Transcript Timber Demand and Supply

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
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
Price Elasticity of Demand
(Ep)
% change in quantity demanded
% change in price
∆Q/Q ∆Q
P
∆Q xP
∆ P/P = Q x ∆P = ∆ P
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
Average
Quality Quality
Demand
1.1
1.2
Supply
1.3
1.5
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
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
375,254
379,057
464,564
378,654
All products
Hardwood Lumber Industry is
Consolidating
Industrial roundwood receipts by Indiana mills,
Doyle log scale
(Piva and Gallion, 2003)
450
400
350
Million Bd Ft
300
250
200
150
100
50
0
1966
1980
1984
1990
Year
1995
2000
Number of active primary wood-using mills
(Riva and Gallion, 2003)
600
Number of mills
500
400
300
200
100
0
1961
1966
1971
1980
1984
Year
1990
1995
2000
Output per mill, MBF.
2000
1800
1600
1400
MBF
1200
1000
800
600
400
200
0
1966
1980
1984
1990
Year
1995
2000
Indiana Forest Products Price
Report and Trend Analysis
• FNR website
– http://www.ces.purdue.edu/extmedia/FNR/FN
R-177-W.pdf
Delivered Log PricesAverage Stand
Delivered Log Prices –
Quality Stand
Species as a factor in timing of
timber sales
• Prime species
• Non-prime species
Nov. 05
Jun.05
Jan. 2005
Aug. 2004
Mar. 2004
Oct. 2003
May. 2003
Dec. 2002
July.2002
Feb. 2002
Sept. 2001
Apr. 2001
Nov.2000
June.2000
Jan. 2000
$ per MBF
Non-Prime Species
Beech Lumber - Applachian
600
500
400
BEFS
300
BE1C
BE2A
200
BE3A
100
0
Beech Sawlogs
300
250
Prime
No. 1
150
No. 2
No. 3
100
50
5
02
99
96
93
90
87
84
81
78
75
72
69
66
63
60
0
57
$ per MBF
200
Jan. 06
Sep. 05
May-05
Jan. 2005
Sep. 2004
May. 2004
Jan. 2004
Sep. 2003
May. 2003
Jan. 2003
Sep. 2002
May. 2002
Jan. 2002
Sept. 2001
May. 2001
Jan. 2001
Sep.2000
May.2000
Jan. 2000
$ per MBF
Prime Species
Black Cherry Lumber - Applachian
3000
2500
2000
BCFS&P
BC1F
1500
BC1C
BC2A
1000
BC3A
500
0
Black Cherry Sawlog
1600
1400
1000
Prime
No. 1
800
No. 2
No. 3
600
400
200
5
02
99
96
93
90
87
84
81
78
75
72
69
66
63
60
0
57
$ per MBF
1200
Red Oak Sawlogs - 4-Year Moving Average
900
800
700
$ per MBF
600
Prime
500
No. 1
400
No. 2
No. 3
300
200
100
5
02
99
96
93
90
87
84
81
78
75
72
69
66
63
60
0
Red Oak Lumber - Annual, January
Red Oak Sawlog
1400
900
800
1200
700
1000
No. 1
400
No. 2
No. 3
$ per MBF
Prime
500
ROFS&P
800
RA1C
RO2C
600
RO3A
300
400
200
200
100
3
0
97
94
91
88
85
82
79
76
73
70
67
64
61
5
02
99
96
93
90
87
84
81
78
75
72
69
66
63
60
58
0
0
57
$ per MBF
600
Comparison of Log and Lumber Prices
1400
1200
800
RO Prime
ROFS&P
600
400
200
3
0
97
94
88
91
85
79
82
73
76
70
64
67
61
0
58
$ per MBF
1000
Producer Price Index
180
160
140
100
Series1
80
60
40
20
5
02
99
96
93
90
87
84
81
78
75
72
69
66
63
60
0
57
1982 $'s
120
Lumber minus Log Price
600
500
Nominal
300
Real
200
100
3
0
97
94
91
88
85
82
79
76
73
70
67
64
61
0
58
$ per MBF
400
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 $332
• What’s fair?
Should all timber be
sold on bid?
Derived Demand for Pulpwood -An Example
• Demand curve for newsprint
d
(1) PN = 450 – 0.35 Qn
($/T of newsprint)
• Supply curve for newsprint
s
(2) PN = 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
500
Pdn = 450 – 0.35 Qn
400
350
300
250
200
150
Psn = 100 + 0.14 Qn
100
Pso = 80 + 0.06 Qn
50
1,000's tons of newsprint
10
50
11
50
95
0
85
0
75
0
65
0
55
0
45
0
35
0
25
0
15
0
0
50
$ per ton of newsprint
450
Derived Demand for Pulpwood -An Example
• Derive demand price for pulpwood in
dollars per ton of newsprint
d
(1) PN = 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