The Marketplace Winter 2017

The Softwood Lumber Debate: How it May Affect the U.S. Marketplace

By: Kristen Bergstrand Utilization and Marketing Program coordinator, Division of Forestry, Minnesota Department of Natural Resources (DNR); co-contributor Don Deckard, forest economist, Division of Forestry, DNR

The softwood lumber agreement (SLA) is a trade agreement between the United States and Canada on the importation of softwood lumber from Canada into the U.S. When the agreement expired in October 2015, both nations had a year to operate freely and negotiate a new agreement. Several rounds of negotiations took place, yet by October 2016 no agreement was in place.

The U.S. and China lead the world in global demand for softwood lumber. The U.S. gets most of its softwood from Canada (69 percent), with 49 percent of that wood coming from British Columbia ¹. British Columbia is the world's largest exporter of softwood lumber.

The core issue of the agreement is based on who owns the fiber resources. In Canada, provincial governments own most (90 percent) of the fiber and lease the timberland selling wood to forest products companies based on a market price that changes based on various indexed economic metrics. In the U.S., private forest landowners own 78 percent of the fiber and competitive markets drive the price.

cut pine

Because of this fundamental ownership difference, the U.S. claims that Canada's fiber is unfairly subsidized and believes U.S. imports should be managed through trade agreements. Canada's stance is that residential housing starts in the U.S. are a key driver for economic growth and the U.S. depends on Canada's lumber to achieve desired economic growth.

Looking back through history you'll see that this is not a new dispute. Dating from the 1930 but last covered by the media in the 1980s, the U.S.-Canada Softwood Lumber Debate has cycled through decades of back-and-forth compromise. This long, complex history is why softwood lumber is excluded from the North American Free Trade Agreement (NAFTA).

On November 26, 2016, the U.S. Lumber Coalition, an alliance of U.S. softwood lumber producers, timberland owners, and the Carpenters Industrial Council of the United Brotherhood of Carpenters and Joiners of America filed a petition for relief from Canadian subsidies to the U.S. Department of Commerce and the U.S. International Trade Commission to restore fair trade of softwood lumber. The U.S. trade laws could manage the imported lumber from Canada through a tariff, quota, or some combination of both. Under the old agreement import duties were triggered when Random Lengths Framing Lumber Composite price was less than or equal to $355 per thousand board feet (Mbf). The average price was below $355 in 18 of last 24 months. Also under the expired SLA, eastern Canada (Ontario and Quebec) had market share caps that decreased with price down to 30 percent.

Canadian imports exceeded 30 percent market share in 2016. Currency exchange rate is favoring Canadian lumber imports over U.S. lumber by 30 percent. Recently, $1 in the U.S. roughly equals $1.30 in Canada, so $355 is CA$461.50. The Canadian lumber firms may be using profits to buy U.S. firms. In 2015, two of top five U.S. lumber producers were Canadian (West Fraser and Interfor). Under the old agreement, the U.S. was concerned about market situations and loopholes that allowed trading partners to circumvent the U.S. intentions of the agreement to restore an environment in which it can invest, grow, and better supply the U.S. market. A new approach may consider establishing more market share-based trade sanctions on Canadian imports. The petition is currently moving through the process.

loading cut timber on truck

The debate is heightened now because of the growing U.S. housing market (housing starts), which were up 4.9 percent in 2016 and are forecasted to grow in 2017. In 2016, domestic production grew 3.5 percent and lumber imports grew by 30 percent. In 2017, the cost of housing is projected to rise due to inflation, rising costs of building materials, costs to rebuild the supply chain and labor force from the downturn of the last decade, and costs associated with implementing housing codes.

As a commodity, lumber is subject to forest resource policies and trade agreements restricting imports or adding tariffs. Outcomes of the trade agreement may result in higher prices for the U.S. consumer. Prices rise when domestic industry lacks infrastructure to produce and ship lumber cost effectively to all locations throughout the U.S. Reports are circulating that the provincial governments of Canada are intentionally informing American middle class consumers how Canadian softwood lumber is making lumber more affordable in the U.S. marketplace.

However, if Canada is hit with large tariffs, quotas, or other trade restrictions, Canadian producers may look for other markets outside the U.S, which will likely soon result in a shortage of lumber for U.S. consumers. This is bad timing because the U.S. does not currently have the capacity to supply the projected housing market growth in 2017. Already, the uncertainty of the terms and timing of the new softwood lumber agreement has U.S. vendors announcing price increases on building materials. Price forecasters are predicting that the price of lumber and other building materials will be volatile throughout 2017.

Finally, any softwood lumber negotiations under the new federal government administration will likely be interpreted as a prelude to what a new negotiation of the North American Free Trade Agreement (NAFTA) might look like. The outcomes of the new softwood lumber agreement could impact future trade policies as well as mill bottom lines, people's livelihoods, and the economic paths of forest products companies in two nations. All political and economic tides indicate that a new agreement will soon noticeably impact American consumers and Canadian producers.

¹Learn about opportunities to export wood products and services from British Columbia, Canada to key international markets at Trade and Invest British Columbia.