Thank you, Mr. Chair, for this opportunity to present the views of Federated Co-operatives Limited concerning the softwood lumber agreement that is under your review.
FCL provides central wholesaling, manufacturing, marketing, and administrative services to over 285 retail cooperatives, representing 1.1 million individual cooperators across western Canada and the northern territories. I'm proud to speak on behalf of those members and some 18,000 employees--over 3,000 directly and another 15,000 at various retails in the cooperative retailing system.
FCL sales were $4.78 billion in 2005. Since 1945, the forest products division at Canoe, B.C., has provided lumber for its cooperative members. The division employs about 400 workers, plus some 230 contractors. Its annual productive capacity has grown to 120 million board feet of lumber. Sales of lumber to the United States represented 54% by volume in 2005.
For the record, the deal is bad for Canada, bad for the industry, and bad for our company, and it was ill-timed. It is encouraging that major flaws are finally being recognized. Most of the terms of the deal have been well disputed by others, and I will not repeat them. In some ways, arguing about the components of a bad deal incorrectly infers that any cleanup makes it acceptable. However, I table a more comprehensive document that does outline difficulties presented by the agreement.
Federated Co-operatives Limited is being forced to concede more than $2.5 million U.S. without recourse because of a deal not of our making. Canada is asked to distribute moneys that the U.S. is specifically prohibited by law from doing. Not only are we disappointed about that loss of more than 20% of cash deposits, to which exporters are legally entitled, but we are also concerned about the adverse impact of the deal going forward. How can absorption of a future export charge that exceeds current unwarranted illegal duties make for a good deal? Based on the current framing lumber composite price, the export charge will be 15%. Surge mechanism may find British Columbia and Alberta subject to 22.5%.
As a medium-sized producer, we are only able to compete successfully because species diversity and manufacturing flexibility enables an emphasis on specialty products. Even though we are primary producers, we add value and manufacture custom products to serve niche markets, just as do remanufacturers. Some examples of products outside the scope of previous agreements include pre-drilled tongue-and-groove decking and cedar-profiled products.
Cedar commands prices in excess of $1,000 per 1,000 board feet. That species is not even produced in the U.S. south. Higher prices attract greater duty, or export charge burden, but such products require higher input costs with the same squeeze on margin as any producer encounters.
Business is about profit margin and return on investment. Our division must also provide adequate return. Managed trade has failed to permit that. Our margins are eroded to a far greater extent than those of the producers of commodity construction lumber. For commodity producers, a $50 margin before trade levies on prices of even $300 per 1,000 board feet may cover a 15% export charge, but specialty producers achieving the same margin on products averaging $450 are no longer profitable. Also, such specialty products are not directly linked to commodity pricing, yet the framing lumber composite price is based on the weighted average of 15 structural lumber prices. Specialty species and products are noticeably absent from the list. The logic for an increasing tax as prices fall is especially incomprehensible to specialty producers.
The surrender of direct claims to Canada or to escrow importers under a separate purchase and sale agreement creates immediate additional encumbrance. Canada export reporting and monitoring is in addition to U.S. Customs documentation and monitoring. Details of reimbursement remain unclear, and extensions can be granted to the U.S. for entry liquidation.
Canada doesn't guarantee payment, and 10% would not be paid until all moneys are recovered. Protracted payments are likely. Export Development Canada also requires reimbursement for expenses in connection with the amendment of documents, preservation of rights, or enforcement of the purchase and sale agreement.
The agreement has a 34% U.S. market cap, based on surge mechanism clause language, notwithstanding two export charge options.
The agreement provides more uncertainty for our operation. Individual companies are subject to regional choices on export measures. How can that be fair? The proposed monthly system is unworkable, and retroactive penalties deny producers rational business choices. Retroactive penalties for regional over-shipment will be applied to all the shippers. Why should the actions of competitors directly impact our operations?
The obscurity and complexity of the deal present more restrictions than currently exist. Instead of a reduced bureaucracy, the agreement calls for more data collection. A softwood lumber committee and technical working groups are prescribed but would lack authority.
Lastly, the fact that past agreements have failed reminds us that the matter needs to find more permanent resolution through third parties. The omission of previously included objectives is logical, because the deal doesn't meet them. The agreement contains no aids for interpretation or measurability. Rather than fostering stability, it has simply relocated the skirmish from U.S. to Canadian territory. Now it is Canadian regions disputing policies and market share allocation, industry versus government, and companies pitted against one another. We have become enemies within our own land.
Managed trade is market interference. Market interference is not freedom. In a statement on world trade, Robert Zellick, the U.S. trade representative, wrote:
The United States will continue to advance the values that define this nation--openness, opportunity, democracy and compassion. Trade reinforces these values, serving as an engine of growth and a source of hope for workers and families in the United States and the world.
The U.S. has equated freedom with free trade; we should too.
FCL opposes this deal and urges refocusing attention to achieving the original objectives, involvement of our industry, and pursuit of free trade.
Thank you. I'm also prepared to respond to questions.