NEW BRUNSWICK REPORT: Value Shift
by Gaston Damecour, RPF

The forest sector is going through a challenging period, one that has been in the making for a long time. The axe started to fall on the pulp and paper sector in 2003 and the bite is now being felt in the lumber sector. 

In both sectors, remedies include revitalization measures, concessions and rationalization - the latter paramount in the current super-mill discourse. In both sectors, wood users implement a string of cost-cutting measures that almost always target wood supply.

We often refer to supply and demand as drivers, but there is a third component – price – and price can be a driver or be driven. Downward pressure on price usually suggests a saturated market, one that will reduce:
• contractor margins for that product creating a financially difficult
situation
• value to the landowner in terms of revenue and in terms of a 
long-term outlook on investing in forestry
• need for a resource management strategy to satisfy a low-end
market – this depends on proximity to market
• the instigator’s economic wood basket. It is no surprise to
see wood deliveries from private lands slow or even stop in
some regions. The market can simply dry up when contractors
and landowners choose to stop servicing the market at a loss
and shift their interests elsewhere. Alternatively, the depressed
product can continue to expect higher value product(s) to
carry the overhead, effectively extracting a subsidy from them.
This works when the other markets are strong and reliable.
In the face of the combined effects of lower prices and potentially long-term limited access to markets, the following short-term strategies might be considered:
• Sell out when the markets are down - this is not a retirement
plan.
• Stop, cut losses, and wait for prices to respond to lack of
supply. There is some validity in this approach for certain
products if you can afford to put the operation on hold - OPEC
does it all the time.
• Extract and generate more value to offset the loss incurred
while servicing the unprofitable market. Contractors combine
marketing efforts followed by merchandising at the stump,
landing, or yard. By increasing the overall value of the
operation, the outcome is more profitable.

This brings us to government policy and intermediate strategies. The current conditions (many of which, in my opinion, are now structural rather than cyclical) do not support continued investment as proposed by current silviculture programs. In fact, experienced large woodlot owners have chosen to shift their energies and resources elsewhere. 

Bringing new or previously unappreciated value to the business and ultimately the woodlot owner will provide the optimism to make it work. The newfound value will eventually be reflected in resource management and silviculture only if there is secure access to a diversity of value-markets to support the investment. 

These are the same rules and incentives used to support large industrial investments (which, incidentally, often span less than one forest rotation). Woodlot owners and the government programs that support silviculture should expect similar support.

With equitable security of economic access to markets for contractors and landowners, attention can be shifted from survival mode to more value-oriented fibre production. The contractors, landowners, wood businesses - and the resource they rely on - will fare better.

Gaston Damecour, RPF, NB & NS, is the principal of AGFOR Inc, a forestry business consulting firm based in Fredericton. He can be reached at 506-462-0333 or gdamecour@agfor.nb.ca.