Marketing of Timber -- Context and Procedures
Feb 22, 2016
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