Marketing of Timber -- Context and Procedures

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. – 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

$/MBF

MBF/yearQ

P

Market demand curve for short-run, i.e. all “shifters” held constant

Derived Demand for Timber

PLu = $300

Plo = $200

DLumber

DLogs

DStumpage

Milling & distribution cost = $100/MBF

Logging & hauling cost = $70/MBF

Q (log scale)Q

It starts with DLumber and DLogs and DStumpage are derived from DLumber

Start with lumber and work back-ward to stumpage

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

Price Elasticities of Log Market

High Quality

Average Quality

Demand 1.1 1.2

Supply 1.3 1.5

Sawtimber Removals as % of Inventory, Doyle

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

Blackcherry

Red oak Whiteoak

Hardmaple

Hickory Allspecies

Species

%Removals are for 2000 and inventories are for 1998

Annual Sawtimber Removals as % of Growth, Doyle

0

10

20

30

40

50

60

70

Blackcherry

Red oak Whiteoak

Hardmaple

Hickory Allspecies

Species

%

Doesn’t reflect recent increase in removals

Based on average growth and removals from 1986 to 1997

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

MBF/yearQ

P SStumpage

Supply of Stumpage Determines Supply of Lumber

300

$/MBF

200

130

SLu

SLo

SS

Milling & distribution cost = $100/MBFLogging & hauling cost = $70/MBF

Q MBF/year log scale

Start with stumpage and work backward to lumber

Timber Supply as Aggregate of Individual Supply Curves

100

50 150

500

100 200 150 300

SstumpB for timber owner Bob

SstumpJ for timber owner Jane

$/MBF

MBF log scale

Price of $100/MBF

Price of $500/MBF

SstumpTtotal stumpage supply curve

For a given price sum quantities horizontally

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

$/MBF

Eps > 1 elastic

MBF

$/MBF

Eps < 1 inelastic

Ss

Ss

Short-Run Equilibrium

300

$/MBF

200

130

SLu

SLo

SS

Q MBF/year log scale

DLu

DLo

DS

Price Elasticities for Stumpage Market

High Quality Average Quality

Demand 0.85 0.82

Supply 1.0 1.0

Indiana Industrial Roundwood Production - Intl. ¼-inch log rule

1980 1984 1990 1995

Sawlogs 347,861 353,509 435,808 353,150

Veneer logs 10,738 14,177 16,765 23,670

Cooperage 8,153 3,949 5,156 1,834

Other 8,502 7,422 6,835 0

All products 375,254 379,057 464,564 378,654

Hardwood Lumber Industry is Consolidating

Industrial roundwood receipts by Indiana mills, Doyle log scale

(Piva and Gallion, 2003)

0

50

100

150

200

250

300

350

400

450

1966 1980 1984 1990 1995 2000

Year

Mill

ion

Bd F

t

Number of active primary wood-using mills

(Riva and Gallion, 2003)

0

100

200

300

400

500

600

1961 1966 1971 1980 1984 1990 1995 2000

Year

Num

ber o

f mill

s

Output per mill, MBF.

0

200

400

600

800

1000

1200

1400

1600

1800

2000

1966 1980 1984 1990 1995 2000

Year

MBF

Indiana Forest Products Price Report and Trend Analysis

• FNR website– http://www.ces.purdue.edu/extmedia/FNR/FN

R-177-W.pdf

Delivered Log Prices- Average Stand

Delivered Log Prices – Quality Stand

Species as a factor in timing of timber sales

• Prime species• Non-prime species

Non-Prime SpeciesBeech Lumber - Applachian

0

100

200

300

400

500

600Ja

n. 2

000

June

.200

0

Nov

.200

0

Apr

. 200

1

Sep

t. 20

01

Feb.

200

2

July

.200

2

Dec

. 200

2

May

. 200

3

Oct

. 200

3

Mar

. 200

4

Aug

. 200

4

Jan.

200

5

Jun.

05

Nov

. 05

$ pe

r MBF

BEFS

BE1C

BE2A

BE3A

Beech Sawlogs

0

50

100

150

200

250

300

57 60 63 66 69 72 75 78 81 84 87 90 93 96 99 02 5

$ pe

r MBF

Prime

No. 1

No. 2

No. 3

Prime SpeciesBlack Cherry Lumber - Applachian

0

500

1000

1500

2000

2500

3000

Jan.

200

0

May

.200

0

Sep

.200

0

Jan.

200

1

May

. 200

1

Sep

t. 20

01

Jan.

200

2

May

. 200

2

Sep

. 200

2

Jan.

200

3

May

. 200

3

Sep

. 200

3

Jan.

200

4

May

. 200

4

Sep

. 200

4

Jan.

200

5

May

-05

Sep

. 05

Jan.

06

$ pe

r MBF

BCFS&P

BC1F

BC1C

BC2A

BC3A

Black Cherry Sawlog

0

200

400

600

800

1000

1200

1400

1600

57 60 63 66 69 72 75 78 81 84 87 90 93 96 99 02 5

$ pe

r MBF

Prime

No. 1

No. 2

No. 3

Red Oak Sawlog

0

100

200

300

400

500

600

700

800

900

$ pe

r MBF

Prime

No. 1

No. 2

No. 3

Red Oak Sawlogs - 4-Year Moving Average

0

100

200

300

400

500

600

700

800

900

60 63 66 69 72 75 78 81 84 87 90 93 96 99 02 5

$ pe

r MBF

Prime

No. 1

No. 2

No. 3

Red Oak Lumber - Annual, January

0

200

400

600

800

1000

1200

1400

58 61 64 67 70 73 76 79 82 85 88 91 94 97 0 3

$ pe

r MBF

ROFS&P

RA1C

RO2C

RO3A

Comparison of Log and Lumber Prices

0

200

400

600

800

1000

1200

1400

$ pe

r MBF RO Prime

ROFS&P

Producer Price Index

0

20

40

60

80

100

120

140

160

180

1982

$'s

Series1

Lumber minus Log Price

0

100

200

300

400

500

600

$ pe

r MBF Nominal

Real

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

Price paid by mill for all logs of one quality $/MBF

Quantity of delivered logs, MBF/year

Total log cost $millions

100 8,000 0.80

150 10,000 1.5

200 12,000 2.4

250 14,000 3.5

300 16,000 4.8

350 18,000 6.3

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?

Should all timber be sold on bid?

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 factors needed to make newsprint

(3) POs = 80 + 0.06 Qn ($/T of newsprint)

Supply and Demand for Newsprint

0

50

100

150

200

250

300

350

400

450

500

50 150

250

350

450

550

650

750

850

950

1050

1150

1,000's tons of newsprint

$ pe

r ton

of n

ewsp

rint Pdn = 450 – 0.35 Qn

Psn = 100 + 0.14 Qn

Pso = 80 + 0.06 Qn

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