Transcript Timber Demand and Supply

Timber (Stumpage)
Demand and Supply
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
Market demand curve
for short-run, i.e. all
“shifters” held constant
$/MBF
P
Q
MBF/year
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
Start with
lumber and
work backward to
stumpage
Logging &
hauling cost
= $70/MBF
DStumpage
Q
Q (log scale)
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
Sawtimber Removals as % of Inventory, Doyle
Removals are for 2000 and inventories are for 1998
4.50
4.00
3.50
%
3.00
2.50
2.00
1.50
1.00
0.50
0.00
Black
cherry
Red oak
White
oak
Hard
maple
Species
Hickory
All
species
Annual Sawtimber Removals as % of Growth,
Doyle
Based on average growth and removals from 1986 to 1997
70
60
50
Doesn’t
reflect
recent
increase
in
removals
%
40
30
20
10
0
Black
cherry
Red oak
White
oak
Hard
maple
Species
Hickory
All
species
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
Q
MBF/year
Supply of Stumpage Determines
Supply of Lumber
$/MBF
SLu
300
SLo
200
SS
130
Start with
stumpage
and work
backward
to lumber
Q
Milling &
distribution cost =
$100/MBF
Logging &
hauling cost =
$70/MBF
MBF/year
log scale
Timber Supply as Aggregate of
Individual Supply Curves
For a given price sum quantities horizontally
$/MBF
SstumpB for
timber
owner Bob
SstumpJ for
timber
owner Jane
SstumpTtotal
stumpage supply
curve
500
100
50
150
MBF log scale
100
200
Price of $100/MBF
Price of $500/MBF
150
300
Competition from Stumpage Buyer’s
Perspective
• Highly competitive stumpage market
– Small mill is price taker
$/MBF
Ss
Eps > 1 elastic
MBF
– Large mill
• Monopsonist – one buyer
• Oligopsonist – very few buyers
$/MBF
Ss
Eps < 1
inelastic
MBF
Short-Run Equilibrium
$/MBF
SLu
300
DLu
SLo
200
SS
130
DLo
DS
Q
MBF/year
log scale
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)
• 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