Minnesota’s State Timber Sale Program:

1. Minnesota’s State Timber Sale Program: An effort to stabilize logger stumpage bidding Ross Brown Photo: MCEA Photo: Potlatch Corp.

2. Outline • Background and Description of Timber Sales • Problem Description • Problem Statement • Alternatives • Evaluation Criteria • Data Sources and Methods of Analysis • Analysis Results • Conclusions/Recommendations

3. Background Evaluation CriteriaProblem Description Data & MethodsProblem Statement Analysis ResultsAlternatives Conclusions • Background/Stakeholders • MN owns ~4 million acres of forest land (25%) and sells the right to harvest trees on their land. • DNR Forester appraises the value of wood and sets up a sale. • Standing trees are sold to loggers at a public auction (oral or sealed bid). • Loggers harvest trees and sell the wood to wood products mills (OSB, lumber, paper). • Revenue from timber sales primarily goes to state K-12 education.

4. Background Evaluation CriteriaProblem Description Data & MethodsProblem Statement Analysis ResultsAlternatives Conclusions • DNR Timber Sale Program Goals • Maximize revenue for K-12 schools • Forest sustainability and multiple uses • Support local communities and wood products industry

5. Problem Description Background Evaluation CriteriaProblem Description Data & MethodsProblem Statement Analysis ResultsAlternatives Conclusions • 2005: Excellent market for MN wood products loggers made very high stumpage bids, higher than the present value of the wood. • 2006: Housing market declines, no market for MN wood products mills reduce production. • Loggers are left with expensive stumpage contracts, but no mills are willing to buy the wood at high prices. • Loggers are forced to forfeit their contracts

6. How did it get so bad?

7. Background Evaluation CriteriaProblem Description Data & MethodsProblem Statement Analysis ResultsAlternatives Conclusions • Excessive bidding at oral auctions • Bidders may get caught up in the excitement of the oral auction. • May place bids that are higher than their true willingness to pay.

8. Problem Statement Background Evaluation CriteriaProblem Description Data & MethodsProblem Statement Analysis ResultsAlternatives Conclusions Loggers are submitting stumpage bids that do not reflect the true present value of the wood. Possible Causes: Loggers are speculating about future prices. Loggers place excessive bids when they get “caught up” in the auction format.

9. Policy Alternatives Background Evaluation CriteriaProblem Description Data & MethodsProblem Statement Analysis ResultsAlternatives Conclusions • No Action • Decrease Contract Lengths • More 2-3 year contracts • More Sealed Bid Auctions • Fewer oral auctions • Use 2nd Price Sealed Bid Auctions • Highest bid wins the auction, but only has to pay the second highest bid price.

10. BackgroundEvaluation CriteriaProblem Description Data & MethodsProblem Statement Analysis ResultsAlternatives Conclusions Evaluation Criteria - Economic Efficiency Will the policy encourage loggers to make bids that reflect true willingness to pay? - Equity Will policy provide adequate opportunities for small loggers to purchase stumpage? - Social Acceptability Will the policy be acceptable to all stakeholders?

11. Data & Methods Background Evaluation CriteriaProblem Description Data & MethodsProblem Statement Analysis ResultsAlternatives Conclusions • Regression Analysis • Data: Records of all MN Timber Sales since 1994 (~13000 records). • How did different sale characteristics (e.g., contract length, auction format) influence logger stumpage bidding? • Interview with DNR Forester and DNR Timber Sales Program Supervisor • How do different stakeholders perceive the problem? • How would stakeholders feel about the various policy alternatives?

12. Background Evaluation CriteriaProblem Description Data & MethodsProblem Statement Analysis ResultsAlternatives Conclusions Analysis Results • OLS Regression • Use all 2005 pulpwood sales where the logger size was known (n=555). • Dependent Variable = % Bid Up • i.e. how much higher the selling price was than the appraised price. • Possible Predictors: contract length, type of auction, number of different products/species, size of logger, etc.

13. Background Evaluation CriteriaProblem Description Data & MethodsProblem Statement Analysis ResultsAlternatives Conclusions R2=0.161 n=555

14. Background Evaluation CriteriaProblem Description Data & MethodsProblem Statement Analysis ResultsAlternatives Conclusions • Interview Results • Contract length was identified as a factor that may contribute to higher stumpage bids. • Current sales are being reduced to three years. • Not much resistance to reduced contract length. • DNR is trying to increase sealed bid auctions. • Many loggers don’t like them because they “leave money on the table.” • Second price sealed bids have not been seriously considered. • Potentially a good solution. • Concerns about collusion.

15. Analysis

16. Conclusions/Recommendation Background Evaluation CriteriaProblem Description Data & MethodsProblem Statement Analysis ResultsAlternatives Conclusions • There is no evidence that contract length influences stumpage bidding. • Sealed bids may help produce more thoughtful, rational bids, but many loggers do not like to leave money on the table and prices are higher. • 2nd price sealed bids may be the best option because they can help reduce excessive bids without loggers worrying about leaving money on the table. • Political and social acceptability are still uncertain.

17. Questions? Photo: City Pages