Day 120: Canadian Tariff Works

The Mother's Little Helper portfolio was up +0.73% today for a gain of+$5,058.31. Overall gain to date: +$112,087.99 (+19.20%). I had to widen the portfolio chart to accommodate the larger returns.

According to CNN Money the S&P 500 is up +6.69% Year To Date (http://money.cnn.com/data/markets/sandp/).

Today we have earnings results from Caterpillar, Pacific Premier Bancorp and Logitech. Logitech will not report until 9:00 pm eastern time, the conference call will be held tomorrow. CAT smashed the consensus earnings expectation posting $1.28/share vs. .62 cents expected. Pacific Premier Bancorp missed by .08 cents, posting earnings of .34 cents a share vs. .42 cents expected.

Canadian Lumber Tariff

As a home designer I can't resist this story. Every home I design utilizes thousands of board feet of softwood lumber and in my fiduciary responsibility to a client I must keep costs in line. So given the presidents recent executive order you'd think I'd be aghast. No, not at all.

President Trump threw the latest splash of gasoline on geo-political fires when he issued an executive order to institute a 20% tariff on Canadian soft wood lumber imports. Initial reaction from many pundits is that this will cause home prices in the US to soar at a time when interest rates are already rising. I’d like to suggest an ‘alternative view’ based on an actual set of ‘facts.’

Nearly 50% of all Canadian forest products exported consist of three primary products all of which are softwood exports; Northern bleached softwood kraft pulp (NBSKP), Newsprint and Softwood lumber.

NBSKP

Canada owns the global NBSKP market producing roughly one-third of the world’s production and three-quarters of the North American total capacity. What is this magical export that is in such high demand in the United States? Toilet paper, tissue paper, paper towels, yep we wipe Canadian. Do you think Costco, Walmart or your local Safeway is going to increase prices by 20% on your favorite brand of TP? Most likely we’ll see some modest price increases, but the biggest impact will be on the profit margins enjoyed by the paper manufacturers and their distribution clients. But let just for a minute consider what a 20% increase might mean. The Costco Kirkland brand 30 roll pack currently sells for $23.99. A 20% increase would bring the price up to $28.79 or .96 cents per roll. Since Costco’s business model won’t allow for this increase we can look to the manufacturer who sells to Costco to eat the increase.

Newsprint

Canada is also the largest producer of newsprint, remember that thing that used to get tossed on your driveway. Canadian capacity to produce newsprint is currently at 4 million tons or roughly 12% of the world’s market share. But a 20% tariff won’t impact this industry as much as Google advertising, Facebook advertising, your favorite blog and the digital version of your news media. North American demand for newsprint has fallen some 65% since the year 2000 because of the simple decrease in demand for the product. We don’t consume as much newsprint as we once did. So to prop up the industry Canada sells the pulp wood timber below cost to pulp manufacturers. If we include a strong dollar in the mix we see that Canada is no longer the world’s low cost producer of newsprint.

Softwood lumber

The third category of Canadian softwood lumber imports is softwood construction lumber used primarily to build homes and light commercial construction. Think all those 2x4’s you see at Home Depot. Canada is one of the world’s largest producers and exporters of softwood lumber and this market represents about 20% of the overall value of Canadian forest products exports. The headlines I see most tell us that Trump’s 20% tariff will increase the price of homes in the U.S. and create a trade war with Canada. Yeah, not so much. First of all the lumber from Canada passes through a distribution system to get it to your local lumber yard or home center. When Canadian lumber is cheaper lumber yards buy more of it, when it’s not, they buy lumber somewhere else. When prices are equal, they buy from who delivers it the fastest to keep their shelves stocked. The biggest impact a 20% tariff will have is to lower the profit margins that the distributors and the lumber yards enjoyed. There isn’t a lot of elasticity in the price of lumber, so lumber yards are not going to suddenly jack up prices, there will simply be some give and take throughout the whole distribution system with the end consumer picking up a little extra cost.

So what’s the benefit of a 20% tariff? First of all 20% is a lot lower than anyone expected! Just look at the stock prices of Canadian lumber companies today, they are soaring on the news. And over the past year lumber prices have gone up 22% in anticipation of this tariff. The increase is already baked in and we've been paying it for a year; there won't be any appreciable increase in the cost of a home, at least not because of this tariff.

I wish President Trump had simply explained it this way: The typical 2,400 square foot, single-family home requires about 16,000 board feet of framing lumber and over 14,000 square feet of other wood products including plywood, oriented strand board, glu-lam beams, wood I-joists, laminated veneer lumber, hardboard, particleboard and medium-density fiberboard (MDF). 220 logging trucks are needed to carry one million board feet of raw logs. That's 4,545 board feet per truck. Roughly 35 jobs are created for each new million board feet of wood processed. Each million board feet provides an increase in personal income that translates into $2.6 million in sales of goods and services in the U.S. economy. A recent number showed that we imported 21.5 Billion board feet of lumber from Canada. That’s roughly $56 Billion dollars added to the US economy.

Stay Invested,

Clay Baker

Disclosure: I am personally invested long in these stocks that appear in the MLH portfolio and may purchase or sell share withing the next 72 hours. I am also invested in other stocks that do not appear in the MLH portfolio: BA, BRK.B, CELG, CSCO, CTXS, CVX, DOW, DVAX, FB, IBM, NTES, NVDA, OMER, PFE, PG, RDHL, SCHW, THO, TWX, VEEV, VZ, XLNX, XOM

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

This article is not intended to offer investing advice, guarantee 100% accurate predictions, or to be interpreted as providing a personal recommendation.