Minnesota’s State Timber Sale Program: An effort to stabilize logger stumpage bidding Photo: Potlatch Corp. Photo: MCEA Ross Brown

Minnesota’s State Timber Sale Program:

An effort to stabilize logger stumpage

bidding

Photo: Potlatch Corp.Photo: MCEA

Ross Brown

Outline

• Background and Description of Timber Sales• Problem Description• Problem Statement• Alternatives• Evaluation Criteria• Data Sources and Methods of Analysis• Analysis Results• Conclusions/Recommendations

• 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 K-

12 education.

Background Evaluation CriteriaProblem Description Data & MethodsProblem Statement Analysis ResultsAlternatives Conclusions

• DNR Timber Sale Program Goals– Maximize revenue for K-12 schools– Forest sustainability and multiple uses– Support local communities and wood products

industry


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


Projecting Future Prices

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$10

$20

$30

$40

$50

$60

$70

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Past Prices

Estimated FuturePrices

Actual Future Prices

How did it get so bad?

• 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.


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.


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.


- 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?

Evaluation Criteria


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?


• 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.


Analysis Results

Independent Variables

Coefficients P-values

Percent Bolts -1.143 .000

# species/products -10.578 .000

Medium Firm -46.177 .000

Small Firm -73.575 .000

Sealed Bid 63.873 .040

Over the counter sale -113.438 .049

Contract Length .416 .884

R2=0.161

n=555


• 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

Alternative

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+/-

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

Documents

Minnesota’s State Timber Sale Program: An effort to stabilize logger stumpage bidding Photo: Potlatch Corp. Photo: MCEA Ross Brown