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Minnesota’s State Timber Sale Program:. An effort to stabilize logger stumpage bidding. Ross Brown. Photo: MCEA. Photo: Potlatch Corp. Outline. Background and Description of Timber Sales Problem Description Problem Statement Alternatives Evaluation Criteria

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Minnesota s state timber sale program

Minnesota’s State Timber Sale Program:

An effort to stabilize logger stumpage bidding

Ross Brown

Photo: MCEA

Photo: Potlatch Corp.


Outline
Outline

  • Background and Description of Timber Sales

  • Problem Description

  • Problem Statement

  • Alternatives

  • Evaluation Criteria

  • Data Sources and Methods of Analysis

  • Analysis Results

  • Conclusions/Recommendations


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.


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


Problem description
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



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.


Problem statement
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.


Policy alternatives
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.


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?


Data methods
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?


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.


Background Evaluation CriteriaProblem Description Data & MethodsProblem Statement Analysis ResultsAlternatives Conclusions

R2=0.161

n=555


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.



Conclusions recommendation
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.


Questions
Questions?

Photo: City Pages


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