Canadian Lumber
...duction volume, their population size necessitates a high import volume of 20 billion BFM of lumber from Canada alone. Over one third of the United States' lumber consumption is satisfied by Canadian imports. At present, the US is the world's largest forestry importer. While US lumber production has grown in the last three years, over the past decade it has fallen notably due to strict harvest limitations. This downward trend is expected to continue as federal forests remain closed to logging. Softwood lumber imports have thus increased to compensate for the continued distancing between domestic supply and demand. Canadian provincial policies enable the national lumber industry to continue producing in most market conditions. In 2000, for example, while US lumber production dropped 700 million BFM Canadian production and exports continued to rise. The government owns 94% of the forestland (71% under provincial jurisdiction and 23% under federal jurisdiction) , and through subsidies, enables Canadian lumber players to set timber fees at one quarter to one third their market value according to US agencies such as the Fair Lumber Coalition. Provincial timber prices, or “stompages”, are said to amount to CND $4.4 billion annually. This figure is an additional issue for debate, as many assertions made by the Fair Lumber Coalition are by Canadian groups. While Canada's forestry industry presently employs over 290,000 Canadians and roughly 300 Canadian communities are dependent upon the forestry sector, its continued production has fueled the US housing industries, which employs over 7 million Americans. In the United States 95% of houses use a wood frame and 40% of the nations softwood lumber consumption is expended in this industry. This is particularly notable as there are over two million new home start-ups in the US annually. The industry has come to rely upon unfettered access to lumber. Should “stompage” prices rise, due to a cease or diminishing of Canadian governmental subsidies the US housing industry is likely to suffer and result in job loss. This would be caused by a both a lessening of a reliable and steady supply and the inevitable increase in “stompage” prices that would drive profits down. Socio-Cultural Canada is the second-largest country in the world, behind Russia, with a wealth of natural resources. With 2.3% of the GDP generated from agriculture, and 3% of the workforce in agriculture related fields, Canada is highly invested in the continued success of the lumber industry. However, Canadian commitment to environmentalism and sustainable consumption of natural resources is not only evident in its adoption of the Kyoto initiative, but also its operations in the softwood lumber industry. In a recent study by Alabama's Auburn University, Canada's forestry practices were ranked both highly and at a higher level for environmental protection than the United States. To note, the US does have harvesting restrictions in place that protect forests. Technological Canada in its commitment to protecting its natural resources has developed processes to insure that sustainable consumption is pursued. Harvesting only one half of one percent of its commercial forests each year, Canada grows twice as much as harvested, and thus nearly one half of its forests will never be harvested. International The volume of Canadian softwood lumber exports, US demand, and the two countries proximity, has ensured that the US remains heavily reliant on Canada for softwood lumber imports. Canadian imports account for 83% of the total softwood lumber imports by value. However, there have been significant increases in US imports from other countries, particularly Brazil, Chile, and New Zealand. Brazil produces high volumes of softwood lumber, often experiencing tree growth rates of two to three times that of the US, and is therefore expected to experience strong growth in the industry. In 2004, Brazilian pine exports totaled US $378 million, which is 60% higher than sales the year prior. Now a major competitor in the softwood lumber and plywood markets, Brazil had positioned itself as a low-cost exporter to Europe, the US, and the Caribbean. (Exhibit #3) A poor domestic economy has driven export markets and in 2005 1.8 million cubic meters of softwood lumber was exported. This is in stark contrast to countries such as the US who in the same year exported a lowly 12.5 million cubic meters. Illegal logging, however, has been a serious concern for both national officials and international environmentalists. The Brazilian government estimates that 80% of logging in the Amazon is illegal and these protected resources are being over-harvested. Brazil also fails to meet many internationals quality standards. These two factors have somewhat hindered its growth, but the shear volume of output poises Brazil for substantial growth and industry gains. Low wood costs, low wages, favorable exchange rates, past subsidies for plantations, faster tree growth rates, and less restrictive environmental regulations, mean that Brazil will continue to be an international player in the softwood lumber industry. Chile's export growth over the past decade is also substantial. However, it still lags behind that of Brazil's. (Exhibit #4) Softwood Lumber Distribution Channel Cost Taxes such as the countervailing and anti-dumping restrictions can significantly hinder a country's ability to maintain industry success as profits are diminished. Transport and warehousing, however, are the areas where costs are most commonly attributed. As wood can be stored in warehouses and on the ground, decisions regarding which storage method to pursue will effect both cost and quality. With the US as Canada's primary purchaser, transportation costs are greatly diminished due to proximity. Companies such as Irving have the advantage of harvesting in east coast Canada and shipping to north eastern areas of the US such as Delaware and other generally eastern US regions. To cut down on transportation costs when marketing the product, brokers such as Mr. Chaisson will travel to only main tradeshows and limit face-to-face communication, in preference for over the phone exchanges. Most selling is therefore done over the phone. Control Selling decisions are made through brokers such as Mr. Chaisson. Representing harvesting companies, such as Irving, brokers are solely responsible for setting the price of the product. Through negotiations, often over the phone, brokers and buyers settle on various prices, for various grades of products, at various quantities. Selling and other activities are often done over the phone so as to best control channel coordination such as how many trucks are transporting what volume to which client by speaking directly and regularly to persons in a cost-effective manner. Capacity When determining how much will be warehoused versus stored on the ground, market considerations are often the primary determinant over capacity. A warehouse may not be chosen to be kept full if on-the-ground storage will allow for more speedy transport and the market is calling for quick delivery, perhaps in light of a natural disaster such as the one in New Orleans. That being said, the number and shipping capacity of vehicles in addition to warehouse space will often affect a broker's ability to move product. Limitations, however, can be utilized in negotiations to push purchasers to buy a larger volume of lumber if craftily pursued. Purchasers will usually buy based on price per quantity (BMF) or speed of delivery. According to Mr. Chaisson, capacity obstacles can be overcome by leveraging one of these two decision-making criteria, with the use of skillful negotiation. Coverage Distribution is provided wherever coverage is most profitable, and therefore, often in closest proximity to production. Businesses such Irving who harvest in eastern Canada will distribute primarily to northeastern US. Canada's closeness to the United States has not only facilitated trade but also a significant export lumber market. While provinces on the west coast such as British Columbia will sell to similar areas in the US, unless businesses who harvest (and warehouse or store on-the-ground) in closer areas have lower supplies driving up their prices or US buyers have a need for lumber, it is often cheaper for US buyers to purchase from brokers with product more closely located. Commodity Lumber is highly undistinguishable. Sales are to large retailers such as Home Hardware or Lones, office wholesalers, stocking distributors, other mills, and specialty markets. Because these are not the end consumer, it is difficult to differentiate, and thus price is often the basis for differentiation. Culture There are no significant distribution issues relating to culture. Political tension between Canada and the US does not directly effect distribution. However, US taxes on Canadian imports will drive up Canadian prices and thereby diminish sales volumes possibly causing distribution coverage to shrink so as to shave off costs. Both countries share similar cultures and purchasers such as office wholesalers. Therefore, distribution does not change on the basis of culture. Country When considering the lumber dispute between Canada and the United States it becomes evident that taxes on exports is a key concern in this industry. Not only does it threaten to challenge international political relations, but it can also act as a serious hindrance to the industry. Similarly, exchange rates play an important role as a strong US dollar to a Canadian lumber exporter can produce significant profits in and of itself. Despite the drop in rates from $1.54 US to CAD, to $1.19, profits can still be m...