Timber pricing evolved over more than 150 years, from a rudimentary licensing system which gave unrestricted access to the forest for very little payment, through to current market pricing, involving competitive processes and mill door sales. The evolution of pricing was in four distinct phases.
Licence system – this entirely inadequate scheme applied to timber sales from the mid-1800s until the early 1900s. A small fee was paid which gave the holder unrestricted and mostly unsupervised access to the forest to cut and remove timber. The system resulted in excessive wastage and sometimes large trees were cut and left on the forest floor. Wastage by sleeper cutters and timber splitters were the constant frustration of the first Forests Conservator, George Perrin. The licence system also produced a very poor financial return to the Crown.
Berthold Ribbentrop reported in 1896 on the poor state of Victoria’s forests, and observed…
The present licence system, which permits a scramble for the forest produce so long as it can be found anywhere, is at the bottom of much of the disorder which exists.
He also noted that…
The income from the forests is ridiculously small.
Ribbentrop’s scathing report prompted a Royal Commission between 1897 and 1901 into the destruction of Victoria’s forests.
Report Number 10 – “Forest Royalties and the Royalty System”, published in June 1900, recommended applying a “royalty” for timber, together with improved regulation of the quantity of timber harvested.
Royalty payments – the 1897-1901 Royal Commission highlighted the shortcomings of Victoria’s timber sales with the stark example of a sawmiller from Echuca who paid a paltry £31 for 1,600 logs from the Barmah Forest, but they would have attracted a royalty of £700 if cut just over the border in New South Wales.
The Government changed the system, and from the early 1900s, timber royalty was charged on logs from Victoria’s State forest.
But the royalty was charged on the quantity of sawn timber produced from a log rather than the input volume. Royalty payments relied on sawmillers honestly self-reporting their production and this approach did little to reduce timber wastage, or trees left in the forest.
The State Forest Department obviously favoured a sales system based on input log volume, measured in the forest or as they were received at the mill.
For many years, the Department unsuccessfully sought change, but unsurprisingly there was vocal opposition from sawmillers together with intense lobbying of their parliamentary representatives.
It took until the 1930s before the system was changed and royalty payments were based on input log volume.
The shift resulted in a 12-fold increase in royalty payments from £50,845 in 1930, to £645,793 in 1950.
Half of this revenue was retained by the FCV in its Forestry Trust Fund for on-ground works in the forests.
Royalty Equation System (RES) – was introduced on 1 January 1950, during the height of the post-war housing boom. At the time, the timber industry was progressively being moved eastwards after the completion of the 1939 salvage in the Central Highlands.
The RES was a significant step, and it aimed to overcome cost disadvantages for more distant sawmills and to “equalise” the costs of sawing and transporting base-grade scantling timber to three marketing zones, including Melbourne.
Individual sawmiller rates were built-up from a base royalty known as the Standard Mill Formula (SMF).
Divergence factors were applied to allow for differences in the value of the timber produced from each grade of logs. The haulage distances were measured for different classes of forest road from the bush to the mills and then the costs of transport from the mill to markets was factored in, with a preference given for rail transport to Melbourne, where available. A residue allowance was applied for the sale of sawdust and chips.
Price increases were set within the Government’s fee and charges guidelines, leading to increases generally below the CPI.
The equitable system was long lasting and was initially retained in the Timber Industry Strategy (TIS) in 1986.
The RES was suitable for its time during the post-war housing boom, but over time it became apparent that it failed to reflect the State Government’s commercial enterprise or ensure that the revenue at least covered the costs of producing the logs.
Market Pricing – was a longer-term commitment by the Government in the Timber Industry Strategy in 1986.
It aimed to generate at least a 4% return on the invested funds and introduction of commercial accounts for the State’s publicly owned forest resources.
The new Victorian Plantations Corporation (VPC) introduced full market pricing for softwood logs from 1993 during individual negotiations for its established supply agreements, while VicForests introduced a similar system for hardwoods from 2004. VicForests also introduced “mill door” sales which covered the full costs of its own operations, plus the costs of harvesting and haulage.
David Williams (2020) Royalty Equation System.
https://www.victoriasforestryheritage.org.au/activities1/producing/461-royalty-equation-system.html
David Williams (2020) Log Pricing in Victoria
https://www.victoriasforestryheritage.org.au/activities1/producing/460-timber-pricing.html
Victoria’s Forests & Bushfire Heritage 