Updated: Mar 10
An Editorial Opinion – Right From The Stump, March 9, 2022
(The following was originally published in the View From The Stump newsletter, February 2022 as BC Budget 2022 - What It Says About Forestry)
To be honest, looking at a provincial government budget in most any year can be boring; however, this year’s budget is different with so much happening with forestry. BC Budget 2022 offers insights, particularly for those trying to understand the BC government’s views on their old growth deferral strategy. The BC Budget was released on February 22, 2022.
Forest revenues for the nearly finished 2021/22 fiscal year represent a forecasted 53% positive variance to budget ($1.8 billion vs. $1.2 billion). As described in the January 2022 edition of the View From The Stump, record stumpage in 2021 was the reason for the variance.
For 2022/23, a $726 million drop or 39% year-over-year decline in forest revenues is projected. A comparison of 2024/25 to 2021/22 shows an even a steeper decline of 51% or a decrease of $938 million. These are major drops in revenue which one might associate with the BC government’s old growth harvest deferrals announced last November, but deeper analysis of the budget shows that the old growth deferrals are not as responsible as one would think for decreasing revenues.
Forest revenues have two components, stumpage and harvest. The BC Budget states the decline in forest revenues is associated with stumpage rate.
For 2022/23, estimated stumpage rates are forecasted to drop by 33%, to $25.04/m3. Stumpage rate estimates are mostly driven by estimates for SPF 2x4 US$ lumber prices.
SPF 2x4 lumber prices as of the end of February are US$1,350. For a BC Budget forecast of US$575 in 2022/23 to be realized, lumber prices would have to collapse immediately and stay well below US$575 for the remainder of the year.
Global lumber demand and supply dynamics, including a decline in the British Columbia timber harvest are supportive of relatively strong lumber prices. Such conditions do not appear to suggest there are impending weaker markets as inferred by the price forecast of US$575. For reference, Spar Tree Group’s price forecast for SPF 2x4s is US$923 in 2022.
That said, Q1 2022 stumpage has retrenched by as much as $80/m3 for interior species to levels prior to their 2021 run-up. This decrease in stumpage is its lag effect to lumber prices which collapsed mid-2021. The Q4 2021 rally in lumber prices, that has carried over into Q1 2022, means stumpage will start to climb in Q2 and be much higher into Q3 2022.
As such, forest revenues should be significantly higher than the 2022/23 forecast because lumber prices will be higher than the BC Budget’s estimate and thus so too should stumpage rates.
BC TIMBER HARVEST ESTIMATES
In reference to the BC Budget summary table (previous page), the total crown harvest for 2022/23 is expected to decline by 11% or 5.0 million m3 to 40 million m3, which will be its lowest level in well over a decade.
The interior harvest will decrease by 12% or 4.3 million m3. The interior harvest is projected to be 31.4 million m3, much lower than it was in 2009 (at 36.5 million m3).
The coast harvest will decrease by 8% or 0.7 million m3. The coast harvest of 8.6 million m3 will still be above its 2009 low of 7.9 million m3.
The BC Budget cites the impacts of the mountain pine beetle infestation, forest fires and the old growth deferral strategy for reducing the supply of timber.
For the interior, the combination of all three factors would explain the relatively large drop in harvest. The effects of the mountain pine beetle have been ongoing and will continue to impact interior harvests and lumber production. As an example, Canfor recently announced the capacity rationalization of its Vanderhoof sawmill due to reduced harvest affected by the mountain pine beetle.
For the coast, the projected decrease of 0.7 million m3 is probably all due to the old growth harvest deferrals given the other cited impacts are not major factors in the coastal region.
BC Timber Sales – THE FALL GUY
It would appear BCTS is taking the brunt of old growth deferrals with a 33% decline or 3.2 million m3 reduction in 2022/23. In last November’s announcement on old growth deferrals, the government said it would immediately cease advertising and auctions of BCTS sales in deferral areas. It would appear the BC Budget is reflecting that immediate action.
Reducing the BCTS harvest by a third will impact many forest products businesses, which will have essentially no economical alternatives for finding substitute timber supply.
With a reduced timber supply, many independent smaller sawmills, remanufacturers and value-added producers will struggle to survive – ironically these are the type of manufacturers that the BC government’s intentions paper, Modernizing Forest Policy in British Columbia sets out a vision for in diversifying the manufacturing base. If these businesses do not have a supply of timber or primary products, they certainly will not be adding to the diversification of the sector – they will be gone.
WHAT DOES IT ALL MEAN?
The provincial harvest excluding BCTS volume is projected to decline for 2022/23 by 5% or 1.8 million m3.
While I stand to be corrected, this projection does not yet appear to reflect the impact of old growth deferrals on non-BCTS forest licensees. These licensees have not dodged a bullet from old growth deferrals; rather I would guess that government does not have a concrete estimate, so it is likely not including the impact in the budget.
It is still too early for the BC government to confidently estimate the total number of hectares which will actually end up being deferred. A large part of that is because they placed the decision of deferrals with the First Nations of this province. So far very few First Nations have publicly stated their intentions and even then, much of what will be deferred permanently depends on pending forest management plans still to be developed by engaged First Nations. This process could take years to complete.
I have yet to learn what the BC government will do if there is no response from a First Nations on deferrals; or, 2) if a First Nations does not agree to all the deferral areas in their traditional territory.
The Right From The Stump blog post, Recipe for Gridlock describes a range of reductions from the 2021 harvest (of all lands, crown plus private) due to the accumulative impacts to the working forest by the time of the next provincial election in 2024. A chart showing the range of reductions is below:
Potential reductions to the harvest that the BC Budget does not fully reflect may include:
Industry estimates of direct AAC reductions due to old growth harvest deferrals may be as much 4 million m3.
Industry estimates of another 6 million m3 hit to the interior harvest, assuming the recommendations of the caribou habitat protections be fully implemented.
Reductions which may take place because of isolating timber due to deferrals.
Part of the Old Growth Forest Strategic Review is a so-called “paradigm shift” which could lead to changes in harvesting patterns that may further limit harvesting.
Ongoing Government Actions Regulation orders (GAR) for wildlife protections which will reduce the working forest.
Impacts of other Modernizing Forest Policy intentions paper initiatives.
And of course, there are continued timber supply reductions due to the mountain pine beetle, wildfires and other factors.
It does not take too much to move from a 10% reduction scenario to a 40% reduction scenario of 22 million m3 by 2024 – election year!
The key takeaways from this BC Budget analysis are revenues projections will likely not be as low as forecasted, but harvest levels could be much worse than forecasted, especially by 2024. The BC Budget confirms that the NDP cabinet is fully aware of their policies and accepting of reductions to the provincial forest sector including the job losses that will ensue.
Most frustratingly, a typical political response to such impacts is “that’s why we need value-added…” Such ignorance is too painful.
WE DESERVE A SECOND OPINION
Despite the negative impacts, the BC government is moving forward on its misguided old growth deferral strategy. It has allocated $185 million in the budget for the next four years to help transition workers, contractors and communities affected by the deferrals – this will not be anywhere near enough.
What is unfathomable from a governance perspective is the blind faith that the Minister of Forest and fellow cabinet ministers have placed in the Old Growth Technical Advisory Panel’s (“TAP”) members and their recommendations.
Putting aside the controversies of TAP, considering such widespread repercussions and costs to government (and tax payers), would it not be prudent to seek a second opinion?
We should have confidence in these recommendations and know that the best science and data was used. The effects of old growth deferrals will last generations
In my opinion there is too much at stake to not obtain a second opinion on old growth forests. We need to make sure we get it right. As British Columbians, we deserve it.
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Written By David Elstone, RPF
Publisher, View From The Stump newsletter
Managing Director, Spar Tree Group Inc.