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NB
Information given here about the economics and
taxation of forestry investments is strictly for
general guidance and does not constitute investment
or professional advice. Prospective or existing
investors are strongly advised to seek professional
advice on all aspects of investment in forestry
and on its taxation, which is complex.
The
Economics of Forestry in the US
There
are around 737 million acres of forests in the
US, of which 247 million acres are reserved from
harvest by law or are slow-growing woodlands unsuitable
for timber production. Approximately 490 million
acres of US forest are classified as 'timberland',
ie forest that can produce more than 20 cubic
feet of wood per acre annually.
For
a variety of reasons, including economic ones,
forests in the US are by no means a declining
resource. There are more trees growing today than
40 years ago, and this is especially true of hardwoods,
which are probably the most interesting type of
tree for tax efficient investing. The timberlands
of the US now contain 28 percent more standing
timber volume than in 1952. It's estimated that
there are 82 percent more hardwoods today than
40 years ago.
Most
hardwoods grow east of the Mississipi river, especially
in the eastern seaboard states of America. Land
prices there are low and opportunities for medium
term capital appreciation are considerable. The
potential value uplift depends as much on species
selection through more intensive management as
it does on physical growth.
The
forests of New England re-seed themselves naturally
following harvesting. The destruction of tropical
forests and political, economic and biological
difficulties encountered in replanting afterwards,
mean that North America is now the only area capable
of sustained quality hardwood production in the
world. Land prices in the hardwood forest areas
are sometimes negative and seldom exceed USD150/acre.
Economic factors in the USA also mean that while
timber prices have recovered recently, land values
have not.
Current
purchases are made on predicted returns of 5%
to 7%, but this ignores obvious facts that point
to severe shortages of tropical hardwoods within
the next few decades. Hardwoods mature slowly
and production realistically cannot be increased
in time by simply ‘planting more trees’.
It would be reasonable to expect the real price
of US hardwood timber to accelerate rapidly in
the first quarter of this century.
In
October 2006, US Trade Representative Susan C.
Schwab announced that the US-Canada Softwood Lumber
Agreement had entered into force.
As
a result, both the United States and Canada began
to implement their obligations under the agreement.
For Canada, based on current market prices for
softwood lumber, this required the immediate collection
of an export tax.
With
respect to the United States, this resulted in
the revocation of the antidumping and countervailing
duty orders on softwood lumber from Canada, an
end to the collection of duty deposits on imports
of Canadian softwood lumber, and the initiation
of the process to refund duty deposits currently
held by US Customs and Border Protection.
"I
am absolutely delighted that we have closed this
long-running dispute that has for too long created
friction with our largest trading partner,"
announced Ambassador Schwab at the time.
She
added:
"This
agreement will move us beyond the uncertainties
created by the intense litigation that has extended
over two decades, benefit consumers by adding
stability in the market, and create opportunities
for the US and Canadian industries to work together
to resolve issues of concern. I am grateful for
the leadership of President Bush and Prime Minister
Harper, and the efforts of Canada’s Minister
for International Trade David Emerson and Ambassador
to the United States Michael Wilson, in accomplishing
this historic agreement."
Ambassador
Schwab also announced plans for the disbursement
of funds to advance meritorious initiatives in
the United States as outlined by the agreement.
The three meritorious initiatives identified by
the agreement include: (1) assistance for timber-reliant
communities; (2) low-income housing and disaster
relief and; (3) promotion of sustainable forest
management practices.
Of
the USD450 million provided for meritorious initiatives
under the agreement, the United States Endowment
for Forestry and Communities, Inc. was identified
to receive USD200 million, the American Forest
Foundation was identified to receive USD150 million,
and Habitat for Humanity International was identified
to receive USD100 million.
Less
than three weeks after the Softwood Lumber Agreement
came into force, almost USD1 billion paid to the
United States in duties had been refunded to Canadian
companies.
“Just
weeks after the Agreement was implemented, our
government has delivered on its promise to Canadian
softwood lumber companies,” stated David
Emerson, Canada's Minister of International Trade.
“The
refunds are going out ahead of schedule, and companies
can realize the benefits of this agreement,"
he added.
According
to Emerson, approximately $950 million in softwood
lumber duty refunds had been disbursed by Export
Development Canada (EDC), a body created in order
to accelerate the return of softwood lumber deposits
to companies that had paid duties to the United
States.
In
return for the tax refunds, Canadian exporting
provinces can choose either to collect an export
tax that ranges from 5 to 15% as prices fall or
to collect lower export taxes and limit export
volumes.
However,
it wasn't all plain sailing with regard to the
new deal, and in April 2007, it emerged that the
United States had requested formal consultations
with Canada to discuss whether that country was
really abiding by the US-Canada Softwood Lumber
Agreement.
Concerns
were raised about Canada’s compliance with
the softwood lumber agreement. Some provinces,
for example, issued new subsidies to their lumber
industries that appear to violate provisions of
the agreement, in the eyes of the United States.
The
US additionally argued that the Canadian federal
government did not appear to have properly implemented
the Agreement’s “surge” mechanism,
which is designed to increase the tax on softwood
lumber imports from Canada when the volume of
such imports hits a certain trigger point.
The
agreement includes a binding arbitration mechanism
to resolve disputes such as this. Either the United
States or Canada can initiate arbitration by submitting
a written request for consultations. If the United
States and Canada cannot resolve the dispute amicably
within forty days, either party may refer the
matter to the London Court of International Arbitration
for binding arbitration proceedings.
The
situation did come to this, and in August 2007,
the United States requested international arbitration
be launched over Canada’s application of
the import surge mechanism and quota volumes.
The
US government announced at the time that it intended
to file a second request for arbitration, challenging
a number of assistance programs implemented by
Quebec and Ontario.
In
January 2008, Sean Spicer, a spokesperson for
the USTR spoke out about developments in the US-Canada
Softwood Lumber Agreement.
In
a statement, Spicer announced that: “On
January 10, 2008, the Government of Canada proposed
creation of a USD1 billion Community Development
Trust, including aid to Canada’s forestry
sector."
"In
response to concerns in the United States about
this announcement, on January 15, 2008, Ambassador
Susan C. Schwab sent a letter to Canadian Trade
Minister David L. Emerson seeking Canada’s
assurance that any funds disbursed to the forestry
sector from the Community Development Trust will
be used in a manner consistent with Canada’s
obligations under the US-Canada Softwood Lumber
Agreement (SLA)."
He
concluded: "The United States remains committed
to the SLA, and hopes Canada will demonstrate
its commitment to the Agreement as it considers
this proposal.”
In
April 2009, US Trade Representative Ron Kirk announced
that the US would begin imposing 10% ad valorem
customs duties on imports of softwood lumber products
from four Canadian provinces (Ontario, Quebec,
Manitoba, and Saskatchewan) after Canada was found
to be in breach of the 2006 agreement. These duties
were to remain in place until the US had collected
USD54.8m from Canada.
In
October, 2010, the
United States requested consultations with Canada
under the SLA regarding the apparent unfair under-pricing
of timber harvested from public lands in British
Columbia, the latest in a series of spats over
bilateral lumber trade.
According
to Ron Kirk, British Columbia was circumventing
the export measures provided for in the SLA by
providing a low-cost input for their products
and thus undercuts its US competitors.
“The
United States and Canada have been engaged in
discussions regarding the apparent under-pricing
of timber harvested in the interior region of
British Columbia for many months, but those discussions
have so far been unsuccessful,” said Kirk.
“The decision to move to consultations is
intended to emphasize the importance of resolving
this matter. As contemplated under the Softwood
Lumber Agreement, we are asking to continue our
engagement on this issue and ensure that the SLA
is implemented as intended.”
The
SLA was agreed in part to resolve disputes as
to whether Canada was unfairly subsidizing the
price of timber sold to its softwood lumber producers.
Under the SLA, Canada agreed to impose export
measures under certain circumstances to affect
the price of softwood lumber exports to the United
States.
The
new dispute centers on British Columbia’s
timber pricing system as it existed on July 1,
2006, which was 'grandfathered' into the SLA.
This provides that timber of a certain grade is
priced at a fixed rate of 25 cents per cubic meter
(other grades are priced at a variable rate, which
can in no case be lower than 25 cents per cubic
meter). In the view of the USTR however, the share
of timber harvested from public lands in the Interior
region of British Columbia and priced at the fixed
rate "has increased dramatically since the
SLA entered into force."
"This
increase does not appear to be justified under
the grandfathered BC provincial timber pricing
system, even when known factors affecting timber
quality in BC (such as the mountain pine beetle)
are taken fully into consideration," the
USTR said.
In
response, Canada's Minister for International
Trade Peter Van Loan said he was "disappointed"
that the United States has rejected talks on the
matter in favor of formal dispute settlement.
"There is no justification for arbitration,
and Canada will make this point forcefully in
consultations," he said.
“The
US complaint deals with a pricing system that
is no longer in place," Van Loan remarked,
adding:
“The
Softwood Lumber Agreement was negotiated with
a view to establishing stability, enhancing cooperation
and facilitating an open dialogue between Canada
and the United States."
“Canada
and British Columbia have been transparent on
BC’s market-based timber pricing system.
This system was already in place when the Softwood
Lumber Agreement was established. The increased
proportion of low-value logs in BC’s timber
harvest is due to the unprecedented mountain pine
beetle infestation. Regrettably, the United States
decided to rely on unfounded allegations, which
are flatly contradicted by trade and other economic
data."
Under
the SLA, consultations were to be held within
20 days. If the matter is not resolved within
40 days of the request for consultations, either
party may refer the matter to arbitration.
There
are many advisory and management firms through
which interests in forest properties may be acquired
and managed. The minimum investment is usually
around USD100,000, but most properties are in
the range USD250,000 upwards. If timber prices
follow historical trends real yields over the
next 10 years will probably be in the 8%-10% range.
Maintenance costs are around 1.5% - 2% pa (deducted
before arriving at the above returns) but local
and property taxes may add slightly to this figure.
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