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## PowerPoint Slideshow about 'Marketing of Timber -- Context and Procedures' - oria

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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

- 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

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

- 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

- 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

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

Based on average growth and removals from 1986 to 1997

Doesn’t reflect recent increase in removals

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

$/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

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

- 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

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

Indiana Forest Products Price Report and Trend Analysis

- FNR website
- http://www.ces.purdue.edu/extmedia/FNR/FNR-177-W.pdf

Species as a factor in timing of timber sales

- Prime species
- Non-prime species

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 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

- 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)

Efficiency of Indiana’s Stumpage Market

- What are implications of this price discrimination?
- To forestland owner
- To mills

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

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?

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)

Derived Demand for Pulpwood --An Example

- Derive demand price for pulpwood in dollars per ton of newsprint

(1) PNd = 450 - 0.35 Qn

(3) - (POs = 80 + 0.06 Qn)

(4) Ppd = 370 – 0.41 Qn

Derived Demand for Pulpwood --An Example

- Convert (4) from T newsprint to cords of pulpwood based on 250 cords per 100 T of newsprint

(4) Ppd = 370 – 0.41 Qn

(5) Ppd = 370 – 0.41/250 Qcd

(5) Ppd = 370 – 0.00164 Qcd

Derived Demand for Pulpwood --An Example

- Rescale to $’s per cord by 2.5 since scale is 1000’s of cords

(6) Ppd = 148 – 0.00065 Qcd

- Given pulpwood supply curve,

(7) Pps = 8 + 0.000128 Qcd

Derived Demand for Pulpwood --An Example

- Solve for equilibrium Q and P

Ppd = 148 – 0.000656 Qcd

–(Pps = 8 + 0.000128 Qcd)

0 = 140 – 0.000784 Qcd

Qcd = 178,571cords

P = 8 + 0.000784 * 178,571

= $30.86

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