Proceedings of the Standing Senate Committee on
Agriculture and Forestry

Issue 4 - Evidence - Meeting of May 28, 2009

OTTAWA, Thursday, May 28, 2009

The Standing Senate Committee on Agriculture and Forestry met this day at 8:10 a.m. to study on the current state and future of Canada's forest sector.

Senator Percy Mockler (Chair) in the chair.


The Chair: Good morning, honourable senators, and witnesses. This meeting is in session.


Welcome to all of you.


My name is Senator Percy Mockler. I am a senator from New Brunswick and chair of the committee.

I would like to begin by asking the members of the committee that are here today to introduce themselves.

Senator Fairbairn: I am from Lethbridge, Alberta.

Senator Cordy: I am a senator from Nova Scotia.


Senator Poulin: I welcome you to our committee. My name is Marie-Paule Poulin. I represent Northern Ontario.

Senator Rivard: Good morning. I am Michel Rivard. I am from Quebec.


(Senator Eaton: I am a senator from Ontario.

Senator Campbell: I am a senator from British Columbia.

The Chair: Witnesses, the meeting today is the committee's ninth meeting for its special study on the current state and future of Canada's forest sector.


We will hear from two groups.


Today, we welcome Ms. Carla Grant, Executive Director of the Ontario Forestry Association; Terry Clark, President of the Canadian Council of Furniture Manufacturers. We would like also to recognize Mr. Rob Keen, President of the Ontario Forestry Association.

Witnesses, the committee thanks you for accepting the invitation to come here this morning and share your professionalism with us so we can produce a study and recommendations that will influence all the stakeholders to find solutions to embrace the forestry sector of tomorrow.

Carla Grant, Executive Director, Ontario Forestry Association: Thank you for the opportunity to appear before this committee today. I would like to begin on a personal note. I had the opportunity to read Tuesday's committee transcripts and read the comments from my former teacher and thesis adviser from the University of New Brunswick, Dr. Tom Beckley. It was quite wonderful to read his comments. I am one of the exports from the Province of New Brunswick that Dr. Beckley mentioned in his closing comments in the transcripts. That left me with a little bit of an impression, I should say.

I am here today to represent the Ontario Forestry Association, a 60-year-old charitable organization that is dedicated to forest stewardship awareness and education. The OFA works with its members, who are primarily woodlot owners in this province, to increase forest stewardship activities and opportunities in Ontario.

The OFA is a trusted source of balanced information on forest issues in this province. We have many education programs and we work closely with educators.

The OFA is also a public advocate for good forestry practices and sustainable forestry on Crown and private lands in our province. We have a role to increase public awareness on these topics.

From our perspective, Ontario is a world leader in sustainable forest management, and this must be promoted more heavily by all levels of government. The industry has been seen for too long as non-environmental when, in fact, sustainably-managed forests contribute more to climate change mitigation than a protected or preserved forest area.

The message to the public has been wrong, and the industry and government should be standing up with groups like the Ontario Forestry Association to promote the forest industry as environmentally forward-thinking and part of the green economy. This has been the case in other parts of the world where the forest sector has not been subject to the same false perceptions as we see here in Canada. The public perception has been that forest preservation is the means to combat climate change and the cutting of any trees is a bad thing to do, when in fact sustainably-managed forests have been shown to sequester more carbon and forest products are generated from a renewable resource, have negative net emissions through their processing and retain carbon throughout their lifespan. Wood products are a wise ecological choice for consumers, especially when compared to other building products like steel, concrete and plastics. The public disconnect extends to the understanding of the renewable nature of all forests and forest products.

The OFA is not a representative of Ontario's industrial forest sector, so we are not able to speak authoritatively about the causes and origins of Canada's current forestry crisis that faces the forest industry directly, issues such as forest tenure, high costs of transportation and energy and softwood lumber disputes with our largest trading partner. I am confident you are hearing about these directly from our forestry industry groups. However, we are able to address the opportunity for the Canadian government to promote the forest industry in the world in order to retain traditional markets, engage in new and innovative markets and enhance our position in the emerging global green economy. There is a lot of work that can be done to counter false public perceptions and there is tremendous opportunity to compete for new forest product markets.

Industry and government must promote the fact that we are world leaders in the management of our valuable forest resources. Organizations like the Ontario Forestry Association have been doing this work on a provincial scale for more than 60 years. In doing so, we are constantly surprised by the lack of understanding among the public of how Ontario's forests are managed and renewed. A prime example of this public perception is around clear-cutting in fire- driven ecosystems.

This tells us that there is still a significant amount of work to do to inform our citizens and instil a sense of pride in the management of our forests. We are maintaining our forest heritage and our wilderness, even though we support a forest products industry. The two do not have to be exclusive.

I think most Canadians would question a statement like ". . . 70 per cent of Canada's forests and other wooded land have never been harvested. . . ." I think it would be quite logical for people to question that statement, which comes directly from a Natural Resources Canada document entitled The State of Canada's Forests 2005-2006.

Unfortunately, during this forestry crisis, organizations like ours are facing challenges to keep doing the work to increase public awareness and forest issues. In Ontario, our forest industry is no longer able to support our efforts, and it makes it much harder to get these messages out to the public.

I would like to take a moment to point out some of the excellent work being carried out by Natural Resources Canada on issues around the forest crisis in Canada and the vision they are providing. The State of Canada's Forests, Annual Report 2008, was released in January 2009 and I believe it has received very little attention.

I would like to bring attention to the section entitled "A Vision for Canada's Forests: 2008 and Beyond," which provides significant insight and focus on forest-sector transformation and climate change as a vision for the future.

Our forests are our greatest natural resource, so my question is why public investment is not being made in forest information, growth and renewal as part of our infrastructure spending. Investment in silviculture shows benefits in the future yield and quality of our forests. Investments in new forests will increase the amount of future forests, and investments in forest information will allow the sector to transform itself through innovation.

We can also invest in the information we are gathering about our existing forests by improving forest inventories on both Crown and private lands in this province. When it comes to a lack of investment in forest growth in silviculture, there are examples throughout southern Ontario that I am aware of on privately-owned forests.

There was a time in Ontario when private-forest owners were given access to technical expertise and resources at little to no cost. During this time, activities like tree planting and silviculture flourished. However, now that the government of Ontario has been forced to withdraw these services, private landowners are faced with the burden of personal investment in forest management.

The Government of Ontario has recently reinvested in tree planting on privately-owned lands through agencies like Trees Ontario, but there is still a void in the long-term assistance for the care and tending of these established forests.

It is not unusual for anyone who is familiar with southern Ontario to see plantations across the province that have been neglected for decades, and they are now in a state of decline. If the proper investment had been made at the right time, these could be highly productive forests today.

The only incentive provided to private forest owners in Ontario to offset their investments in forest stewardship and the opportunity costs of maintaining forest cover is the Ontario Managed Forest Tax Incentive Program. This is an important program in the province, but it does not go far enough to offset the investments in sustainable forestry that is required to benefit us all.

Forest owners that make personal investments in the long-term productivity of their forest are actually penalized by the income tax system in Canada, which does not recognize a small-scale forest as a business investment, as they do with farm properties. I would argue that forests are just as deserving of favourable income tax treatment with respect to investment because of the ecological function of these lands throughout their life cycle.

A forest contributes to our environmental well-being and health, even more so when it undergoes a sustainable harvest. Unlike a typical agricultural property, a forest property provides ecological services such as oxygen production, water filtration, soil stabilization and critical habitat at every stage during its life cycle.

A forest owner who wishes to invest in good forestry practices must do so over long periods of time. According to Revenue Canada, the expenses incurred to fulfill a forest management plan do not meet the requirements of a reasonable expectation of return on investment. This is an ongoing frustration for our members. It is short-sighted, in our opinion, as these types of investment require vision and longstanding commitment on the part of the forest owner. It is a shame that such vision and opportunity is being this thwarted by income tax regulations.

The same could be said of intergenerational land transfers when it comes to forest lands. However, I will not go into that subject because I am sure that Peter deMarsh from the Canadian Federation of Woodlot Owners has raised these concerns to this committee.

I would like to close by saying that we believe this is a time of opportunity for the Government of Canada to promote the forest industry as environmentally forward thinking and part of the green economy, to create investment in the management of our forest resources and to remove barriers to forest stewardship.

We would like to thank the committee for this opportunity to represent these perspectives. We would be happy to elaborate on any of the points that we have made and answer any questions when the time comes.

Terry Clark, President, Canadian Council of Furniture Manufacturers: I am here today as president of the Canadian Council of Furniture Manufacturers, which was established in 1965 as a national organization to represent three regional residential furniture manufacturing associations — the Quebec Furniture Manufacturers Association, the Ontario Furniture Manufacturers Association and Furniture West Incorporated, where I presently serve as chairman of the board.

As the president and owner of a Winnipeg-based furniture manufacturing company for the last 32 years, I am well aware of the important role and the important contribution that Canadian forest products provide to our members across the country. In 2008, there were about 1,600 furniture manufacturers in Canada, with production concentration of about 40 per cent in Quebec, 35 per cent in Ontario, 12 per cent in British Columbia and, to a lesser extent, in Alberta and Manitoba.

The industry is dominated by small family-owned firms with deep-rooted connections in the communities in which they operate. The average company employs about 50 workers, and their activities are devoted about 70 per cent in the production of wooden furniture, 20 per cent in upholstered furniture and 10 per cent in the category that is known as "other furniture," with a total national complement of about 93,000 employees.

The principal wooden material input that the industry uses is hardwood lumber. Black cherry, red oak and hard maple account for 50 per cent of the lumber consumed. Species selection varies by geography, product category, style and price point. For example, the prevalence of softwood in Western Canada causes manufacturers in that region to use more of that particular type of material.

Apart from solid lumber, the industry utilizes large quantities of engineered wooden panels of varying thicknesses, such as particle board, medium-density fibre board, hard boards and oriented strand board. The upholstery segment of the industry has been moving toward the use of engineered components for the construction of their frames.

Finally, hardwood and softwood plywood, along with wood veneer, round out the variety of forest products to which value is added by our manufacturers. Total annual consumption of all wooden material inputs in the household furniture industry is estimated at over 320 million board feet, with a value close to $1 billion.

Canadian furniture manufacturers have established a reputation for building a premium quality product, which has enabled many of them to successfully export to the United States. The United States is the destination of 94 per cent of our exports. In recent years, external factors, such as the high value of the Canadian dollar versus the U.S. dollar, have weakened our competitiveness in the U.S. market. Another challenge has been stiffer competition in both the U.S. and our domestic markets from Chinese furniture. China has replaced Canada as the leading exporter to the U.S. market at 50 per cent, and placed us in a distant second at 14 per cent. Over the last five years, furniture from Asia has also satisfied about 50 per cent of internal consumer demand. In 2007, it went over 50 per cent, with the impact most severe for our upholstered furniture sector. However, unlike many U.S. companies, most Canadian firms have not yet started to relocate production to Asia. Despite significant restructuring, due to increased competition from low-wage suppliers, the Canadian furniture industry has kept its base in this country.

We remain optimistic that this will be a valuable asset in the years ahead when the recovery of the U.S. economy generates new demand for furniture that their local industry will not be able to satisfy. In addition, Canada's proximity to the U.S. market may become more advantageous in terms of the growing costs of global transportation.

Future success in furniture exports to the U.S., however, will also be dependent upon the ability of Canadian manufacturers to comply with new U.S. material regulations, such as those specified in the Consumer Product Safety Improvement Act, which will become law in 2010. Our industry will continue to work closely with and rely upon suppliers of engineered wooden panels to meet the new requirement for reduced urea formaldehyde, as well as to develop materials for wooden and upholstered furniture that will ensure compliance with new environmental regulations.

We want to emphasize and we want the committee to realize that we rely not only on the forest products industry for the supplies that they deliver. We also rely on them for the research and development through agencies like Forintek and FPInnovations to help us develop the new products that will be required for the consumer market of the future to comply with environmental and health regulations under acts such as the American Consumer Product Safety Improvement Act.

We realize that as we make conscious efforts to retain a critical furniture manufacturing mass in Canada, we will need to forge alliances with suppliers of forest products, such as local hardwood suppliers and manufacturers of components.

That concludes my comments, Mr. Chair, and I would be pleased to respond to questions from the committee at the appropriate time.


Senator Poulin: Ms. Grant, thank you for this interesting presentation. You were right, we have heard several witnesses. To each one, I ask exactly the same question. The first objective of our study is to explore the causes and origins of the current crisis in the forest industry.

Could you tell us briefly, as executive director of the Ontario Forestry Association, how you see the causes of the forest crisis that we are now experiencing in Canada, and in particular in Ontario?


Ms. Grant: I have seen the crisis in the northern communities. In Ontario, much of the discussion has been around energy costs affecting the forest sector, with transportation also being high cost and the cost it takes to move wood from harvested areas to the mills. These have been huge factors. As well, the rise in the Canadian dollar has had a large impact on importing wood products into the United States.

The forest management system in Ontario has been long cited as a positive thing. There is a rigorous system of forest management in this province, but much of it is downloaded onto the companies themselves. The management process as well as forest tenure have been issues cited by industry as strong causes of the crisis.


Senator Poulin: Mr. Keen, do you have something to add to Ms. Grant's remarks concerning the causes of the forest crisis?


Rob Keen, President, Ontario Forestry Association: Ms. Grant described the management costs that the forest industry bears with regard to the planning for forestry activities for many users of our forests in Northern Ontario. The forest industry does a lot of the planning for those forests and unfortunately bears the cost of that planning. At this point, many of the other users do not pay toward the planning costs. I see that as an issue with regard to the multiple uses that our forests have to offer, for recreation, for tourism, and for all the other users of the forest. It does not seem equitable that the forest industry has to pay for most of the planning.

Senator Poulin: Ms. Grant, in your presentation, you also spoke of the good work that the Department of Natural Resources is doing. Could you give us what you see as the key roles and responsibilities of the federal government in the forestry industry?

Ms. Grant: Promoting the industry to the world would be the key role of the federal government, as well as investing in the resource itself on a national scale. The government should be involved in forest inventories and get a grasp of our forest resource. The government should invest in silviculture in all parts of Canada and instill a pride in Canadians that we do have a world-class industry here in Canada.

Senator Poulin: Do you want to add something, Mr. Keen?

Mr. Keen: We need to let our own citizens know how well the forests are being managed. We have to let them know of the resources that we have and that it is an important industry to Canada. I do not think many people are aware of how important this industry is to Canada.

Senator Poulin: We certainly see it in Northern Ontario with the devastation that the crisis is having on our communities, on our people and on our institutions.

Mr. Keen: Exactly, and likewise, when you read or do not read about the devastation going on in Northern Ontario, people in Southern Ontario communities are not aware of what exactly is happening to our Northern Ontario communities.

Senator Poulin: This is where we see we are a big country.


Mr. Clark, could you, as president of the Canadian Council of Furniture Manufacturers, explain to us your analysis of the causes of this forest crisis?


Mr. Clark: As I explained, senator, we are consumers of the fibre and the lumber. Although we have read about the crisis as described, and I read the comments by Mr. Lazar who appeared before the committee, we probably were a little narrow in the devastation within our own sector and not aware of the depth to which there was loss of employment and loss of mills and mill capacity.

My purpose today is to assure this committee that Canadian forest products are important to us as a domestic industry and important to us as an exporting industry in this country, and we believe that, whatever it takes, it is worth saving.

Two comments that is Mr. Lazar made to the public press had to do with the way the financing is done and the way the forest products industry is rewarded, if you will, for research and innovation. In a negative business factor, they do not qualify. I know that he suggested to the committee and to the public press that there would be advantages to extending the accelerated capital gains and the clawback provisions.

One more thing Mr. Lazar said that we agree with was the emphasis on helping the industry become green, if you will. We are finding more and more requests to comply with our products having green materials, and we find it beginning in the public institutional furniture field. We also find it now becoming more so with informed consumers in the residential field.


Senator Rivard: Mr. Clark, I was surprised to hear you cite those statistics on the decline of Canadian furniture exports to the United States and about the high level of Chinese imports to our country.

Does that mean that we should adopt a protectionist system to put an end to this situation? Two important Quebec manufacturers were previously exporting to Asia, namely South Shore Furniture, for the industries on the south shore, and Shermag, in Montreal. What would you envision in the short or medium term? And more importantly, should we, despite globalization, try and stop this debacle in the furniture industry in Canada?


Mr. Clark: The offshore competition from China principally and Asia in general is mainly in low to medium price points. Canadian manufacturers have developed niche markets in higher-end categories offering customization opportunities and faster delivery. Foreign competition cannot respond as quickly. As everyone at this table is a consumer of the products we make and the type of things we make our living in, there is a "sameness" in the marketplace with imported products that a company like Shermag does not have to contend with. They can perform customization for customers in colour, finish and style, and perform it in reasonable lead times, as opposed to product from offshore, where we cannot compete head to head on price. It has to be high volumes and similar style and finish. We believe that, with increasing costs of global transportation, we are on the right track to offset some of that competition.

Senator Rivard: Do you expect that some companies like South Shore Furniture will move to China to build their product there and then re-import to Canada?

Mr. Clark: On the contrary, Senator Rivard, there have been attempts by Canadian manufacturers, in particular those you mentioned, to source components from China and they have not been overly successful in quality and in service. The two examples you cite are companies that have struggled very hard and restructured very diligently to be able to maintain a Canadian base.

Senator Eaton: I would like to continue on the same path that Senator Rivard took. You are looking at a high- quality niche and you are looking at faster delivery. Will that make you competitive if our dollar keeps on rising? Although we have a bit of a deficit this year, it still looks as if we are way ahead of the other G7 countries. We are far ahead of our GDP ratio; we are very much in better condition to come out of the recession than other countries. That means that if the U.S. keeps on spending, our dollar will probably go up in the short term. Are you ready for that?

Mr. Clark: I would like to respond, Senator Eaton, by telling you that is a work-in-progress. The dollar in the 80- cent range proves very beneficial to Canadian exporters of furniture. In excess of 90 cents becomes, not only detrimental, but beneficial to those Americans still in production, exporting to us.

Senator Eaton: However, are you considering options?

Mr. Clark: Yes.

Senator Eaton: Are you getting prepared?

Mr. Clark: Yes, we are.

Senator Eaton: Do you feel that, on the whole, we are as good in design as we could be and as good in marketing as we could be?

Mr. Clark: That is a subjective question, Senator Eaton.

Senator Eaton: I am hoping you will give us some clarity.

Mr. Clark: In my opinion, we are better than good enough. The competition, especially in the low to medium price points, has moved offshore and developed the sameness in the marketplace that I explained to Senator Rivard, and we have a chance to excel. Due to the fact that we are doing mass customization as part of our strategy, that area of the business continues to improve.

Senator Eaton: Senator Rivard talked about a policy of putting up barriers. Listening to the witnesses over the many weeks we have, we do not seem to tell the consumer over and over again, "buy Canadian; give a Canadian a job; support us." We do not do that, do we? We are not very naturally pro-Canada. We keep it very quiet. Have we ever tried to do that?

Mr. Clark: Definitely, Senator Eaton. One of the large companies in Senator Rivard's region actually advertises, commercializes and advocates the "buy at home" theory, if you will — "made in Canada by Canadians."

At the retail level, when the sellers of our products emphasize price and terms, as opposed to value, life cost and quality, it is an uphill battle. However, consumers are getting more information as marketing and distribution methods change. More and more companies are doing Internet marketing and consumers get much more information that way. The price is not the first thing consumers read about when searching the Internet and looking for an item; they get construction features, durability features, warranties and so on.

People who are doing that are proving that consumers want to have that information. It is a difficult message to get out, and not unlike the other witnesses explaining public awareness of their industry. Furniture is a fashion item but, in distribution, price awareness has become predominantly advertised.

Senator Poulin: There was an item this morning on Radio-Canada. A former bank executive is predicting that oil will increase to $200 a barrel in the next 24 months, and the impact will favour Canadian manufacturers.

Ms. Grant said the cost of transport is one of the key causes of the forestry crisis. On the other hand, I am hearing now that it will be a benefit to the manufacturing industry. Do you have any comments about that, Mr. Clark? How do we balance this?

Mr. Clark: Senator Poulin, Canadian exporters of many products, not just home furnishings, are more comfortable with a 20-cent spread between our dollar and the American dollar. Some of us feel, in economies of scale in our industries, that it levels the playing field by virtue of population and opportunity. However, we have products that are very high-volume to value to transport. Therefore, if that prediction you made us aware of becomes real, it also poses a threat for distributing a product — getting it to market.

Senator Cordy: We know that the furniture made by Canadian manufacturers is top of the line. We know that cost is definitely a factor to determine whether Canadians are buying imports from Asia. We know the quality is not nearly the same as it is from Canadian manufacturers. Others have mentioned earlier that types of messages — like the green messaging, the hiring Canadian message and the quality — are things that we should be promoting in order to promote our Canadian furniture manufacturers.

You talked about the cost of transportation being so close to the U.S. market, but we are also talking about the markets within Canada, and Canada is a large country and transportation becomes a factor.

I am not sure that we can just depend on that. I knew that we in Canada are being bombarded with furniture from China. I have not seen the numbers but it seems like it would be dramatically outselling furniture made from other areas. However, I did not know about the Chinese imports into the United States being 50 per cent and, from Canada, being 14 per cent. That is a pretty dramatic number to make up.

Should we not do more than just hope that transportation costs will provide us with the answer? What types of things should we be doing, from the federal government perspective? Rather than just waiting for changes in the Canadian dollar or changes in transportation, should we not be more proactive? What kinds of proactive measures should we be taking to ensure that our furniture manufacturers are still viable in 40 years?

Mr. Clark: That is a very good question, Senator Cordy. Thank you for the endorsement of our industry's quality.

One of the things that I can point out to the committee is that packaging is anywhere from 8 per cent to 10 per cent of the cost of our product. Again, as I mentioned, it is high volume to value to ship the products we manufacture within Canada or out of Canada.

As the environmental standards become more discriminating about packaging, we will have to learn how to package more efficiently. That involves our colleagues in the forest products industry, because so many of the things they produce are used for pallets, crates and containers. If we can find ways to simplify, recycle and reduce our packaging costs, it will go a long way to help us with our distribution. We will work hand in hand with the forestry industry to go green.

I do not know if the committee is aware of the California Air Resources Board, CARB. This board has put into law new standards for formaldehyde emissions. It targets particleboard, medium-density fibreboard and hardwood plywood used in upholstery frames. A Canadian exporter of wood furniture or upholstered furniture to California, starting in 2010, will have to comply with the new formaldehyde rules.

That means we will need to have formaldehyde-reduced material from the forestry industry. It must be tested and certified by a third party laboratory, which I know will present challenges to the forest products industry. The manufacturer of the furniture has to maintain records of the chain of custody and has to label the product to be able to sell in California under the new standard.

Non-compliance results in stiff penalties. Senator Rivard is not here, but one of the firms he mentioned this morning has already been penalized in California for a non-compliant product on a retail floor. They are inspecting at random. Unfortunately, what we learn in our industry is that what begins in California usually spreads to other states.

In a long answer, Senator Cordy, as we become compliant to sell to California and the U.S. on reduced- formaldehyde products, we would have a leg up on the Asian imports. That would be one advantage.

Senator Cordy: Is Canada doing anything in terms of making legislation for reduced- formaldehyde products?

Mr. Clark: Not to our knowledge.

Senator Cordy: That would be helpful for our industry.

Mr. Clark: There are producers of particleboard and medium-density fibreboard in Canada that produce urea formaldehyde-free products. That product is available to us.

Senator Cordy: If that became a law in Canada, many of our manufacturers are already doing it and that would help the furniture industry within Canada.

Mr. Clark: Yes, it would.

Senator Cordy: Instead of depending on the United States to make the laws, perhaps we should be making them ourselves. Is that a yes?

Mr. Clark: You make an extremely interesting point.

Senator Cordy: Ms. Grant, part of your mandate is to educate. You talked about promoting the industry to the world and what the Canadian government could also do. If I recall, you said it is becoming more challenging in these economic times for agencies such as yours — you are a non-profit agency — to spend huge amounts of money on educating, and that is a role the Canadian government could play.

Could you be more specific? You talked about the vision for Canada's forests that just came out in the Natural Resources report of January 2009. You said not many people know about it, but it has some good information.

Could you be a little more specific, rather than just saying the federal government should promote the industry? What specifically should the federal government do to promote the industry and to educate Canadians?

Most of our population lives in cities and although forestry issues should be of interest to all Canadians, perhaps we do not pay as much attention as we should. What should the federal government do to educate the public?

Ms. Grant: I certainly see that disconnect with urban areas. Being in Toronto, we attend a number of public events and talk to the public about forestry in our province. There is a very large divide, as I see it, between the North and the South, and the urban areas and the rural components of Canada. I think that urban areas focus on urban issues and they are not hearing about the strife in the forest industry.

Within Canada, we are not aware of the degree of the crisis facing the forest industry. If something is happening in the auto industry, we are fully aware of the debate. The forestry industry is the second largest industry to the auto industry, yet the general population would be hard pressed to give you much detail on how many mills have closed and how many people have been affected in single-industry communities.

In terms of raising our own public consciousness, the public should be educated to understand that there is a crisis going on in our forest industry. The public should learn that we are doing a great job managing our natural resources. As I mentioned, we are maintaining our wilderness in this country while supporting a forest industry sector. We are able to balance the two.

As Canadians, we all need to know and have a sense of pride in this industry. It relates to the product sector as well in that buying Canadian should be something that should be seen as a green act. Buying a Canadian forest product should be seen as a green act and as doing the right thing for our country.

Senator Cordy: There is always the domino effect, too; it will not just affect the forestry sector, it affects a number of other sectors.

I would like to talk about tax incentives. You rightly stated that if you have a forest management plan, it is not fulfilled in one year. Forestry being what it is; it will take a long period of time. Yet, Revenue Canada says that it does not meet the requirements of a reasonable expectation of return on investment.

That does not make sense to me when you are talking about the forestry industry. That makes sense to me if I am manufacturing a watch, but not if I am growing a tree. Has your association done any work in trying to educate Revenue Canada?

Ms. Grant: We have done some work. We have been working on property taxation issues in this province. I know the Canadian Federation of Woodlot Owners has been working with federal representatives to try to raise those income tax issues.

I speak from a private land forest perspective when it comes to these issues and making that comparison to agricultural production. A successful and efficient forest management plan has a harvest horizon of 20 years to 40 years. A person involved in this enterprise is unable to get an annual return on investment. Each year, the person incurs maintenance costs and cannot charge these costs against income, because the horizon of return on investment is too long for Revenue Canada to accept.

Mr. Keen: With regard to the question about the furniture industry and using forest products, I think we recognize the importance of the value of maintaining value-added to our own forest products. For many years, we have seen raw materials being exported offshore and the finished product being bought back again into Canada, therefore losing that opportunity to increase the value of our raw material here in Canada.

We can claim that Canada is producing green products and we should seize the opportunity to promote that fact to Canadians. Consumers in Canada are becoming more and more educated and want to buy green products. In fact, some large retailers are giving preference to certified forest products in their large sales of forest industry products. There is a real opportunity for Canadians to promote our green products as value-added products that we produce and perhaps sway customer purchasing of those products.

Senator Cordy: That is an excellent point. A good place for our government to start would be promoting green.

Senator Campbell: I would like to start with Senator Poulin's comment on the cost of oil at $200 a barrel. We have to be careful when we start throwing these numbers around. We have a government that said nine months ago there was not going to be a recession, eight months ago there would not be a deficit, and now we know where we are. When you have a banker that says that oil going to be $200 a barrel, we should just assume that that is where the dart hit the board on his office wall that morning.

Canadians are modest, and that is both a virtue and a curse. I have been in China and seen the manufacture of furniture. My lungs have just cleared up after being in that factory. We know the issue is environmental, at whatever level that may be. One would think that we should be looking at not just whatever comes out of the product that you have in your home but also the process that goes into making it. It would seem to me that Canadian manufacturing standards and the environmental standards Mr. Clark spoke of are much higher than anything we would see from the Third World.

I would suggest to you that perhaps Canadians would respond to advertising that says: "Here are your choices. You can have a plant that is spewing some of the most noxious chemicals ever imagined by man, or you can have a plant in Canada that is following regulations, not only from the point of view of product but the air." Is that not something that we should be considering, Mr. Clark?

Mr. Clark: To some extent, it is assumed that manufacturers of the products they buy are compliant in every respect from the environment they work in and from what their process does to the environment they live in. Enlightening the Canadian consumer about the type of environment you witnessed, where the air comes in chunks and cubes, as you found, would probably be looked upon as negative marketing on the competition's products, if you will. It is hard to transmit what you saw to a consumer who may be looking at articles on a retail floor and the one made in Canada costs double the one made where you were.

Senator Campbell: Mr. Clark, you are in a war to survive.

Mr. Clark: That is correct.

Senator Campbell: It is just a matter of time. If it continues the way it is going, we will not have furniture manufacturers in Canada. We do not export to China. I could care less whether the Chinese see this as bad taste or whatever. For you to survive, you will have to get into that market.

I think you are wrong to assume that Canadians understand that you follow different rules, that you take the higher road and that you care about the environment. We know how much Canadians care about the environment, and you have to point out your superior product to them. They are coming into our markets with inferior products, and the only reason people are buying them is because they are cheaper, with no knowledge of the background of what goes into that product from the labour point of view, from the environmental point of view, where they get their wood from and how is it harvested.

I think you need to get down in the mud. I really do. I would do it to the U.S. too, because I have been in some of their plants down in the Southern States, and that is no walk in the park either.

The GST was dropped by 1 per cent. The idea was that this would generate a lift. Did you see any lift? Did people say, "Wow, it is 1 per cent cheaper to buy good furniture"?

Mr. Clark: That would be better measured, Senator Campbell, at retail. I do not think it was significant from our standpoint. At least the retail dealers that we distribute our products through did not indicate that to us.

Senator Campbell: You have had a $60 million drop from 2007 to 2008.

Mr. Clark: Yes. It may have helped consumer products, what they refer to as big ticket items, but when a retailer looks at that, it is across the board with electronics, major appliances, home furnishings, and they have not identified us as having benefited from it directly.

Senator Campbell: I did not quite understand. California has brought in standards with regards to what emission?

Mr. Clark: California is bringing in a standard on formaldehyde emissions. Formaldehyde is one of the resins used in the manufacture of particleboard, medium- density fibreboard. The product is in kitchen cabinets. It is in home furnishings. It is in many things that are in the home. They have reduced the emissions for their state but, as I explained, generally, other states follow suit.

Senator Campbell: California is broke. One of the reasons they are broke is because they are unrealistic in their expectations. I would doubt very much whether you would see other states running quickly behind California on this issue, because many of those products made in the United States have the same qualities as our Canadian-made products.

I really wish you well. We have major problems in British Columbia. This is crippling, and when you throw in the pine beetle on top of it, we have major problems. I believe that we can trump the competition with facts, not by blowing them out of the water but just saying, "These are the facts. This is what goes into our product; this is what goes into their product. Which would you rather have in the environment?"

Mr. Clark: Thank you for your comment.

The Chair: Are there any other comments on Senator Campbell's question on the aspect of better marketing concepts for the products?

Ms. Grant: We could have similar marketing for our forest management systems in Canada.

Senator Campbell: That is another thing, yes.

Ms. Grant: We could make worldwide comparisons.

Senator Campbell: Has anybody ever considered that we depreciate wood over its lifetime the same as we depreciate equipment? I mean, every year, you have to put something in to keep that wood growing. Has anybody considered that we treat that as a depreciating value? I know that this would get us into all kinds of trouble under the Softwood Lumber Agreement, which is the biggest travesty we ever signed with them, I think.

It would scare them. You are right: Over a period of time, you keep putting more and more money into the forest, but you do not have a monetary return until the tree is harvested and becomes a product.

God bless Revenue Canada, which is not the "virtue of free enterprise." However, it would be helpful if you could depreciate the forest, or even depreciate your maintenance costs. The forester should not be taking a continual loss.

Ms. Grant: There is a large risk, especially to the private-forest owner, to invest in forest management over those long periods of time because of associated environmental risks such as insects and disease. Therefore, the private-forest owners are involved in a balancing act. If you compare a sustainably-managed or a well-managed forest to one that has been just allowed to grow and change on its own, there is a measurable difference in the quality of the forest product.

Senator Campbell: God knows we go out of our way to save other industry plants.

Ms. Grant: Yes.

Senator Campbell: Plants like steel and auto.

Maybe you need to explain about managed forests.

Ms. Grant: Yes. There is a discussion about ecological goods and services happening now in the forest and agricultural community. Our forests are not just giving us forest products at the end of their lifespan; they are giving us ecological goods throughout their lifespan, which are benefiting us all, especial people in urban areas. I think people in rural areas are looking for recognition from urban dwellers that the forests they maintain provide a variety of goods.

Senator Fairbairn: Ms. Grant, when you started talking about Southern Ontario and the places in forestry down in that area, it certainly caused me to perk up. There is one sentence from your presentation that reads:

Forest owners that make personal investments in the long-time productivity of their forests are penalized by the income tax system in Canada that does not recognize a small-scale forest as a business investment, as they do with farm properties.

I have the pleasure of having in my house some quite extraordinary and very old pine equipment from the southern part of Ontario. It is outstanding.

I find it really hard to take or even to understand that there is such a passage between how you deal with forests and how you deal with farms on these kinds of issues. You are talking about it. We can tell by your words that you are quite frustrated.

How do they explain why there cannot be assistance and the kinds of support for that particular industry and that particular part of this country which has a history that goes back hundreds of years?

I come from a place where our history is farming and ranching. They are pretty much looked at very carefully and helped. I find it hard to understand why that would not take place in some of the finest parts of this country, given the history of this issue and the fact that it is still happening.

Ms. Grant: It does go back to that long-term nature of forest management and the investment that needs to be made. When you are a large-scale forest producer — a forest company working on a large landholding in Northern Ontario or other parts of Canada — your land base is large enough that you are harvesting on an annual basis.

However, a landowner who owns maybe 50 acres or 100 acres, a small-scale forest owner does not take an annual income out of that forest. The forest is maintained for some unique and large range of values, one of them being the eventual production of wood products. I think that is where the difficulty appears with Revenue Canada.

My frustration comes directly from talking to forest owners; they call me and ask for advice on audits that they may be facing where they have, in their minds, very legitimately expensed the costs of forest management. Then they get questioned back by Revenue Canada and are facing audits on these issues.

The only explanation has been on that time frame and a traditional business plan. I have actually heard officials from Revenue Canada say: "What kind of business plan would require investment for 20 years with no return for that period of time? That is not a business." I think that is where the difference lies between agriculture, where there is an annual crop, and forestry where there is not. It is very frustrating.

Senator Fairbairn: It is troubling. In a sense, it is troubling in today's interests, but it also is troubling when you look back at this as a part of history.

Ms. Grant: It is, and it is a part of our heritage. Many of these woodlot owners are managing, not just for their generation or even for their own personal benefit, but for future generations. Many hope to have these woodlots become a family legacy, as well.

I see that in the attention that landowners pay to the development of their management plans for their property and the development of information. They really take it to heart. It is something that becomes a part of the family and a part of who they are. These plans get passed on for generations. Even when a landowner sells a property — and we do see sales of forced properties — 9 times out of 10, that landowner makes sure that the new owner receives a copy of the management plan. The sellers make the buyers aware of their personal objectives for the forest. The landowners want to continue even if they cannot own the property themselves.

There is that long-term stewardship ethic ingrained in many forest owners and you hate to see that penalized.

Mr. Keen: I have one comment with regards to the disincentive for forest landowners to maintain that forest. In Southern Ontario, there are huge pressures on landowners because of urban pressures and developers. Developers can offer very large sums of money to landowners and the developers will eventually strip the land and grow houses.

Any kind of incentive, as opposed to disincentive, that we can provide to landowners to maintain that forest is good. Ms. Grant talked about the Managed Forest Tax Incentive Program as a partial incentive. It is a good program, but because landowners are not considered as a business through their forest management activities, that is a huge cost. Anything we can do to encourage landowners to maintain that forest, and put them into more of a business category for the cost incurred to maintain that forest, would be a positive thing.

Senator Fairbairn: I hope you will both fight on.

Senator Cordy: I know you have talked to Revenue Canada, but have you worked with Environment Canada or Natural Resources Canada? Those two departments should have a better understanding of the forest management plan and the need for a plan that recognizes that this is enterprise is not realized in just one year.

Ms. Grant: We have had discussions on property taxation issues because they have been specific to Ontario. However, when it comes to federal income tax issues, we have not worked with provincial ministries.

Senator Cordy: They would also be the federal industries.

Ms. Grant: I believe that the Canadian Federation of Woodlot Owners works on a national scale with some of those industries. I cannot speak directly to their tactics.

The Chair: We hear many times that there is not enough research and development in the hardwood sector. Do you have any comments on what we could do to encourage research and development?

We have seen the work of Forintek and others across Canada. Compounded with the crisis that we have, what would you recommend government do when looking at research and development. What sector should we be looking at for the manufacturing side and also for the forestry side?

Mr. Clark: I echo my earlier statement, which is that we rely on the forest product sector to do research and development of new and existing products that will allow us to comply with the new regulations.

We talked to Senator Campbell about reduced-formaldehyde components and the same applies for any efforts toward purchasing green products. We rely on our suppliers, as they rely on the organizations such as Forintek and FPInnovations to develop some of the materials that probably are known at the scientific level today but are not on the market.

The advantage to being first in compliance with these new regulations is you get a leg up on other countries that are importing into the American market. It would add to our story of quality and compliance before others could achieve it. It would be an advantage if the federal government continues to support the organizations like FPInnovations and Forintek. The research is important.

The Chair: Do you feel that there is enough research and development on hardwood?

Mr. Clark: I cannot speak on the hardwood lumber issue. The research and development that we require is on the composite wood panel side.

Ms. Grant: The majority of our high-quality hardwoods are located in Southern Ontario. There are some very impressive forests in south-western Ontario.

Those forests and those products do not have a lot of manufacturing capacity. There is not a lot of investment in small cottage industries. Allowing entrepreneurs to be able to invest in these kinds of markets and take advantage of these great resources would be something I would see as beneficial. Allowing for small specialty forest products using some of our higher quality hardwoods would be a positive thing.

Mr. Keen: We touched on the ecological goods and services aspect of forests their contributions to society. There is work going on right now on trying to quantify that information, trying to come up with an actual dollar value for it.

I am sure everyone is familiar with the evolving carbon market. Experts are trying to establish protocols to assess, identify, and validate the market value of the carbon being produced or sequestered by our forests. This is an ongoing evaluation.

As we have said, the forests provide much more than just a carbon sink. With ecological goods and services, there is an opportunity to put a true value to what those forests are providing for our society. If we can come up with a better monetary value, if it has to go to that, we will then be able to talk to folks like Revenue Canada and be able to identify the true dollar value of our forests.

Regarding climate change, we have seen our forests change and we know that they will not be able to keep pace with our changing environment. It is extremely important that we establish some research plots so we can monitor how the forests are adapting to the climate change or being impacted by climate change and be able to respond to those changes. Through adaptive management, we can certainly do that, but there is the necessity to have resources available to establish these plots and have the research available to assess how we can respond to those changes.

The Chair: We see that government has embarked on the Value to Wood Program and the North American Wood First Program. What impact will these programs have in enhancing and opening new markets? I refer to both the manufacturing side, if I look at furniture and on the forestry management side of the forest when I look at silviculture.

Mr. Keen: It is certainly a benefit to have more resources available to provide proper silviculture for forests, especially for the hardwood forests. They do require it, and through past management practices, there is a lot of opportunity to improve the quality of those forests. Unfortunately, in some situations, the value of the materials that are being generated from the forests is not adequate to pay for the work that needs to be done to improve and enhance the potential productivity of the forests. Having the resources to put toward standard improvement-type operations where you can go in and do some non-commercial activity, would be of benefit to enhancing the value of the forest.

The Chair: On the Value to Wood Program and North American Wood First Program, senators mentioned Asian competition. What are your comments on the Mexican competition in North America?

Mr. Clark: Let me respond on the Value to Wood Program. First, Natural Resources Canada funds that program, and that enables an organization like Forintek to help the downstream users directly. They follow it from the forest to the mill to the end user. Forintek specialists are available to manufacturers of furniture across this country to help them streamline their production to optimize their usage of the wood they receive. In that regard, the funds do get right to the manufacturer from the Value to Wood Program.

Mexico is an exporter to the U.S., but they are well down the chain, I believe just making the top 10 list. They are not a significant exporter of wood furniture into the American market, and very insignificantly into the Canadian market.

The Chair: What is the volume of Canadian hardwood versus imported hardwood?

Mr. Clark: Ninety per cent of the wood inputs we use are from Canada. The hardwood lumber species black cherry has some percentage imported from the U.S., but I do not have that figure. I can provide the committee with that information.

The Chair: Could you, please?

What are your comments on what is at stake for our furniture manufacturers? Can we do more to help identify niche markets? Can we do more to assist Canadian entrepreneurs produce more value-added products into Canada rather than sending our raw material down south and buying it back in their major chains? What are your comments on how we could assist your industry to grow this market?

Mr. Clark: Senator, it has been identified around the table in the form of design and development. The format for many companies to design is to visit a market, possibly in China or Europe, find a product and try to be first to bring it to your home market. That is not designing to the consumer.

The Canadian industry has been at the disadvantage of not dealing directly with the consumer. We do not directly know consumer requirements. We have left that to the distribution channels. They have to learn to do a better job of manufacturing what the consumer wants. The industry of the future will be satisfying niche markets through customization opportunities and through quicker delivery times than our competition from the distant shores can do. Research and development of new product design would be an area that could be of great assistance.

Ms. Grant: High-quality hardwood forests and the proximity of processing facilities to these forests has been a challenge in Ontario and in other parts of the country as well. We do see a lot of our hardwood leaving this country. It leaves the country, is manufactured into a product on the other side of the border, and then we buy the finished product.

The solution I see is investment in small-scale cottage industry to develop some of these products here at home. These should be located within a reasonable distance of the forest as the opportunity cost is diminished the further you have to move the tree from the forest to the manufacturing facility.

The Chair: Witnesses, if you would like to add to the study, please feel at liberty to send us your comments in writing.

I am not at liberty to share the companies that I have talked to in the last few years about new marketing strategies, but for the manufacturing side, Mr. Clark, what percentage of your industry sells products online?

Mr. Clark: At this time, senator, it is a very small percentage because there are conflicting channels of distribution. It is difficult for them to transfer from relying on the big box retailers that are all throughout the communities across the country and then suddenly revert directly to the consumer. Right now, there is information on the Internet for the ultimate consumer, but not sales.

The Chair: I know some manufacturing companies in the furniture business across Canada have lately used the Internet for ready-to-assemble and high-end products. They have captured niche markets that they never thought of because of the gizmo-buying generation working on the Internet.

It has had a 20 per cent to 40 per cent impact on their industry in sales volume. When we see that type of increase in sales volume, we should be helping and promoting the industry and looking at new markets with new sales strategies.

On behalf of the committee, I sincerely thank each one of you for being here this morning. As I said earlier, please feel free to write us as you follow the work of committee. Later this year, we will be visiting communities, and we would certainly be disposed to visiting some of your furniture manufacturing companies.

I would ask senators to stay for a brief in camera meeting.

(The committee continued in camera.)

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