50-605 0 - 85 - 9 3 O BBF 20 U.S. DEMAND 30.3 35.3 39.8 42.1 39.6 33.7 32.4 31.6 39.7 42.4 3.8%/YR. 10 -6 U.S. & CANADIAN CONVERSION COSTS U.S. MANUFACTURERS HAVE COMPARABLE "CONTROLLABLE" COSTS TO CANADIAN PRODUCERS BUT HAVE A " When viewing cost performance on the part of U.S. and Canadian producers, it is useful to isolate "controllable costs,' from the manufacturer's standpoint, from "non-controllable costs. Controllable costs are those the manufacturer can manage directly and consist of log harvesting and plant manufacturing costs including plant supervision. "Non-controllable costs" include stumpage (the price paid for standing timber) which is set by the timber market in the U.S. and by the provinces in Canada, and an offset to wood costs called residuals, which are the revenues generated from wood chips and other residuals developed in the manufacture of lumber. As can be seen from the table, 1984 "controllable costs" in the U.S. are comparable to those of Canadian producers. In the U.S., they range from $144/MBF in the South to $190 in the West. In Canada, they range from $151 in B.C. to $215 in Quebec. Total variable costs, however, are significantly lower in Canada with B.C. at $133/MBF and Quebec at $144, versus the U.S. West at $197 and the South at $201. This is due to the dramatically lower stumpage prices charged by the provinces in Canada than the free market system demands in the U.S. Quebec is $119/MBF less than the U.S. South, and B.C. Interior is $117/MBF less. -8 STUMPAGE PRICES AS ARBITRARILY ESTABLISHED BY THE PROVINCES IN CANADA ARE Stumpage prices (the prices paid for standing timber) are established by the free market system in the U.S. where multiple buyers come together with sellers in a bid system with timber cutting rights going to the highest bidder. In Canada, through a series of different contract types (cutting agreements), the provinces arbitrarily establish stumpage prices with each individual buyer. There is no bid system, and therefore, no mechanism to establish market value for the timber, allowing the price to be set at artificially low levels. This phenomena, and the huge competitive advantage it provides, can be readily seen in the table. In 1984, Quebec lumber manufacturers paid $62 less/cunit of wood (100 cubic feet) than U.S. Western producers and $65/cunit less than Southern. B.C. Interior lumber producers paid $61/cunit less than Western U.S. competitors and $64 less than Southern. This wood price advantage is immense when domestically produced lumber collides with Canadian in the market place. The advantage is magnified on a $/MBF (thousand board feet) lumber basis because a cunit of wood produces only approximately 700 BF (board feet) of lumber. It is this stumpage component of cost (arbitrarily set by the provinces) which makes Canada competitive on a manufacturing cost basis with U.S. producers. |