SpruceRoots Magazine - May, 1999

 

Logging As If Communities Mattered

­ establishing a log yard for fair competition and access to wood

by Paul Mitchell Banks

In 1992, the Forest Resources Commission of British Columbia (BC's fifth forestry commission) completed their mandate and presented to the B.C. Legislature a report containing more than three hundred recommendations addressing concerns with forestry in the province. The establishment of two community log yards in BC directly results from this Forest Resources Commission.

A number of recommendations were identifying the need for alternative harvesting methods that would address and incorporate socially desirable practices. There were also recommendations addressing marketing systems that would establish a province-wide competitive log market in order to encourage and finance better forest resource management practices.

 

Marketing logs at home

Two pilot projects were approved to explore alternative harvesting techniques (other than conventional clearcutting), as well as to increase the knowledge of log marketing. One pilot project is located in Duncan, on Vancouver Island. The second is located in Lumby, a small town near Vernon in the Okanagan.

Now the need to increase the knowledge of log marketing begs the question "What is there to learn about marketing logs?" There is a lot we need to learn. We do not have a lot of information about what the value of a log is, despite the fact that in 1993/94 approximately 78 million cubic metres of wood were harvested in BC.

Cubic metres is the unit of measurement that is used extensively to describe the volume of timber harvested (cut down) or processed (milled into wood products). As a rule of thumb, think of an average telephone pole being as approximately one cubic metre in volume. By thinking of telephone poles everytime you see the word cubic metres, it makes the volume a little easier to grasp. By any standards 78 million telephone poles is a lot of wood.

So, with such a large volume of wood being harvested and processed every year, why is there a need to establish a province-wide competitive log market? The answer is that BC forest companies are not presently operating in an open competitive market, and in fact they have not experienced much competition for decades.

Economists study markets, the place where people or companies conduct buying and selling. A competitive market is where there are many players (people or companies) selling goods (such as 2x4s) or services (assistance ­ such as forestry engineering services).

 

Clearing the marketplace

A perfect competition market has many players, in which no one person or company is a price taker (they can not determine the overall market price for their good or service) - in other words, everyone is working as hard as they can ­ theoretically only the strongest players survive. It is almost like ecology in this regard, where the most successful survive and no-one receives preferential treatment. In the perfect competitive market, goods and services are exchanged (bought and sold) in a manner that society benefits the most. The idea is that people sell something at a fair price, and people buy at a fair price. This is often referred to as the optimal allocation of resources.

In British Columbia, we have seen a number of changes occur over the last century. In the earliest days of commercial or industrial forestry, there were hundreds of small scale operations, each of which competed furiously with each other to sell their logs or timbers. Some players grew in size, others failed, and the reasons for their rise or fall can be attributed to many causes, including the presence or absence of good business management, strong financial resources, innovative and efficient manufacturing, good market access, government policy encouraging industrial concentration, mergers, and simply good or bad luck.

Over the years, what has resulted is an incredible concentration of timber rights (the legal licence or authority to harvest trees from the crown or public forests). These forest industry players also own almost all the wood harvesting and processing capability. This is referred to by economists as vertical integration. This type of market situation with only a few players is called an oligopoly. In an oligopoly, goods and services are not exchanged at competitive prices because there are not enough players to compete against each other to drive the prices to fair levels.

 

More competition creates fair prices

In BC there has been a steady increase in the concentration of committed harvesting rights. The table below indicates how non-competitive forest companies are in acquiring and processing wood. In 1990, BC's single largest group of companies had committed harvesting rights to almost one sixth of all wood that was available. The four largest had over 40%, the eighth largest over 60%. It will not be surprising to see even higher figures for 1996 as there have been a number of purchases of harvesting rights and mills.

Competitive markets need lots of players. Think of what would happen to airline fares to the Islands if we had a number of companies servicing this market. Just as two large airlines in Canada do not create a lot of competition, having a few forestry companies does not make a competitive market.

 

Trends in the Concentration of Committed Harvesting Rights in BC

Company Group

 1975

1980/81

1989

1990

 Single Largest

 13%

11%

14%

17%

 Four Largest

 35%

32%

41%

44%

 Eight Largest

 53%

51%

57%

62%

 Twenty Largest

 74%

77%

79%

86%


Source: Think Wood, Cyril Shelford, 1993.


So, here we are in a situation with very few companies holding most of the harvesting rights. What makes the situation even less competitive is that the companies that hold the harvesting rights also own most of the pulpmills, papermills and sawmills that use the logs to make products.

A good example of this is here on the Islands. Timberwest, Western Forest Products, MacMillan Bloedel and Husby have virtually all of the harvesting rights on the islands. The first three have mills, while Husby sells his logs down south. We have the Islands growing the world's finest wood but there is no competitive market for it. Worse, virtually none of the wood is processed on the Islands. Doesn't this sound absurd?

It is ironic that what the Islands Community Stability Inititiative (ICSI) is arguing for is an increase in competition in the forest sector on these Islands. ICSI would like more people to have access to harvesting rights. (see sidebar) With an Islands log yard, the wood harvested could be put up for auction, so that anyone would have the right to bid for wood. With the situation as it is, we could build a fabulous mill, or a series of them, and not be able to get the wood to run them. This is the situation that Abbott and Lavoie face. This is why over 50 millworkers here on the Islands are not working full time, year round, year after year. Fifty full-time wood processing jobs would create a significant amount of community stability. Even more processing jobs would create even more security.

 

Paying for what you use - there is no free lunch

What industry is afraid of losing is the control over the harvesting rights that they currently enjoy­why would they want to give up access to the trees at bargain prices? Why would they want to have to bid on the logs that they cut in their mills? Forest company mills often buy logs to add to or supplement the volume that the company harvests. This purchased wood is called incremental wood, and is always more expensive to obtain than the cost of their tenure wood for which they pay only stumpage.

An outcome of this is an activity called surrogate bidding. Surrogate bidding occurs when a small businessman or company acts as an agent on behalf of big industry to purchase wood intended for small business. Small business wood is obtained by competitive bidding against other registered small business players. The bid prices tend to be very high compared to stumpage rates for tenure holders. A partial explanation for this is that part of the bid price covers the silvicultural costs that the Ministry incurs in doing the forest management over the land.

Perhaps a more significant aspect of this high price stems from the surrogate bidding leading to inflated prices. The surrogate bidder bids up the price to a level often higher than any independent small business can afford to pay. Industry can afford to back the high prices the surrogate bidder bids because this high-priced incremental wood only raises industry average log price by a tiny amount due to the low stumpage rates they pay on their tenure wood.

Forest company tenure (harvesting rights/licence) holders get low stumpage rates, they argue that they need to make a lot of money to address silviculture and forest management. This is true for replanting new forests, but it does not take a lot of money to manage an old growth forest. There is no weeding, brushing, pruning, spacing, fertilization or similar silviculture practices carried out on trees that are hundreds of years old and as tall as skyscrapers in Vancouver. In a sense the old growth forest is free wood, there has been no money spent on creating these forests.

It is the second growth that will cost a lot to manage and maintain. This is another argument why our generation should not cut down all of the forests that could benefit the generations that will follow us. Old growth forests that we are seeing cut now, will not grow back on the logged land. The short harvest times planned for the new aka managed aka second growth forests will prevent old growth forests from ever reappearing. They will be gone forever. That is not sustainable. To be blunt, the management strategy is short sighted, it dangerously undermines community stability and is extremely selfish. The biggest beneficiaries to such a strategy are the forest companies and their shareholders. It represents a 'cut and run' attitude - as the best wood will soon be gone, and then what? It is the large companies that are the loudest in arguing for economic and operable wood. Unfortunately, it seems to be the large companies that are the ones who define economic and operable.

 

Plugging the drain - capturing work and dollars

Revenues from the forest company operations are used to pay for the running of the company, pay for taxes (that which is not deferred), and what is left over is either re-invested into the company or paid out as dividends to shareholders.

The resources that generate the money come from the rural areas but the flow of revenues goes to the large urban or city centres. Think of this as a huge drain, in which the wealth from the rural areas goes down the drain and is lost and not seen again.

In many ways, this is not very different than the way England 's industry thrived off of the resources of the colonies of the British Commonwealth. England's industries did well, and the colonies paid the price.

Every week we see the huge barges sailing away from the Islands, carrying their massive loads of logs, and the hundreds and hundreds of jobs those logs represent. The employment associated with processing those logs disappears over the horizon, this is little different than a few hundred years ago when we exported our best timbers to England so that their ship building industry could continue. Besides the ship building industry, do not forget all of the jobs created in the transport industry, shops, services etc., that looked after the ship builders and their families. The more things change, the more they stay the same.

 

More jobs, less wood

What a community log yard would do is capture more of the economic value from the Islands forests. It would permit more players to have access to a public resource, and would encourage more innovation, small scale, high value, and high employment processing. In short, it would create more jobs out of the wood that is being cut. What is even more hopeful is that it could create more jobs than exist today out of a smaller volume of wood.

Many people believe that even if the harvest volume were reduced over three years to the Long Run Sustained Yield (LRSY), which is what ICSI is arguing for, there could be no job loss and very likely a gain in employment. The whole idea of job loss and volume reductions is based on the assumption that what we are doing now is the best way to tackle the challenge of getting the most value from the forests. Look around your communities. There is temporary housing, frequent forest worker layoffs, streets that have pot holes that seem to continually grow (and I would argue they move around!), a constant turnover of families, the lack of a permanent school, and donations of $25 from multi-billion dollar corporations to firehalls. Do these seem to be symptoms of the wise use of the forest for sustainable and healthy communities? These are just some of the symptoms that indicate we have a significant problem with how the forest is managed and exploited.

 

The Vernon Log Market Model

In this article we have reviewed a little history, looked at basic economics, now let's finish off with getting down to business. There are very practical steps we can take.

The Vernon Log Sale Project was established in the first half of 1993. and it had three objectives:

1. Increase the variety of alternative silviculture systems and commercial thinning used throughout the province;

2. Try alternative ways of selling logs;

3. Examine the financial viability of the first two objectives.

The Project was administered by the Vernon Forest District, and involved a volume of 53,000 cubic metres that came from a 5% volume take-back when Fletcher Challenge sold some harvesting rights to Riverside Forest Products Ltd. Everytime forest harvesting rights are sold from one forest company to another, there is a reduction or take back of 5% of the volume. This was initiated by the provincial government to encourage more small business in logging, as the government recognized how exclusive the industry had become.

Sixteen blocks were harvested, with layout, cruising, Pre-Harvest Silviculture Prescription (PHSP) preparation and road development contracted to forestry consultants. Harvesting contracts were advertised and awarded to the lowest bidder. The logs were transported to a log yard in Lumby, where they were scaled, graded and sorted into 23 sorts (types and grades of logs). The log yard was managed by a contractor, and there were two contract scalers. Ministry workers were also involved in harvesting and log yard operations. Note the level of contracting and competitive bidding involved here, the Vernon model really opens up the business and results in lower costs.

 

Checking for Fairness

Every Thursday between August and March, the logs in the yard were auctioned in lots to the highest bidders on a sealed tender basis. In February 1995, Price Waterhouse was hired by the government to review the Vernon Log Sale Project and to examine if the three objectives were achieved.

Objective 1. Increase the variety of alternative silviculture systems and commercial thinning used throughout the province;

Price Waterhouse said "Objective #1 was achieved to the extent that 69% of the volume was harvested by methods other than conventional clear cutting. However, Vernon already had considerable experience with similar silvicultural systems from previous Small Business Forest Enterprise Program (SBFEP) projects."

Objective 2. Try alternative ways of selling logs;
Price Waterhouse said "Objective #2 was achieved. The log yard successfully operated for the fiscal year and the MOF [Ministry of Forests] obtained valuable experience in marketing logs."

Objective 3. Examine the financial viability of the first two objectives.
Price Waterhouse said "Objective #3 was achieved. The Project achieved a net profit of $2.0 million after paying stumpage of $947,000 to the MOF. However, this amount excludes some administrative costs related to certain Regional and District staff that were involved in the Project. In addition, the project costs exclude planning and other pre-harvest costs that were incurred prior to April 1, 1993 [some earlier forest harvest planning]. Appropriate data collection systems need to be set up to accurately track all project costs."

The Price Waterhouse report continues...
"Had these blocks been harvested under the regular SBFEP, the equivalent bonus bid revenue that could have been realized by MOF is estimated at approximately $1.9 million, or $0.1 million less than the net profit of the Project. However, due to the lack of accurate cost tracking systems and potential variability in the net revenue calculation, it may be concluded that the net revenue to the Crown would have been similar under either sales mechanism."

Price Waterhouse also addressed the issue of fairness and efficiency...
"It should be noted that significant compliments and credit were given to the Vernon MOF by the customers. All those contacted felt that the log yard was operated both fairly and efficiently."
By all accounts, this experiment was a resounding success. Appropriate prices and a fair and efficient (read non-bureaucratic) means of marketing logs was achieved.
Everyone was able to bid for the logs, and there are two interesting examples of how beneficial this proved to be for some log users.

One man, who makes guitars, was able to purchase three logs for his work, and he was able to choose each log. Another man who builds log homes had run short of logs, and was able to purchase just enough logs to finish a log home project.

The SBFEP system would not have been able to meet these timber processor needs. I do not use that term "processor" lightly - the guitar maker had to specially mill the logs in to thin strips for his guitar faces, while the log home builder had to debark, notch and scribe the logs so they fit perfectly onto the log home being built. Guitar making and log home building are two of the highest value added industries in existence and the log yard enabled them to continue on their successful business.

Just think of some of the value added businesses that could start up on the Islands given a ready access to exactly the right types and volumes of logs.
Some of these might include:

Some of these businesses are operating successfully now but with easier access to wood at a local log market the potential for growth increases. Business people have said to me that access timber has limited the ability for their business to grow.

Only low volumes of wood required, fair prices for the logs, access for everyone, high employment and return from small sales of logs, working people able to spend money locally, new businesses starting up, revenues for communities to invest into schools, recreational centres, infrastructure such as roads, drainage, lighting, power generation, playing fields... You have to wonder why industry and the government are not tripping over their feet to support and provide assistance to ICSI in trying to marry community needs and desires with a clear, simple economic solution for stabilizing our Islands future.

SpruceRoots Magazine - May, 1999