: Implications of reducing stumpage to help companies during poor markets

With the recent announcements of mill closures and pressure on the government to make changes to help lower production costs, I think it is a good time to review how stumpage is calculated and what are the best ways to make adjustments which will help and not hinder the situation.

“Stumpage” is the rate per cubic metre paid for logs harvested from Crown forests and is determined using the Market Pricing System (MPS). One of the main reasons for using this system is in response by government to U.S. lumber lobby accusations of providing subsidized logs. The MPS is designed to give some predictability to determining log costs and show the log price is market-driven and not based on the desires of the government of the day.

When markets are high and stumpage is relatively low, lumber profits are good. For example, a survey of good market time shows four of the top 10 largest global firms are based in B.C. (West Fraser, Canfor, Interfor and Tolko). Profits during the good years have allowed these companies to invest in U.S. sawmilling assets. Collectively, these four companies own 49 U.S. sawmills (including joint-ventures), as well as forest companies in Sweden, as compared to only 38 in Canada.

Companies’ profits drop quickly when the markets bottom out and the stumpage still remains high because of the review times built into the MPS formula. For example, the Stumpage Rate determination is designed to be an objective approach and is adjusted every 12 to 18 months for timber sales input and quarterly for the stand selling price.

The Stumpage Rate is derived from the MPS Equation after inputs from BC Timber Sales Auction Data and the Stand Selling Price and Variables, which include type of logging method, distance to market and urban centres, and species composition and quality. The MPS is finally reduced to reflect the Tenure Obligation Adjustments, which includes forest planning and administration costs, road development and management costs, along with basic silviculture costs.

While trying to tamper with the stumpage rate may not be a good idea, there are other ways to help out struggling companies. Maybe the 12-to-18-month adjustment period needs to be shorter. There are also ways to reduced government red tape and speed up the issuing of logging permits during emergencies like the recent need to increase the processing of the fire-killed timber permits.

Governments could also reduce log exports and encourage value-added and diversification of products to lessen the dependence on lumber and other commodity wood panel products, which are more susceptible to the boom and bust cycles. Other government fees that could be looked at include the following: log export tax (fee in lieu of manufacture), which is based on prescribed value for each grade of log, as well as waste and residue – the measurement of merchantable wood left behind after harvesting.

For those looking for more details, most of the information in this article came from a power point presentation entitled “Forestry 102 Stumpage and Log Marketing” by John Lacoviello, RPF. The author’s paper was published Jan. 15, 2014, but I think it is still close to what is happening today.

Jim Hilton is a professional agrologist and forester who has lived and worked in the Cariboo-Chilcotin for 40 years. Now retired, he volunteers his skills with local community forests organizations.

Read more…