Softwood timber royalties in New Brunswick at decade low after system overhaul

Softwood lumber prices in North America this summer have been hovering at levels up to 50 per cent higher than they were eight and nine years ago.

But under a complex new timber royalty system set up this year by the New Brunswick government, forestry companies are paying lower royalties now for wood the lumber is made from than they did back then.

That is generating concern the new royalties are designed to benefit industry and will undercut what private sellers of wood will be able to charge mills this year for what they sell.

"I don't think anybody's feeling overly positive as to where we've landed at this point," said Rick Doucett, the president of the New Brunswick Federation of Woodlot Owners about thenew royalty system.

The province moved to overhaul timber royalties this year after acknowledging its former policy of charging forestry companies a flat rate for wood cut in public forests had failed to take advantage of a two-year explosion in international lumber prices.

"When a new normal is established, you know, our systems must reflect that," Mike Holland, the natural resources minister, saidin May 2022 about the need forchanges.

The new royalty system Holland's department created is two-tiered with a base rate paid on timber cut in public forests and a secondary floating rate that rises and falls monthly with the prices of various wood-based commodities.

"Over-performingmarkets equals higher royalties, under-performing markets equals lower royalties," the province has explained in various presentations about the new system around the province.

Independent woodlot owners have long supported royalties that are tied in some way to markets, but there is worry the province has set its base rates too low and placed restrictions on the floating rate that will end up with forestry companies paying lower royalties than they used to, not more, as originally expected.

Doucett said that in early meetings with the province he was expecting much higher charges to be levied than what he thinks the new system can produce.

"It feels like we discussed sort of a ham dinner.and now we're being presented with a bone that has been cleaned by the vultures," said Doucett.

About 60 per cent of the wood cut by companies in public forests in New Brunswick ends up as softwood lumber of some kind.

About one million cubic metres of spruce, fir and jack pine saw logs are taken from Crown land annually. Last year the royalty rate on those was raised for the first time in eightyears to $40.60 per cubic metre.

Underthisyear's new system the base royalty rate for those logs has been dropped almost in half, to $21.83 per cubic metre. Although a floating royalty rate is then added to that amount, it starts out at 75 cents and doesn't increase until lumber prices rise above $637 per 1,000 board feet.

That's significantly below levies charged on softwood saw logs in New Brunswick in the past.

In the 2015 fiscal year, with softwood lumber prices averaging $471 per 1,000 board feet, royalties on softwood logs in New Brunswick were set at $31.09. That's a 37.6 per cent higher royalty than would be charged under New Brunswick's new system at similar lumber prices.

To reach a royalty rate equal to what was charged back in 2015, ($31.09 per cubic metre), lumber prices now have to reach $780 per 1,000 board feet, nearly two-thirds more than lumber prices in 2015.

To reach the even higher royalty rate of $40.60 set on softwood saw logs last year, lumber prices now have to exceed $925 per 1,000 board feet.

However, since the new system went into effect on April 1, lumber prices have been nowherenear those levels, averaging closer to $640.

Kim Jensen is general manager of the Carleton-Victoria Forest Products Marketing Board in Florenceville and worries lower-than-traditional royalties means prices her members can charge mills for wood will sufferaccordingly.

"If they're getting Crown wood at a lower price, then they are not going to pay a higher price for private wood, that's for sure," said Jensen.

Dustin Jalbert is a senior economist with the online commodity-price reporting servicefastmarkets.com. He said a number of factors can change the outlook, but he expects with no major surprises softwood lumber prices will settle somewhere below $750 per 1,000 board feet for the next few months.

"Yeah, that's probably what we would call it,"Jalbertsaidin an interview Tuesday.

That's higher than historical lumber prices but not high enough to keep royalty amounts in New Brunswick from falling below historical levels.

Another wrinkle in the floating royalty rate is that it is capped at 100 per cent of the base royalty.

That means no matter how high softwood lumber prices go, total royalties paid by companies cannot exceed $43.66 per cubic metre.

That limit happens when lumber prices reach $974 per 1,000 board feet even though during the two-year record escalation of lumber prices amounts regularly exceeded $1,000 and in May, 2021 exceeded $2,000.

Doucett said a cap on how high royalties can go during surging lumber markets was not discussed at any meeting he attended, and he questions why theprovince would limit revenue to itself if there is anotherlumber price explosion.

"That's ridiculous," said Doucett.

"If you're selling lumber at $2,000 a thousand board feet, you're making lots of money. Wouldn't the government be getting a little more money out of that?"

In a briefing to discuss the new system officials with the Department of Natural Resources said a maximum on royalties was set because a minimum was also established.

The department alsomade the point independent woodlot owners will benefit from the new system becauserevenue from the floating royalty will be spent exclusivelyon services for that group.

In an email it also cautioned against comparisons of the old and new royalty systems and said while royalty rates on softwood may be lower, royalties on some hardwoods are up.