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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Timber stumpage demand and supply

Timber (Stumpage)Demand and Supply


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



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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