1. Timber (Stumpage) Demand and Supply

2. 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.

3. 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

4. Derived Demand for Timber P Lu = $300 P lo = $200 D Lumber D Logs D Stumpage Milling & distribution cost = $100/MBF Logging & hauling cost = $70/MBF Q (log scale) Q It starts with D Lumber and D Logs and D Stumpage are derived from D Lumber Start with lumber and work back- ward to stumpage

5. 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.

6. 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

7. Removals are for 2000 and inventories are for 1998

8. Doesn’t reflect recent increase in removals Based on average growth and removals from 1986 to 1997

9. 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/year Q P S Stumpage

10. Supply of Stumpage Determines Supply of Lumber 300 $/MBF 200 130 S Lu S Lo S Milling & distribution cost = $100/MBF Logging & hauling cost = $70/MBF Q MBF/year log scale Start with stumpage and work backward to lumber

11. Timber Supply as Aggregate of Individual Supply Curves 100 50150 500 100200 150300 S stumpB for timber owner Bob S stumpJ for timber owner Jane $/MBF MBF log scale Price of $100/MBF Price of $500/MBF S stumpT total stumpage supply curve For a given price sum quantities horizontally

12. 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 E ps > 1 elastic MBF $/MBF E ps < 1 inelastic SsSs SsSs

13. Short-Run Equilibrium 300 $/MBF 200 130 S Lu S Lo S Q MBF/year log scale D Lu D Lo DSDS

14. Efficiency of Stumpage Market Theory is that buyer pays same price for all the stumpage it purchases –Price based on intersection of S s and D s Price paid by mill for all logs of one quality $/MBF Quantity of delivered logs, MBF/year Total log cost $millions 1008,0000.80 15010,0001.5 20012,0002.4 25014,0003.5 30016,0004.8 35018,0006.3

15. 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

16. 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)

17. Efficiency of Indiana’s Stumpage Market What are implications of this price discrimination? –To forestland owner –To mills