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MARKET WATCH

Closing the Gap between Stumpage Prices and Delivered Fiber Prices

Posted by Pete Coutu on March 28, 2016

We have written extensively about the challenges associated with procuring wood from an increasingly fractured supply base, an issue that Fred Souba addressed just last month in his Lake States industry analysis. However, this trend is not unique to a single region; one question I often hear when speaking to landowners is, “How much is the logger or dealer getting for my timber at the mill?”

It’s a good question, but not one I can answer directly. Just as timberland owners must subscribe to Forest2Market’s Timber Owner Market Guide 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 I can say is that if there is a difference between the price a dealer or logger offers a timberland owner and the price listed in the stumpage price database or in the Timber Owner Market Guide, there should be a logical explanation for the variance. In a hypothetical scenario in which timber inventory remains stable, factors that might affect the stumpage price for an 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.Logger_sign.jpg
  • Tract size: The larger the tract, the more cost effective it is for a logging company to move its equipment to the site and work efficiently in a single location. The timber on these sites is therefore more desirable and brings a higher price.
  • Access to roads: Quality roads to the tract of timber improve supply chain efficiency. Generally speaking, a tract of timber that is close to both a county road and a consuming mill will be more valuable.
  • Timber quality: The more intensively a tract is managed by a landowner or consulting forester, the more likely it is to bring a higher-than-market price.

While these factors will always contribute to price discrepancies to some degree, I also believe that the value added through the harvesting process and the expenses involved with running a logging business more than make up for the difference between stumpage price and delivered price. One little known fact is that most logging operations run on profit margins of two to five percent. Why are these margins so low?

  1. A primary reason is that loggers are positioned in the middle—and most malleable part—of the supply chain. On one hand, land owners want the highest possible stumpage prices for their timber. On the other hand, sawmills and pulp and paper mills want to reduce their costs by lowering the delivered prices for timber.

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

  1. Logging companies must also survive on low profit margins because they must be actively harvesting and hauling in order to generate revenue and pay their operating costs. If they aren’t logging, they’re not making any money. This realization may force many operations to take whatever job(s) they can get, even if profits will be very slim.
  2.  The logging trade is a dangerous, highly regulated, and operationally expensive profession. The hazardous nature of logging requires large insurance and worker’s compensation payments that increase every year, and the cost of training—both in safety and compliance—also increases every year. Expensive equipment must be purchased, maintained and repaired, and the amount of fuel needed to run such equipment in order to deliver timber is considerable.

Given the considerable risk and expense, the better question might be, “Why do people stay in the logging business?” The truth is that these days, fewer and fewer are. Those that do, however, choose to stay involved in the profession for many of the same reasons that timberland owners hold on to 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 certainty, lucrative profits and easier working conditions. If this trend continues in the future, timberland owners could face difficulty finding loggers to harvest and haul their timber to market.

As consolidation within the profession continues, surviving logging companies have become much more professional and proficient. They generally operate with solid 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. This professionalism leads to timber tracts and roads being left in better condition post-harvest.

Ultimately, everyone in the forest products supply chain agrees on one common point: timber and the myriad products made from it are inherently valuable to the market and to society. The forest products industry therefore has a vested interest in preserving its rich heritage and protecting its future within America’s rural communities by ensuring that the supply chain remains profitable for all participants.

 

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Topics: supply chain, Stumpage Prices

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