Timber (Stumpage) Demand and Supply

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Timber (Stumpage)Demand and Supply
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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.

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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
MBF/year
Q
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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
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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.

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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

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Removals are for 2000 and inventories are for 1998
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Based on average growth and removals from 1986 to
1997
Doesnt reflect recent increase in removals
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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
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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
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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
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Competition from Stumpage Buyers Perspective

• Highly competitive stumpage market
• Small mill is price taker
• Large mill
• Monopsonist one buyer
• Oligopsonist very few buyers

/MBF
Ss
Eps gt 1 elastic
MBF
/MBF
Ss
Eps lt 1 inelastic
MBF
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Short-Run Equilibrium
/MBF
SLu
300
DLu
SLo
200
DLo
SS
130
DS
MBF/year log scale
Q
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Efficiency of Stumpage Market
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

• Theory is that buyer pays same price for all the
  stumpage it purchases
• Price based on intersection of Ss and Ds

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Efficiency of Stumpage Market

• Example
• Mill buys 12,000 MBF _at_ 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 ?VC/ ? Q,
• 1,100,000/2,000 550/MBF
• MC isnt 250 - 200 50

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Efficiency of Indianas 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)
• One-on-one negotiation between single buyer and
  timber owner (lower price)
• Owner accepts first offer made by buyer (lowest
  price)

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Efficiency of Indianas Stumpage Market

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