3 min read

Closing the Gap between Stumpage and Delivered Prices

We enjoy any opportunity to speak with our customers. One question we often hear is, “How much is my logger or dealer getting for my timber at the mill?”

It’s a good question, but not one we can answer directly. Just as timberland owners must subscribe to the Timber Owner Market Guide (TOMG) or our Online Service to get stumpage prices, those who receive our Delivered Price Benchmark must subscribe and contribute data in order to access delivered prices.

What we can say is if there is a difference between the price a dealer or logger offers the timberland owner and the price listed in the stumpage price database, then there should be a logical explanation for that difference. Some factors that might affect the price for any individual tract of timber include :

  • Loggability - Can the tract be logged year round, or does wet weather prevent access by heavy equipment? All weather access generally brings a price premium.
  • Tract size - The larger the tract, the more cost effective it is for a logging company to move its equipment to the site. The timber on these sites is therefore more desirable and brings a higher price.
  • Access to roads -The better the roads and the closer the tract is to both a county road and a mill, the more the timber is worth.
  • Timber quality - The more intensively a tract is managed by a landowner, the more likely it is to bring a higher-than-market price.

We also believe the value added through the harvesting process and the expense involved in running a logging business more than makes up for the difference between stumpage price and delivered price.

One little known fact is that most logging operations run on a profit margin of two to five percent. Why is the profit margin for logging businesses so low?

A major reason is that loggers are squeezed in the middle. On one hand, timberland owners want the highest possible stumpage prices. On the other hand, sawmills and pulp and paper mills want to reduce their costs by lowering delivered prices.

In effect, timberland owners and mill management have options. Timberland owners can withhold their timber from the market if prices are too low, and a mill can always find someone else willing to deliver wood if a logger demands what they deem too high a price. Mills can pick and choose, sometimes among dozens of logging companies, whereas a logging business may only have two or three facilities it can deliver to without losing money.

Logging companies must also survive on low profit margins because they have to harvest and haul in order to pay their operating costs. If they aren’t logging, in effect, they’re out of business.

Another factor affecting the profit margins of the logging trade is the industry’s status as dangerous, highly regulated, and expensive. The dangerous nature of the business requires large insurance and worker’s compensation payments that increase every year, and the cost of training—both in safety and compliance—grows every year. Expensive equipment must be purchased and repaired, and the amount of fuel needed to run equipment and deliver timber is substantial.

Given the considerable risk and expense, the best question might be, “Why do people stay in the business.” These days, fewer and fewer are. Those that do, however, stay in for many of the same reasons that timberland owners keep their working forests even when developers offer them big paydays: to preserve a legacy.

Many loggers these days are in their 50s or older. They inherited their businesses from fathers or grandfathers and hope to pass them on to sons and daughters. Increasingly, this is a challenge. The next generation is more likely to choose a profession with more lucrative profits and easier working conditions. If this trend continues, timberland owners could face difficulty finding loggers to harvest and haul their timber to market.

On the other side of the equation, surviving logging companies have become much more professional. They have good business plans and are more cost conscious than ever. The investments they make in new equipment and training lead to more efficient, sustainable and safe logging practices. And this leads to timber tracts being left in better condition post-harvest.

Ultimately, everyone in the supply chain agrees with one point: timber and the value-added products made from it are inherently valuable. Crad Jaynes, President of the South Carolina Timber Producers Association has said, “There’s enough money for everyone; landowners, wood dealers, timber harvesters and wood receivers.” In the end, we think we’ll find that Jaynes is right.


Comments

Tom Busch

07-02-2014

THANK YOU!! I wish every timberland owner and wood procurement manager would read the article.

As long as 40 years ago, talking with loggers we would say “well, things will get better” - yet they haven’t. One day (fairly soon?) the mills are going to find that there isn’t enough logging capacity to keep wood in the pipeline.