New Brunswick to reform timber royalty system, raise stumpage rates in interim

New Brunswick will temporarily raise timber royalties, also known as stumpage rates, on Crown land before implementing a new system that could see royalties adjusted on a monthly basis.

Natural Resources Minister Mike Holland said the changes will increase the price the lumber industry pays to harvest wood from Crown lands by about $10 per cubic metre and result in an extra $50 million in government revenue this year.

The temporary boost is in reaction to record lumber prices over the past two years.

“This is a transition year that captures that commodity pricing is high and that we’ve seen a couple of years of high commodity pricing, this adjustment that we made will allow us to transition into that new system next year,” Holland said.

That new system will be implemented by new legislation tabled in the fall and take effect on April 1, 2023. It will set a base market rate for Crown land stumpage each month, then an additional “upward adjustment” to reflect commodity prices will be applied in order to ensure that Crown land prices don’t undercut private woodlot owners. The revenue generated from that additional adjustment will then go towards helping private woodlot owners manage their land.

Stumpage rates in New Brunswick have barely budged since 2016 and the provincial government faced increasing pressure to raise timber royalties as lumber prices soared last year.

“Mr. Speaker, the Minister of Natural Resources continues to extol the stability of the current stumpage rate system, but ‘stable’ does not mean frozen. Stability does not mean comatose. Stability means that in times of extremely high prices, we should expect reasonable returns for our fibre. In exchange, in times of extreme lows, the industry can expect not to fall into a crisis,” the Liberal natural resources critic Rene Legacy said during Question Period on May 11.

Holland said the province worried that by chasing resource prices when the price of lumber was high, it would have to do the same thing when prices are low, thereby undercutting private woodlot owners.

“That’s exactly why we didn’t act in a knee-jerk reaction to just a commodity price with our royalty rates, because we must ensure that Crown land will always be priced higher than private woodlot fees,” he said.

“We don’t want to get into a situation where we’re competing with or undercutting our private woodlot sector.”

However, according to the president of New Brunswick’s Federation of Woodlot Owners, the province’s stable timber royalties effectively act as a market cap for private sellers and, therefore, low Crown prices meant there was very little ability for private sellers to raise their own rates.

“The government is the largest supplier of the wood in the domestic marketplace,” said Rick Doucett.

“If they have a discounted price for their wood, all of the other suppliers end up with that same discount.”

The temporary rise in stumpage rates, along with the new system to adjust those rates monthly, should result in a more competitive market and allow private sellers to get better rates for their product, Doucett says.

“It’s a great first step to create that pathway and the next step we need to take is how can we create enough value for the wood that the growers, the cutters and the truckers can make some money, but also the industry can make money,” he said.

“It’s about finding that sweet spot where everybody is making a little bit of money.”

When asked for comment on the changes, J.D. Irving, the province’s largest forestry company, provided a statement from the New Brunswick Lumber Producers.

“While studies have shown that stumpage prices do not correlate directly with downstream lumber prices, the New Brunswick Lumber Producers understand the government of New Brunswick’s position that increases to royalty rates for Crown timber might be warranted when commodity prices are extraordinarily high, particularly given the lag in time between the government’s survey of private stumpage prices and implementation of new Crown stumpage rates,” said Jerome Pelletier, vice president of J.D. Irving’s sawmill division and chair of the New Brunswick Lumber Producers.

“Nevertheless, we are disappointed by the lack of transparency and details associated with the government’s proposal.”

The statement goes on to call for the government to immediately release how the new system will calculate its market rate and “upward adjustment.”

“If the system proposed by the Minister is not properly structured, there is tremendous potential for severe and negative impacts on the long-term sustainability of New Brunswick’s forest products industry,” the statement reads.

When asked what impact the changes could have on the ongoing softwood lumber trade dispute with the United States, Holland said that those issues aren’t part of his expertise. In 2017, Washington removed New Brunswick’s exemption from softwood tariffs, arguing that the amount of timber harvested from publicly-owned Crown land amounted to a subsidy for the industry.

The province implemented a five-year freeze on the amount of wood available to be harvested from Crown land in 2015.

Doucett called the changes a great first step but says more needs to be done to create a more competitive marketplace for private woodlot owners. Part of that is on the supply side, where there is so much Crown wood available that private sellers have very little leverage when negotiating with mills.

He also said that the steady weakening of the forest product marketing boards has further diminished the power of local sellers. The province has several regional marketing boards that were set up in the 1970s to act as an intermediary between timber sellers and buyers. Originally, sellers would sell only to the board, which would then sell to lumber producers.

In 2012, J.D. Irving stopped buying timber through the Southern New Brunswick marketing board, making deals with individual suppliers instead. The practice was challenged and eventually upheld by the New Brunswick Court of Appeal in 2018.

The irrelevancy of marketing boards makes it harder to secure a higher price for all private sellers, Doucett says. He still thinks, though, that the current negotiating system can be fixed to produce higher prices.

“We need to look at the negotiating system that exists today and we need to plug all the holes,” he said.

“There’s no need to sit down and negotiate a deal with a marketing board.”