timber stumpage demand and supply
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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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time periods
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.
timber demand
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

derived demand for timber
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

stumpage supply as a flow
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.
stock compared to flow for indiana
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
slide8

Based on average growth and removals from 1986 to 1997

Doesn’t reflect recent increase in removals

timber supply
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

supply of stumpage determines supply of lumber
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

timber supply as aggregate of individual supply curves
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

competition from stumpage buyer s perspective
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

short run equilibrium
Short-Run Equilibrium

$/MBF

SLu

300

DLu

SLo

200

DLo

SS

130

DS

MBF/year log scale

Q

efficiency of stumpage market
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
efficiency of stumpage market1
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
efficiency of indiana s stumpage market
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)
efficiency of indiana s stumpage market1
Efficiency of Indiana’s Stumpage Market
  • What are implications of this price discrimination?
    • To forestland owner
    • To mills
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