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Timber (Stumpage) Demand and Supply

Timber (Stumpage) Demand and Supply. 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 .

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Timber (Stumpage) Demand and Supply

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  1. Timber (Stumpage)Demand and Supply

  2. 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.

  3. 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

  4. 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

  5. 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.

  6. 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

  7. Removals are for 2000 and inventories are for 1998

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

  9. 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

  10. 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

  11. 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

  12. 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

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

  14. 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

  15. 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

  16. 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) • One-on-one negotiation between single buyer and timber owner (lower price) • Owner accepts first offer made by buyer (lowest price)

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

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