I’ve got a friend. Let’s call him Daryl. Daryl has some strong opinions regarding the fairness of softwood prices received by private woodlot owners in the face of skyrocketing lumber prices.
Daryl’s opinion is not entirely unreasonable, its just unfounded and here is why.
Daryl’s take on wood pricing stems from his belief that the price of finished lumber is correlated to what a mill should pay for the round wood log that went into making that two by four. In the long run this is true, notwithstanding other regional or local market drivers like condition of roads in the wood stand, efficiency of harvesting, quality of the timber, nature of the terrain and so on. These elements can of themselves greatly influence the value of the tree.
That aside, the driver that Daryl should be considering is simply supply and demand. When lumber demand outstrips supply the price goes up. That was the case for lumber for much of the middle half of the year as production curtailments in British Columbia due to rising wood cost and a robust renovation market driven by COVID bound homeowners delivered a one-two supply and demand punch to the delight of lumber producers who had amassed significant inventories of finished goods leading up to the burst in demand. It was great timing.
Now so was the supply and demand case for round wood. Mill yards did not start to experience any real supply issue until late September. Willing buyers and sellers, which is what truly defines a fair market, were abundant. So, prices remained relatively stable because log supply and demand were relatively balanced.
Log prices at the mill gate have started to move up in recent weeks in response to supply pressure but certainly not to the extent of the gain in lumber prices, nor should they necessarily, as they move at different rates. Given enough time one would expect a continuing lumber price climb to drive log demand and drag prices up with it. But this meteoric rise, as dramatic as it was, and I stress the past tense, was not sustainable and mills and wood producers alike know this. As an example, 2×4 random length 2&btr grade lumber prices have fallen over $700 since last month from the year high of $1500, a 47% decrease. Furthermore, the leading indicator that is the lumber futures market is looking at a spring 2021 return in the $600 MFBM range. That is a 60% decrease in less than a year.
So, after reading the auditor generals report on timber royalties, Daryl concluded that royalty rates for softwood lumber should have been given a “huge increase” based on the significant but albeit short lived increase in lumber pricing. Daryl may have read the Auditor General’s report, but he missed the part that states that the value of private wood transactions can be a valid way to determine crown royalty rates. And the value of those fair market setting prices for softwood are significantly lower than the current crown royalty rates being paid by mills. The most recently published Forest Products Commission stumpage survey attests to that.
A return to free and unfettered trade with our valued U.S. customers with wood sourced from fair trading New Brunswick wood producing markets is good for mills and wood producers alike. That’s where round wood demand and price gains will be found, not in short term market bubbles.
Executive Director of Forest NB