Log Prices and Contracts

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Log Prices and Contracts

• The Importance of Price in re-negotiating Long
  term supply Contracts from softwood Plantations
  - The case of Queensland Australia
• by
• Dr. Michael J. Quayle
• Senior Lecturer in International Business
• School of International Business
• Queensland University of Technology
• Brisbane
• Australia

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Log Prices and Contracts

• Presentation
• Long Term Contracts Log Price Setting
• 1. Plantation Production Costs
• 2. Supply arrangements in State of Queensland
• 3. Nature of Supply Contracts
• 4. Cost-Based Pricing SR vs LR
• 5. Market Based Pricing - criteria
• 6. Bilateral Monopolies - Price Indetermination
• 7. Impacts on SSFF
• 8. Impacts on Industrial Small Scale
  Foresters

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Log Prices and Contracts

• INTRODUCTION
• Origin of Research
• QDPI-F major supplier of logs in QLD
• QDPI-F approached Quayle/Cox
• Object
• 1. Determine PRICE for LT contracts on log
  sales from softwood commercial plantations
• 2. Develop a model for adjusting Log Sales
  Prices in Long Term Contracts.
• - transparent, efficient, easily administered
  and market price related
• IUFRO 3.08.00 Small Scale Forestry
• IUFRO 6.11.02 Forestry Rural Development in
  Industrialised Countries

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Log Prices and Contracts

• Price Determination Approach
• Options
• Cost-based pricing MC or FATC
• Market-Based pricing competitive pricing
• Simulated Market Pricing
• Determining the reservation price
• Determine Value of Logs in End-Market
• Determine Economic rents on logs
• SCP - International Perspective
• Price Adjustment Mechanism
• Adjustment of contract prices to simulate market
  conditions.
• The Issue
• Pt ( Pt-1)(WWI) FAS
• where
• WWI wood weighted index
• FAS Factor Adjustment System

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Log Prices and Contracts

• Rationale for End- Market Pricing
• Revenues Log Costs in End-Market

End Market Revenues
Rev Costs
Log Prices
Time
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Log Price Adjustment Models
Log Prices and Contracts

• Log Sales in Queensland
• Nature of the Market
• Qld NSW high concentration
• Public Ownership of softwood plantations
• QLD 89 ownership
• NSW 70 ownership
• All Eastern States 66 ownership
• In QLD
• Size of forest Estate 178,000 ha
• Species Pinus Elliotti, Carabaea, Auracaria
• Log sales by Propositional Calls
• Usually single tender

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Log Price Adjustment Models
Log Prices and Contracts
Short Run Marginal Costs
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Log Prices and Contracts

• Cost Based Pricing
• Two Options Short Run / Long Run
• Short Run
• Increase supply cut more of existing forest
• Supply curve upward sloping
• Long Run
• Expand the plantation estate
• All costs are variable in the long run
• Full LRATC LRMC
• Supply curve is influenced by these costs
• LRTAC consist of
• Fixed cost element
• Long Run Variable Costs

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Log Prices and Contracts
Long Run Land Establishment costs Plantation
Forest (28yr rotation)
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Log Prices and Contracts

• Market Based Pricing
• Competitive Markets
• Criteria
• Demand for logs
• VMPL MRPL MPPL . MR
• ( P MR)
• Uncompetitive Markets
• Criteria
• Demand for logs
• VMPL gt MRPL MPPL . MR
• ( MR lt P)
• Monopsonists demand logs by MRP
• not VMP

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Log Prices and Contracts

• Market Imperfections
• If MR lt P logs are paid lt VMP
• For Large Buyers
• Demand equates with MRP
• not VMP of logs
• If Monopsonist increases demand for logs
• Pay a higher price for additional logs
• ME curve above AE curve
• AE curve supply curve
• Equilm ME on Logs MRP sets Stb
• On the Supply Side Large Supplier
• Rule MR MC sets Sts
• Sts gt Stb

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Log Prices and Contracts

STS
F
SLMCS AEB
STB
DB MRPLARS
MRS
LS
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Log Prices and Contracts

• The Queensland Case
• Characteristics
• Regional Monopoly / Monopolist
• Strategically located mills / plantations
• Guaranteed MT LT contracts
• Propositional Calls Negotiated Pricing
• Reserve Price Setting St s
• (lowest acceptable price)

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Log Prices and Contracts

• Impacts on Small Scale Forest Farmers
• If SSFF have lt 10 of market
• Log Price set by large supplier/buyer
• Regional Monopolies
• 1 buyer / 1 seller
• Bilateral Monopoly
• Price indeterminacy
• Price Bargaining
• SSFF follow price set by Market leaders
• Log Price not market determined.

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Log Prices and Contracts

• CONCLUSIONS
• Non-Competitive Structured Markets
• Price/Quantity outcome - indeterminate
• St s gt St b
• Negotiations used to settle on price / quantity
• Final agreed outcome economically inefficient
• Misallocation of resources to forestry investment

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Log Prices and Contracts

• END
• The Importance of Price in re-negotiating Long
  term supply Contracts from softwood Plantations
  - The case of Queensland Australia

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Price Adjustment models
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Log Price Adjustment Models
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Price Adjustment models
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Price Adjustment models

• Dr. Michael Quayle
• Queensland University of Technology

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Price Adjustment models

• Dr. Michael Quayle
• Queensland University of Technology