N.B. fixes to wood pricing system not enough to satisfy U.S.

New Brunswick's attempts to fix its system for calculating private woodlot sales to sawmills have failed to persuade the U.S. government that the province has a free market in timber pricing.

Last year, Kim Adair-MacPherson, the auditor-general at the time, said the province had made "significant improvements" to address one of the U.S. rationales for slapping countervailing duties on New Brunswick wood.

At the time, the Higgs government hoped this might spell relief for New Brunswick exporters.

But the recent U.S. ruling upholding softwood duties says the province still doesn't have a market-based pricing system because the Crown wood supply and a handful of major industrial buyers continue to dominate.

The U.S. Commerce Department calls it an "oligopsony," a market where a small number of large buyers can influence the price paid for a commodity. 

It says with the province acting as the largest supplier of wood through Crown land licences, prices paid by mills to private woodlots can't help but be pushed downward.

"Oligopsonistic conditions continue to exist in New Brunswick that contribute to the distortion of the market for private-origin standing timber in the province," says last month's U.S. ruling, which reaffirmed punishing duties on New Brunswick wood sold south of the border.

Adair-MacPherson's 2020 audit citing a better process for counting private wood sales represented a potential lifeline to the forest industry and amounted to an update of a 2008 finding by her predecessor.

That earlier audit said data on sales were often incomplete and sample sizes were sometimes too small, making it difficult to assess whether the Crown royalty rate reflected market conditions.

It also said a small number of mills "directly or indirectly control so much of the source of the timber supply in New Brunswick means that the market is not truly an open market."

That meant it was impossible "to be confident that the prices paid in the market are in fact fair market value," it said.

The U.S. timber industry seized on the wording of the 2008 audit to persuade Washington to end New Brunswick's exemption from duties on timber heading to U.S. buyers.

The U.S. views Canadian wood as overly subsidized, making it cheaper than American wood. The duties charged to U.S. buyers are designed to to level the playing field. 

No real changes, U.S. says

Adair-MacPherson's 2020 audit said the province had improved how it measures wood sales from private woodlots by using larger samples, adopting third-party verification and making participation in the survey mandatory.

But the U.S. ruling says the audit also confirmed that there had been no real change to the problematic ownership structure in the forest industry.

The government's dominance as a wood supplier, and the power of four large companies buying most of both Crown and private wood, "impedes the independence of the prices for private-origin standing timber charged by private woodlot owners," it says.

That echoes the views of New Brunswick private woodlot owners, who complain the province's refusal to raise royalty rates on Crown wood prevents them from charging more for their wood to take advantage of high lumber prices.

"When you have the biggest supplier who isn't concerned about making money and competing directly with those that need to make money, the system doesn't work," Rick Doucett, president of the New Brunswick Federation of Woodlot Owners, said in June.

The U.S. ruling making the same point was one of two issued by the Biden administration last month adjusting duties on Canadian wood following an annual review.

Wood from most New Brunswick mills will be hit with combined countervailing and anti-dumping duties of 17.9 per cent. Wood from J.D. Irving Ltd. will be charged 15 per cent.

In a statement, New Brunswick's Department of Intergovernmental Affairs said the U.S. is ignoring the fact that Crown stumpage rates for softwood are higher than fair market values of private wood.

Spokesperson Johanne LeBlanc said the U.S. was continuing to rely on "comments taken out of context from an obsolete report from over 13 years ago." She said the U.S. "ignored" the 2020 audit.

In fact, the U.S. ruling devotes 16 pages to analyzing the 2020 audit and explaining why it didn't persuade officials in Washington.

It said the New Brunswick government provided "insufficient information" to show the market had changed, and its claim that there's more private wood being sold was "not meaningful" because it did not compare that to Crown wood sales at the same time.

It also pointed out the province has ignored other parts of Adair-MacPherson's 2020 audit.

While it called the new measuring process "a valid tool" to help set Crown timber rates, it noted the province wasn't using it to update the rates annually as required by law.

The rates had not been updated to match the provincially calculated average stumpage price since 2015, she said, a finding the U.S. flagged in its ruling.

Province's response does not address 'oligopsony'

The province's statement did not address the U.S. finding of an oligopsony.

Natural Resources and Energy Development Minister Mike Holland was not made available for an interview. He said last year that his department was "working toward" updating the rates every year as required.

Other provinces have increased their royalty rates in response to soaring timber prices over the last year, but New Brunswick has not.

Lumber prices hit $1,700 US per thousand feet of two-by-four lumber in May 2021, about five times what they were when provincial royalty rates were set in 2015. The current price of more than $1,000 remains more than double the 2015 price.

The gap allows mills to pay the province, and woodlot owners, the lower rate while charging U.S. customers the higher price.

Earlier this year Holland said he prefers "stable, steady" stumpage rates that don't rise and fall with the price of lumber. 

The province said it's committed to working with stakeholders to find "a just solution" to the U.S. duties. 

On Tuesday, the Canadian government announced it was filing a formal challenge of the duties under the Canada-U.S.-Mexico free trade agreement.