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Marketing of Timber -- Context and Procedures. Components of Hardwood Market. Economic Background. 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 l.jpg
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 l.jpg
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 l.jpg
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 l.jpg
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 l.jpg
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




Slide11 l.jpg

Based on average growth and removals from 1986 to 1997

Doesn’t reflect recent increase in removals


Timber supply l.jpg
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 l.jpg
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 l.jpg
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 l.jpg
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 l.jpg
Short-Run Equilibrium

$/MBF

SLu

300

DLu

SLo

200

DLo

SS

130

DS

MBF/year log scale

Q


Price elasticities for stumpage market l.jpg
Price Elasticities for Stumpage Market




Industrial roundwood receipts by indiana mills doyle log scale piva and gallion 2003 l.jpg
Industrial roundwood receipts by Indiana mills, ruleDoyle log scale (Piva and Gallion, 2003)


Number of active primary wood using mills riva and gallion 2003 l.jpg
Number of active primary wood-using mills rule(Riva and Gallion, 2003)



Indiana forest products price report and trend analysis l.jpg
Indiana Forest Products Price Report and Trend Analysis rule

  • FNR website

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


Delivered log prices average stand l.jpg
Delivered Log Prices- ruleAverage Stand

1.1% per annum


Delivered log prices quality stand l.jpg
Delivered Log Prices – ruleQuality Stand

1.5% per annum


Species as a factor in timing of timber sales l.jpg
Species as a factor in timing of timber sales rule

  • Prime species

  • Non-prime species




Efficiency of stumpage market l.jpg
Efficiency of Stumpage Market rule

  • Theory is that buyer pays same price for all the stumpage it purchases

    • Price based on intersection of Ss and Ds


Efficiency of stumpage market36 l.jpg
Efficiency of Stumpage Market rule

  • 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 l.jpg
Efficiency of Indiana’s Stumpage Market rule

  • 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 market45 l.jpg
Efficiency of Indiana’s ruleStumpage Market

  • What are implications of this price discrimination?

    • To forestland owner

    • To mills


Should all stumpage sellers get consultant s bid prices l.jpg
Should All Stumpage Sellers Get Consultant’s Bid Prices? rule

  • 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 l.jpg
Should All Stumpage Sellers Get Consultants’ Bid Prices? rule

  • Hold cost to mills constant at current level of $126 mil for 380 MMBF

    • Average stumpage price would be $332

  • What’s fair?


Should all timber be sold on bid l.jpg
Should all timber be rulesold on bid?


Derived demand for pulpwood an example l.jpg
Derived Demand for Pulpwood -- ruleAn 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)


Slide50 l.jpg

P ruledn = 450 – 0.35 Qn

Psn = 100 + 0.14 Qn

Pso = 80 + 0.06 Qn


Derived demand for pulpwood an example52 l.jpg
Derived Demand for Pulpwood -- ruleAn 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 example53 l.jpg
Derived Demand for Pulpwood -- ruleAn 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 example54 l.jpg
Derived Demand for Pulpwood -- ruleAn 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 example55 l.jpg
Derived Demand for Pulpwood -- ruleAn 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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