Marketing of Timber -- Context and Procedures

1. Marketing of Timber -- Context and Procedures

2. Components of Hardwood Market

3. Economic Background

4. Time Periods • Short-run – all factors (shifters) are held constant, only P and Q change. • Long-run – all factors can shift, defining new relationships between P and Q. • At any given price the quantity of stumpage can change because of factors other than price.

5. Timber Demand • Specify a time period, usually one year, and a group of buyers, then • Timber demand is the quantities of stumpage that the group would purchase for harvesting at different prices Market demand curve for short-run, i.e. all “shifters” held constant $/MBF P Q MBF/year

6. Derived Demand for Timber It starts with DLumber and DLogs and DStumpage are derived from DLumber DLumber PLu = $300 Milling & distribution cost = $100/MBF DLogs Plo = $200 Logging & hauling cost = $70/MBF Start with lumber and work back-ward to stumpage DStumpage Q (log scale) Q

7. Stumpage Supply as a Flow • Flow supply is based on the “flow” of stumpage at a given price, quantity that would actually be sold. • Stock supply is timber inventory in the market area specified, only a small portion of which is actually available at prevailing market prices.

8. Stock Compared to Flow for Indiana • Sawtimber volume was 17.1 bil. bd. ft. (Doyle) in 1998 (Stock supply) • Sawtimber harvest of industrial roundwood was 367 mil. bd. ft. in 2000 (Flow supply) • Flow was 2.1% of stock

9. Price Elasticity of Demand(Ep) % change in quantity demanded % change in price ∆Q/Q =∆Q x P =∆ Q P ∆ P/P Q ∆P ∆ P x Q Ep is function of (1) inverse of the slope of the demand curve and (2) the point on the demand curve

10. Price Elasticities of Log Market

11. Removals are for 2000 and inventories are for 1998

12. Based on average growth and removals from 1986 to 1997 Doesn’t reflect recent increase in removals

13. Timber Supply • Specify a time period, usually one year, and a group of sellers, then • Timber supply is the quantities of stumpage that forest owners would sell for harvest at different stumpage prices $/MBF P SStumpage MBF/year Q

14. Supply of Stumpage Determines Supply of Lumber $/MBF SLu 300 Milling & distribution cost = $100/MBF SLo 200 Logging & hauling cost = $70/MBF SS 130 Start with stumpage and work backward to lumber MBF/year log scale Q

15. Timber Supply as Aggregate of Individual Supply Curves For a given price sum quantities horizontally $/MBF SstumpTtotal stumpage supply curve SstumpB for timber owner Bob SstumpJ for timber owner Jane 500 100 MBF log scale 150 300 50 150 100 200 Price of $100/MBF Price of $500/MBF

16. Competition from Stumpage Buyer’s Perspective • Highly competitive stumpage market • Small mill is price taker • Large mill • Monopsonist – one buyer • Oligopsonist – very few buyers $/MBF Ss Eps > 1 elastic MBF $/MBF Ss Eps < 1 inelastic MBF

17. Short-Run Equilibrium $/MBF SLu 300 DLu SLo 200 DLo SS 130 DS MBF/year log scale Q

18. Price Elasticities for Stumpage Market

19. Indiana Industrial Roundwood Production - Intl. ¼-inch log rule

20. Hardwood Lumber Industry is Consolidating

21. Industrial roundwood receipts by Indiana mills, Doyle log scale (Piva and Gallion, 2003)

22. Number of active primary wood-using mills(Riva and Gallion, 2003)

23. Output per mill, MBF.

24. Indiana Forest Products Price Report and Trend Analysis • FNR website • http://www.ces.purdue.edu/extmedia/FNR/FNR-177-W.pdf

25. Delivered Log Prices- Average Stand

26. Delivered Log Prices – Quality Stand

27. Species as a factor in timing of timber sales • Prime species • Non-prime species

28. Non-Prime Species

30. Prime Species

36. Efficiency of Stumpage Market • Theory is that buyer pays same price for all the stumpage it purchases • Price based on intersection of Ss and Ds

37. Efficiency of Stumpage Market • Example • Mill buys 12,000 MBF @ $200/MBF • Total cost is $2,400,000 • Mill wants to increase output, need to buy 14,000 MBF. • Must increase price to $250/MBF • Total cost is $3,500,000 • Increase in total cost is $1,100,000 • Marginal cost is ΔVC/ Δ Q, • $1,100,000/2,000 = $550/MBF • MC isn’t $250 - $200 = $50

38. Efficiency of Indiana’s Stumpage Market • Stumpage markets are segmented by • Average quality of timber stand, and • How timber is sold • Sealed bid, usually with a consulting forester conducting the sale (highest price), ~ 15% of stumpage purchased • One-on-one negotiation between single buyer and timber owner (lower price) • Owner accepts first offer made by buyer (lowest price)

46. Efficiency of Indiana’s Stumpage Market • What are implications of this price discrimination? • To forestland owner • To mills

47. Should All Stumpage Sellers Get Consultant’s Bid Prices? • Currently • 380 MMBF sold • 15% @ $510 per MBF • 85% @ $300 per MBF • Stumpage cost to mills - $126 million • All sold at bid price • $194 million • $68 million cost increase to mills

48. Should All Stumpage Sellers Get Consultants’ Bid Prices? • Hold cost to mills constant at current level of $126 mil for 380 MMBF • Average stumpage price would be $332 • What’s fair?

49. Should all timber be sold on bid?

50. Derived Demand for Pulpwood --An Example • Demand curve for newsprint (1) PNd = 450 – 0.35 Qn ($/T of newsprint) • Supply curve for newsprint (2) PNs = 100 + 0.14 Qn ($/T of newsprint) • Supply curve for all other factorsneeded to make newsprint (3) POs = 80 + 0.06 Qn ($/T of newsprint)