Minnesota’s State Timber Sale
Program:
An effort to stabilize
logger stumpage
bidding
Ross Brown
Photo: MCEA
Photo: Potlatch Corp.
Outline
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Background and Description of Timber Sales
Problem Description
Problem Statement
Alternatives
Evaluation Criteria
Data Sources and Methods of Analysis
Analysis Results
Conclusions/Recommendations
Background
Problem Description
Problem Statement
Alternatives
Evaluation Criteria
Data & Methods
Analysis Results
Conclusions
• Background/Stakeholders
– MN owns ~4 million acres of forest land (25%) and
sells the right to harvest trees on their land.
– DNR Forester appraises the value of wood and sets
up a sale.
– Standing trees are sold to loggers at a public auction
(oral or sealed bid).
– Loggers harvest trees and sell the wood to wood
products mills (OSB, lumber, paper).
– Revenue from timber sales primarily goes to state K12 education.
Background
Problem Description
Problem Statement
Alternatives
Evaluation Criteria
Data & Methods
Analysis Results
Conclusions
• DNR Timber Sale Program Goals
– Maximize revenue for K-12 schools
– Forest sustainability and multiple uses
– Support local communities and wood products
industry
Background
Problem Description
Problem Statement
Alternatives
Evaluation Criteria
Data & Methods
Analysis Results
Conclusions
Problem Description
• 2005: Excellent market for MN wood products
loggers made very high stumpage bids,
higher than the present value of the wood.
• 2006: Housing market declines, no market for
MN wood products
mills reduce production.
• Loggers are left with expensive stumpage
contracts, but no mills are willing to buy the
wood at high prices.
• Loggers are forced to forfeit their contracts
How did it get so bad?
Projecting Future Prices
$70
Price Recieved at Mill
(less harvesting costs)
$60
$50
Past Prices
$40
Estimated Future
Prices
$30
Actual Future Prices
$20
$10
$0
-4
-3
-2
-1
0
1
Year
2
3
4
5
Background
Problem Description
Problem Statement
Alternatives
Evaluation Criteria
Data & Methods
Analysis Results
Conclusions
• Excessive bidding at oral auctions
– Bidders may get caught up in the excitement
of the oral auction.
– May place bids that are higher than their true
willingness to pay.
Background
Problem Description
Problem Statement
Alternatives
Evaluation Criteria
Data & Methods
Analysis Results
Conclusions
Problem Statement
Loggers are submitting stumpage bids
that do not reflect the true present
value of the wood.
Possible Causes:
Loggers are speculating about future prices.
Loggers place excessive bids when they get “caught up”
in the auction format.
Background
Problem Description
Problem Statement
Alternatives
Evaluation Criteria
Data & Methods
Analysis Results
Conclusions
Policy Alternatives
• No Action
• Decrease Contract Lengths
– More 2-3 year contracts
• More Sealed Bid Auctions
– Fewer oral auctions
• Use 2nd Price Sealed Bid Auctions
– Highest bid wins the auction, but only has to
pay the second highest bid price.
Background
Problem Description
Problem Statement
Alternatives
Evaluation Criteria
Data & Methods
Analysis Results
Conclusions
Evaluation Criteria
- Economic Efficiency
Will the policy encourage loggers to make bids
that reflect true willingness to pay?
- Equity
Will policy provide adequate opportunities for
small loggers to purchase stumpage?
- Social Acceptability
Will the policy be acceptable to all stakeholders?
Background
Problem Description
Problem Statement
Alternatives
Evaluation Criteria
Data & Methods
Analysis Results
Conclusions
Data & Methods
• Regression Analysis
– Data: Records of all MN Timber Sales since 1994
(~13000 records).
– How did different sale characteristics (e.g., contract
length, auction format) influence logger stumpage
bidding?
• Interview with DNR Forester and DNR Timber
Sales Program Supervisor
– How do different stakeholders perceive the problem?
– How would stakeholders feel about the various policy
alternatives?
Background
Problem Description
Problem Statement
Alternatives
Evaluation Criteria
Data & Methods
Analysis Results
Conclusions
Analysis Results
• OLS Regression
– Use all 2005 pulpwood sales where the logger
size was known (n=555).
– Dependent Variable = % Bid Up
• i.e. how much higher the selling price was than the
appraised price.
– Possible Predictors: contract length, type of
auction, number of different products/species,
size of logger, etc.
Background
Problem Description
Problem Statement
Alternatives
R2=0.161
n=555
Independent
Variables
Percent Bolts
Evaluation Criteria
Data & Methods
Analysis Results
Conclusions
Coefficients P-values
-1.143
.000
# species/products
-10.578
.000
Medium Firm
-46.177
.000
Small Firm
-73.575
.000
Sealed Bid
63.873
.040
-113.438
.049
.416
.884
Over the counter sale
Contract Length
Background
Problem Description
Problem Statement
Alternatives
Evaluation Criteria
Data & Methods
Analysis Results
Conclusions
• Interview Results
– Contract length was identified as a factor that may
contribute to higher stumpage bids.
• Current sales are being reduced to three years.
• Not much resistance to reduced contract length.
– DNR is trying to increase sealed bid auctions.
• Many loggers don’t like them because they “leave
money on the table.”
– Second price sealed bids have not been seriously
considered.
• Potentially a good solution.
• Concerns about collusion.
Analysis
Criteria for Evaluation
Economic/
Effectiveness
Equity
Social
Acceptability
No Action
-
+
+/-
Shorter
Contract
Length
no impact
+
no impact
+
More Sealed
Bid Sales
?
rational bids
high price
+/-
2nd Price
Sealed Bid
?
rational bids
+
low price
+/-
Alternative
Background
Problem Description
Problem Statement
Alternatives
Evaluation Criteria
Data & Methods
Analysis Results
Conclusions
Conclusions/Recommendation
• There is no evidence that contract length
influences stumpage bidding.
• Sealed bids may help produce more thoughtful,
rational bids, but many loggers do not like to
leave money on the table and prices are higher.
• 2nd price sealed bids may be the best option
because they can help reduce excessive bids
without loggers worrying about leaving money
on the table.
– Political and social acceptability are still uncertain.
Questions?
Photo: City Pages