Here’s How to...Decide between Stumpage- or Delivered-Price Harvest Models

By Karl Walters, CF

When I meet with a client to discuss the details of a har-vest scheduling modeling project one of the first ques-tions I ask is, “What are your objectives?” Most often,

the answer is to maximize the value of discounted future cashflows. In these cases, the next question is, “Do you want astumpage- or a delivered-price model?” While the answer clearlyhas implications for the model-building process, there is a morefundamental question being asked about the client’s managementgoals tha, he or she may not have considered.

In this article, I will explore these two models, first by delvinginto the mechanics involved in building them, and then by dis-cussing their implications for managers. Of the two, a stumpage-price model is the more common and easier model to formulate,so I will start there.

In a stumpage-price model, the prices for various products rep-resent the average value of timber and the total of harvesting andhauling costs, as well as other costs, such as severance taxes leviedat the stump. For example, suppose a nearby mill pays $350 perMBF for conifer saw logs delivered to the gate. If it costs $120 toharvest 1 MBF, $80 to haul 1 MBF to the mill, and the state impos-es a severance tax of $2.50 per MBF, the net return to the landown-er is $147.50 per MBF.

If there are multiple mills in the area with various hauling dis-tances, a weighted average stumpage price can be determined foreach product. There also may be different stumpage prices,depending on whether the timber is produced via thinning or finalharvest. And, if the forest estate being modeled is large and geo-graphically diverse, stumpage prices may be assigned at the tractlevel, representing logical assignments of logs to the nearest millto minimize hauling costs.

While stumpage represents the revenue side of the equation,silvicultural treatments provide the costs: site preparation, plant-ing, herbaceous competition control, fertilization, precommercialthinning, pruning, etc. The decision variables in a stumpage modeldetermine whether an activity (e.g., fertilization, commercial thin,final harvest) is carried out, and when and where it is implement-ed on the forest. These decision variables trigger revenue or costoutputs. In the objective function, the discounted silviculturalcosts are subtracted from the discounted harvest revenues to yieldthe net present value of future cash flows.

In a delivered-price model, the prices for various products rep-resent what a particular mill pays at the gate (e.g., $350 per MBFfrom our previous example). If there are multiple mills to consid-er, each may have a unique price for each product it buys.Moreover, the hauling distance to each mill will similarly beunique and therefore will have a unique, associated hauling cost.At the stand level, harvesting and silvicultural costs are not affect-ed by the decision to send products to any one mill. These costs

are applied in the same fashion as in the stumpage model. In thestumpage model, the destination for products is predetermined; inthe delivered- price model, the destination for products is part ofthe decision.

For example, in a stumpage model, a decision variable mayrepresent a clearcut harvest in period 1, yielding 100MBF of timber, and revenue of $147.50. In the delivered-pricemodel, there may be multiple decision variables, all with the same100 MBF yield, harvest cost, and severance tax coefficients, butwith different hauling cost coefficients. Because the revenue coef-ficient in the stumpage model is an average, the net revenue gen-erated in the delivered price model for that same stand may bequite different.

Delivered-price models can get very complicated, dependingon the number of products, mill destinations, and how detailed onegets calculating hauling costs (e.g. stand-level vs. tract-level).Remsoft’s Allocation Optimizer extension to Woodstock isdesigned specifically to address complex delivered-price models.

So, let’s go back and look at the decision variables again, butthis time I will examine what it means from a managerial perspec-tive to prefer a stumpage model over delivered price.

In a stumpage model, management is asking, “What is the beststrategy to manage this property to maximize financial returns?” Iftwo stands have the same species, site, and stocking, the silvicul-tural regime to be applied to them is exactly the same, regardlessof their location in the forest. The viewpoint is distinctly forest-level, and is typical of large landholders such as integrated forestproducts companies that historically owned forestland to meettheir own mill requirements.

In a delivered-price model, the management question isfocused more at the stand or tract level: “What is the best invest-ment to apply to this stand or tract to maximize financial returnsoverall?” Consider the same two stands in the previous example,except that one stand is 10 miles from the nearest mill and theother is 80 miles. Does it make sense to invest as much silvicul-ture in the remote stand as the nearby stand? The optimal solutionprobably suggests no.

So other than for the sake of simplicity, why would anyonechoose a stumpage model over a delivered price model? Considerthat harvest scheduling models are strategic planning tools, withlong planning horizons, and that the most consistent aspect of anyplanning environment is change. Suppose that next year, the near-by mill from the previous example closes, and now the two standsare equally distant from another mill. Would your silviculturalstrategy change? With the stumpage model, changes to the silvi-cultural strategy are not likely to change much at all, but a com-pletely different strategy would probably result in the delivered-price model.

Moreover, foresters charged with implementing silviculturetypically do not maintain different sets of silvicultural regimes for

From the March 2007 issue of The Forestry Source

each forest tract. Instead, they are more likely to use a common setof prescriptions over the entire land base to maximize productivi-ty overall, with the hope of creating more options for selling intoa changeable marketplace. After all, a chip-n-saw log can be soldas pulpwood if need be, but the converse is not true.

So which model form do you choose? It depends on severalfactors, but land tenure is a key consideration. If you represent atimberland investment management organization and the forest isbeing held in a closed-end fund for 10 years, your planning hori-zon is sufficiently short so that events like a mill closure wouldforce large-scale changes to your strategy anyway, and a deliv-ered-price model that is sensitive to these types of changes may beappropriate.

On the other hand, if you have a long- term outlook and planto hold land for decades, there is the very real possibility that anew mill could open to replace the one that closed. If the foresthas been managed to consistent standards throughout, it is lesslikely that you will have made a very wrong decision about aparticular stand (e.g., high site stand under minimum-levelmanagement five miles from the new mill), than with a delivered-price model. Also of importance are the number anddiversity of potential mills to which wood could be delivered,both within your organization and to outside buyers. Increasesto the number of mills available increase the likelihood thatthere is a mill close to any stand or tract, which makes the deci-sions similar to a stumpage-price model. The final decision is atrade-off between precision at the tactical level versus a morestrategic look over the long term. A final decision can only bereached by clearly understanding the goals and objectives of theplanning exercise and with a thorough knowledge of the forestand the markets for wood products in the region.

Walters is vice-president of forest planning services forFORSight Resources. For more information, contact him atFORSight Resources, LLC3813 H Street, Vancouver, WA 98663;(360) 882-9030; karl.walters@forsightresources.com; http://for-sightresources.com.