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Ii'IL’ " 33!“!IL L 12.31» IILLJLL _ —.~ W W 1mm \Iij 3 129300 This is to certify that the thesis entitled An Analysis of Pulpwood Marketing in Michigan presented by Gordon Depew Lewis has been accepted towards fulfillment of the requirements for Ph .D degree in Forestry //z/aw Maia/professor Date February 11;, 1961 0-169 LIBRARY Michigan State University ABSTRACT AN ANALYSIS OF PULPWOOD MARKETING IN MICHIGAN by Gordon D. Lewis This study was made to determine the structure of the pulpwood market as it exists in Michigan, and to determine the purposes served by the various segments of the marketing chain. Special consideration is given to the pulpwood transportation system and procedures, and to the potentialities of cooperative marketing as a method of making pulp- wood production more attractive to the more stable producers. Data were obtained by mail questionnaires in 1957 and 1959, and field interviews were conducted in the summer of 1959. In 1957, mail questionnaires were sent to all Lower Michigan pulp mills and to the railroads serving them to gather information pertaining to transporta- tion methods and costs. In 1959, a second set of mail questionnaires was sent to Michigan and Wisconsin pulp mills to obtain data as to pulpwood consumption, prices, sources, and methods of procurement. In the sumer of 1959, field interviews were conducted with the public landowners, pulpwood marketing cooperatives, and selected producers. These sources of primary'data were supplemented with information from a number of secondary sources. Michigan pulpwood, the major revenue-producing product of the forests of the state, is the chief raw material for the Michigan pulp and paper industry and constitutes almost one-fourth of the Wisconsin -1- .A Gordon D. Lewis pulpwood consumption. This pulpwood is produced primarily by small, part-time producers dealing directly with the pulp mills. All produc— tion is carried out under contract; but is quite irregular, varying from 700,000 to 1,000,000 cords per year depending on pulp mill demand. At present, the main source of pulpwood stumpage is the small private forest ownerships, but due to poor cutting practices in the past, there is'a definite trend toward taking a greater proportion of the annual procurement from the public forest lands. There is a con- tinuing steady decline in the pulpwood productiveness of the private woodlands. No Michigan pulp mill is completely dependent on the pulpwood middleman, and, at present, only a limited number are using the ser- vices offered by the pulpwood dealers. As dealer services are depend- ent on the distance between the pulp mill and the wood supply, the present trend toward greater usage of the more common hardwoods and the over-supply of the other species tend to discourage the use of the dealer system. The greatest advantage of the use of the middleman is that the pulp companies may grant contracts of’greater size to fewer individuals, thereby reducing the administrative costs. However, as the use of pulpwood dealers does not free the pulp companies from having to grant financial aid, many companies feel that the dealers do not fully serve their purposes. All Michigan pulp mills grant aid to their suppliers. This aid is usually in the form of advance payments on wood which has been cut but not delivered. No pulp company provides funds for stumpage procure- ment, and few will purchase stumpage for their suppliers. Gordon D. Lewis All pulp companies pay basically the same price for pulpwood, but they tend to compete with one another in nonprice terms. The willing- ness to purchase pulpwood at points other than the mill woodyard and to assume the costs of transporting it to the mill permits the mills to compete for wood in the same areas without affecting the price while re- ducing the costs to the seller. Pulpwood production is a.profitable operation, but the extent of profitability varies greatly depending on the species, locations, and negotiating abilities of the producers. However, the long-term effect of the characteristic cutting practices on private lands is that the landowner may not be maximizing his long-run profits. AN ANALYSIS OF PULPWOOD MARKETING IN MICHIGAN By \ V Gordon DélLewis A THESIS Submitted to Michigan State University in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Forestry 1961 "I F. PREFACE This study was undertaken as a part of a continuing study of the pulpwood market carried on jointly by the Department of Forestry and the Agricultural Experiment Station at Michigan State University. It does not pretend to be a new approach to the problem or to develop a perfect solution to all the difficulties. It is, I hope, a clear, logi- cal presentation of the pulpwood market as it exists today with a few suggestions for the correction of certain difficulties. I have attempted to be as unbiased as possible and to present all sides of all problems discussed. However, marketing is a human endeavor and research in marketing attempts to explain why people carry on this endeavor. It is difficult not to be sympathetic with certain groups and not to paint their problems much blacker than absolutely necessary. In spite of my efforts, it is highly possible that some unknown personal bias may have crept in. The reader is hereby warned. I would like to apologize to botanists, silviculturists, and other technicallyaminded scholars fer the usage of the word species in this study. In my usage, the word covers everything from a true species to a forest type. This was done, not through ignorance, but to avoid some very awkward expressions. To try to express my gratitude and thanks to all who made this study possible would be impossible; the result would read like a directory of pulpwood marketing. But without the assistance of the producers, middle- men, pulp companies, public agencies, and many others, this study would -11- have had no foundation. They gave freely of'their time, opened their records, and expressed their views and opinions beyond all expectation. They provided authoritative sources of information on the minute aspects of the actual practices. Their problems in earning a living in the pulpwood market brought forth many of the human aspects which cannot be shown in statistics. Specifically, I would like to express my heartfelt thanks to a small number of people who not only provided me with information, aid, and assistance, but who also provided the inspiration and motivation necessary for the undertaking. Special credit is due Dr. Lee M. James for his teachings, his en— couragement, and his guidance. His interest in the project, and in me, created the atmosphere necessary to develop the study, and his assistance throughout the project insured its completeness. I am indebted to Dr. T. D. Stevens and the staff of the Department of Forestry at Michigan State University for the means of carrying out this project. 'Uithout the financial assistance, it would have been im- possible to do the study, and without the "coffee break” debates,1nuch mental stimulation would have been lost. Credit is also due to the De- partment of Agricultural Economics for providing me with analytical techniques. Thanks are due Dean Ross Hilliams, School of Forestry, Montana State University, for encouraging me to complete the manuscript. Last, but by no means least, I am deeply grateful to my wife, Yoshie, whose effort went far beyond the call of marriage. Her en- couragement, her direct and indirect labors, and her unshakable faith -iii- in Dr. James brought about the completion of this study. Gordon D . Lewis -iv- 'TABLE OF CONTENTS PREACE O O O O O O O O O O O O O O O O O 0 O O O O O O O O O O HST OF TAHJES O O O O O O O O O O O O O O O O O ..... O O IIIST OF mm D O O O O O O O O O O O O O O. ..... O O O 0 Chapter I. INTRODUCTION . . . . . . . . . . . ...... . . . . Pulpwood Marketing Pulpwood Marketing in Michigan II. OBJECTIVES AND SCOPE OF THE INVESTIGATION . . . . . . . VII. Objectives of the Investigation Scope of the Investigation METHODSOFPROCEDURE................. REVIEWOFLITERATURE................. Pulpwood Consumers Pulpwood Middlemen Pulpwood Marketing Cooperatives Pulpwood Producers and Landowners Pulpwood Costs and Prices PULPWOOD PRODUCTION, EXPORTS AND IMPORTS ........ Trends in Pulpwood Volumes Areas of Pulpwood Production mo 0D SUPPLY O O O O O O O O O O O O O O O O O O O O Allowable Cut and the Actual Cut in Michigan Supply ‘and Price Relationships THE MPMIUJS . O O O O O O O O 0 O O O O O O O O O 0 Methods of Procurement Contracts Delivery and Storage Page ii viii xi 16 20 29 52 71 Chapter VIII. XII. XIII. XIV. MARKET AGENTS . . . . . . . . . . . . . . . . . . . Pulpwood.Middlemen The Pulpwood Middleman in Michigan Pulpwood Producers Pulpwood Producers in Michigan OOOPERATIVES IN MARKETING FOREST PRODUCTS . . . . . . Cooperative Stores in Michigan Forest Products Cooperative in Michigan mm WWEE O . 0 O O O O O O O O O O 0 O 9 0 Public Ownership Pulp Company Ownership Other Industrial Forest Landowners Farm Forest Landowners Other Forest Landowners m STS 0F PRODUflION O O O O O O O O O O O O O O O 0 0 0 Stumpage Logging Costs Hauling Costs PULNO OD PR1 CES . 0 0 O 0 C O O O C O O I O O 0 C O 0 Comparison of Pulpwood and Pulp and Paper Prices Pulpwood Prices in Michigan Competition PULPWOODTRANSPORTATION.............. Truck Transportation Rail Transportation Comparison of Truck and Rail Transportation Costs The Influence of Nonprice Factors COMPARISON OF PULPWOOD COSTS AND PRICES . . . . . . . . SUMMARY AND CONCLUSIONS . . . . . . . . . . . . . . . . Production and Supply Pulpwood,Markets Pulpwood.Market Agents Pulpwood.Marketing Cooperatives Forest Landowners Pulpwood Costs and Prices Pulpwood Transportation Pulpwood Profitability Page 103 127 1h8 169 182 196 221 229 BMOGRAM 0 0 O O O O O O 0 O O O O O mmmx O O O O O O O O 0 O O O O O O 0 -vii- O 0 O O O O LIST OF TABLES Table Page 1. Returns of pulp mill questionnaires by Michigan and Wisconsin pulp mills procuring pulpwood in Michigan: 1959 . . . . . . . . . . . . . . . . . 23 2. Pulpwood production in Michigan as a percentage of the total.Michigan production for selected species: l9h6-1958 . . . . . . . . . . . . . . . . 58 3. Pulpwood production in Wisconsin as a percentage of the total Wisconsin production for se- lected species: l9h6-l958 . . . . . . . . . . . . . 61 h. Pulpwood production in Michigan by region and 7 species: 1958 . . . . . . . . . . . . . . ..... 6h 5. Comparison of actual and allowable annual re- movals for the major pulpwood species and types in Michigan: 1958 . . . . . . . . . . . . . . 7h 6. Excess of allowable cut over actual cut in Michigan for the major pulpwood species and types: 1958 0 e e o o e e o e e o o o o o o o o o o 76 7. Geographic source of pulpwood consumed by Michigan and Wisconsin pulp mills: 1958 ...... 88 8. Michigan produced pulpwood consumed by Michigan and Wisconsin pulp mills by species: 1958 . 9O 9. Contracts issued and volume received by type of procurement fbr reporting mills: 1958 . . . . . . . 111 10. Distribution by occupation of Michigan pulpwood dealers . . . . . . . . . . . . . . . . . . . . . . 116 11. Receipts from timber sales on state forests in Michigan by number and type of sale: 1958 . . . . . 152 12. Sales of pulpwood on national forest in Michigan by size and number: 1958 . . . . . . . . . . . . . 156 -viii- Table Page 13. Range of stumpage prices on state forests in Michigan: 1958 . . . . . . . . . . . . . ...... 173 1h. Average pulpwood stumpage prices received by public and private forest landowners by SPECIES: 1958 o o o o o o e e o o e e e o e e o o o 175 15. Average logging costs incurred in producing pulpwood in Michigan: 1959 . . . . . ...... . . 177 16. Maximum prices offered for Michigan produced pulpwood by Michigan and Wisconsin pulp mills by species and method of delivery: 1958 O O O O O O O O O O O O O O O O O O O o O 0 O O 189 17- Receipts of Michigan produced pulpwood at Michigan and Wisconsin pulp mills by method of delivery: 1958 . . . . . . . . . . . . . . . . . 197 18. Sliding price scale additions to the base price for different distances of haul used by six Lower Michigan pulp mills for truck delivered PH1pwood: 1958 . . . . . . . . . . . . . . . . . . . 201 19. Average contract truck-hauling charges for direct deliveries of pulpwood to Lower Michigan mills by distance of haul: 1957 . - . - . . . . . . . . - 203 20. Distances, number of railroad lines involved, and rates per 100 pounds for pulpwood shipments from loading points in use to Lower Michigan pulp mills: 1957 . . . . . . . . . . . . . . . . . . 205 21. Distances, number of railroad lines involved, and charges per 100 pounds for pulpwood shipments from selected loading points not in use in Lower Michigan: 1957 . . ..... . . ....... 208 22. Comparison of charges for railroad transportation from loading points in use with differentials for direct truck deliveries from the same points to Lower Michigan pulp mills: 1957 . . . . . . . . . 212 23. Comparison of sellers' average truck-hauling costs to rail loading points with net costs to sellers of direct truck deliveries to Lower Michigan pulp mills: 1957 . . . . . . . . . . . . ...... 21h -ix- Table Page 2h. Breakeven distance points or zones for pulp- wood sellers between short and long truck hauls to railroad loading points and direct truck deliveries to Lower Michigan pulp mills: 1957 . . . . . . . . . . . . . . . . . . . . 218 25. Margins and profit ratios from the production of Michigan pulpwood delivered on railroad cars from a hauling distance of 30 miles: 1959 . . . . . . . . . . . . . . . . . . . . . . . . 223 26. Costs incurred and prices received for the manu- facture of bleached hardwood sulphate wood pulp: 1959 . . . . . . . . . . . . . . . . . . . . 227 Figure 10. ll. 12. 13. 1h. LIST OF FIGURES Pulpwood production, exports, imports, and apparent consumption in Michigan for all species: l9h6-1958 . . . . . . . . . ....... . Pulpwood production, exports, imports, and apparent consumption in Wisconsin for all Sp€Ci€S$ 19116-1958 0 o O o o o o o 000000000 Pulpwood production in Michigan for selected SPeCieS: 19h6-l958 o o o o e e o e e e e o o e e o e Pulpwood production in Wisconsin for selected BPCCICSZ 19b6—1958 o o o O o e o e e o o o o o e o o Pulpwood production of all species in Michigan by county: 1959. . . . . . . . . . . . . . . . . . . Aspen pulpwood production in Michigan by county: 19S9eoooooeoooeeeoooo ooooooo Balsam fir and spruce pulpwood production in Michigan by county: 1959 . . . . . . . . . . . . . . Pine pulpwood production in Michigan by county: 1959 o e o o o o e o e o o o o e e e e e e e o o o 0 Miscellaneous hardwood pulpwood production in Michigan by county: 1959 . . . . . . . . . . . . . . Aspen pulpwood price—quantity relationships . . . . . . Balsam fir pulpwood price-quantity relationships . . . . Location and capacity of Michigan pulp mills in operation in 1958 . . . . . . . . . . . . . ..... Location and capacity of Wisconsin pulp mills in operation in 1958 . . . . . . . . . . . . . . . . . . Pulpwood procurement areas in Michigan for Michigan and'Hisconsin pulp mills . . . . . . . . . . -xi _ Page 53 SS 57 6O 63 66 67 68 7O 80 80 85 86 89 Figure Page 15. Trends in annual membership and total sales value of the forest-products cooperative in Michigan: 19h6—1959 . . . . . . . . . . . . . . 138 16. Maximum prices paid per cord of rough pulpwood for selected species delivered at Wisconsin "11118: 19h7-1957 e o o o 0 e o o o e o o o e o o o 183 17. Pulpwood price and pulp and paper price indices: 19146-1957 0 e o o e e o o e e o o o e o e o e o o o 186 -xii- CHAPTER I INTRODUCTION The importance of markets to forestry and sustained-yield manage- ment of all woodlands has been recognized repeatedly in forest litera- ture. Duerr states that: The marketing process holds a pivotal position in the forest economy, not only because it is the means of getting much of the economic output in the hands of consumers, but also because it determines the major tangible rewards--hence incentives--for forest management (Duerr and Vaux, 1953, p. 335). This implies that forest management is a productive process which responds, although more slowly than other processes, to the variations in supply and demand. It assumes that the landowner is concerned with problems of price and value in an effort to maximize his financial re- turns. Marquis (1939, p. 2b) states that "it Eborest managementfl must be in response to the profit motive“ if it is going to become applicable to private ownership. Only the government can practice forestry without some type of a market for the forest products, and this is forestry in the negative sense only. ‘Without markets, wood becomes a product with no economic value, and without profitable markets there is no production. Advocates of tree planting have always maintained that such plantings are profitable in the long run by pointing out the increase in the value of wood products over time. And, within reason, they are correct..Analy-~ sis of the forest situation suggests a continuing rise in relative timber prices. However, this is reforestation, not sustained yield. Sustained -1- -2- yield, as defined by the Society of American Foresters (1958, p. 96), re— quires that an annual or periodic income equal to the interest on the capital value invested be received. The decisions of management must be based on the existing markets and market conditions. The forest manager cannot wait for inflation to make his operation profitable. On the other hand, forest management does not haVe the flexibility of the management of other enterprises. The planning period usually ranges from five to ten years as compared to six months to one year for other productive processes. Once a plan has been determined, it is im- possible to vary it rapidly to meet changing market conditions.. The forest manager must base his course of action on the market conditions of a relatively long time period; he cannot take advantage of the short term market fluctuations. Thus, in order to develop a plan of sustained-yield management, it is necessary that there be a stable, continuous market for forest products. However, the quantity removed at any one time will vary with stand condition, silvicultural requirements of the species involved and the end product desired, and the size of the woodland. These removals then may range from very small quantities to relatively large quantities of one or more species of varying desirability. If there is a market for the re- movals and if the volume is large enough to be salable, the cutting is commercially feasible; if not, it is termed a pre-commercial cutting and will increase the costs to be charged against the future returnsfrom the stand. The lack of desirability because of species can only'beeovercome by technological advances, but, quite often, thinnings are forced to be pre- connercial as they do not yield a great enough volume to be acceptable in the market. Thus, it is necessary for forest management to have open 5.! If 51 I” F'J .3- markets if an open market be classed as one that will accept the product regardless of the quantity offered. Open market pricing is important as the greater part of the timber land of the United States consists of ownerships of 500 acres or less, independent of any connection with timber utilizing organizations (U. 8. Forest Service, 1958). The larger private ownerships are either in the hands of wood using concerns or are large enough to obtain preferential treatment from the wood consuming companies. These large ownerships seldom operate in the open timber market, but rather operate under market conditions of their own selection. The smaller landowners, however, do not have the power, either through size or organization, to adjust the market to meet their needs. Their output must flow through regular market channels in direct competition with all other wood in the channels. This flow of wood should be controlled by price in order that it be maintained at a level equal to the market demand for it. Thus, forest management- requires that there be enough buyers to prevent price control and that market information dissemination to permit the sellers to learn of the market conditions be from sources other than the buyers. Pulpwood Marketing Pulpwood buyers may be classified as oligopsonists. The economies of scale resulting from the possibilities of larger equipment and greater expansion have given a decreasing unit cost of production which has led to fewer and larger pulp and paper companies controlling the industry. This, on the more local scene, is intensified by geography to, at times, an almost monopsonistic condition. Duerr (1960, p. 292) feels that pulp companies, being mutually repulsive, maintain distances between mills -14.. great enough that the transportation costs act for them in the same manner as protective tariff barriers. Under these conditions, it may be assumed with confidence that the prices offered for pulpwood are not those arising from the equating of supply and demand in an open competitive market, but are prices administered by the buyer. Administered prices are stable prices. The prices once set are sel- dom adjusted for short periods of supply disequilibrium, but rather are adjusted to long term trends and for errors in procurement judgment. In the face of variations in market demand for pulp and pulp products, the companies limit their procurement rather than change the pulpwood price. Defenders of this type of pricing feel that it is the only way of providing a type of price stability which would encourage management on small wood- lands while facing the reality of an unstable market. If it were assumed that the economy of an area containing the timber- sheds of several pulp companies suddenly declined in reaction to a general business recession, and pulpwood price cutting was resorted to in an effort to offset the losses due to the falling prices of pulp and pulp products, the result would be a decreasing return per cord for pulpwood sold. Galbraith and Black (Haugh, l95h, Pp. Sh-60) suggest that as long as any per cord return were available, the seller would increase produc- tion in order to maintain his income at its pre-recession level because of the nature of his fixed costs. Farm woodlots would be especially sus- ceptible to this type of cutting as the woodland output can be adjusted much more rapidly than that of agricultural crops provided the management plan is discarded. However, any woodland owner would follow the same course if his overall income were tied to prices received for the sale of any recession affected product, or if pulpwood sales make up a large part -5- of the income. Of‘course, the extent of the overcutting would be directly connected with the length of the recession.. If economic conditions became so bad that industrial workers were laid off, a "back to the land" move- ment could develop with these workers returning to their rural holdings and entering the pulpwood market with the only product presently existing on the land. The overall result would be an increasing flow of pulpwood into a steadily softening market. The prices would continue to decline until economic conditions improved or the market collapsed. By this time, few pulpwood producing woodlots would still be on sustained-yield manage- ment. On the other hand, if the prices for pulpwood were administered, and woodlot management assumed, the woodlot owners would have little tendency to discard management plans and overcut. 'Hhile the price would remain constant, the quantity accepted would decline with the economic conditions so that the seller would have no chance to increase his income through additional pulpwood sales. For an individual seller, the market would be limited to a given quantity. ‘Hith.the quantity he may sell fixed regard- less of the price he is willing to accept, there is no incentive to cut more than that quantity. If it is assumed that the recession purchased quantity is less than the pre-recession quantity, and that the pre- recession quantity was within the allowable cut of the woodland, the management plan would remain useful and the woodland would be still in proper condition for sustained.yield production when the economic situa- tion improved. Administered pricing may have the effect of stabilizing the market to some extent, but its effect on forest management is questionable. First of all, it ignores the needs of the landowner. In periods of I IV \I -6- economic decline, he is willing to accept a smaller unit return in order to obtain enough income to meet his expenses, but this system does not permit him to do so. His pulpwood ceases to be an economic good, and the pulpwood market becomes a ”fair weather friend." Secondly, forest management, through administered pricing, would re- quire pulp company control of pulpwood cutting on all woodlands in the timbershed. Unless there were some system of rationing, there would be the possibility that a small number of sellers would overcut to supply the entire reduced demand, thereby forcing others completely'out of the market. ‘Hhile this would limit excessive cutting to a small number of woodlands, it would eliminate all pulpwood income for many others. Lastly, the effect of the market loss may, in itself, be adverse to forest management in the recovery period. A pulpwood produc a‘ who found himself’once without a market may feel that the greatest return would be derived by discarding the management plan, selling the total cut when the market reopens again, and employ his time elsewhere. This attitude may be prevalent among farmers and landowners whose main source of income is from selling in a more price-competitive market. The administered pricing of pulpwood could be used to encourage forest management by the restriction of the quantity marketed in periods of economic decline, but under the present system in which the final pro- duction decisions are made by the landowner, administered prices may cause an adverse social reaction and may be resented by the pulpwood seller. Being faced with a fixed price controlled by a limited numberof~ buyers, the pulpwood sellers may increase their returns only by reducing the prices offered to the next lower levels of the market chain. Actually, -7- this is achieved, in part, by the actions of the final buyers. Pulp com- panies set two prices on pulpwood, the middleman price and the producer price, with the former being greater than the latter. In this sense, the pulp companies attempt to administer prices on two marketing levels, but the middleman does not necessarily maintain this Spread. It may vary with the local supply situation. Thus, a producer could increase his returns by changing from; dealing directly with a pulp company to selling his pulp- wood through a middleman or _v_i_c_e 3.2.59.2 depending‘on market conditions while a middleman may increase his returns by reducing the price he pays the producer. In certain regions, the middleman may have greater control over this ability to increase his cost-price spread as the pulp companies insist on procuring through middlemen only, but in other areas where pulp companies procure directly from producers, the middleman must be more flexible in his pricing. It is only at this level of marketing pulpwood that supply and demand tend to exert an influence on pricing. Pulpwood procurement is normally done by contract with the size of the contract dependent on the procurement agencies' propensity for bookkeeping. However, most contract quantities exceed the productive capacity of any single private woodland. «Thus, a seller obtaining a contract must procure pulpwood from sources other than his own timber stands. This may be done by purchasing pulpwood from others or by prode additional stumpage from forest landowners. If the contract were obtained by a middleman, it is more likely that the required pulpwood would be purchased from producers. The fact that the producers will market through a middleman is an indication that they cannot obtain enough stumpage to deal directly with the pulp company, or that they -8- are part-time producers, each selling a.very limited amount of pulpwood. In size of operation, any producer selling through a middleman is quite small in comparison to the middleman to whom he is selling, and as pulp- wood is a relatively low value product in relation to its weight, it cannot be transported far, so the producer is faced with a limited number of buyers. The overall situation is quite similar to that between the pulpwood seller and the pulp company. There is, however, one large difference. The pulpwood middleman is bound by his contract to deliver a certain volume of pulpwood, and in many cases a large part of his income is dependent upon fulfilling his contract obligation. The producer supplying him is under no such obligation. Pulpwood production, especially among the part-time producers, offers supplementary income, and is not the major source of livelihood, so that they are in a position to accept or reject any price offer as they see fit. The supply they are willing to market will vary inversely with the remuneration of the alternative occupations and directly with the price offered. Thus, in spite of the monopoly position of the middleman in the local pulpwood markets, alternative occupations for the pulpwood producer and the resulting lack of dependence on the pulpwood market prevents come plete monopsony control and permits price variations to influence the flow of pulpwood. low, if pulpwood be obtained by stumpage purchase, the competitive conditions vary quite considerably, depending onthe ownership of the timber stand and the area involved. If there were a unit of measure of.compe- tition for stumpage and the competitive conditions were plotted geo- graphically so that the vertical axis indicated competition and the hori- zontal axis indicated area, a relatively regular are or bell-shaped curve I 1’ l‘f -9- would be developed with competition being minimum at the extremes of area and maximum at the midpoint. This, of course, assumes equality of stand density, stand composition, timber quality, site, and many other factors, but it does give some idea of the effect of size on marketing opportun- ities. Where competition does occur, it is mainly between the stumpage buyers on the basis of their minimum acceptable return. mcept on public lands, stumpage prices are determined by the buyer, and for public stump- age, the minimum acceptable price is determined from the buyers' viewpoint. The costs of stumpage production are never considered. The small private landowner may be considered to be a passive factor in pulpwood stumpage transactions. He is approached by a producer and a bid is made on the timber. Usually this is the only bid. The landowner's preoccupation with other work and his lack of lmowledge of buyers of pulp- wood and pulpwood stumpage prevent him from soliciting other bids. A very decided factor of indifference enters into stumpage sales from the seller's side. For the individual sale on a small woodland, there is no interplay of supply and demand. Price variations are due primarily to stand con» dition, cutting restrictions, and location rather than to response to changes in supply and demand. Individual landowners will not vary the removal permitted in response to a change in the price offered while an increase in price will bring few additional landowners into the pulpwood stumpage market. This is to be expected in a market where the factors which determine price are many and complex. The buyer determines the price for each operation on the basis of the costs to him. The seller, having no concept of the costs involved on either side, is at a disad- vantage . 'SJ ’1! I .‘L 1": -10- In the case of the large private and the public ownerships,vstumpage sales are seller controlled. The large private owners offer stumpage at a given price to selected buyers. There is no competition. The buyer either accepts or rejects the offer. If it is rejected, the landowner makes the same offer to another stumpage buyer. On the other hand, sales on public lands are made on a bid basis, but a minimum acceptable price is set. Competition on these public stumpage sales is often limited by the size of the sale and the payment requirements. Both landowners, public and large private, base their stumpage prices on the costs of harvesting and marketing the resulting pulpwood. Thus, while the public stumpage sales may be somewhat more competitive than those on the private lands, the prices on all large sales are controlled by the seller on the basis of the buyer costs of operation. Competition between buyers is present, but variable, while the interaction of price and quantity, in the sense of greater production and smaller demand at higher prices and zigg‘zgggg, does not occur. The pulpwood market cannot be considered by any means a normal market. It is characterized by administered prices and a large potential supply. Price competition is found only in one segment of the marketing system, and only where there is a middleman-producer relationship, Price determination is usually based on the producer costs of operation and is developed for each successive, higher stage as the pulpwood progresses from the forest to the pulp mill. Under these conditions, the equating of supply and demand is achieved, not by the classical "higgling and bargaining of the market" (Smith, 1937, p. 31), but by the almost dicta- torial control of the buyers. This buyer control is not, in itself, bad. The great potential -11.. supply of timber which is being produced with relatively little cost could have a war! depressing effect on a completely open market. A system of orderly marketing would prevent a disastrous flooding of a completely open market, but at present the disinterest of the pulpwood and stumpage sellers prevents a seller organization from developing such a system. The ultimate buyers have taken it upon themselves to provide a method of market control which is an imperfect form of orderly marketing. By main- taining stable prices and controlling the flow of pulpwood in the market channels by contracts with selected sellers, the pulpwood buyers prevent a constant oversupplying of the market while completely supplying their own needs. Those sellers who receive contracts consistently form a stable marketing group that can maintain itself in the market. Pulpwood Marketing in Michiggp In Michigan, pulpwood production is the major revenue producing opera- tion on the forests of the state. It provides a source of income for ' thousands of full- and part—time woods workers while permitting forest *° landowners to obtain a return from their forests. To the owners of small . forest tracts, it represents the only method of obtaining a product from their lands in a reasonable time, while the larger owners depend upon pulpwood production to yield a return on silvicultural treatments required in the production of sawtimber. In addition to providing a livelihood for many woods workers and forest owners, pulpwood production in Michigan supports the Michigan pulp . and paper industry almost entirely and provides some 21; percent of the re- quirements of the pulp mills of Wisconsin. In 1958, pulpwood production in Michigan was 900,000 cords worth approximately $27 million of which -12- slightly less than one-half of the volume and slightly more than one-half of the value was exported to'Wisconsin. The remaining pulpwood provided 83 percent of the roundwood requirements of the.Michigan pulp and paper industry; an industry which, in 1957, employed some 33,000 workers and. paid wages and salaries totaling $159 million. The industry added $272 million in value to the product by manufacture (Bureau of the Census, 1959). The pulp and paper industry came into the Lake States at the turn of the century to base itself on that part of the timber resource which the lumber industry considered inferior for its needs. This was, at that time, primarily spruce and hemlock, which were very adaptable to pulping. The steadily diminishing supply of commercially available swamp conifers and technological developments in pulping caused the industry to turn to those species which were invading the cut—over, burned-over timber lands that had been divided into many small ownerships. The pulpwood market became a source of income for farmers clearing crop lands and for others who owned lands which had proven to be non—agricultural. The stabilization of the land ownership pattern after the depression, of the 1930's changed the picture slightly. Upper Michigan and parts of northern LowerfiMichigan saw increases in public land holdings while the southern part of the Lower Peninsula remained primarily in private owner- ship. The increased demands of an expanding industrial and urbanrpopula- tion caused the rural sections of the southern part of the state to con- centrate on agricultural production and either liquidate or ignore their timber holdings. The pulp mills established in the area were forced to look outside the section for their supply. The pulp mills which had established themselves further north continued to tap private woodlands, -13- but those areas which had reverted to public ownership were closed to cutting. Thus, all pulp mills drawing on Michigan for pulpwood had to draw mainly on private lands in the northern parts of the state, and from varying distances. The differences in location advantages brought about the development of a rather complex procurement system. Although the public forest lands are slowly coming back into pulp- wood production, the major source of pulpwood for Michigan and some ‘Wisconsin pulp mills is still the small woodland. Some h3 percent of the 900,000 cords produced in 1958 came from public forest lands. The rest 'was timber from the 12 million acres of commercial forest lands owned by some 17h,OOO private citizens and organizations with the greater part coming from the 8 million acres in 173,000 ownerships of less than 500 acres. Thus, there exists a situation in which a few multimillion dollar manufacturing units are almost entirely dependent upon a great number of ‘very small producing units for their raw materials. While the pulp companies are dependent upon these small units, they are not at their mercy. The pulp mill often offers the only market for the small woodland owner's products. In many cases, the individual.wood- land is too small to encourage sawtimber production as the volume of the end product would be too small to permit economical harvest, or the wood- land is in such poor silvicultural condition that the timber is usable only as pulpwood. Also, the lack of other markets demands that, if the landowner is to receive any return from his woodlands other than products for home use, he must sell pulpwood. -lh- Pulpwood production may be the “highest and best" use1 of much of the non-agricultural lands in small ownerships. Although estimates of just what constitutes economic feasibility in sawlog operations are vague, it is felt that small tracts will never contain enough volume of sawtimber to make it worthwhile, either to the landowner or to the sawtimber opera- tor, to concentrate on sawlog production. As the other markets for forest products are either'tOO small, too local, or too exacting in their requirements to encourage the production of any other forest product, pulpwood may be the only answer to the small woodlot problem. Actually, the question of dependency arises when the pulpwood seller markets his product. Species preference and market location may limit a seller to a single outlet for his pulpwood; an outlet that may be con- sistently glutted. The great number of producers, without exceeding the statewide allowable out, are constantly offering greater amounts of pulp- wood than the present market can or will absorb. Thus, while the industry is dependent on the small suppliers for its raw material, many suppliers are dependent upon a single pulp mill for their market. A similar situation exists throughout the entire pulpwood marketing system. Each level in the channel through which pulpwood passes from the forest to the mill is based on a highly competitive supply base and faced with monopsonistic or oligopsonistic markets. The existence of competi- tive marketing conditions depends upon whether the particular group in question is being viewed as a purchasing or a selling organization. In general, by looking at the two extremes, the producers and the pulp 1"Land resources are at their highest and best use when they . . . provide an optimum return to their'operator or to society." (Barlowe, 1958, p. 13.) -15- companies, it may be said.of pulpwood marketing that an almost perfectly competitive group of sellers is supplying an almost perfectly oligopsonis tic group of buyers. It is this question of the differences in the market position that draws attention to pulpwood marketing.‘Whenever there exists a large number of relatively small sellers attempting to supply a few relatively large buyers, there is always the possibility of market control in such a manner as to be adverse to the sellers. ‘Uhen the sellers belong to that group of landowners that the U. S. Forest Service (1958, p. 107) maintains has the major responsibility of supplying the nation with the necessary forest products to meet the anticipated future demand, an adverse marketing situation for the present products may have a detrimental effect on the future supply. CHAPTER II OBJECTIVES AND SCOPE OF THE INVESTIGATION As pulpwood is the major product of the forests of Michigan, an investigation of the entire pulpwood marketing system is essential to the understanding of the actions and reactions of forest landowners to sus- tained yield forest management. It is necessary to know the marketing paocedures which are followed and the results which occur from following them. Objectives of the Investigation The objectives of this investigation are to determine the structure of the pulpwood market as it exists in Michigan at the present time and to determine what purpose is served by the various segments of the market- ing chain. iHore specifically, the objectives may be listed as: l. The determination of the quantities of pulpwood involved, the sources of the pulpwood, and the movements of pulpwood within the state, out of the state, and into the state. 2. The determination of the supply of pulpwood by species as the base for the maintenance of the pulp and paper industry on a sustained basis and to compare it with the actual pulpwood production. 3. The determination of the number and location of the ultimate buyers and their methods of procurement. h. The determination of the various market agents and to examine -16— -17- the relationShip between them. In view of the potential advantages of cooperative marketing, it is necessary to determine what have been the results of such marketing in Michigan. 5. The determination of the ownership and relative importance of the sources of pulpwood and to examine the methods of timber sale and cut regulation of the different ownerships with emphasis upon the effect of present policy on the future supply. 6. The determination of the methods by which pulpwood is transported to market and to examine the relative costs of the various methods both from the pulp company viewpoint and from the seller viewpoint. 7. The comparison of the costs incurred in producing pulpwood and the prices offered for the pulpwood.to determine the relative profita- bility of the production of the different species of pulpwood and relation to the returns from wood pulp production. Scope of the Investigation This study was carried out as a part of a continuing study of the structure, organization, and operation of the pulpwood market for Michigan— produced pulpwood. The detailed production studies are limited to Michigan, although some consideration of the output of pulpwood in Wisconsin is necessary as the pulp mills of that state constitute the only out-of—state consumers of Michigan pulpwood. These Wisconsin pulp mills exert no little influence on pulpwood production in, at least, one part of Michigan. Euphasis is placed primarily on showing the existing market insti- tutions and explaining the advantage and disadvantages of the methods of operation of each. It is upon these units in the marketing system that -13- the pulpwood producer must depend for the maintenance of the flow of his product to the pulp mills and the returns on his labors to him. In most cases, these structures were formed, not by the producer, but by the pur- chaser. Thus, they are worthy of very close scrutiny to determine their value to both marketing parties. One of these institutions, the cooperative, is given special consid- eration. The assumption of Bratton (l9h9, p. 190) and many others that cooperative marketing is the elixir to cure many of the ills of the pro- ducers of forest products from small woodlands requires that this type of organization he examined in detail. As Michigan is blessed with two types of cooperatives which have been in operation in the field of pulpwood marketing for some time, it is possible to present a rather detailed analysis and to present cooperative marketing as a special type of market structure. The effects of the potential, sustainable production of pulpwood and its possible effect on price were also investigated. The question of a ”fair" price for pulpwood and the possible results of price changes on production has been the subject of much discussion in the trade publica- tions and has resulted in a Congressional hearing and investigation. An analysis is made on the basis of production returns and price-production relationships, but no attempt was made to determine what a "fair" price for pulpwood should be. It is understood that this is being considered by an anti-trust investigation group which has much better data collecting methods than those available for this study. Throughout the study, the actions of the market agents are referred back to the forest landowner, especially the small woodlot owner, to -19- question the possible effects of such action upon the continuing productivity of these lands. CHAPTER III METHODS OF PROCEDURE This study is a continuation, modification, and expansion of a.prior study in pulpwood marketing. In l95h and 1955, Dr. Lee M. James gathered primary data by means of questionnaire-guided interviews with pulp com- pany representatives, pulpwood dealers, producers, contractors, and pulp- wood-selling landowners. This information was supplemented with second- ary data obtained from other agencies and individuals. All the public landowners and.almost all the pulp companies using Michigan produced pulpwood were interviewed. The other groups were sampled by random selection of names from.lists supplied by the pulp companies and certain dealers and producers. The results obtained from this study were later published as a Michigan State University Agricultural Experiment Station bulletin (James, 1957). While there is no question as to the quality of the original study, changes in the pulp and paper industry and the existence of areas which ‘were not taken into consideration in the original study have given rise to a need for expanding the study to examine pulpwood transportation, pulp- wood supply potential, and the cooperative marketing of pulpwood; and to determine the effect of the expansion of the industry upon the market structure and the cost-revenue relationships. The additional primary data required were gathered in 1957 and 1959. The data-gathering process followed, in general, the procedures set up for -20- -21- the original pulpwood study in Michigan by James (1957), but was separated into two distinct phases. Information gathered in 1957 pertained to the transportation aspects of pulpwood marketing and was collected by mail questionnaires and corres- pondence.1 The contacts were limited to Lower Michigan pulp mills and the transportation organizations serving them. As a result, the questionnaire returns--with a little prompting--were 100 percent. A publication covered this segment of the study and is included in part in this paper (James and Lewis, 1960, pp. hhh-69). The information pertaining to the small trucking contractors was ob- tained from five pulp companies, 21 dealers, and 17 producers by question- naires and supplemented with material collected for the original study. It had been found in the data collecting process in l95h and 1955 that the small truckers themselves were a very poor source of information as most rates were determined by negotiation for each contract, and the re- sulting contracts had little relation to the costs involved. Thus, it is necessary to depend on the more cost-conscious users of small trucking contractors for much of the information. Data sources for the longer trucking hauls were limited to a sample of one trucking concern which had filed rates with the Michigan Public Service Commission for pulpwood hauling and which was the chief contract carrier for one Lower Michigan pulp mill. As this carrier limited its hauls to distances greater than 75 miles, it tended to operate beyond the competitive range of the smaller contractors. The use of a single concern, lSample copies of all questionnaire material may be found in the Appendix. -22- while regrettable, is unavoidable. This trucking company is the only large concern which limits its activities to pulpwood transportation alone. Thus, the published rate schedule of the trucking company and question- naire material from the pulp company utilizing the trucking organization provided the best data on a large, purely pulpwood transportation opera- tion. Detailed tariff rates were obtained directly from the major rail- roads transporting pulpwood to Lower Michigan pulp mills. The pulp mills provided lists of loading points within their procurement areas, indica- ting those at which they would accept pulpwood and those they did not use. The lists were forwarded to the railroads which served the.areas to obtain the rates charged, the distances of haul, and the number of railroads involved in transporting the pulpwood from each loading point to the mills. 'Hith these data for large and small trucking contractors and for the railroads, it was possible to develop a comparison of the costs of trans— portation for pulpwood shipments by rail and truck. However, due to the peculiarities of pulpwood procurement in Michigan, it was necessary to consider the costs from two viewpoints. The assumption of rail transpor- tation costs and the payment of higher prices for the longer truck de- livery distances by the pulp companies create costs for the pulpwood buyers while the differences in prices for rail-delivered and truck- delivered pulpwood and the presence or absence of additional handling costs create varying costs for the pulpwood sellers. e In the spring of 1959, another series of questionnaires was mailed to all Michigan and Wisconsin pulp mills. These questibnnaires followed the pattern of those used in the original study, but differed from those -23- of 1957 in that the 1959 pulp mill questionnaires were primarily to obtain volume, price, and cost information. The returns were not as great as in 1957 in spite of as many as two reminder letters sent at thirty-day intervals (Table l). Those'Wisconsin pulp mills which reported using no Michigan pulpwood were eliminated. TABLE l.- Returns of pulp mill questionnaires by Michigan and Wisconsin pulp mills procuring pulpwood in Michigan: 1959 Pulp Mill Location Questionnaire Condition 'Wisconsin Michigan Number Percent Number Percent Completed 16 69.6 9 69.2 Partially Completed 2 8.7 3 23.1 Data Refused 2 8.7 0 0.0 No Response 3 13.0 1 7.7 Total 23 100.0 13 100.0 The majority of the pulp mill questionnaires were returned com- pletely filled out, but a number of mills expressed reluctance to give price and cost data. However, information from similar mills in com- parable locations permitted estimates of costs to be made with little fear of error. As will be discussed later, many of the costs and prices are almost standard for the various mills. In one case, one -2h- company reporting fbr two mills gave only the totals without differenti- ating between the mills. This required some estimating of locational data, but permitted basing the estimates upon sound totals. The report- ing mills accounted for 71 percent of the consumption of’Michigan pro- duced pulpwood. Interviews with public landowners were held in the summer of 1959. These interviews were made on the basis of formal questionnaires, but an open-end questioning technique was used. A 100 percent sample was taken, and consisted of interviews with the Division of Forestry of the Michigan Department of Conservation for all the state forests and with the supervisors of each of the three national forests in the state for the federal ownership. In addition, informal "spot“ interviews were made with several national forest officers working directly on cutting areas. Other landowners were not contacted directly as it was felt that the time lapse between this study and the original study was too short for any great change to occur in practices and policies of private landowners, especially the smaller ones. A study of the pattern in landownership in the northern half of the Lower Peninsula (Yoho st 31., 1957) provided data as to forest landowner attitudes, and comparison with landownership data from the original study indicated that similar conditions exist throughout the state. Thus, this study was used for developing the section on forest landowners. Interviews were held with all the cooperatives in Michigan that market or had recently marketed pulpwood, but with one notable exception the results were meager. The lack of activity in pulpwood marketing had caused several to discard all past records of such transactions. However, by interviewing with open-end questions of the opinion type, it was .n \.‘ 1'01 n. o ..- nu he. '4‘ Me a \‘1 -25- possible to obtain much information as to pulp company relations and methods of operations from a distinctly different point of view. Producer interviews were limited to five with pulpwood operators who marketed through the cooperatives. It was hoped that a more un— biased group could be contacted in this manner rather than using lists provided by the pulp companies. In the original study, names of pro- ducers and middlemen had been obtained from the Michigan pulp companies, but it was felt that the names given were those of individuals who were highly biased in favor of the pulp companies submitting the lists. Of course, the same is probably true of the cooperative producers. They, naturally, would be in favor of marketing through a cooperative middle- man, and their views would not necessarily correspond with those of a completely independent producer. However, discussions of their reasons for joining the cooperatives gave an excellent view of the problems of the small producer dealing with pulp company representatives and other (non-cooperative) middlemen. The results of these interviews and those of the original study are thought to give a reasonably complete picture of the producer operation in Michigan. Information concerning the operations of the independent, full—time producers was obtained primarily from the public agencies and from a single large timber operator. Although this is a far from acceptable sample or sampling technique, the information obtained is quite similar to that from other indirect sources and is felt to be reasonably accu- rate, especially as it agrees quite well with the data obtained in interviews for the original study. In general, the 1959 data collection was divided into two parts; a light, extensive sample and a very intensive sample. Those areas -26— which had been covered in the original study were lightly resampled from a slightly different direction to determine if any notable changes had occurred. If there were no changes, the original data were assumed to be acceptable and applicable. If changes were evident, then the collecting was intensified to bring the original data up to date. In those areas which the original study had not stressed or had omitted, intensive data collecting was planned and carried out. Thus, while this study closely parallels the 1957 study, certain areas such as cooperative marketing and supply potential receive much more emphasis while the areas well covered in the basic study are lightly passed over and only significant changes noted. Mathematical statistical analyses have been almost entirely elimi- nated. In attempting to cover so wide a field, it is felt that sta- tistics would become so complex and awkward as to detract more from the ease of data handling than it would add in accuracy. With the exception of price-production relationship analyses, the data presented in tabular or graphic form are the actual data collected or averages and percent- ages. In this type of study where the accuracy of the data varies greatly from one sample to the next, it is difficult to attempt to analyze the information statistically as an analysis cannot weight it- self as to the accuracy of the data. 'Uhere questions or disagreement in the information arose because of the diversity of sources, and field verification or determination was impractical, U. 8. Forest Service data were used as a standard and the other sources adjusted to conform with such information. This was especially true in the case of production and cost figures. The Forest Service was selected as arbiter without appeal as the field -27- studies found a great number of answers prefixed with "I think . . ." or ”I should judge . . .” while Forest Service replies were usually based upon definite studies on the forests and from the Lake States Forest Experiment Station in which the errors of estimates could be de- termined. The effect of the recent Congressional committee hearings in ‘Uisconsin and in Hashington, D. C., upon the divergence of answers given in interviews and in mail questionnaires is unknown, but the possible presence of such an effect leads toward greater reliance in Forest Service data than in private sources. Forest Service data were more acceptable than those from other public agencies as the other agencies lack both the staff and the funds to carry out research and often even to keep their records current. The whole process of the study is to move downward along the supply chain from the pulp mills to the forests. This requires the study of a series of units which decrease in size of operation and increase in num- ber as the study progresses. In general, the process has been from pulp mill to middleman to producer to landowner with attention being given to the different supplementary units or contractors where they occur.1 However, the structure of the marketing system prevents the elimination of a certain amount of overlapping and reiteration as the overall system of supply differs with each unit being supplied. The market units are examined to determine the methods of operation, the organization and structure, the location, and the advantages and dis- advantages of each. An analysis is made as to the relationships of each unit to the other units of the marketing chain. Certain units may exist 1Definitions for the various units are given in the sections given to the study of them. _28- alone, but in almost all cases, the operation of one influences the others. However, it must be remembered that the boundaries between the units are by definition only and there may be cases of boundary overlapping by individual operations. Actually, it is possible for a supplier to operate in all the market units at one time; thus, making the entire process a single operation by a single unit. The analysis of costs and prices is not made until each unit has been individually examined, and is treated as if for a single operation. The costs are primarily the costs of moving pulpwood through the entire marketing chain, and as Such are considered for purposes of illustration to be the costs to a single hypothetical individual. This is done to eliminate confusion due to the difficulty in determining the point of title transfer. The services provided by others are treated as a cost of operation. No attempt is made to try to determine a margin for profit and loss for each marketing unit; only for the marketing system as a whole, because of the variability of the overall structure. The methods of procedure of this study of pulpwood marketing are to present a logical picture of the channels through which the pulpwood moves, based upon a combination of field data checked against and corre- lated with supplemental information collected from libraries and files of a number of organizations. All data, both primary and secondary, were accepted, rejected, or modified on their respective merit and weighted accordingly. All analyses, with one exception, are made on the basis of actual data rather than on the terms of some accepted norm or mean a CHAPTER IV REVIEW OF LITERATURE The ultimate dependence of forestry upon the markets for forest products has given rise to a number of marketing studies which, accord- ing to Gregory (1957, p. hSh), are based on the assumption that if marketing information is made readily available, forest management will automatically be established or improved. An additional emphasis was given to marketing research under this assumption when the U. S. Forest Service (1958) in its Forest Resource Report No. 1h, asserted that, in order to meet the future demand, a good part of the nation's future supply of wood must be provided by the small, almost entirely unmanaged woodlots. If management is going to come to these woodlands, it is necessary to provide market information. The majority of the pulpwood marketing studies have been done by public organizations and are primarily oriented toward the marketingH mm.om amma pm.; mH.HH mm.m op.m HH.:H o:.om mmma oo.m m~.ma we.» mm.oa oo.om oa.om «mad mo.m :~.HH mm.0H po.ma om.aa o~.mm Hmma o~.s Ho.ma so.oa mm.~H msama o~.em omaa o~.4 po.ma on.» mm.aa m4.mm pm.~m mama oo.~ sm.ma H~.~H co.ma ~:.~m ~m.:~ mama ms.a ao.aa as.ma mo.- sm.o~ ms.- area om.o ~o.ma Ho.oa mm.m~ sm.ma oa.a~ mama I I Pamnvhmm I I nooowoamm noon-magma»? cog-um warm good—8m HE asuasm mama How noaooam ' H mmmaacama sundown» oopooaon mom composooan commend!“ Hope» on» no omensooaoa a or sewage“: ma commences“ ooosndsm I.m mamas -59- Aspen production rose from 29 percent of the total output in l9h6 to a high of 57 percent in 1955. Although it declined to h8 percent in 1958, this has been compensated for by increases in the production of pulpwood from the miscellaneous hardwoods. The miscellaneous hardwood pulpwood output increased some 875 percent; raising its proportion of the total production from less than 1 percent in l9h6 to almost 9 percent in 1958. Unlike Michigan, where there has been little increase in the total pulpwood production, Wisconsin's output nearly doubled from l9h6 to 1958. The production of any species would have to increase considerably to hold its own in terms of percentage. Production of softwood pulpwood in Wisconsin, with the exception of pine, has varied little in absolute volume (Fig. h). As a result, hemlock production declined from 15 percent of the total output in l9h6 to 7 per- cent in 1958 (Table 3). Balsam fir dropped from 11 percent to 8 percent while spruce fell from 7 percent to 3 percent of the total production. Only the production of pine pulpwood, among the softwoods, has increased to any great extent. This increase has enabled pine pulpwood to maintain its proportion of the total output at almost 18 percent. Aspen production increased greatly and was able to maintain its position of comprising h5 percent of the total while the miscellaneous hardwood pulpwood production increased, both actually and relatively. Between 195k and 1958, pulpwood production from the miscellaneous hard- woods increased 100,000 cords to increase its proportion of the total output from 0.02 percent in 19h6 to 19 percent in 1958. I . .ma 0: H a ooozgasm : .m ooma3.cw CowpoSUOL \ . Homam Umpom mm how Cams . wumHI 0H .mm. hummus NM%\ «6% mhmw cow urine. Wt \QVWVVQ \vohuthhx _6Q- thxQ new mwhtxmmxmv WQQBQQWVQ 0m,\\\ 06% 009\ —- 070 Soag 3/0 SO/V 1757,1954 9W / -61- Hm.sa me.m om.sa mo.o as.s mm.sa mmaa mm.ma ma.~ ms.ma wa.o os.o as.ms smafl Ha.aa ma.~ No.4H ss.m os.o ~o.~m omma am.oa om.m so.sa Hm.m ma.o so.am mmaa no; 3.: 3.2” mag“ mod 3.0m am? ms.s no.4 em.ma aa.m 4H.m H~.mm mmma mm.~ mo.o Hm.oa Hm.aa No.ma sm.ss mmma oo.m as.m so.ma ma.m oa.a Hm.as Hmma sm.s Hm.o ma.o~ m~.oa mm.sa o~.~s omaa I--- om.o s~.aa as.a mm.ma -.m area «0.0 mm.» Ha.m~ mm.oa as.ma as.mm mama Ho.o m~.o em.am aa.oa sm.oa mo.mm seam «0.0 as.» oH.sH mm.sa ao.aa m~.s ones I I psoouom I I mooosonem nsoomoaaoooazp oosnnm scam xooHsom mam ammamm mogmdL meow modoonm mmmHIczmH .moaoonm oopooaom mom composoonn mansoomfim Hence on» «o owepsooaoa a no cansoomfi3.ma aoapoaoonn ooosndsm I.m mgmdy -62- Areas of Pulpwood Production The 1958 production of pulpwood in Michigan tended to be concen- trated in specific areas rather than being evenly distributed over the state (Fig. 5). This production concentration is due mainly to the near- ness of pulp mills or market areas, and the site requirements of a given species. Some hh percent of the 1958 production was cut in the western half of the Upper Peninsula. This section produced greater quantities of all species excepting pine and aspen than any of the other three divisions of the state (Table h). The presence of relatively large tracts of public and private timber lands, and the ease of access to the Wisconsin markets permitted this area to excel in the production of those species which had enough value to permit their being transported some distance. In addition, the Michigan production of the northern softwood species was limited to this area and the eastern half of the Upper Peninsula by the site require— ments of these species. The eastern half of the Upper Peninsula produced less than one—half as much as the western half or some 18 percent of the total. This pulp- wood went primarily to those pulp mills situated in that section of Upper Michigan. The northern half of the Lower Peninsula produced 3h percent of the 1958 production and was the main source of pulpwood for all the Lower Michigan pulp mills. Only one Lower Michigan mill went out of the Lower Peninsula for additional pulpwood, and that was due to previously devel- oped sources of supply and technological preferences. However, within the area, there is a shifting of production. Unlike the l95h situation -63- EACHDOT/QEDPESE/VTS :::,.~I-lhl.‘l ' . ”00 Kim/We? 60908 *22-‘58 7//AA/5oo €0,903 X5" LIP] .1 L/‘ Fig. 5. - Pulpwood production of all species in Michigan by county: 1959 (Source: Forestry Division, Michigan Department of Conservation, Lansing, Michigan) command: op .33 hem Eon.“ crane on: m .8. vocab? adamant-m mono-Hp 83500 spawn 0cm anemia mo mergers-poo. snowmen one. by 020.33 mflsmmfimom swamps momamnsoapmosu Haas one ..so.-..: finance-H ~6h- .moapmenomcoo mo puma-Daemon sewage“: .mofimafid beseech «and: 33mm :5 .ooEom pmomom .m .D $03.03 95555 phenom mover-w cam-H «monsom ooo.mmm oo~.sm oom.mom ooo.moa ooe.mmm Hosea ooo.os ooo.~ oom.oa cos.m coo.am noooseamm afloofimHHm cud: . oo~.mm o 00H ooa.m ooo.~m xeoaaom com o o co: co: meanness 00s.msa oom oom.ooa ooa.mm oo~.sa mesa 84.92” 0 08$ 84.3 08.3 are 533 oom.om o oom.: oom.s~ oom.sm custom ooo.sms oom.o~ oom.awa cos.ma ooo.msa seaam uses: one moam< I I noses one-05$ I I smashes: Hana name means _muamm monsoon :4 amofisom swomvaoz snowmen Pumper: manned-com moron adamant-m woman mmma 3300A» one common .3 command: m..- mogoeooan ooosnflsm I4. mama. —65— reported by James (1957), when production was concentrated in the ‘western portion of the northern counties, the 1958 map shows produc- tion to be spread throughout the northern counties. In fact, the locus of heaviest concentration is now on the eastern side of the peninsula. This change is tied to the development of new pulp mill markets. The southern half of the Lower Peninsula produced less than 35,000 cords (h percent) which consisted mainly of aspen going to one mill, but some pulpwood was supplied to the other mills in the area. Almost all the pulp mills in Michigan use some aspen pulpwood. As a result, the production of aspen pulpwood is found throughout the state, but low prices cause concentration around the mills or receiving points to minimize the hauling costs (Fig. 6). The areas of production are limited more by the location of the markets than by the location of the timber. However, some aspen is exported to Wisconsin from both Michigan peninsulas. In contrast, the production of pulpwood from the northern soft- woods--spruce, balsam fir, and hemlock--is limited almost entirely to the Upper Peninsula by site and climatic requirements of the species (Fig. 7). Due to location and high value of the pulpwood, much is ex- ported. In 1958, 69 percent of the spruce and balsam fir production was exported while almost all the hemlock and tamarack were shipped out of the state. Pine production is centered mainly in the northern half of the Lower Peninsula (Fig. 8). The localized production of this species is also due to the location of the timber stands rathern than to the avail- able markets. Domestic demand and the distance to the out-of-state mar- kets prevent exportation of too great a share of the production. In -66, (é;4(Dz/”£DC?7PVGQSJC;G%E;SZ§VV7FE3 'flbi:t;EE¥?F§;1. *' /000 STA/V0490 C0908 “m 230% 33:21 :. “1538 TIL/AW 500 €0,903 E“ ‘° “‘V °° a. a; :xnfii l I * V [a :» fll Iak l *I l I Fig. 6. — Aspen pulpwood production in Michigan by county: 1959 (Source: Forestry Division, Michigan Department of Con— servation, Lansing, Michigan) —67— ASHZIA/ A3k77"3<3594362525k§3¢4733 fi—> moo srA/vo/I E0 (0903 4‘ [£33 77%W 500 60803 Fig. 7. - Balsam fir and spruce pulpwood production in Michigan by county: 1959 (Source: Forestry Division, Michigan Department of Conservation, Lansing, Michigan) -68— 4574(76/ASk27’4435549€%E§$LESMV7’E9 JKDCX3~59774/MZ34/FZD (1242436; *EZLéKSEQ.779fi4/V4fifibr>C>7‘AEEEF3€25132S7\/7153as . . -*"t /000 8774 NBA PD COPDSC I I ' an as J—I‘ A; .. . l f" “f Fig. 9. - Miscellaneous hardwood pulpwood production in Michigan by county: 1959 (Source: Forestry Division, Michigan Department of Conservation, Lansing, Michigan) x- 4588 TAM/V 500 C0908 CHAPTER VI PULPWOOD SUPPLY As pulpwood is the major revenue producing forest product in Michigan at the present time, and as it is the basic raw material for the greater part of the Michigan pulp and paper industry and for a number of Wisconsin pulp mills, it is necessary to give some considera- tion to the available supply. The fact that a producing area falls within the procurement territories of a number of pulp mills does not insure a pulpwood market. If the available supply exceeds the fixed capacity of the mills, the surplus timber is left without a market. How- ever, if the pulp mill capacity is large enough, it is possible that the pulpwood will be in short supply. Since pulpwood is a product of growing timber, it has the poten- tial--but not necessarily the absolute--abi1ity to be continuous in supply, and it will be considered on this basis. The financial invest- ment required to establish a pulp mill and the presence of state and Federal forest lands make consideration of the pulpwood supply from a depletion viewpoint unrealistic. Pulp company practices in the South (Malsberger, 1956, p. 6&2) indicate the pulp mills will protect them- selves by encouraging sustained-yield forest management on private woodlands while it is normal policy to manage public forest lands for the maximum sustained yield production possible within economic limits (U. 3. Forest Service, 1959b, p. 9). Thus, it is best to discuss -71- -72- pulpwood production on a sustained-yield basis. Sustained yield implies a "continuous production with . . . an approximate balance between net growth and harvest" (Society of American Foresters, 1958, p. 96). However, this definition assumes a fully regu- lated forest containing the desired level of inventory. In order to reach this level of stocking, it is necessary that the allowable out be limited to that volume which may be removed during a given period while building up sufficient growing stock to meet specified growth goals (James and Lewis, 19603, p. 825). In actual practice, the allowable cut is a tenuous managerial concept in that it is not based entirely on growth, but rather is controlled by (1) the purposes of management, (2) market conditions, (3) silvicultural needs, (h) logging problems, and (S) the degree of harvest continuity de- sired (Davis, l95h, pp. 120—21). Usually the allowable cut is quite conservative for depleted timber lands in order to build up the stands to the desired inventory levels as rapidly as possible. The U. S. Forest Service in Michigan sets its total allowable cut for pulpwood at 56 per— cent cf the growth in the Upper Peninsula and h6 percent of the growth in the northern half of the Lower Peninsula (U. S. Forest Service, 19598, p. 8h). However, these figures may vary from year to year because of the above reasons. Allowable Cut and the Actual Cut in Michigan In 1958, the actual cut of pulpwood in Michigan was slightly more than one-third of the estimated allowable annual removals (Table 5). Aspen and paper birch had an excess of allowable cut over the actual cut of 70h,500 cords while the miscellaneous hardwoods had an excess of -73- h06,900 cords with the greatest concentrations of the excess being in the northern half of the Lower Peninsula. These hardwoods accounted for 86 percent of that part of the allowable out not taken. Balsam fir and spruce had an excess of h9,600 and h6,000 cords respectively while hem- lock pulpwood production was 65,600 cords less than the allowable output. The allowable cut for tamarack was l6,h00 cords greater than the actual cut. Only the actual cut of pine pulpwood exceeded the allowable cut, and this by the narrow margin of 2,900 cords (Table 6). However, in terms of production areas, the excess of allowable cut over the actual cut becomes somewhat smaller for specific species. In the western half of the Upper Peninsula, pine and spruce are being over- cut while the excess of the allowable cut of balsam fir over the actual cut is only 6,500 cords. In Lower Michigan, pine is being relatively heavily overcut while those species which show an excess of less than 10,000 cords have a very small allowable cut. Only the eastern half of the Upper Peninsula shows a substantial margin between the allowable cut and the actual cut for all species. The southern half of the Lower Peninsula is restricted to hardwood pulpwood production by species dis- tribution. Remembering that the allowable cut is a conservative figure, the regional excesses of the allowable cut over the actual cut indicate that the pulpwood markets are absorbing all the timber that can be taken of a few species in some regions, but, in general, far more pulpwood is available for cutting in Michigan than is being consumed by the pulp mills. The tremendous excess in hardwoods is focusing attention on hardwoods as a reservoir of potential pulping stock (Federal Reserve. Bank of Minneapolis, 1959). -7h; TABLE 5.- Comparison of actual and allowable annual removals for the major pulpwood species and types in Michigan: 1958 Upper Peninsula Species western Halfa Eastern Halfb - - Standard Cords - - Aspen and Paper Birch Actual Cut 173,000 h5,700 Allowable Cut 288,100 287,300 Hemlock ‘ Actual Cut 32,000 3,100 Allowable Cut 60,600 32,000 Pine Actual Cut lh,700 32,900 Allowable Cut 8,300 h8,h00 Balsam Fir Actual Cut 61,000 h9,h00 Allowable Cut 67,500 7h,700 Spruce Actual Cut 5h,200 27,800 Allowable Cut 53,500 65,h00 Tamarack Actual Cut too too Allowable Cut 5,300 11,900 Miscellaneous Hardw00d Actual Cut 57,600 3,700 Allowable Cut 105,600 92,300 Total Actual Cut 392,900 163,000 Allowable Cut 588,900 612,000 Source: Ray E. Pfeifer (1959) Pul cod Procurement and Allowable Cut igJMichi an. Division of Forestry, HichiganDepartméfit'cf Conser- vation, Lans§ng, Michigan. aEastward to and including Marquette and Dickinson Counties. bWestward to and including Alger, Delta, and Menominee Counties. -75- TABLE 5.- Continued Lower Peninsula Northern Halfc Southern Halfc All Michigan - - Standard Cords - - 189,500 26,800 838,600 h95,500 68,200 1,139,100 100 -—- 35,200 7,800 800 100,800 100,300 800 188,700 89,000 100 185,800 5,000 --- 115,800 22,800 —-- 165,000 8,300 --— 86,300 13,800 --- 132,300 —-- --- 800 "" "" 17,200 10,300 7,000 78,600 205,600 82,000 h85,500 309,500 38,200 899.600 83h,100 105,700 2,185,700 cNorthern and southern halves divided roughly by a line drawn from Bay City to Muskegon. -76- .m magma «condom ooa.cm~.a oom.cHH ooc.smm ooo.ms; ooo.cma Hussy oom.cos ooo.m~ oom.mma ooc.mm ooo.m4 succsusum mfiom EHHmOMAE oos.ca --- --- oom.HH oom.s xccssssa 000.6: --- ooa.m ooc.sm cos- conscm ooc.ms --- oom.~H oom.mm oom.c use ssuficm oom.~- cos- oom.HH- oom.mH cos.c- scam ooc.mc cos oo~.s oom.mw ooc.m~ sccascm oom.sos cem.Hs 000.com coc.asm 00H.maa Assam uccsc . 1 one acam¢ u 1 women owmocmpm u n uasm “Hum case case cucnpnom aucnpnoz chopmmw campus: cowanoaz mmfiocnm Has wasmndnmm nosog masmcficmm moan: mmmfi “weak; one neaocam ooosnasn aches can now cwwanoax ca #50 Hmspom nm>o use canmsoaam mo mmmoxm 1.0 mqm <22‘<53 \r4’ ¢ié \ , ° %§\J ' '<23 A /0 ~— 50 Q I I I I I I & /00 200 300 400 500 575 #0202115 //I/ WVMA/OS 0F Caeos Fig. 10. - Aspen pulpwood price—quantity relationships IZEZF. . 2/ 52 § _. ‘g 20 _. 555'5‘ 5% . 40 \ 82 5'6 57 Q ‘1 g;:( /@?.. -§€> . 8 7’9 § /3 ... u . 5 /7__ 67 5'0 85 I I I I I I I 1 I I /o 20 so 40 50 so 70 80 90 /00 Ibzz/A/E //V WOW/V05 0F C0903 Fig. 11. - Balsam fir pulpwood price-quantity relationships -81- 1959, p. 32), producers will cut the other species available on the area before opening a new area to produce additional balsam fir pulpwood. Spruce production has a very poor response to price change. This may be due to a number of factors. Spruce production is a highly spe- cialized operation requiring a large investment. In Michigan, most of the spruce stands are located in areas where access is limited and diffi- cult to create. As much of the timber is found in swamps, requiring that production be carried on in winter (Rudolph et 31., p. 33), a seasonal production aspect is created. This seasonal aspect may discourage the better operators who desire full-time work. As a higher price for spruce pulpwood is indicative of a better overall economic condition, the spruce operator, being the superior businessman among the pulpwood producers, is encouraged to apply his talents in other fields that will provide a full- time occupation (Pikl, 1960, p. 278). The reverse would be true in times of declining prices. Thus, changes in spruce pulpwood production do not always appear to be directly linked to changes in spruce pulpwood prices. Pine pulpwood production has a direct relationship to price move— ments, but to a very limited degree. For this species in Michigan, the general overcutting and the large amounts of pine timber in public owner- ship tend to prevent any great increase in production. The increasing importance of pine as a pulping species over time and government control of the greater part of the supply have tended to cause this relationship rather than any inherent economic condition. It is doubtful that an in- crease in price would bring forth larger quantities. The physical limi- tations of quantity cannot permit expansion within the present sustained- yield objectives. A general stabilization of production regardless of price changes may be expected. HA! V50 MI {ix I .. “up I 09%. I... .‘1 MI 1| n) 1 ID [1 ’m h‘: [Ii .12 r+ l {... ec -82- While these curves indicate the possible relationship between price and supply, examination of the annual price-volume intersects and the correlation coefficients yield the fact that the price changes that have occurred have not been the controlling factor in pulpwood production. Annual price-quantity relationships show years in which price increases while production decreases, price decreases while production increases, and prices and production move in the same direction for all species. Statistical comparisons of the correlation coefficients show that the calculated coefficients are not significant (Dixon and Massey, 1957, p. 868). Several factors tend to limit better correlation between pulpwood prices and production. Almost all pulp companies procure pulpwood on contract, with contract periods of six months to a year. This would eliminate any possibility of producers taking advantage of price changes as they occur, and would prevent the development of a supply response under conditions of free interaction of supply and demand. For example, a pulp company may contract for a good part of its pulpwood requirements at a given price. To fill the remainder of its needs, the price may have to be increased and a second series of contracts let. As the second con- tracts are let for only the required amount, the increased production may actually be much less than the amount that would have been offered for sale at the new price had the market not been controlled. The interaction of pulpwood production by species may have an impor- tant relation to the lack of correlation. Operations will normally not respond to a price change in one species if the production of that species means abandoning other pulpwood species on an accessible area. All mer- chantable species in a sale area will be removed before a producer will -83- proceed to another area. Depending upon contract availability, usually the pulpwood species are removed in descending order of price. This would cause a lack of response between a price change and production for a higher-priced species so long as the price change is not great enough to cause a great variation in the total number of producers. Of course, there is always the effect of monopsonistic practices which may tend to prevent a better correlation between price and produc- tion. The Canadian Restrictive Trade Practices Commission (1958) found definite evidence of price control in Canada while there is enough evi- dence of such practices in the United States to warrant recommending in- vestigation (Stoddard, 1959, p. 60). The overall timber resource base for the Michigan pulp and paper industry is quite adequate for the existing mills and is capable of per- mitting an expansion of production to more than three times that of the present on a sustained basis. However, expansion in the procurement of the softwood species is limited to much less than this by the lack of volume. Aspen and the other hardwoods offer the best potential for ex- pansion of production without a large increase in the price offered, but spruce and balsam fir production have a relatively limited expansion potential and react only slightly to price changes. Expansion in pine pulpwood production is not possible on a sustained—yield basis under the present allowable cut concepts. The encouragement of expansion of production cannot be brought about by small price increases alone. Such factors as cost of entry into pulp— wood production, stand accessibility, alternative employment opportunities, availability of suitable labor, and general economic conditions apparently influence production to a greater extent than price. CHAPTER VII THE PULP MILLS In 1958, there were thirteen Michigan and twenty-three Wisconsin pulp mills in operation which depended upon Mfichigan pulpwood production to sapply part or all of their needs. The thirty-six mills were owned by twenty-five pulp and paper companies with four companies owning a total of eleven mills located in both states. The thirteen Michigan mills, with two exceptions, were drawing on Michigan forests for their entire pulpwood supply. One of the exceptions drew 21 percent of its supply from Michigan pulpwood producers while the other drew 90 percent. These thirteen mills consumed 51 percent of the total Michigan production with the remaining h9 percent being taken by the Wisconsin mills. The Michigan pulp mills show a definite pattern in location with re- gard to water supply, raw material, and transportation facilities. Figure 12 shows the location of all Michigan mills in production in 1958. Seven mills were located in the Lower Peninsula; four on the western side, two on the northeastern edge, and one in the southeastern section. The six Upper Peninsula mills were more or less concentrated in the middle of the Peninsula except for two on opposite sides of the base of the Keweenaw Peninsula. As shown in Figure 13, the Wisconsin mills were mainly concen— trated in two areas: the Green Bay area and the Midstate area, with several mills along the MichiganeWisconsin boundary. The location of the -8),- 435- .900 is? I 31 M4 CZ fiSS/F/CfiT/O/V [V i l | 81/ 24 29/02/29 /C?EDO(/(770 04/0/4677”? //v 729N8 / N O - /~ 50 0 —- 50— /50 , __ _ G -- /50—25'O I | ' —I G —-250 we OVEP I s I O O Fig. 12. - Location and capacity of Michigan pulp mills in operation in 1958 (Source: U. S. Forest Service, Division of Forest Economics Research, Woodpulp Mills in the United States, washington, D. C., 1959) -86— “I— I _ I Q ‘ T‘ Ts; ? 7_' I 7 O = /- 50 (I.=.fifiCF-/QSZD G = /5'O~25O —" 0=A80V£250 -r—( M/zz. CLASS/F704 7'/O/V 8 Y 24 HR PRODUC‘ 7’/O/\/ 04940 77/ //V TONS Fig. 13. - Location and capacity of Wisconsin pulp mills in operation in 1958 (Source: U. S. Forest Service, Division of Forest Economics Research, Woodpulp Mills in the United States, Washington, D. C. ,1959) -87 - Wisconsin mills is due more to histonkal development of the industry than to present production factors. As might be expected, the pulp mills drew their pulpwood from many of the same areas. Table 7 shows the geographical sources of pulpwood con- sumed by the pulp mills of both states. The Lower Peninsula mills tended to draw their entire supply from the Lower Peninsula except for the one mill which, due to favorable transportation conditions and other con- siderations, drew wood from both Michigan peninsulas and from Canada. The Upper Peninsula mills drew their supply from the Upper Peninsula plus a small amount from Canada and Minnesota; the imports going primarily to one mill. The Wisconsin mills drew upon all surrounding states, some of the Western states, and Canada. The greater part of the Michigan produced pulpwood consumed in Wisconsin was taken from the Upper Peninsula. Although there is much overlapping of procurement areas of the various pulp mills (Fig. lb), price competition for pulpwood is relatively limited. In the Lower Peninsula, seven pulp mills drew almost all their supply of wood from the forests of the northern half of Lower Michigan, yet prices paid for pulpwood are quite constant with little variation over time and between mills. This lack of price competition may be due to the fact that the different mills did not depend upon the same species for the bulk of their raw material. It is said that a pulpwood seller knows the buyer and the price by the species he sells. For example, from the 1958 production of aspen in the Lower Peninsula 195,800 cords were taken by the Lower Peninsula mills (Table 8). Some 56 percent of this was taken by one mill with two others taking about 13 percent each. The re- maining 18 percent was unequally divided among the four other mills. The same situation exists in regard to the other species. Some 57 percent of -33- .mmnwmncowpmodo Haas pom .meomommfiz sass: .flsmm .p. .oowbpom pmosom .m .D .coflpmpm pcoewnoaxm phenom mopMpm mama ”oohsom ooo.mae.m ooe.mcm.a ooo.msa oom.so; Mecca ooc.ssm oo~.omm ooo.w oom.ms sesame ooa.sm oos.am o o .m .p assess: ooe.eam oom.scm oom.a o uscucccax oom.aam oom.aam o o nauseous: ooc.csm ooc.a~ o oooflmmm manussscm ucch ooa.mmm oom.mas oom.mmH co; m sasucascm scene coma-Loam I - canoe csccsusm - I uaaaz_ mafia: masmcfinom Momma mazmcficom nozoq mag; 3sz 3.30m Had camcoomwa ownmmnwocc mmca "mamas QHSQ amncoomwz cam :rmwnowz_hn omsrmmoo ooozmnsm mo mosses swarmhmomw s.n mqmde -89- MosrLR’M/zzs gggx ‘ 351/5941. 1...? gas: _, - M/zzs Isms. FE $x§N“" owes/em; "Ag/”cg r ‘ WWW... E g .. I 'II sews-'04; (M? ,e’ I “h 33:753.. MST/4’45. M/AAS ' _-_'-:- y [/7725 10040 — ——- A _ f , PfooaCWO/v ~ -‘- "'- I I L mecca/WA E53] 551% I I? I f 1311/56 PE/V/A/S axe Fig. 111. - Pulpwood procurement areas in Michigan for Michigan and Wisconsin pulp mills (Source: Lee M. James, Marketing Pulpwood in Michi an, Special Bulletin I411, Agricultural EXperiment Station, Michigan State University, East Lansing, Mich., 1957) -9o- .monamznowpmoso HHHE one ..noax .mcamcmq scoapmbnomcoo Mo escapnmuon cmwfinofizsscoamabaq hhpmonom «.mcax «Hump .pm .mofibsmm pmonom .m .D .moapwpm pcoewnomxm pmohom mmpmem mama «condom ooc.aam cos.ass cow.mma oo:.mmm Hausa ooc.ma ooc.ma ooa.as ooN.m~ succssssm mfiovcmHHOOMHS oom.mm ooa.mm 0 cos sccasum oow cow 0 o xomnmsma ooa.msa oom.Hs cow.» oom.ooa scam oos.maa oom.ma ooc.am oom.m nae assacm oom.cm ooa.mm oom.mm oom.m ccsscm 862-3 63.3 8.1mm coaxe- 85 uses . one 534 - .. assoc assess-cm .. - made: 2.3: mflsmmficum hogan mfizmmacom meson mafia: asses msacscm Has assesses: sameness .Qc.) d . Mme Lego em mflaae mm m. maze caccocz+3 one names. 2 my cesamnoc non.1~.m “suspecm newnnodz u.w mqmde -91- the annual pine consumption was taken by one mill and more than 56 per- cent of the miscellaneous hardwood pulpwood was taken by another. Thus, the presence of one large buyer of a given species apparently holds price competition to a minimum. In the Upper Peninsula, competition is somewhat more intense as both.Michigan and Wisconsin mills are drawing on the same areas for the same species. But as Michigan pulpwood has to compete with wood from other states and from Canada for the Wisconsin markets, the eastern half of the Upper Peninsula is more or less isolated by transportation costs from the Wfisconsin mills and supplies only the Upper Michigan mills. As these mills tend.to use different species for the greater part of their pulp production, competition is again limited, but not to the extent that exists in Lower Michigan. Thus, it is only in the western half of the Upper Peninsula that competition in the procurement of Michigan pulpwood exists. IMethods of Procurement The methods of obtaining title to pulpwood differ between pulp mills procuring Michigan-produced pulpwood. Few mills limit themselves to only one method while several have as many as three. Truck transported pulpwood is purchased upon delivery at the pulp mills. Normally a single price is offered for this pulpwood as the greater part is obtained from cutting areas near the mills. However, in Lower Michigan, a policy of making additions to the base price by dis- tance for the longer truck hauls has been adopted by all except one of the mills. One company, in addition to the price increases for truck delivered pulpwood, will purchase pulpwood at roadside beyond a h5-mile _92- radius of the mill, and assume the truck transportation costs. Of course, a price reduction accompanies the change of method. As yet, the Wisconsin and Upper Michigan pulp mills have not seen fit to use any type of sliding price scale; they pay only the basic delivered—at-the-mill price. 11 Michigan-produced pulpwood transported to the pulp mills by rail is purchased on the railcar at the railroad siding where it was loaded. This type of procurement permits the pulp companies to obtain pulpwood from a distance while eliminating locational advantages between sup- pliers. Although the price paid is lower than that for truck delivered pulpwood, the avoidance of the excessive hauling distance that would be involved in attempting to truck the wood to the mill encourages pulpwood production in those areas served by the rail loading points. The use of rail transportation does not eliminate the location ad- vantages of the pulp mills; while tempered by rail rates, it tends to accentuate the advantage. Prices within a given timbershed supplying several mills tend to be equal; possibly a result of competition during a period of high demand. The general reluctance of the pulp companies to engage in direct price competition prevents a change so equalization is maintained. As rail rates do increase with distance, the pulp>mills more distant from the pulpwood sources may be at a very decided disadvantage in terms of procurement costs. No Michigan-produced pulpwood moves by water, although one pulp mill imports a good part of its out-of—state supply by barge. Water delivery accounts for 72 percent of this mill's total receipts, but only 12 per— cent of the receipts for all Michigan mills. The difference is due to the fact that the single mill is procuring foreign pulpwood from distances up to fifteen hundred miles. Because of existing marketing arrangements and -93- a technological preference for the imported species (spruce and balsam fir), the company prefers this wood, and water transportation is the only economic means of hauling a low-value product this distance. In most cases, the pulpwood is paid for when delivered at the mill, but some is purchased at the loading point. Usually pulpwood delivered at the mill is the cheaper pulpwood in terms of procurement costs. Although the price offered is higher than in any other method of procurement, the average freight bill paid for the other delivery methods by the pulp companies exceeds the price differen- tial by a significant amount. However, the location of the desired species, the desired mill inventory, the woodyard space and unloading facilities, the number of contracts required, and the economics of main- taining the longer supply channels may prevent the use of truck delivery alone. The flow of pulpwood into a pulp mill woodyard must be correlated with mill consumption and must be controlled so as to keep the inventory as low as possible within the limits of seasonal fluctuations. Most mills attempt to keep a maximum of six-months supply on their woodyards and let it decline during the periods of slow pulpwood receipts. However, it is seldom that the inventory is permitted to fall below a three- months supply.1 The use of rail delivery gives the pulp company better control over pulpwood delivery. In order to maintain the desired inflow of truck delivered pulpwood, both over time to keep a stable inventory and at any one time to expedite proper usage of unloading equipment and the 1' 1The storage time is more dependent upon area and rate of delivery rather than upon deterioration of pulpwood or insect attack. -9h- movements of the delivering trucks, it would be necessary to have very definite delivery dates in the contracts. This would be impractical from the producer's viewpoint and extremely difficult to administer so rail procurement is almost essential. Hail delivery cannot be initiated until the pulp company accepts the pulpwood on the railcar. Prior to this time, the producer can con- centrate his efforts in felling, bucking and skidding the logs to road— side. Then, when pulpwood is desired, the pulp company notifies its pro- curement agent (a pulpwood middleman or a company employee) who, in turn, notifies the producers. The railcar is then placed on the proper rail siding and loaded. The pulp company has excellent control over the quantity and the timing of delivery, both at the rail loading point and at the pulp mill, thereby being able to maintain a relatively smooth flow of pulpwood into the wood yard. One Lower Michigan pulp mill had maintained a concentration yard for the purpose of controlling the flow of wood to the mill and to reduce shipping costs.1 Pulpwood produced within a thirty-mile radius was pur— chased delivered at the concentration yard at $0.50 less per cord than the prevailing price for pulpwood purchased on railcars. The pulpwood ‘was then peeled and stored until required by the mill. The peeled pulp- ‘wood was later shipped to the pulp mill 207 miles away. Although the $0.50 reduction in price did not cover the loading costs completely, the pulp company was able to effect a $1.90 per cord saving in shipping costs by peeling. However, the increasing use of small deharkers in the woods by the producers has permitted the abandonment of the debarking ‘— 1Concentration yards are not used extensively in the Lake States, but are quite common in the South. -9§- operation at the concentration yard. Apparently, the increase in control over the flow of pulpwood to the mill gained by use of the concentration yard is considered to have value enough to cover the cost of operating the yard. Three Wisconsin pulp companies engage in logging operations in the Upper Peninsula, but the other Wisconsin and the Michigan pulp mills pre- fer to obtain their wood from independent operators. On company-owned lands in Michigan, pulpwood production is carried on by contract loggers or by stumpage buying producers. As producers are able to provide the necessary pulpwood, actually there is little need for the pulp companies to produce their own pulpwood, and the companies are relieved of the re— sponsibility of the necessary labor administration and financial invest- ment. On the other hand, approximately half of the pulp companies procur- ing pulpwood in Michigan have to aid their suppliers in obtaining stumpage. This is usually'done when there is no other way for one of a company's more reliable producers to obtain the necessary timber. The main place where the pulp companies find it necessary to enter into stumpage pro- curement is in the large state and Federal timber sales. The average supplier does not have the funds available to make the necessary invest- ment to obtain such large tracts of timber. This aid for stumpage may be granted in two ways. The pulp com- panies may purchase the stumpage directly and resell it to their pros ducers with payment being deducted from the price of the pulpwood or they may grant the funds directly to the supplier, allowing him to pur- chase the stumpage in his own name. Repayment is again deducted from Paynent for the delivered pulpwood. In any case, the pulp companies -96- enter stumpage purchase transactions reluctantly. All pulp companies do not like to grant financial aid of any type to their suppliers, but with the exception of several companies with small operations all do grant aid to the reliable suppliers. In all cases ex- cept stumpage purchases, financial aid is based on the quantity of pulp- wood cut and ready for delivery. Primarily, the aid is advance partial payment on undelivered pulpwood, paid in order that the supplier be able to complete the marketing transactions. These advances are usually made to provide working capital. Few pulp companies will advance funds for capital investment. The granting of financial aid has opened the producer-middleman question as to which should receive the aid. Only three pulp companies grant aid to both. Among the other mills, one group grants aid only to producers as they feel that the dealer fee should eliminate the need for additional funds while the second group feels that aiding the middleman gives the pulp company better control over the funds while recognizing that the middleman may have a very large investment in the pre-delivery stages of the operation. While both groups have valid reasons for their actions, the majority of the pulp companies feel that only the producers should be aided. Several mills have eliminated the dealer fee entirely as they consider financial aid a substitute for the fee. Contracts The policy concerning contracts between the pulp companies and their suppliers is different among the companies and for the various groups of suppliers. Some mills use a very informal contract (a letter request or an oral agreement) while others use a much more formal type. Some use -97- a series of short-tern contracts (sixsmonth time periods) to provide flexibility while always having the required quantity of pulpwood under contract. Others use contracts with longer time periods (seven to ten months) and depend on informal contract or non-contracted pulpwood de— liveries to provide wood for the remainder'of the year. One company uses a formal contract which calls for a given weekly quantity to be de- livered without placing a time limit or a total volume level on the over- all contract. In most cases, the smaller the pulpwood operator contrac- ted with, the less formal and less exacting the contract. The pulpwood contract is designed to serve one basic function; to insure the delivery of a given quantity of pulpwood while granting the pulp company some flexibility in adjusting procurement to the mill re- quirements. The shorter term and the more informal contracts permit the adjustment in requirements to be made more rapidly, with greater ease, and less drastically than in the case of the longer term, more formal contracts. Informal contracts.--The informal contracts range from oral agree- ments between the pulp company's local procurement agent and the supplier to letter requests from the company's procurement division to a specific supplier. The basic agreement is usually a statement of the quantity of wood desired by species and specifications, the price that will be paid, and, usually, the overall time period of contract life. The smaller de* tails as to time and place of actual delivery and the minimum acceptable quantities of partial deliveries are usually'worked out and agreed upon after cutting has begun and the need for such agreements has arisen. £23221 contracts.--The formal contract differs from the informal in that it carries the signatures of both parties. Quite often, the -98- stipulations are the same as in the informal contracts with many details left to later oral agreement. The contract usually states the volume and price per cord for each species, method and time of payment, specifica- tions for acceptable wood, and loading directions, especially if the pulpwood is going to be shipped by rail. Various other requirements may be stated pertaining to clear title to the pulpwood and to compliance with government labor regulations in the production of the wood. Due to the almost standardized nature of pulpwood procurement, many details are not stated unless an exception to the standard procedure is desired. The time of deliveries is usually not specified for any particular date. The pulp companies would very much like to be able to specify exact dates and times of delivery in grder to reduce excessive inventory and ——-—.-_._.,__--_._- .- ... —. .. still have enough pulpwood coming in to operate. At the same time, the companies would like to prevent a congestion of suppliers in the woodyard and at the loading points, but the problems faced by the suppliers pre- vent thisvfi'Weather conditions, labor availability, transportation diffi- culties, and the like do not permit the supplier to have constant day—by— day control over the production and movement of pulpwood. Thus, a con- tract will often stipulate that the amount of pulpwood required by the contract will be delivered within the time period of the contract. Most of the pulp companies use a six-months contract so that the entire amount will be delivered within six months, placing a six-months maximum on the amount of pulpwood that has to be maintained in the woodyard. One com- pany tries to maintain better control by stipulating that a given part of the total contract must be delivered within a three-months period while another requires a given quantity every month. The difference be- tween these two methods and the standard procedure is not particularly -99- significant. One procurement policy upon which all pulp companies receiving Michigan-produced pulpwood are in agreement is the refusal to hold suppliers to exclusive contracts and to grant exclusive territories. The absence of exclusive contracts is a two-edged policy. It permits any given individual producer or middleman to act as supplier for as many mills as will grant him contracts; thereby, increasing the flexi» bility of his operation and offering a more certain market. If one pulp mill modifies its contract to call for less pulpwood, the supplier may shift his excess wood to the fulfilling of another contract. However, it also weakens the supplier's position in regard to bargaining. The pulp company is not compelled to offer either large contracts or to pay higher prices as the supplier is not dependent upon a single pulp company for his market, nor is it dependent upon him for a large share of its pulpwood receipts. This policy tends to require the pulp company to grant a larger number of relatively small contracts to prevent the devel— 0pment of exclusive contracts by custom. The refusal to establish exclusive territories appears to have arisen out of the avoidance of exclusive contracts. The pulp companies maintain that since they do not attempt to control the marketing of a supplier's pulpwood by exclusive contract, they are in no position to attempt to control or limit the territory in which he operates. Occas- ionally, a pulp company will attempt to select its suppliers in such a Way that their normal sources of timber will not overlap, but the prac- tice is not widespread nor is it followed strongly, As a result, Hichigan suppliers often find themselves competing for stumpage--and bidding up the price--in order to produce pulpwood for the same pulp —lOO- mill. Many suppliers feel that the practice is an example of the pulp industry attitude toward supplier welfare in general. Delivery and Storage Pulpwood deliveries are quite eccentric, but tend to follow a vague seasonal pattern.. Usually the high point in receipts occurs in the early spring with a seasonal low in the early fall. These variations are due primarily to weather conditions, the seasonability of the farm labor usually employed in pulpwood production, and demands for certain types of pulpwood. Although truck and rail delivery may continue all through the year, truck transportation is slowed during certain seasons when the woods roads are nearly impassible and loading is possible only where the pulp sticks can be skidded to a well-surfaced road. The movement of woods workers to agricultural pursuits in the spring and early fall causes some reduction in output, but often it is too spo- radic to develop a definite pattern. It is most evident during the autumn when the producer has no backlog of cut wood to continue delivery as he has in the spring. During the spring breakup, pulpwood production may be carried on while transportation is restricted. Thus, during the planting season, the cut wood is delivered as loading requires less labor than the other production functions. In the fall when the labor force turns to harvesting agricultural crops, pulpwood output is slowed and there is no backlog of cut wood. In the summer months, as in the winter, pulpwood logging is a "hot" logging operation in that the wood is cut and hauled to the mill in an almost continuous operation. The supplying of peeled pulpwood was, at one time, a very seasonal occupation in that the peeling had to be done in the spring or early -lOl- summer when bark removal was easiest. The delivery of peeled pulpwood occurred after the peeling season and was usually completed in a rela- tively short time, seldom longer than three months. However, the in— creasing use of portable, mechanical debarkers in the woods is grad- ually eliminating that variation in delivery due to the peeling season. In general, while there are seasonal characteristics in pulpwood delivery, the seasons of maximum and minimum delivery may vary between the pulp mills and even from year to year for a given mill. There are no completely acceptable explanations for the lack of delivery patterns. It is highly possible that variations in the delivery pattern may come as a result of company buying policies (Stoddard, 1959, p. 26). On the other hand, it would be to the companies' advantage to regularize the flow to the mills. All pulp companies stockpile pulpwood. In the face of the irregu- larities of receipts, it is necessary to do so, but it does raise ques- tions as to the effect of prolonged storage on the pulping qualities. In the Southeast where deterioration due to insect attack is quite prev- alent, pulpwood stockpiles are limited to a maximum of a three-months supply with six weeks being preferred. Procurement is often on a weight basis to insure delivery of fresh cut pulpwood. However, in the Lake States, only with aspen is it considered necessary to rotate stock so rapidly; Several of the spruce and fir consumers prefer to hold the wood longer, and build up correspondingly larger stockpiles. They feel that storage for at least a year improves the quality of the pulpwood. However, long storage does reduce the fiber quality somewhat in all species. Although small stockpiles are desirable to reduce the raw material -102— investment requirement, forecasts are not carefully made. There is little reason for poor forecasting as most pulp mills operate at between 85 and 100 percent capacity, but generally there is a tendency to have very irregular purchasing. The pulp company which is forced to maintain a small stockpile due to space limitations has to initiate short—term purchases quite rapidly and to refrain from purchasing abruptly in order to adjust the stockpile to changes in mill demand. This does work a hardship upon a supplier in that he cannot regulate his production in a proper manner. The accelerator effect operates to cause an even greater fluctuation in his operation than in the pulp company's. It would seem possible for the producer to reduce the effects of irregular purchases by supplying a number of pulp mills and shifting the flow of pulpwood between them, but as many pulp mills are supplying the same market, they all may adjust their procurement in the same direction at the same time. CHAPTER VIII MARKET AGENTS Pulp mills obtain pulpwood from four sources: (1) from pulpwood middlemen, (2) from pulpwood or timber-products producers, (3) from landowners, and (h) from pulp company owned timber lands or from inte— grated wood processing plants. If company—owned lands are considered from the viewpoint that the company is a landowner, the sources may be limited to the first three categories as very little pulpwood comes from integrated plants, especially in the Lake States, although mill and logging waste are becoming of greater importance. The complete pulpwood marketing chain would then consist of the landowners who grow the trees, the producers who convert the standing timber to delivered pulpwood, and the middlemen who handle the financial and business arrangements. However, the pulpwood marketing system is not that regular. A single individual or organization may carry out the furctions of any one or of all the categories while the policies of the pulp companies may eliminate or require the existence of certain of them. The landowner role in pulpwood marketing is often an indirect one and is carried out by a very diversified group with motives other than simple pulpwood production. Although it is the first stage in pulpwood marketing, discussion will be deferred to a later section in order that this group may be examined from a viewpoint other than that concerned only with the problems of pulpwood production and marketing. - -103- -101;- Pulpwood Middlemen In the pulp and paper industry, the middleman in the raw-material supply system developed at a relatively early stage. While pulp and paper manufacture is a relatively raw-material oriented industry, its location is greatly influenced by other factors, and, historically, land ownership and raw material production have never been of primary impor- tance. However, the high costs of establishment, the great fixed costs, and the large quantity of pulpwood consumed does require that a source of constant supply be maintained. As long as the mill size remains small and a lack of competition permits the use of local pulpwood sources, pro- ducer contracts supply the mill requirements. ‘With the introduction of competition for pulpwood and expansion of mill capacity, the area of pro- curement must expand, and in expanding the pulp company must arrange some method of controlling procurement from a distance. This control is attained by either hiring or contracting with an individual to supervise procurement in the more distant areas. The economics of the situation determines the method to be employed, but normally contacts are used; first with the large producers, but finally with the middlemen in a given area as the demand increases. Thus, the middleman development in the pulpwood marketing field is a direct result of competition between pulp mills and increases with the distance of procurement. Variations in the use of the pulpwood middlemen are due to company policy in regard to the amount and type of aid the company wishes to offer and the existing procurement procedures of the firm. Maintaining a large number of producer contracts can become quite complicated due to the sellers' need for aid. This requires that a company dealing directly -105- with pulpwood producers be prepared to shoulder the direct and indirect costs of making and administering numerous small advances, and sometimes procuring stumpage. A company which feels that these costs are less than the middleman's fee will automatically reject the middleman's service, but the middleman will also be rejected if the company feels that the in- tangible returns from dealing directly with producers outweigh the savings resulting from the proposed use of the middleman. If the pulp company has operated for some time with producer con— tracts and has developed a procurement organization of some size, there is a decided tendency to retain and expand the organization rather than develop a middleman system of procurement, especially if there is a large fixed cost involved. In the Lake States, all pulp companies have re— tained that part of the procurement branch which deals with producers die rec tly, even when they have accepted a middleman system, as they will not depend on a middleman system entirely. In one case, where no middleman is ‘used, the procurement organization has been expanded to the point Where it even provides product transportation from the woods to the mill for its producers. Thus, the development of the middleman in pulpwood marketing is by no means an automatic thing, but it is determined by the needs and wishes of the firms of the industry. Economic advantages are the primary cause or a company's acceptance of the middleman, but in many cases the exist- i’ng procurement structure and the desirability of certain intangible hen eIits may cause rejection in spite of economic considerations. The V”asiq'biation in the use of the middleman system is due primarily to differ- e: hces in company policy rather than to inequalities in cost structures ‘5 Q't'I-Feen the companies. 1' UL p). (I) -106— The advantages of the middleman system in pulpwood procurement are numerous, but utilization of these advantages is dependent upon pulp company policy and the middleman himself. In his study of the contractor system in the South, Duerr (l9h9) found that the use of the middleman could relieve the pulp companies of a great number of social responsibil— ities as well as well as eliminate many of the more expensive aspects of direct procurement from the producers. The majority of the Southern pulp mills use the middlemen as their only source of pulpwood and insist that all producers deal through their local middleman. To the producer, the middleman is a known pulpwood market. The .113c3a1.middleman is usually more accessible to the small or part-time pro» ciziczeer than a visiting company representative while within the small, sometimes exclusive, area served by the local middleman, the procurement agent who lives within the area is in a much better position to contact élflLII. known and potential producers. IMiddleman procurement of pulpwood has forced the development of Certain practices which are highly advantageous to the pulpwood producer. In Order to meet contract requirements, the middleman must not only pro— c‘lre pulpwood, but must also take the necessary steps to insure the EafiwéaiijLemdfilityof wood to procure. Quite often, it is necessary for the ISRJL:1413Wflkood middleman to provide the producers in the procurement area with credit and with stumpage. The lack of credit availability is one of the limiting factors in p11:LPWood production. While equipment can be obtained through credit pm- <:=]tl“E1E3es, it is almost impossible for a producer to obtain credit for “fiut:>‘1’1ting capital or for stumpage procurement through normal credit sources ( S“fooddard, 1959, p. 149). Funds for these purposes come from the ~ -lO7- producer's resources or from the pulpwood buyer. As the pulp mills hes— itate to make such loans except to the larger, more reliable producers, the small producer turns to the pulpwood middleman. This credit is seldom provided as cash unless it is provided as ad— vance payment for pulpwood cut but not yet delivered to the normal point of acceptance. The actual form of credit depends upon the use the pro- ducer will make of it and the business enterprises of the middleman. If the credit is needed to procure stumpage, normally the middleman will make the actual purchase and deduct payment from the returns due the pm~~ ducer upon delivery of the wood. Where the funds are needed to meet cur- rent expenses, the middleman will make cash loans more often, but if the middleman is operating some type of mercantile establishment or if the fun ds are required for living expenses, the middleman will provide the pro d'ucer with a credit account in the store. This is relatively common arnong the smaller middlemen whose pulpwood activities are carried on in Con nection with the operation of a grocery store or gasoline service Station (Stoddard, 1959, p. 226). The pulpwood middleman is often a prominent figure in the stumpage market. Rather than depend on the local producers to procure their own Stumpage, it is often more advisable for the middleman to obtain title +- ‘0 s"Landing timber and to negotiate with the producers to harvest it. '1‘ - hls is almost a standard procedure when large tracts of timber are sold. After purchase, the middleman then either contracts with one or more proe <1qu ers to harvest the timber for him, or he resells the stumpage ’00 a hmnber of producers outright or on the basis of payment for the stumpage, plus a handling fee, at the time of the sale of the delivered pulpwood. The entrance of the middleman into the stumpage market is necessary rq .a v‘.~ or, m, ,m -108- due to the inability of the producer to invest his limited funds for the time period between timber purchase and pulpwood sale. This is a very decided factor in preventing the entrance of the producer in large timber LG ales and public timber sales. Any stumpage sales which require a deposit are usually closed to the small producer. Only the presence of the iniddleman permits the producer to obtain any of this stumpage. It was .just such a condition that caused the U. S. Forest Service to bring a nriddleman into existence in Michigan (Franson, 19h9, p. 309). The acceptance of credit and stumpage, however, places the producer eat: a disadvantage in that it obligates him to deal with the middleman who sstlrnplied the needs. Thus, the producer is again faced with a limited rnéaziket for his pulpwood. Although this, in itself, would work no more hardship on the producer tiriéaxu if he were selling directly to a single mill, the ethics and methods errEEDILoyed by the middlemen may work to the disadvantage of the producers. 1T3; ‘vvas charged by the president of the Wisconsin Pulpmen's Union that '7't313452 pulp mills have paid the same price for the last 10 years, but the d‘ELEIULers have set prices according to conditions and supply." It was 'ffloir‘1;}ler alleged that middlemen who advanced credit in the form of sup- I):l5i-€Bss would not purchase enough pulpwood to permit the repayment of tLIEKGB eentire debt (Stoddard, 1959, pp. 25-26). The extent of such practices has not been determined, but they do point up the fact that producers may be faced with difficulties which 1hr<:’1131d.not be encountered in direct marketing. If, as in many cases in It;]r1‘3 South, there is only one middleman serving the only pulp mill pro- <:=jt15rfing pulpwood in a given area, the producers of the area are completely ‘duil the mercy of the dealer. In the Lake States, extensive cross-hauling -lO9- of pulpwood may eliminate this. The major advantage of utilization of the middleman system of pulp- wood procurement is the reduction of administrative costs and better control of the flow of pulpwood to the mill. It has been suggested that the system permits the shifting and avoidance of certain social responsi~ bilities and the elimination of labor problems (Duerr, 1919). However, in the light of recent developments, these problems and responsibiliti as may never have been, legally, a part of pulp-company procurement require-- ments. The relationship between the pulp company and the producer has often been considered as employer-employee on the basis of size. It has been advocated that the producer, when under contract, is a part of the pulp Company, and the pulp company then becomes responsible for the produc r ' r actions. Under this concept, it is felt that it is the duty of the com— pany to see that all labor and social security regulations are met and that the company is responsible for insuring clear legal title to the 1313-3— Wood. However, in a recent court decision, it was stated that a pill mood producer is an independent operator, and, as such, has no direct Connection with the pulp company. In no sense is a contract producer to be <30 nsidered an employee of the company (American Pulpwood Association, 1959 ) - Therefore, the pulp company is relieved of all concern as to l €1er laws and legal title, and is not, legally, responsible for the i llegal actions of its producer-suppliers. In regard to social responsibility, it is generally found that the In“ lddleman does not relieve the pulp company of any social obligations. I h the South, where the middleman system is the strongest, the pulp com— b . ahles have accepted as their duty to society-—and themselves--to ‘ —llO— encourage the maintenance of pulpwood production and to provide the tech» nical aids necessary to place individual forest lands on sustained yield management (Malsberger, 1956, p. 6h2). In Michigan, this type of public relations work is almost nonexist~ ent. Relief from social responsibility is not primarily determined by the procurement system, but by company policy. The Pulpwood Middleman in Michigan The operation of the middleman or dealer system in the marketing of pulpwood in Michigan has received a mixed reaction. Although a number of mills use the dealer system to obtain part of their pulpwood requirements, no mill is completely dependent on dealers. Moreover, there are eight Michigan mills which do not use the dealer system at all. Of these ei ght, four own forest lands and three are obtaining a small part of their pulpwood needs from such lands. Table 9 shows the quantities of pulpwood, by type of procurement, Supplied to Michigan and Wisconsin mills in 1958. In the Lower Peninsula, deal ers supplied only 11; percent of the total Michigan produced pulpwood CO USIlmed by Michigan mills. This figure is somewhat misleading as one p111?!) mill, which accounts for almost half of the entire pulpwood con— S1’~"’113‘t.:i.on in Lower Michigan, depended entirely on producer sources and I31"O‘f1ded all the benefits to the producers that the dealer would normally be <>alled on to provide, plus maintaining its own trucking organization. The five Lower Peninsula mills which avoided the use of the dealer system Inng or less limited their sphere of procurement operations to within 200 mi-1~es of the mill and depended mainly on truck delivery. They received “(3:719 91; percent of their supply by truck at a maximum distance of 190 mHHHE mafipnoaop mo gonad: one mam mmmonpcmhmm CH mumpsszm mmm Pam.ae; emm.a omN.H Ham.wam sea mammv mane: flea H.» Jr as: Ham.ema omm mmm.a seo.mma mme mamav camcoomaz mam Hea.m: was one emm.oa em mfimv «flamencmm page: can mom.mem mow oao.m ooo.mm ma afiev mesmaacmm peace sewage“: monoo ca mopoo ca mpomupcoo mohoo ca monoo ca meomepcoo mmmnm>< mesao>. no nopezz owwnob< mesao> mo nopssz :oavwooq Han: pmosoonm awEmHoon 9.1.. :4, > J o . .9 gay pom pcmehSoocfl 4o )9 mmmfl am .35 toe aggfioa “as emennfl mega . 0a. 33 -112- miles while the remaining 6 percent came by rail from distances not ex- ceeding 200 miles. On the other side of the picture, the two mills using the dealer system in combination with producer contracts procured wood at distances up to LLOO miles when delivered by rail and 250 miles when delivered by truck. Truck deliveries accounted for bl percent of the total volume of wood procured. In the Upper Peninsula, a similar situation existed. For the three reporting mills, 72 percent of the pulpwood consumed was obtained from producers with trucking distances limited to 50 miles and rail distances not exceeding 135 miles. The only mill of the three to use the dealer system was also the only mill to procure pulpwood at distances greater than 100 miles. A combination of dealers and producer—suppliers was generally de— pended upon to furnish the 15 reporting Wisconsin mills with Michigan- produced pulpwood. Four Wisconsin mills depended entirely upon dealer Sources while one drew its supply from producer sources only. One mill drew upon company owned lands in Michigan for its Michigan-produced prlljlD'Wood, doing all harvesting with its own logging crews. In Michigan, the pulp companies procured more pulpwood from pro- duce‘rs than from dealers. In the Lower Peninsula, producers provided ahno st nine times as much wood as did the dealers while in the Upper Peninsula the ratio was 2—1/2 to 1. However, in terms of cords per con— tract, the picture reversed itself. In Lower Michigan, the average (1 _ Seller contract called for some eight times as much pulpwood as the K ePage producer contract while in the Upper Peninsula the dealer con- tact was approximately three times as great as that of the average ~113- producer. The actual size of dealer operations is quite variable. Some dealers may handle as little as 300 cords per year, while at the other end of the scale of operation, one dealer may handle more than 60,000 cords (James, 1957, p. 33). This size variation is due to many factors with the major ones being distance from the mill or mills being supplied .and the ability of the dealer to obtain'contracts. The greater the dis- inance between the supplied mill and the supplying dealer, the greater the size of the contract will be. Thus, as there is a limit beyond which a mill will turn to pulpwood dealers to maintain better control over wood procurement, the greater the distance beyond this limit, the more the mill will reduce the number of contracts. This reduction is carried out ‘kfiyr increasing the size of the contract. For example, in Upper Michigan where the distance for dealer usage is just over 100 miles, there are numerous dealer contracts of relatively small size. The Wisconsin mills I“7I‘ are they required to deal with only one mill. Michigan dealers can, and often do, have contracts with more than one pulp company. James ‘: :1~S>S7) found that the majority of the dealers have, at least, three con- t'I‘Elcts. Only the smaller dealers content themselves with one contract -11h- and many have two. The large dealers may hold more contracts; the greatest number for a single dealer being twelve. Thus, the ability of dealers in Michigan to expand the size of their operations depends more on their ability to obtain contracts from a greater Also, the mills prefer {number of mills than to obtain larger contracts. Only three Wisconsin mills depend on a single using a number of dealers. dealer to supply them with Michigan-produced pulpwood. Two mills de— pended on one dealer to supply them with almost 214,000 cords while the th_i-rd mill received less than 3,000 cords from its dealer. In Lower lchigan, the pulp mills using the dealer system apparently use a number few dealers are able to obtain the quantities of dealers for two reasons: Of pulpwood necessary to meet mill requirements, and the companies wish to In Upper Michigan, preVent possible monopolization of the dealer market. Upper Penin— the dealers are able to supply a greater number of mills. SIR-la dealers are able to obtain contracts with both Upper Peninsula and T"rii'rsconsin pulp mills. Pulpwood dealers in Michigan seldom attempt to operate over a large This per— area- Normally, operations are limited to a SO-mile radius. mits a dealer to obtain, and maintain, close contact with pulpwood pro— Ch:‘Qers and landowners and to become known as the pulpwood agent in the ar‘ea. Michigan dealers usually provide those services granted to pulp- “God producers by dealers. The larger dealers provide stumpage, either directly or indirectly, for their producers. Normally, funds for stump- age purchase come from the dealer's own resources, but in most cases the pulp companies will advance funds against cut pulpwood for this purchase. The pulp companies will never purchase stumpage directly for the dealers. an. ‘5. r AA! ‘- . i). In 1,; n . ’3 “n -115- All dealers make advance payments to producers. As these payments are made on the basis of pulpwood cut, but not delivered, these grants are considered as advance payments for the wood rather than loans so interest may not be charged. However, James (1957, p. 35) found that 10 percent of the Michigan dealers do charge interest when using their own funds to make the advances while Stoddard (1959, p. 145) maintains that, while no interest may be charged as such, dealers do require pay— ment of a service charge which covers interest and managerial expenses. In addition to providing funds and stumpage, Michigan dealers often provide transportation. Producer wood is purchased by the dealers at rO adside where the dealer takes title and provides the means of trans- porting the wood to the point where the title is transferred to the pulp In few cases is the transportation provided by the dealer's comI>anies. Normally, the dealer will contract with a local trucking OWTI vehicles. cor1<_‘:ern or an individual to do the actual hauling. Nearly 60 percent of the pulpwood dealers in Michigan are part-time They handle pulpwood in combination with other occupations. de55'-3_ers. About. one—half of these part-time dealers are grocers--cooperative stores and independent operators—-while farmers represent less then 10 percent. Wood~using industries make up about a fourth of the part-time dealer pop- 1.11 at, ion (Table 10) . Grocers represent the largest group of the part-time dealers for a The grocers are in a central location in a given area nuJ‘Tber of reasons. and are in a position to contact the local producers and landowners 93811” they are able to provide aid in the form of merchandise with \ lJames (1957, P- 39) designates as contractors those people who provide services in pulpwood marketing without taking title to the wood. ~116 - TABLE 10.- Distribution by occupation of Michigan pulpwood dealers Type of Dealership Number Percentage Percentage and Alternative Oc- in of of Dealer- cupations Sample Total _ ship Type Full-time Dealers Regular 7 39 88 Cooperative l E 12 Total 8 hO lOO Parts-time Dealers Grocer 14 20 33 Wood Using Industry 3 15 25 Cooperativea 2 10 17 Farmer l S 8 other 2 10 17 Total 12 60 100 B Source: James, Lee M. (1957) Marketing Pulpwood _i_n_ Michigan, ufill'Letin 1411, Agricultural Experiment Station, Miaiigan State tilKrersity, East Lansing, Michigan, p. 3b. a’I‘he cooperatives are also grocery stores but are listed Separately due to the difference in organization. litt1e or no additional capital outlay; and they are in a position to berlefit both from the dealer fee and from the additional purchasing Power of the producer. In the smaller communities, the local grocer- dealer has an advantage in being able to make known his pulpwood re— qufirements to the local producers and contractors with little effort. The store is usually a point of congregation for the landowners and “0 I‘kers so the grocer-dealer can make contact, either directly or indi- rectly, without leaving his establishment. He is also in excellent position —ll7- to learn of stumpage sales by local landowners and is often able to make the first and only bid on such stumpage. The ability of the grocer-dealer to offer aid to local producers in the form of merchandise permits him to operate at great efficiency. Often he is able to obtain any needed additional merchandise from wholesalers in liberal credit terms (Lebow, 1958, p. 3’47). Thus, he does not necessarily have to completely deplete his stocks. If such wholesale credit is neces- sary, the additional wholesaler charge is passed on to the producer. This type of aid, plus some stumpage, permits the local producer to operate within the limits of his own resources while involving no actual money Credit. Of course, this type of aid binds a producer to the dealer quite strongly. If the grocer-dealer is the only pulpwood buyer in the area, 1”-Fhis type of aid may lead to conditions which led to the charge made be- fO re a Senate committee that " . . . unless you bought . . . supplies from the contractor (dealer) you could not obtain any tickets (producer con- tracts)” (Stoddard, 1959, P. 30). There is little evidence of this in Michigan. The smallness of the number of farmer-dealers is quite understandable in ”View of the services demanded of dealers. First of all, the farmer- dealer is in a position where contact with the producers and landowners m1; 5; t compete with his normal occupation for time, and this requires ad— ditional effort on his part. Time spent in procurement must yield a return great enough to repay the costs of that procurement plus a larger amount than would have been received from the alternative work upon which the time would have been spent. By having two sources of income competing $9? the available time, pulpwood procurement costs may be somewhat higher for the farmer-dealer than for other part—time dealers. —118- Secondly, the farmer-dealer must provide all the necessary aids and benefits to the producers from his own cash resources. On the average, Michigan farmers do not have the capital necessary to finance pulpwood operations. Although, as a farmer, the dealer may have extra sources of credit available, such as the various government agencies, the standard practice of not charging producers interest discourages the use of inter- est charging sources of capital. The farmer-dealer's ability to provide credit is almost directly tied to his ability to obtain interest—free ad'vances from the pulp companies. In general, Michigan farmers do not hayre the constant flow of available capital to permit them to offer the r; e c essary aid. Dealers who operate some type of wood using plant are not in as good 130 sition as grocers to provide non-monetary aid to producers, but they are in a better position than farmers to create the necessary contacts to Ob'tain the needed wood. Depending upon their method of operation, this "type of part—time dealer is in a position to generate much of his own 1311Lljgtmood or to procure pulpwood generated by others in connection with pro curing the raw material for his own wood-using mill. A pulpwood dealership provides an opportunity to expand the existing operation, to provide integration to offset economic fluctuations, and to dispose of a waste product of normal operations. The last main group of part-time dealers is a highly varied one, consisting for the most part of local businessmen. These dealers enter the field of pulpwood marketing because of some attribute of their alter- r1Eltive occupation. The ability to contact producers and the existence of a source of credit are the main factors which, when properly correlated With the major occupation, permit entry into the pulpwood-marketing field. -ll9- The full-time pulpwood dealers are those market agents who limit their operations to purely pulpwood marketing or to the marketing of general forest products. This group accounts for hO percent of the pulpwood dealers in Michigan. These dealers operate as any business 0 rganization and provide all the necessary funds for their producers. However, all operate primarily on advance payments from the pulp com- panies. P111 pwood Producers Pulpwood production consists of the actual conversion of standing tin-ber into pulp sticks. It is usually an independent logging operation *3: (3.1" ried out by 'a relatively large number of small production units. In 1.959, the American Pulpwood Association estimated there were lh,700 full- time pulpwood producers cutting more than 1,000 cords per year per pro- dllc er, and 35,000 producers cutting less per year on a part-time or Seasonal basis. These 19,700 producers supplied, directly or indirectly, more than three-fourths of the pulpwood procured by the pulp mills of the nation. ‘ The existence of large numbers of producers supplying the major part of the raw material for an industry indicates the presence of a highly cCDTnpetitive sellers market. The fact that there are more than twice as Ina-fly part-time producers as full-time producers show that entry into and exit from the pulpwood production field is quite easy and inexpensive. The figures do not show the seasonal nature of pulpwood production. Pulpwood production is, in itself, not a seasonal operation. With 1An independent logging operation is a logging operation carried out by a small, normally unincorporated concern which has no direct affilia- tion with a buyer other than a supply contract (Stoddard, 1959, p. 15). -120- the exception of ease of peeling and transportation difficulties in certain seasons, pulpwood may be cut and sold at any time of the year. However, the presence of large numbers of part-time producers, affected by the seasonal aspects of the alternative occupations, gives rise to seasonality in pulpwood production. This is particularly true where farming is a major, but marginal enterprise, and pulpwood production pro- vides the only source of additional incomes. The farmer, however, is not the only part—time producer. In many cases, pulpwood is a variable by—product of another woods operation. The: small sawmill operator produces pulpwood to maximize the returns from a timber purchase. The availability of pulpwood—size timber depends en- tirely on the type of sale, and the quantity of pulpwood produced depends “‘1‘130 11 the existing market price for low-grade lumber and other forest pro ducts. Lastly, there is the miscellaneous group of part—time producers coI"lsisting of small businessmen, workers in non-agricultural occupations, and landowners possessing small quantities of timber and wishing to pro- duce pulpwood. Pulpwood production by this group constitutes a very small part of the total output. By its very nature, such production is ex- tI‘ emely small in terms of output per producer. The number of producers in this group tends to vary with local economic conditions rather than by season. Many workers and small landowners go into pulpwood production €111ring periods of economic decline to bolster incomes. The actions of this group tend to obscure the seasonal fluctuations of pulpwood produc- t'ion. James (1957, p. 37) found that the ratio of full-time producers to Part—time producers in Michigan was similar to the national ratio. ~121- Approximately 66 percent of the part-time producers were farmers who pro— duced less than one—third of the pulpwood harvested by part—time producers. Part-time producers supplied h6 percent of the producer-supplied pulp- wood taken by Michigan and Wisconsin pulp mills. In 1958, 76 percent of the Michigan-produced pulpwood procured by Michigan and Wisconsin pulp mills came directly from producers. While there was a tremendous variation in the actual production of the indi- 'Vi dual. producers, the average production for all producers was 353 cords. I 1:; “terms of market area production, producers supplying Lower Michigan 1:11-115 averaged 31:6 cords per producer while those supplying the Upper Peninsula mills averaged 213 cords. Apparently those producers contract- ing Twith Wisconsin mills were the larger producers of the Upper Peninsula; they averaged hh9 cords per producer. m.—-The producer may have a contract with the pulp mills or W‘i‘th a pulpwood middleman. The method of contracting is largely a matter of company or local policy. In the South, all producers contract with pulpwood middlemen as the pulp companies refuse to grant contract directly to the producers. In the Northeast and the Lake States, contracts between the pulp mills and the producers are much more common. Producers contracting directly with the pulp mills usually have some the of written contract. The contract is the standard form used by a given pulp mill with all its suppliers. It states the requirements as to S1'3ecies, quantity, method of delivery, point of acceptance, time and me"Ghods of payment, and conditions as to credit and advance payments. The restrictions are usually limited to specifications about the quality or the wood and deductions for crook, fire scar, and rot. The actual f0 rmality of the contract wording depends upon company policy, but there -122- is a general tendency for the formality to decrease with the quantity to be supplied. In several cases, extremely small producers are permitted ‘tc> sell wood with no written contract. James (1957, p. 32) cites the iansstance in which one mill, when requiring pulpwood, places notices in Ifrwant of its woodyard that it will accept pulpwood from anyone who brings ixt.- While this system worked for this particular mill, the practice is by ric> means common. Stumpage.--Pulpwood producers in Michigan procure stumpage from their cytvzi lands and from other timber landowners in the immediate area. Plcacrvnally, this stumpage is purchased by the producer, but some producers Cic> tvork only with "free" stumpage; that is, stumpage from their own lands C>I? sstumpage provided by pulp companies or pulpwood middlemen. The freeness CDJE’ iihis stumpage lies in the agreement between the producer and the pro- ‘gTi-Cleer of the stumpage. The producer may purchase the stumpage from the 1317C>xrider and have the price deducted from the payments for the delivered “00d, or the producer may act as a logging contractor and receive payments ‘CfirlULzr for the harvesting and delivery services.1 The procedures used and iik1€3 monetary returns to the producer are approximately the same in either cgéififee; the difference lies in possession of title to the stumpage. ‘Where iwrlfie producer works as a logging contractor, title remains with the pro- ‘rfoflrer of the stumpage, but where the price of the stumpage is deducted the producer is thought to receive title to the timber, although it may EDGE considered as being encumbered with a mortgage or lien (Barlowe, 1953, 13~ 119). Credit.--Producer credit is connected with producer purchase of 1James (1957, p. 39) considers the latter type of producer a pulp- WCBod contractor rather than a producer. -123- stumpage. The average pulpwood producer has too small an operation to have a sizable backlog of funds for stumpage purchase. Stoddard (1959) found that the only source of credit were the buyers. Banks were willing to make small, short-term loans on the basis of equipment collateral but would not accept timber or timber products as collateral and would make no long-term loans of any kind. Any producer who requires credit must turn to the buyers. The pulp mills will offer the more reliable producers advance pay- ments upon request, but mostly base such advance payments on the quantity of cut, undelivered wood held by the producer requesting the advance. The pulp companies seldom offer loans or advance funds to producers for stumpage purchases, but they will, on occasion, purchase stumpage directly . or provide stumpage from company lands in order to keep certain producers in operation. Pulpwood middleman advances of funds or purchases of stump— age vary directly with the ease with which the middlemen can obtain ad- vances from the mills supplied. In all cases, such advances are available only to the more reliable producers with repayment being based on deduc- tions from the final pulpwood sale. Pulpwood Producers in Michigan In 1958, there were almost l,hOO producers selling pulpwood directly to Michigan and Wisconsin pulp mills and supplying nearly 500,000 cords. These producers were unequally divided, both in number and production, between the Upper and Lower Peninsulas. The Lower Michigan producers, accounting for 60 percent of the number of producers, supplied 58 percent of the producer-supplied pulpwood in Michigan and 88 percent of all the pulpwood procured in Lower Michigan. -12h- The greater number of producers in the Lower Peninsula was due to the greater number of pulp mills, the policies of the pulp companies, and the landownership pattern. Only two of the seven pulp mills in the Lower Peninsula used the services of pulpwood middlemen in their procurement and these two mills used a combination of middlemen and producer—suppliers. The other Lower Michigan mills drew their entire pulpwood supply directly from producer sources. Land ownership in Lower Michigan is somewhat more diversified than in the Upper Peninsula, with fewer large blocks in single ownership. This would indicate that there are a greater number of part—time producers cut- ting on their own or other, small woodlots. In general, the producer in Lower Michigan is in a much better position for direct marketing than the producers in the Upper Peninsula. The ownership pattern of Lower Michigan timber lands is more conducive to small operations with limited capital backing. The proximity of the pulp mills to the timber sources apparently has a lesser effect on the situation than the size of the timber tracts offered for sale. Individual producers are in a better position to pur- chase small volumes of stumpage than large volumes since stumpage on small tracts is cheaper on a per unit volume basis and the total investment is smaller. The policy of the Lower Michigan pulp mills of granting producer contracts and granting aid in the form of advance payments and, occasion- ally, stumpage purchases and allotments tend to favor direct marketing. The purchasing procedure of buying producer pulpwood at rail loading points, and even at roadside, permits small producers to supply pulpwood at great distances from the mill. In.Upper Michigan, producers supplying the Upper Peninsula mills -125- were fewer in number, only about one—fourth as many as in the Lower Peninsula, and supplied much less wood. Less than half of the six Upper Michigan mills depended entirely on producer-suppliers for their pulp- wood. In terms of competition with pulpwood middlemen, the ratio of middleman supplied pulpwood to producer pulpwood in the Upper Peninsula was 1 cord to 2—1/2 cords as compared to a l to 9 ratio in Lower Michigan. The decrease in dependence on producers in the Upper Peninsula was due prnnarily'to the presence of large areas of timber lands under single ownership which reduces the number of small timber sales available to the producer. As the Upper Peninsula pulp mills will not advance funds for stumpage procurement, limiting advances to cut wood alone, the small pro— ducer in the Upper'Peninsula must seek credit from pulpwood middlemen in order to obtain stumpage. The Upper Michigan producers supplying Wisconsin mills were fewer than half the number that supplied the Lower Michigan mills and produced a little more than half as much wood. These producers supplied almost four times as much wood to Wisconsin mills as to the local mills. Exam- ination of the average production of these Michigan producers supplying Wisconsin mills shows that the average production of this group is well above the Michigan average. Thus, it may be assumed that the Wisconsin mills offer direct marketing contracts only to the larger, better fi- nanced producers in the Upper Peninsula. Examination of the average output per producer gives some indication of the average size of operation carried out by a producer dealing di- rectly with a pulp mill. As mentioned before, the actual variation in output among these producers is quite great, ranging from 10 cords for a part—time producer to 10,000 cords for a large, full-time operator; it —126— is strongly influenced by the species supplied and the mill procurement policy. Now, assuming that the basic function of the pulpwood middleman is to secure and to concentrate pulpwood from the small producers, those producers supplying the middlemen must be very small. Figures from one Lower Peninsula middleman indicate that the average producer supplying him delivers approximately 50 cords. Comparing this to a Lower Peninsula average of 3h6 cords for a producer marketing direct to the mill, and Upper Peninsula averages of 213 and h99 cords for producers selling to Upper Peninsula and Wisconsin mills respectively, it may be said that, on a statewide basis, the size of producer output indicates the method of marketing; the transition between direct and indirect marketing is approx- imately 125 cords. Actually, the transition between marketing through a middleman and marketing direct to the mill would not be a definite quan— tity, but rather a range of volumes whose extent depends upon the pulp mill procurement policies and procedures and the producer's knowledge of pulpwood marketing. CHAPTER IX COOPERATIVES IN MARKETING FOREST PRODUCTS The smallness of pulpwood operations is often pointed to as the cause of the poor pulpwood market conditions. The small operator is in no position to have any effect upon the pulpwood market, even the local market; he must either accept what is offered or not sell his wood. This condition provides a potential source of unfair business practices for the pulpwood buyer and discourages entry into the market of a better type of small producer. In turn, the lack of better producers tends to leave the small landowner without a method of harvesting his woodlot timber in a manner which will encourage future production. Efforts to encourage the landowner to harvest his own timber have failed because of the small total return and conflicts with other interests. The small producer operation is the only way to harvest timber on these small, scattered tracts which are the "key to adequate timber supplies in the future.” (U. S. Forest Service, 1958, p. 107.) In order to overcome the difficulties faced by the small producer and to insure him better marketing conditions, the establishment of coop- erative marketing organizations have often been advocated. Basically, the cooperative would be a middleman, but with certain advantages to the producer which the ordinary middleman cannot offer. The cooperative would be controlled by the producers themselves, and thus would be more sympathetic to their problems. The cooperative would be willing to -127- -l28- accept smaller quantities of pulpwood from individual producer-members and would be able to provide more services at lower cost than some other type of middleman. The major advantage, however, would be the ability of the cooperative to pay the "middleman profits" to the pro- ducer in patronage dividends; thereby granting him a higher price for his pulpwood than he would receive if he sold directly to the pulp mill or through a middleman. Even if these profits were retained by the coop- erative, the producer-member, having control of the cooperative, could insure their use to provide expansion of and additional benefits from his future operations. In addition, the banding together of a large number of producers in a cooperative would permit the cooperative to control quantities of pulp- wood great enough to obtain a favorable bargaining position with the buyers. 'While a cooperative would not grant the producers a monopoly position, it would certainly reduce the present inequities in the market- ing of forest products. The handling of forest products under cooperative systems has not had the success that is found in the agricultural cooperatives. In a study by the U. S. Forest Service, records of 57 cooperatives handling forest products from 1935 through 191d; were examined (Cunningham, l9h7). The results were not at all promising as to the future use of coopera- tives for forest products without special assistance from public agencies. In three cases of general cooperative marketing and purchasing organizations (cooperative stores) which were marketing forest products as an additional service to their patrons, the value of the forest pro- ducts handled declined continually during the period studied. In the ~129- case of forest-products marketing associations which were formed for collective marketing of forest products only, mortaility was almost two—thirds, with survival predominant among those cooperatives handling timber from.public land. The only processing cooperative studied was showing some success, but it had been maintained prior to 19h? through government aid. General cooperative marketing and purchasing organizations try to handle forest products in order to give the member an additional source of income. In theory, the greater income would cause the landowning mem- ber to take more interest in his forest lands and practice some sort of sustained-yield management to encourage the continuation of this income. Such is not the case. In almost all cases studied, landowners marketing their forest products through such outlets "mined" their woodlots to ob- tain immediate income and, over time, exhausted the supply of timber available for sale. In one cooperative of this type in Michigan, forest- products sales outranked all other products for the first 20 years of the cooperative's existence but has declined to the point where it is, at present, a very minor product. Of the 30 forest-products marketing cooperatives whose records from 1930 through l9hh were studied by Cunningham (l9h7), only 11 were still in existence in l9hh. The major cause of the failures was world War II and the resulting sellers' market. In spite of by—laws stating aims of practicing forest management and offering assistance to members to imple- ment these aims, members were quick to withdraw from using the coopera- tive's facilities when approached by the buyers while the war-time loss of personnel prevented the organizations from giving the needed technical assistance if requested. The result was that many of these cooperatives -130- failed either because of a lack of membership or the overcutting of the woodlots of the members with the latter being suspected as the major cause. Those cooperatives with the best record of sustained operations were those which received their timber from public lands. It would appear that the members of the cooperatives are primarily interested in immediate revenue, and practice sustained-yield cutting only when re- quired to obtain the necessary stumpage. In the only case of a florestmproducts processing cooperative, the results appear better than in the other forms of cooperatives. This par- ticular association was formed primarily "to promote, foster, and encour- age the better care and increased productivity of woodlands." (Rettie and Ineson, 1950, p. 6.) IHembers were required.to sign contracts with the cooperative promising that their woodlands would be managed in accord- ance with association prescribed regulations. In return, the association offered aid in planning; it cruised and marked timber to be cut, manu- factured the logs, and marketed the product. The organization was rather heavily capitalized through government loans in its early history and experienced financial difficulties until quite recently; The establishment of the sawmill was more expensive than had been anticipated; the government insisted that the association follow a depression relief program; and management plans required light cutting for setting up the sustained-yield program. These situations added to the cost of going into operation and limited the early timber receipts and sales. During the war when the demand for wood was high, the cooper- ative was unable to take advantage of the market situation due to the labor shortage. It was not until after refinancing in 19h? that the cooperative became profitably productive. -131- One of the major factors working for the success of this associa- tion was the fact that the majority of the members were owners of fair- sized woodlands and were not being forced toward timber liquidation by the need for immediate income. A fair percentage of the membership could be classified as absentee owners who were quite willing to let the coop- erative take over complete management of their forest lands. In 1959, there were four cooperative organizations marketing forest products in Michigan. Three of these were cooperative stores which were handling forest products more as a service to their patrons than as an actual revenue producing effort. The fourth cooperative marketed only forest products, and although it handled almost all types of timber pro- ducts --pulpwood, posts, sawlogs, lumber and railroad ties--it depended upon pulpwood for 90 percent of the total revenue. Cooperative Stores in.Michigan The cooperative stores interviewed in this study were incorporated under Michigan law as nonprofit cooperative corporations whose primary purpose was the retailing of food, gasoline, and other consumer products to member and non-member consumer in the areas served. The oldest was established in 1913 and began to market forest products in 1925. In the beginning, such marketing was highly successful for all the coopera- tives, and pulpwood became the largest value product handled by the co- operatives. In 1930, one cooperative marketed some $265,000 worth of logs and pulpwood, with the pulpwood accounting for the greater part. After 1930, the quantity and value of pulpwood handled began to decline (Barton, 19h9, p. 183). By l9h3, the value of forest products marketed was $20,000, and in 1959 the value of pulpwood was $7,000. This last -132- value represents less than 1 percent of the total value of the coopera- tive's business. Prior to 1950, there had been four cooperative stores marketing Upper Peninsula pulpwood to the pulp mills in Upper Michigan and‘Wiscon- sin. In 195h, only three were found to be still handling pulpwood (James, 1957, p. 3h). Only two marketed pulpwood in 1959; the third having sold no wood since 1957. The latter cooperative still stood ready to market pulpwood if mill orders could be obtained. Only one cooperative was attempting to maintain itself in the forest— products field by marketing something other than pulpwood. It had devel- oped a market for chemical wood, and in 1959 sold some 1,000 cords of hardwood logs valued at $13,000. Hope was expressed that this market would take more wood in the future. Membership in the cooperative is not a requirement for patronage. The cooperative stores will accept pulpwood from member and non-member producers alike provided a mill contract is available. As a pulpwood producer would not become a member for the purpose of marketing pulp- wood alone, but for reasons pertaining more to the retail activities of the organization, and as all members are not pulpwood producers, compari- sons of cooperative membership and of value of pulpwood handled are of little value. The pulpwood marketing procedures of the cooperative store are rela- tively simple. ‘Hhen orders fer pulpwood are received from a pulp com- pany, the cooperatives notify the local producers either by personal con- tact or by posting notices in the stores. As all pulpwood is procured within a 20-mile radius of the stores, the local producers are known and -133- easily notified.1 ‘Uhenever possible, the mill orders are equally divided among all producers who have pulpwood to sell and have notified the co- operatives of the fact. One cooperative attempts to base the division on past output to favor those producers who have shown superior ability. The selected producers then deliver their allotted portions to desig- nated rail sidings where the pulpwood is scaled and payment made. One cooperative pays its producers on the basis of a cooperative scaler's measurement while the other pays on the scale by a mill representative. Both cooperatives pay the producer the same unit price he would receive had he sold the wood directly to the pulp company. Normally the wood is transferred directly from the producer's truck to a railcar, but on occa sion the cooperatives will purchase wood stacked at the rail siding if a railcar is not available. This, however, is an expensive operation as the cost of each handling is estimated to be between $0.50 and $1.00 per cord. The cooperatives then sell the pulpwood to the mill on the railcar at the loading point for the contract price. This contract price is the dealer price and is from $0.50 to $1.00 per cord more than that paid the producers. Title to the pulpwood passes to the pulp company at this point, and the company pays the transportation costs for'shipment to the mill. The cooperatives deduct any expenses incurred and place the remain- der of the mill payment in the patronage account for later distribution to the members. The distribution is made annually on the basis of patronage throughout the year. None of the receipts from pulpwood are 1As producers are constantly offering pulpwood, the cooperatives often obtain the necessary pulpwood without notification. -13h- withheld to develop a working capital reserve for future pulpwood opera- tions. working capital is not needed as the c00perative stores offer no aid to the pulpwood producers of any type. In the past, all the co- operatives had purchased stumpage and allocated the harvesting to their producers, but now the cooperatives find that they can obtain sufficient pulpwood from producers cutting on their own lands or purchasing their own stumpage, so the cooperatives do not provide stumpage or advance pay- ments on undelivered pulpwood. One of the cooperatives had provided pulpwood handling equipment, but lack of use forced it to discard the equipment lending part of its operation. Presently, the cooperative stores only provide the means by which the producers may come into con- tact with the buyers in the pulpwood market. The relationship between the cooperative stores and the pulp mills is one of almost complete disinterest. The cooperatives maintain a passive attitude toward pulpwood marketing. In all cases, contract nego— tiations are initiated by the pulp companies. There is no effort on the part of the cooperatives to gain contracts or to offer the pulp companies additional services. This attitude is due, in part, to the lack of re— turns from pulpwood marketing in comparison to the other cooperative activities. Pulpwood marketing represents less than 1 percent of the activities of the cooperatives and is considered too small a part of the overall activities to be given any great amount of time or effort. Little or no effort is made to initiate negotiations, either with the pulp companies or with the producers. Normally, everything depends upon the cooperative being approached by both the supplier and the buyer, al- though the cooperative will initiate negotiations with the producers if -135- necessary. The cooperative stores receive no aid from the pulp companies. At one time, the pulp mills made advances on the basis of cut wood, but they have not done so for a number of years. As long as the time between cooperative purchase of the pulpwood from the producer and receipt of mill payments remains short (about two weeks), and the cooperative does not purchase stumpage, make large advance payments to the producers, or make other investments in pulpwood procurement, there is no need for such advances. In addition, the pulp companies supplied feel that advances to dealers should not be made. In general, the cooperative stores still maintain a dealer relation- ship with the pulp companies, but the title is slowly becoming an honorary one as there is little actual ”dealing" between the cooperative stores and the pulp companies. The cooperative stores face little competition from other dealers. There are few pulpwood dealers in the cooperatives' areas of operation and they, for the most part, are facing the same difficulties as the co- operatives. The greatest advantage the cooperatives offer the pulpwood producers is the annual patronage dividend which acts as a delayed higher payment for their pulpwood. The lack of mill orders prevents full play of this factor. The possibility of patronage dividends attracts many small producers to the cooperatives, but the inability of the cooperative stores to market the wood forces the producer to turn to any other dealer in the area who will take the wood. An almost constant over-production of pulpwood and a shortage of mill orders prevents excessive competition between the cooperatives and other Upper Michigan pulpwood dealers. The managements of the 000peratives interviewed expressed a great -136- interest in the activities of the pulpwood market, but for the most part they had little knowledge of the field and its problems. Their training was limited to the procedures of operating a cooperative retail store and maintaining the necessary accounts. In only one case did a cooperative store manager show any extensive knowledge of the problems of pulpwood marketing. This individual had been with the cooperative for some time and had been active in pulpwood marketing when the cooperative was hand- ling pulpwood in quantity. The Cooperative stores offer pulpwood marketing facilities as a service within the framework of their other activities. As it represents, at present, less than 1 percent of the total value of all cooperative activities, no effort is being made to expand or stabilize it. All funds, less expenses, received from.marketing of pulpwood are dispersed to the patrons in the annual dividends. The cooperative stores, at one time, were quite important in pulp- wood marketing in the Upper Peninsula, but the volume of pulpwood.handled has declined until, at present, the cooperative stores are very minor sup- pliers of pulpwood in Michigan. Forest-Products Cooperative in Michigan The one cooperative in Michigan that deals with forest products only was incorporated under Michigan law as a nonprofit timber marketing or- ganization in l9h0 under the auspices of the U. S. Forest Service to pro- vide a system by which plantation thinnings on the neighboring national forest could be harvested. It was originally financed by a $3,000 unse— cured, five-year, 3 percent loan from the Farm Security Administration of the U. S. Department of Agriculture. This loan permitted the -l37- cooperative to make advance payments to members without "binding itself to any one purchaser" (Cunningham, 19h7). By l9h5, the loan had been reduced to $1,800 and a $5,000 working fund had been built up. In 19h6, a full-time secretary-treasurer was employed to replace the Forest Service employee who had provided this service on a part-time basis. By 19h9, the cooperative was doing an annual business of $100,000, had developed a working capital of $20,000, and was free of all large debts (Franson, 19h9). For the past ten years, the cooperative has shown a steady increase in its total sales value. From a low of $26,000 in 19h6, its business rose to $372,000 in 1957 while its membership rose from 72 to 221. In 1959, the annual business was $300,000 and the membership was 162 (Fig. 15). Membership in the cooperative is based on two requirementss payment of a $2.00 annual membership fee and residence on or near the Tawas work- ing Circle of the Lower Peninsula National Forest. The board of directors makes some effort to insure that the new member has some "roots" in the community. The membership agreement is quite simple. The member is re- quired to abide by the by-laws and the decisions of the board of directors in matters pertaining to the operation of the organization. There are no stipulations requiring the member to accept the cooperative as his only dealer or not to sell pulpwood directly to any pulp company, The coop- erative regulates cutting only to the extent of specifying wood quality requirements. No attempt is made to proscribe any type of cutting or timber management practices. The present procedure on procurement is for the pulp companies to come to the cooperative with contracts. The cooperative then contacts -138- ”Ex/agesxmo os\ QQN “xvmu 09v mmmagonma unmmflnoflz CH o>flpmnmmooo mpospopaupmmaom exp mo osam> monm Hmpop was mfinmponsos amazes cw mpnmne a .ma .mflm anxvmwx VVUWQ mm? me than whmx ommx macs Six q q _ a _ _ _ a _ _ _ . 0 \ I / .l 0 \/ / \/ \ / \ o\ Q\}m,nw\.mumv\\.ww\\ \ \ I / / \ /\ // \ \ . /\ .. /\ / \ .. Com. Whats when ( .. 00m. u .. 09v 3317’ 7700 do SO/VVSOQ/QA /V/ :70 7 1% 9.5759 751.41. ~139- its "hard core” of producers for allocation of the contract quantities. If these producers are unable to fill the contracts, other members are contacted and, if necessary, new members are attracted to the coopera- tive. The last is seldom necessary as the cooperative is often approached by independent producers. Once production has started, the cooperative scales and accepts pulp— wood at roadside every two weeks. If the wood is from private lands, the cooperative scale alone is accepted while wood from public lands is scaled jointly by the cooperative sealer and a representative of the public or- ganization. Although the cooperative by-laws provide that payment need not be made until receipt of the proceeds from the final sale of the product, pay- ment to the producers is usually made within h8 hours after scaling. This payment, made for pulpwood at roadside, is equal.to the estimated costs of production, less any advances. The cooperative arranges transportation of the pulpwood from roadside to the railcar. If the producer wishes to deliver his wood to the rail loading point, he receives an additional $h.25 per cord. Only some 3 per- cent of the pulpwood is procured in this manner. Transportation from roadside to rail siding is accomplished in two ways: (1) The cooperative contracts with a local trucking company at a rate of $h.25 per cord for all hauls up to 30 miles. Although there is ‘ no direct connection between the trucking company and the cooperative, operations have been mutually advantageous and the cooperative uses this company entirely'for the larger operations. (2) Where the quantity of pulpwood is small or scattered, the cooperative rents a truck-loader com- bination from one of its employees on a mileage basis. The cooperative -1h0- was instrumental in obtaining this piece of equipment, but title was passed to the individual. The cooperative sells the pulpwood to the pulp companies on the railcar. The cooperative is responsible for obtaining and loading the cars, in accordance with its contract, but there is some agreement with the company procurement division as to when such loading will be done in order that the company may plan receipts and maintain a constant flow. The payment from the pulp companies is placed in the Working Capital Account and credit is noted to the proper producer. In addition to making payment before receipt of payment from the pulp companies, the cooperative provides several other aids to the pro- ducer members. Small interest-free loans are granted to individual mem- bers to meet current expenses. These loans are limited to the book credit of previous allocations of the borrower and are deducted from the payments for pulpwood produced. ‘While the cooperative provides no equipment as such, it will take the necessary steps to see that certain equipment is made available to the members. If the board of directors decides that a piece of specialized pulpwood equipment is necessary and desirable, the cooperative will pur- chase the equipment, and immediately resell it to a member on a long- term repayment basis. While the legal title is passed to the individual, the cooperative maintains some control of the use and the rate charged. The repayment is usually made by the cooperative receiving a part of the usage charge. Two pulpwood debarkers and a truck-and-loader combina- tion have been purchased under this arrangement. The former were sold to two member producers while the latter is owned by an employee of the co- operative. 41,1- The cooperative also buys and resells at cost such minor items as gloves, axes, and saw chains. It had once attempted to handle larger items such as power saws, but maintenance problems prevented economical operation so the sideline was discarded. The major aid granted the producers by the cooperative is stumpage purchases. The cooperative is a major bidder on national forest pulp- wood sales, and it does purchase stumpage on private tracts. This coop- erative-purchased stumpage is immediately resold in smaller portions to the various members on the basis of their production in the past three years. This resale is a.paper transaction until the pulpwood is actually purchased by the cooperative. Then, the stumpage price is deducted before payment for the wood is made. The cooperative has been supplying pulpwood to its present customers since its establishment. The cooperative had supplied another mill which has now developed the use of truck delivery for the greater part of its wood. This mill now does not use any dealers, but purchases wood at roadside and provides truck transportation through a wholly-owned truck- ing subsidiary. The cooperative has had little success in dealing with mills which prefer truck-delivered wood. The two Lower'Peninsula mills which use the dealer system and pur- chase rail-delivered wood accept the cooperative as a dealer and pay a $0.50 per cord increase in price. Both mills purchase pulpwood from the cooperative on an f. o. b. railcar basis at specified rail loading points and make payment on the basis of mill scale of the wood. The mills have fOund that the cooperative is a dependable supplier and that it can ad- Just readily to changes in mill requirements and contract specifications. Normally, the contract between the mill and the cooperative is a formal, 41,2- written agreement, but the cooperative will fill mill needs on the basis of a verbal or letter request. Recently, there has been an interesting development in the relations between the cooperative and one mill which depends on truck-delivered producer wood. In the past, this mill has refused to use the dealer system. However, the mill is now offering to purchase pulpwood from the cooperative at prices which exceed those paid to its producers. The price increase is still less than the usual dealer fee, and it is esti- mated to be approximately half of the unit cost to the pulp mill of pro- curing its own wood.l Although it is much too soon to look upon this as a trend, it may be an indication that the pulp companies are finding that procuring pulpwood directly from producers is an expensive operation. The pulp companies being supplied offer the cooperative advance pay- ments when needed. These payments are considered payments for future de- livery of cut pulpwood, and not loans, so no interest is charged. They are based on the volume of wood either on the railcar or stacked at road- side. No advances are made on the basis of standing timber. These advances are necessary for the cooperative's operations. Without them, the cooperative would be constantly short of working capital, especially when cutting on national forest lands where downpayments are re- quired prior to cutting. The cooperative has received advances totaling as much as $65,000. The forest-products cooperative is organized as a nonprofit corpora- tion. Under the Clapper4Volstead Act, such cooperatives are required to l‘Personal conversation with Mr. v. B. Schultz, Manager, The AuSable Forest Products Association, East Tawas, Michigan, 1959. ~116— distribute earnings to member and non-member patrons on an equal patron- age basis or to allocate them on the accounts to the patrons upon whose business they were realized. The byelaws of the cooperative state that "ten per cent of the net earnings shall be set aside . . . for working capital purposes." This reserve must be maintained at a level not less than the paid—in membership. In reality, the cooperative has been setting aside 10 percent of the net earnings each year regardless of the monetary value of the paid-in membership. All pulpwood income received by the cooperative is placed in a gen- eral fund (the Reserve for'Ubrking Capital) and credited on the books to the various members transacting business in proportion to the amount of business transacted. At the end of the fiscal year, the earnings in ex- cess of the reserve requirements are distributed among the member patrons in proportion to their annual business if distribution is deemed desir- able by the board of directors. If such distribution is not called for, the cooperative may retain the earnings to build up working capital so long as the records show the proper allocations. In this manner, the cooperative has been able to build up a sizable working capital reserve. All other income is placed in a Capital Surplus fund. This income is derived from the cancellation of membership for failure to abide by the regulations and byslaws of the cooperative, for having transacted no business for one year, or for moving out of the territory served by the cooperative, and it consists of membership fees and patronage refunds. The Capital Surplus is not distributed among the members but is retained by the cooperative for its own use. The cooperative, like any other business organization, has to main- tain certain relationships. The cooperative is vitally concerned with -1uh- markets, its sources of raw material, and its competition. The markets for the cooperative's pulpwood are two Lower Michigan pulp mills which make use of the dealer system, but as they do not demand the same species of pulpwood there is very little competition between them for the wood offered by the cooperative. In 1959, one mill took the coop- erative's entire output of pine (1,700 cords) while the other limited its purchases to aspen (3,100 cords), balsam fir (l,h00 cords), and spruce (1,900 cords). The cooperative draws on the nearby national forest and on privately owned timber lands equally for its stumpage. However, the cooperative does not maintain a constant search for stumpage. The pulpwood procured from privately owned lands may be the result of the landowner requesting the cooperative to purchase the standing timber, a request from a member to aid in the purchase of timber for which he has bargained, or a member bringing in wood which he has purchased with his own funds or has cut from his own land. The cooperative will not accept pulpwood from non- members. They must either become members or deal through a member. In general, the cooperative has few direct negotiations with pri- vate landowners. Most of the bargaining and actual stumpage purchasing is carried out by individual producer-members, although the source of funds may be the cooperative. As most of the private timber sales are rather small, the cooperative feels that it is better to make a non- interest bearing loan to an individual member living in the area than to purchase the timber itself. The attempt to make an equitable distribu- tion of such a small quantity of stumpage to all members on a three-year patronage basis is detrimental rather than helpful to the members re- ceiving the allocation. -1h5- 0n the other hand, all timber from public agencies is purchased directly by the cooperative. Seldom do the individual members negotiate for or bid on public stumpage. In its area of operations, the coopera- tive is one of the larger dealers so that it is often a successful bidder for public stumpage. It is financially able to bid on sales which are too large for an individual producer’to meet the bonding and advance pay- ments requirements but which are too small to encourage the larger non- resident timber concerns to bid upon. The cooperative is still carrying out the functions for which it was created. A peculiar situation is beginning to develop between the cooperative and the Forest Service. The cooperative was formed to harvest pulpwood on the national forest, but there has been a slow trend to private stump- age as the cooperative expanded. The Forest Service management plans did not permit the providing of enough stumpage to allow the expansion on the basis of national forest thinnings alone. The original plantations which had required thinning are now ap- proaching sawtimber size. In accordance with Forest Service regulations these tracts will be sold to the highest bidder for the combination of all products that are present. The cooperative feels that the presence of the sawtimber will encourage the entry of "big" lumber operators into the sales. These operators would purchase and harvest both sawtimber and pulpwood on a single sale. The sawtimber would be used by the lumbermen and the pulpwood would be sold to any pulp company interested. The cooperative does not have the financial backing or the sawlog market to bid on the sawtimber sales. The opinion is that the Forest Service developed the cooperative to fill a definite need, and now as the need no longer exists, the Forest Service is withdrawing its support. -1h6_ The Forest Service feels somewhat differently. It maintains that the cooperative has never received any undue aid from the Forest Service, but it is providing a definite service, both to the national forest and to the local community. The cooperative could expand to sawlog marketing with very little investment or it could remain almost entirely dependent on pulpwood and still remain in operation.¢ National forest production of pulpwood is expected to remain stable in the future and there will always be a demand for the thinning of the younger stands. However, this does not necessarily mean that the species will remain the same so there may be definite problems of adjustment. In general, the cooperative is in the same position in relation to its raw material supply as the independent dealers, but it would appear that due to the peculiar relationship of the cooperative to its suppliers, the cooperative has a much better system of finding private stumpage than its competitors. The ability of the cooperative to accumulate working capital places it in an advantageous position in bidding on stumpage on public forest lands. The cooperative faces competition from two directions. In the coop- erative's sphere of operations, there are other dealers operating in essentially the same manner and supplying the same mills. However, each is limited to the quantity requested by the mills and, normally, there are more producers offering more pulpwood than is needed. In periods of high pulpwood demand when dealers must aid the producers in obtaining stumpage, the cooperative has a slight advantage. Due to its superior ability to obtain credit and working capital by withholding part of the annual dividend, it can afford.to pay for stumpage at time of purchase. The second source of competition is from those pulp mills which do -lh'y- not use the dealer system. Several of these procure wood from the same sources as does the cooperative, but usually these companies purchase the pulpwood from producers at the rail loading points. However, there is one pulp company which actually extends its purchases, through a sub- sidiary organization, into the woods. It purchases stumpage on the large public sales, contracts with producers to cut it, and arranges its own truck transportation. In addition, it will purchase producer pulpwood at roadside. This particular company purchases large quantities of two of the four species handled by the cooperative. Apparently, all marketing groups are getting all the pulpwood they need to meet mill requirements. The cooperative is too small to compete directly with the pulp mill procurement divisions while the individual producer is too small to compete with the cooperative for public stumpage. Competition for markets occurs to some extent between the cooperative and other dealers, but only on the basis of reputation for past service. In the East Tawas area,the cooperative appears to have the advantage as it has been in business longer than the other dealers in the area. The consistency with which it receives contracts would indicate that the pulp companies with which it deals are satisfied with the services of the cooperative. CHAPTER I FOREST LANDOWNERS There are some 19.3 million acres of foreSt lands in Michigan, of which 18.8 million acres are classified as commercial forest lands.1 ‘While this commercial forest land is divided almost equally between the Upper and Lower Peninsulas (h? and 53 Percent respectively), it is quite unequally distributed among types of ownership and sizes of ownership. Approximately one—third of the forest lands in Michigan are in public ownership. The privately owned lands are mainly in the hands of indus- try or non-farmer individuals (h3 bercent) and in farm woodlots (20 per- cent) with only 3 percent belonging to the pulp companies. Public Ownership Public (national and state) forests contain some 6,371,000 acres of commercial forest lands, and produce h3.2 percent of the state's pulpwood crop. These forest lands are, on a regional basis, considered to have the greatest productivity, with at least 80 percent being classed in the highest grouping in the Forest Resource Report No. 1h (U. S. Forest Service, 1958, p. 605). ‘Host of this publicly owned land is found in the Upper Peninsula 1Commercial forest land is defined as forest land which is (a) pro- ducing or is capable of producing usable wood, (b) economically available, and (c) not withdrawn from utilization (U. S. Forest Service, 1958, pp. 50h and 630). -lh8- -1h9- with almost none in the southern half of the Lower Peninsula. This is not surprising when the methods of acquisition are considered. The greater part of the state lands was acquired through reversion for tax delinquency while the bulk of the Federal lands was obtained through purchase and land exchange with the state (Barlowe, l9h8, p. 15). State Forests In 1958, the state forests of Nfichigan produced 20 percent (188,000 cords) of the total pulpwood output of the state. The ratio of pulpwood production to the total area was relatively low (h.9 cords per 100 acres), but the potential productivity is quite high. The low ratio is not indicative of poor management, but merely of the small quantity of removals per 100 acres. The state forests are capable of yielding larger quantities of pulpwood, and in the past five years re- movals per 100 acres have increased hO percent. While these removals are still well below the estimated allowable out, they are an indica- tion that the Michigan Department of Conservation is expanding its harvesting program. The basic cause of undercutting on state forest lands is the lack of markets. James (1957, p. hl) found that, in l95h, 80 percent of the allowable cut of aspen on the state forests was offered for sale, but only about 33 percent was purchased. The pulp-mill demand at present is not great enough to consume all the pulpwood offered, and mill rep— resentatives state that producers are offering much more pulpwood from all sources than can be taken. Timber sales on state forests are of two types: the public sale and the small sale. The public sale consists of all sales of more than $300 -150- in value in the Lower Peninsula and $500 in the Upper Peninsula, while the small sale consists of the sale of all timber valued at less than these regional limits. In the public sales, the Forestry Division of the Department of Conservation determines a base or tract stumpage price per unit volume for each species to be sold. This price determination is based upon the present market prices with adjustments for timber quality, logging diffi- culties, distance of haul, and special cutting restrictions (Michigan Department of Conservation, 1958). The sale, with all the particulars and specifications, is then advertised for two weeks in the local news— papers and opened to competitive bidding. The bidding is carried on in one of two ways: by sealed bids or by public auction. In the past, the public auction was the more common, but there is a trend toward sealed bids. It is maintained that while the auction brings in the greatest revenue, it tends to be a tool by which the larger operator may eliminate the small producer at a minimum of expense. The sealed bid permits each bidder to state the amount he is willing to pay for the timber. As this is calculated on the basis of the costs of operation for the individual bidder, the bids are on a more equitable basis. There are three methods of completing the sale: (1) the bidder makes the required bid per unit of volume plus a lump-sum cash bonus, (2) the bidder makes a lump-sum cash bid, and (3) the bidder makes the bid on a purely per-unit-of-volume basis. In the first method, the cash bonus is offered at the time of the sale, and the sale goes to the ac— ceptable timber operator offering the greatest bonus. In the second method, the bidding is based entirely on the lump-sum bid, while in the ~151— third, the cash bonus is eliminated entirely. The first method is the more common. It is understandable why the last two methods are not used too frequently. The lump-sum cash bid, while yielding cash in advance and reducing administrative costs to the state, demands that an extremely accurate inventory be taken prior to the sale in order that the state place a proper value on the timber. The cash-advance requirement for the entire amount of the sale tends to eliminate the small producer en« tirely. The method of bidding on a unit volume basis is the more equitable and permits the small bidder to actively participate, but due to the Con- servation Department‘s methods of sale, it is very difficult to admini— ster except in pure stands of a single species. The bidder is required to bid on all species in the sale area, and not just on the desired species. Thus, a bidder may be high on one species, but low on another. The combination of the cash bonus and a per-unit-of-volume bid is apparently the most equitable to all concerned. The cash bonus is much smaller than the lump-sum payment, but still yields a direct source of revenue to the state. As the base payment does not have to be made unt‘l the operator is ready to remove the cut products from the forest, the only investment the small producer has to make is the cash bonus, and possibly a cash compliance bond. Often, the pulpwood buyer will make advance pay- ments on the cut pulpwood which will permit the producer to pay the Con— servation Department the per-unit-of—volume bid, and then deliver the pulpwood. The small sales which are valued at less than $300 or $500 are negotiated between the district forester and the buyer. No bidding is -152- involved and payments are made on a per-unit-of-volume basis at the time of removal of the cut product from the forest. This type of sale, being more adapted to local needs, accounted for 93 percent of the stumpage sales but for only 52 percent of the revenue in 1958. TABLE ll.- Receipts from timber sales on state forests in Michigan by number and type of sale: 1958 Type of Number of Total Average per Sale Sales Receipts Sale Public Sale 126 $311,671 $2,h7h Bonus --- 27,518 218 Small Sale 1,6h9 370,572 255 Total 1,775 $709,761 $ 399 Source: Forestry Division, Michigan Department of Conservation, Lansing, Michigan. The sales policy of the Department of Conservation is to offer timber for sale by tract rather than by product. All species above a minimum diameter are put on bid and a buyer must bid on all in order to obtain the desired species. For sales of pure stands, the buyer must be abl (I to find markets for the different products that may exist. 0n the more diverse sales, the buyer is faced with the problem of finding mar- kets for the different species as well. The small operator who gener— ally markets one product limited to one or two species is at a very de— cided disadvantage. The operator must either find markets outside his normal sphere of operations or limit his procurement to the smaller -153— sales. Sale contracts awarded by the Department of Conservation are usually limited to one year's duration, but in 1958, to were for two years, 10 for three years, 3 for four years, and l for five years. As the Depart- ment may, by law, grant contracts for periods not exceeding ten years, there have been requests for larger sales of the longer periods. It is felt that the long—term, large-area sales would increase the total volume of timber sold on state lands, but there is much question as to the effect of such sales on the small operators. There is general agreement that, in Michigan, the political climate is such as to favor the maintenance of the short-term, smaller sales. However, there is one sale covering 6,000 acres containing 3h,950 cords of pulpwood under a single five-year permit. The Department of Conservation bases its stumpage prices on the ”going" market price for similar private stands and then makes adjustments. It does not attempt to determine stumpage prices as residuals of the prices of the products less the costs of conversion. The Department does not want to dictate prices or to compete with private landowners. It feels that the state forest holdings are large enough to exert a very strong influence upon the stumpage market, but if public sales are priced according to local private prices, the impact will be held to a minimum. 0n the other hand, the buyers may tend to bid low for private stumpage in order to be able to obtain public stumpage at relatively low prices. The entire Department of Conservation pricing policy is open to question on the grounds that any seller as large as the state will have a direct influence on the smaller sellers of the same product regardless of the pricing method. The small sellers usually look to the large sellers for price leadership, but in this case the large -1Sh- seller is looking to the smaller ones for the leadership. This tends to create some confusion in the market. Under these conditions, state for- est stumpage prices may be somewhat lower than would be normal in a per- fectly competitive market or in a price-led market. National Forests The Federal government is the second largest single forest landowner in Michigan. It owns some 2.7 million acres, of which 2.6 million acres are in national forests. The national forests (13.5 percent of the ccm~ mercial forest lands in Michigan) produced, in 1958, 22 percent of the state's pulpwood, making the U. S. Forest Service the second largest single pulpwood grower in Michigan. The national forests are presently the most productive pulpwood pro- ducing forests in Michigan, yielding almost 8 cords per 100 acres. This is considerably below the allowable cut of pulpwood for these lands. Forest Service figures show that the maximum allowable cut is about lb cords per 100 acres. 0n the basis of individual species, the actual cut is below the allowable cut for all species with only spruce and hemlock approaching the limit of the allowable cut. The excess growth is build- ing up a surplus of timber.1 This could have an adverse effect on the management plans and a depressing effect on the market. The sale policy of the Forest Service is basically one of granting contracts to the highest bidder. All sales over $2,000 estimated value are required to be advertised for a period of at least 30 days in local newspapers, giving information as to the location of the stand or tract to 1James (1957, p. h3) found the allowable cut to be 8.5 cords per 100 acres in l95h. The increase of 5.5 cords is due primarily to the inclu- sion of hardwoods and past uncut pulp stands. -155- be sold, the estimated volumes of the various species on the tract, and the base price acceptable by the Forest Service. In addition, notices of the sale are sent directly to the known timber buyers of the area. The sales are made, either by auction or by sealed bids, on the basis of unit volumes for each species and each product with the highest total bid for all species being accepted. The Forest Service requires that a cash deposit be made at the time of the bid. This deposit is then either refunded if the bid is unsuccess- ful or accepted as part payment of the successful bid. In no sense is it considered a bonus. The remainder of the bid must be paid before the timber can be cut. However, the stumpage payment may be paid in install— ments, with each installment being paid prior to the cutting of the timber for which payment is made. After felling, the products are scaled in the woods by the Forest Service to insure the accuracy of estimation of the volume sold. Pulpwood, being measured in standard cords, must be stacked and scaled in the woods after felling and bucking but before be- ing transported from the tract. The sale is made much like the ones on state lands in that it in— cludes all merchantable products and species on the timber tract. The trees to be removed are either marked by Forest Service personnel or de- scribed in the contract by setting a minimum diameter and length above which everything must be removed. Thus, the successful bidder must be prepared.to find markets for several products from a number of species. The Forest Service contract is more restrictive than the average private sales contract. The normal restrictions usually pertain to log— ging procedures necessary to minimize damage to the residual stand or to encourage reestablishment, utilization requirements, slash disposal and -156- penalties for noncompliance with the contract requirements. In addition, special restrictions and clauses may be included that pertain to such things as road locations and construction specifications, rights-of-way, and any practices not considered as normal in a standard sale contract. These special requirements are included in the advertisement and other advance information pertaining to the sale. The bidder knows that he is faced with an increase in his production costs prior to making the bid. The Forest Service, like the Michigan Department of Conservation, is authorized to make noncompetitive sales of timber with an estimated value of less than $2,000. These small sales are negotiated directly by the forest officer in charge and the buyer. In 1958, the small sales were about seven times greater in number than the larger sales, but they ac- counted for slightly less than half the volume. 0n the average, a single large sale produced 8 times as much pulpwood as a small one (Table 12.) Table l2.- Sales of pulpwood on national forests in Michigan by size and number: 1958 Size of Number of Total Average Sale Sales Volume Volume Cords Cords $1,999 or less 581 97,000 167 $2,000 and over 83 105,000 1,265 Total 66h 202,000 30h Source: Supervisors of the national forests in Michigan. -157- Forest Service sales tend to discriminate against the small inde- pendent pulpwood producer much more than private sales and somewhat more than state sales. The payment-before-cutting and the bonding require- ments tend to require the small operator to invest capital for some time before he receives a return upon it. The greater number of restrictions are not particularly discriminatory in that they constitute an increase in the cost of production which is reflected in a lower bid. However, in certain special cases, they may require additional equipment not norm- ally used in pulpwood operations. Forest Service sales contracts are usually let for one year, but they vary between six months and four years depending on the size of sale. A generalized formula for contact periods is that if the value of the sale is less than $300, the period will be about six months to one year; if between $300 and'$2,000, one to one and one-half years; and if greater than $2,000, two or more years. Four years is the longest con- tract period in Michigan at present. Pulp Company Ownership_ Commercial forest lands in Michigan owned by pulp companies consti- tute 3 percent of the state's forest land. Only four of the thirteen pulp mills in Michigan have forest holdings (a total of 381,000 acres), With 96 percent being owned by two mills. Another 182,000 acres are owned by five Wisconsin mills, with one mill owning some 150,000 acres. Pulp companies do not depend to any great extent on their forest lands. At present, Michigan and Wisconsin pulp mills draw 3 percent of their total consumption from company lands. Assuming that with ideal management the pulp companies could attain an annual allowable cut of -1§8- 1h cords per 100 acres (the estimated allowable cut on Forest Service lands), the company lands would be able to supply only 9 percent (207,000 cords) of the present consumption. For pulp company lands in Michigan alone, pulpwood production is about h percent of the state total. Again, assuming an annual allowable cut of 1h cords per 100 acres, the potential production is 80,000 cords or 9 percent of the 1958 Michigan production. However, in terms of con- sumption, the Michigan pulp company lands alone are yielding 1 percent and have the potential of supplying only 3 percent of the present consump- tion. Thus, it is apparent that pulp company land holdings are more of an historical vestige than an attempt to provide mill security or to become self-sufficient. The fact that only one-third of the Michigan pulp mills own forest lands and only half of those owning land cut more than 5,000 cords in 1958 is indicative of the company attitude toward landownership and toward the lands owned. Of the five Wisconsin mills owning land in Michigan, only two had harvested pulpwood in 1958. The dependence of the companies upon these woodlands is almost nil, and pulpwood is harvested only to the extent that it is available and that such cutting is bene- ficial to the stands. The fact that little pulpwood is being taken from company lands should not be construed as a lack of interest in these lands by the com— panies concerned. The majority of these lands are under the management of trained foresters, but the management objectives are not purely pulp— wood production. Cutting practices are primarily aimed at sawtimber rmcduction in the long run. The timber is usually cut as sawtimber and pulpwood combined with restrictions--usually minimum diameter limits-- -1S9- to insure the proper stocking and regeneration of the tract as potential sawtimber stands. Sawtimber trees are usually marked by company foresters for sale and cutting as sawtimber while the pulpwood is usually designated by contract as such by species and diameter limits. Sales of pulp timber on pulp-company lands are usually made directly to a buyer without competitive bidding and with little negotiation. The pulp company will approach a known buyer and offer the timber at a given price and certain contract requirements. The buyer may accept or reject the offer, but seldom is the offer changed to meet buyer requirements. Actually, the offer is seldom rejected as the stumpage price is usually slightly lower than the existing market price. Payment for the stumpage is deducted from the price of the delivered pulpwood so the buyer need not make an actual cash payment. However, he is expected to sell the result— ing pulpwood to the mill owning the land. The sale of stumpage on pulp— company lands is done entirely by formal contract stating price, condi- tions of sale, and harvest requirements and regulations. Payment is made on the basis of the volume actually taken. The scale is usually mill scale unless the wood is accepted at a point other than the mill. The use of company logging crews to harvest company timber was limited to three'Wisconsin mills. As a general rule, the harvesting of timber on company lands is done through stumpage sales in order that the pulp company be relieved of all labor problems and regulations and to permit the company to provide stumpage for its producers and dealers when they are unable to provide it for themselves. This type of contract cutting is also found in the South where pulp company land ownership is much more extensive than in Michigan (Mayer, 1960, p. 183). Company-owned forest lands act as a small reserve for emergencies -160- and as a source of aid to the mill suppliers. Forest land ownership is not an absolute requirement for pulp-mill operation. Other Industrial Forest Landowners Michigan industries other than the pulp industry own some 3,000,000 acres of commercial forest lands. These lands, while being owned by a diversified group, are primarily in the hands of mining companies, wood- using industries, and public utility organizations. In general, these lands are among the best managed of the private lands, and individual ownerships may be very intensively managed. However, in terms of pulp- wood production, output is relatively low. James (1957, p. h8) found that pulpwood production per 100 acres was 2.2 cords. The industrial land owners are primarily interested in their forest lands for sawtimber production, and pulpwood is a by-product. The timber sales may be made on an "all products" basis or on an individual product basis. About half the land owners make pulpwood stumpage sales without selling other products while half insist that all the products on a given stand be sold at the same time. This policy toward the type of sale may vary slightly to meet the conditions presented by any given stand, but when the products are sold individually, the sawtimber is sold first, and the pulpwood later. This provides the pulpwood producer with an indirect benefit as he is able to utilize improvements, such as roads, made by the sawtimber buyer without additional expense. In the case of selling all the products at once, the buyer must bear these improvement costs. The sales policies of industrial owners are very similar among the different landowners.. All sales are usually on a per-unit-of—volume —l6l- basis, formally contracted with minimum diameter limits of cutting and other harvesting provisions. The perennit-of-volume payment is insisted upon so that the seller may reap income tax benefits through the use of capital gains, and advance payments are normally required to prevent a time lag between cutting and payment. The sales are usually negotiated, but with a minimum of bargaining. The landowner states the price and stipulates the contract requirements. Potential buyers are contacted individually and offered the stumpage on a "yes or no" basis. Bids will be accepted if offered, but are unsolic- ited with the exception of one firm which sells on a lump-sum bid basis. In general, industrial forest landownerships are a constant source of relatively small quantities of pulpwood with little possibility of increased output. Under present management objectives, pulpwood produc— tion is limited in absolute quantity and limited to those producers whc are known to the seller. The "all products" type of sale presents the same obstacles to the small pulpwood producers or to the pulpwood special- ists as the state sales while the advance payments in both types of sale tend to discriminate against the producers will little capital. Farm Forest Landowners In Michigan, there are 127,000 farmers owning 3,877,000 acres of commercial forest lands. These lands produced, in 1958, 82,000 cords of pulpwood or 2.1 cords per 100 acres. In overall terms, this means that 20 percent of the commercial forest lands in Michigan are producing 9 percent of the annual pulpwood output. This lack of production by the third largest ownership group is due primarily to three factors: the size of individual woodlots, the condition of the stands, and the -l62- location of the timber in relation to the pulp mills. The average size of woodlots in Michigan is 31 acres. If one assumes that production is 2.1 cords per 100 acres,an average woodlot would produce less than 0.65 cords. However, for any given farm wood- lot, the production is much greater due to the method of cutting. In order to make an economical cut, it is often necessary to take all timber that can yield pulpwood. This frequently amounts to clear cutting, especially on the smaller woodlots. In many cases, the landowner does his own cutting and hauling. Of the Michigan farmers selling pulpwood, about one-fourth sell pulpwood stumpage while one-fourth cut their own pulpwood and sell at roadside. The remaining 50 percent cut and sell their wood on board railcars or delivered at the mill. If the farm woodlot is taken as a part of a complete entity—-the farm--a pattern be- gins to emerge. The woodlot appears as a crop producing area whose crop may be harvested at will, and in as large or as small a quantity as is desired. Thus, the harvesting of pulpwood on the farm woodlot may be considered on a time-involved, rate—of—return basis. During the slack season, the farmer may harvest the small quantity of pulpwood available in order to gain some return. This is especially true if there is no alternative occupation available at the time. In the southern half of Lower Michigan, production is low. Farm woodlots in this area account for l.h million acres which produce almost no pulpwood. This means that the 82,000 cords produced on farm woodlots came from 2.5 million acres; an output of 3.3 cords per 100 acres, some- what lower than found in prior'years in spite of a greater overall pro- duction (James, 1957, p. hO). The decline may be indicative of a general trend toward greater usage of public lands where the larger volumes and _163- acreages provide a more economical operation. The Census of Agriculture for 19Sh indicates that only about 2 percent of the total farms sell pulpwood in any one year (U. S. Bureau of the Census, 1956). Farm wood- lots are left after cutting in such poor condition that the regeneration of the stand issflow and incomplete. Yoho and others (1957) found that farmers, in general, had a very low concept of timber management. The usual cutting limits on harvesting farm pulpwood are the mimimum size acceptable to the pulp companies with no restrictions on the methods of harvest or slash disposal. Three-fourths of the sales are made on the basis of the farmers' need for money or the attractiveness of the offer. In many cases, farmers feel that any price they can get for their timber is acceptable, and they will not cloud the offer with contract restric- tions. However, as many farmers do their own logging, they are respons- ible in many cases for the poor condition of their woodlots. ‘Why farmers permit their woodlots to deteriorate has often been the object of much learned discussion. The basic reasons usually accepted are ignorance, slowness of returns, and length of tenure. In the first case, farmers are specialists in agricultural crops and not in forest management. Many farmers have no knowledge of the aid programs offered by Federal and state forestry organizations, but they have complete knowledge of the agricultural programs (Yoho st 31., 1957). To these farmers, any income from their forest lands is accepted as a windfall gain which occurs only once. Thus, they are willing to sell everything possible to maximize the immediate returns. Closely related to the acceptance of the windfall gain concept is the slowness of returns for investments of time and labor in the farm woodlot. Farmers are accustomed to receiving a monetary return on their -16h- investments within one year or one growing season. Even orchard opera- tors or Christmas-tree growers think in terms of only five to ten years. Many farmers view the possible losses too large and consider the likely returns much too small to be worth the investment. Tenure length is always a lasting problem in farm woodlot manage- ment. Unless a farmer remains on his farm for a relatively long period of time, there is little to encourage him to practice good forestry on his woodlot. Changes in ownership of farm lands in Michigan occur quite frequently. As farm prices seldom reflect the condition of the woodlands, there is little incentive to leave the stand in good condition. Rather, the reverse is true; there is a tendency to remove everything merchantable from the stand prior to the ownership transfer. This leaves the stand in a very poor condition. If several ownership transfers are made in a short time, the stand deteriorates to the point where it is valueless. Thus, it would appear that unless Michigan farmers develop an inter- est in pulpwood as a long-term crop blended into the overall production pattern of their farms with impact enough to cause the retention of the farm or to demand a woodlot value in transference, the outlook for pulp- wood production is poor, and continuing decline in woodlot output may be expected. The Michigan farmer is more of a pulpwood producer than a pulpwood grower. James (1960) found that the farmers cutting pulpwood on their own lands were also cutting an equal amount elsewhere. Realizing that the woodlot will not sustain the rate of cutting very long, it is probable that in the following pulpwood cutting season-~the slack farm period-— the farmer cuts pulpwood for another landowner or ceases to be a producer. Because of the poor condition of most farm woodlots, the second-season -165- cutting must be done on other woodlands, indicating that the farmer- producer is highly dependent on other forest ownerships for the source of his livelihood. The farmer's sales policies are quite flexible. In the case of stumpage sales, the farmer is approached by a buyer and a bid is made on his tract. Usually, this is the only bid. If the farmer has knowledge of the going prices, the bid is accepted or rejected on its own merits. If the farmer is unsure of the market price, the bid is often accepted. While this may be a dangerous practice, the buyer is usually a local pro- ducer or dealer whose reputation must be maintained so, in all probabil- ity, the offer is quite close to the present market price. 'Where the bid is on a perennit-of-volume basis, the farmer is usually paid on pulp mill scale so no estimate of the stand volume is made. Most pulp mills will scale the wood into their yards by source and inform the farmer of the volume delivered. Thus, the farmer knows the amount of income he may expect. Although partial payments may be made as the buyer receives payment from the pulp mill, the farmer must wait until the final delivery is'made to receive the final stumpage payment. Thus, in this segment of the pulpwood market, the timber grower often furnishes credit to the pulpwood producer; the seller aids the buyer. This is a complete reversal of the normal credit flow. I In the case of the farmer harvesting and hauling his own pulpwood, the usual one price offer and acCeptance is also used as the individual farmer-producer is usually limited to a single market by the weight— value ratio and by the credit need, especially if he is cutting on other lands. ~166- Other Forest Landowners Slightly more than one-fourth of the commercial forest lands of Michigan is owned by an extremely diversified group of peoples house- wives, wage earners, business and professional people, speculators, recreational groups, retired people and many more. This classification can be divided into three general groups based on the reasons for ob- taining or retaining the ownership. In the first are those who obtained the land as a home site or to satisfy a desire to own land, and those who received the land through inheritance. To these people, the timber stand represents a symbol of ownership and is either reasonably well managed or let entirely alone. As these people are occupationally oriented away from the timber lands, their concepts of forest manage- ment may be classed rather low. Yoho (1957) found that cutting practices on these lands were satisfactory on 58 percent and poor on h2 percent of the lands used fer residences, but were uniformly poor on the remainder. The second subdivision consists of those people who look upon the forest landownership as an investment. The business and professional people and some recreational groups comprise this class. The object of ownership is to provide a definite periodic return from the land. The concept of forest management is above average. The landowners are usually well informed as to the general forest-products market conditions and are the ones most often requesting information and assistance from public foresters. Timber sales by this group are usually under formal contract with specifications as to cutting practices, slash disposal, etc. However, the majority of the people in this group are absentee landowners and fail to provide supervision of the actual cutting. As a result, the ~167- condition of the forest land is often quite poor. The last subdivision is landownership for speculative purposes with the landowners consisting of real estate dealers and some business or professional people. These people are holding the land in expectation of an increase in value due, primarily, to a change in land use. They have no concept of sound forest management and tend to look upon the forest only as source of income to defray the ripening costs of holding the land for a short period. They will actively seek a timber buyer and encourage heavy cutting where such action will reduce the general property tax upon the land. The extent of this, of course, depends upon the ex— pected future use of the land. The complete lack of interest in the future of the timber resource and the desire to minimize the holding costs precludes any attempt to enter pulpwood production except as a one- time move. The sale policies of these non-industrial, non-farmer private land- owners tend to be quite similar to those of the farm woodlot owner with the exception that more of the sales are stumpage sales. Only an occa- sional resident landowner will harvest his own timber and only a small number attempt to supervise the cutting. The sale is usually made on a single lump—sum bid. Some effort is made to determine the volume of timber on the tract, but usually distance from the area and the pressure of the primary occupation prevents more accurate cruises and a study of the market. However, in cases where the sale represents an important proportion of the landowner's income, the landowner does obtain accurate volume estimates and seeks additional bids. Here again, as in the case of the farmer, payment is normally made after delivery to the pulp mill although partial payments may be made ~168- from time to time. In some cases, the stumpage price will be paid before cutting, but this is rare. The small size of the tract of timber prevents entry of producers with enough capital to make advance payments for stump- age. The landowner, with the exception of owners of large tracts, may ad- vance the producer stumpage on credit until the pulpwood is delivered to the pulp company or to the middleman and payment received. CHAPTER XI COSTS OF PRODUCTION The Michigan pulpwood producer has three basic, but extremely vari- able costs. The logging costs and the hauling costs are directly re- lated to the operations and react to changes in the operations in a normal manner. The stumpage costs are residuals based upon the differ- ences between the logging and hauling costs and the prices received for the resulting pulpwood. The first two costs vary directly with changes in physical conditions while the third varies inversely with the other two. Actual costs tend to vary widely as the different operators have different cost concepts. The producer doing the logging often uses family labor and counts only a nominal labor cost. Hauling is usually done under negotiated contracts so the rates will vary greatly depending on the quantity of wood to be trucked, the distance of haul, the avail- ability of other sources of truck employment, and general bargaining ability. Few operators have any idea of machine rates and depreciation for power equipment or of the value of supervision or costs of overhead. No pulpwood producer operates on a fixed minimum level of return, and often the stated margin for profit and risk is the difference between the price received and the out-of-pocket costs. As long as this remains positive, the producer will market pulpwood. However, the out-of-pocket costs may be computed on an erroneous basis. The producer's own -169- -170- services may be valued at less than the actual market price, and part of the stumpage may be taken from the producer's own land at no cost. Thus, with no concept of the actual costs, the producer may be satisfied with a smaller margin than he realizes. Stumpage Stumpage pricing is residual pricing with little or no attention being given to the costs of timber growing. In the historical develop- ment of the nation, the timber was there for the taking and its removal was counted as a benefit to an expanding agriculture. The trees were grown by a bountiful nature so there were no timber production costs and profit margins to be considered. In later years, the same cut-over areas grew trees again through the intercession of the same bountiful nature. On private lands, the only production costs incurred were the annual tax payments. Stumpage which is produced by deliberate effort and monetary expense must compete on the stumpage market with that which is received as a free gift of nature. As the stumpage market is competitive from a seller's position, the presence of the free-gift timber requires the timber grower to concede that his costs of production are sunk costs and accept the best offer. -171- Pricing stumpage is a combination of a simple mathematical formula and a purely subjective desire for return. The mathematical calculation of the conversion return is (Davis, l9Sh, p. 385): Conversion 3 Selling Value of _ Costs of Logging Return the Product and.Hauling The margin for profit and loss is automatically combined with the stump- age price in the conversion return as these two represent the major variables in price determination. Both depend upon the desires and the negotiating abilities of the parties involved. Under pulpwood-producing conditions of a short-time period, a small investment, and risk lying largely in the production costs, it is possible to set the margin for profit and loss at a given percentage of the logging and hauling costs. However, if used by the buyer, it yields the maximum stumpage price he is willing to pay if he considers the percentage as minimmm while if used by the seller, it will set his minimum acceptable price if he con— siders the percentage as maximum. And as there is little likelihood that the two would agree on a proper percentage margin for pnafit and loss, the only use of this method is to determine an objective basis from which to begin negotiations. The seller of pulpwood stumpage, with the exception of the large landowners, has very little information upon which to develop a stump- age price. The average landowner has no knowledge of timber production costs, and without the production costs, the landowner can determine only the price of the delivered pulpwood. The seller is forced to depend 'upon recent pulpwood sales in the adjacent areas and upon the pulpwood producers trying to buy his timber for an estimate of the proper price. -l72- The only procedure open to the seller is to bargain on the theory that the producer's offer is the minimum price for the timber. Actually, the buyer is in almost as bad a position. 'Hith the ex— ception of the full-time producers, the average pulpwood operator has little knowledge of the costs involved. Quite often, he is seeking stumpage to complete a contract which was partially filled by timber from his own woodlot or he is attempting to make his slack time more productive. In any case, he does not have the background to determine his full costs. This is especially true for the small aspen producer who is using family labor at minimum or no cost and farm equipment and trucks to keep them from being idle. The stumpage offer, perhaps tem— pered by a rough cost estimate, is based on other recent stumpage prices. In the final analysis, small private stumpage prices are deter— mined for each individual sale by negotiations between two rather ill- informed parties. Federal and large private stumpage prices are usually quite care- fully calculated by the landowners on the basis of complete knowledge of the factors involved, including a definite rate of return for the stumpage buyer. For state stumpage sales, the price is based on "going" market prices for stumpage in recent sales in neighboring areas. The stumpage prices demanded by the U. S. Forest Service are well conceived, assuming that the allowance for profit and loss is acceptable. The allowances for logging costs are based on studies involving hundreds of cords cut on the various national forests and surrounding areas. These costs are established by area and species or Species group, and are applied by the forest officers in the areas concerned. Hauling costs are determined for the various types of roads that are traveled Ill,AlIIIIIIIIIIIIIIIIiiiiIIIIIIlIIIIIIIIIIIIIIIIIIiiIiIIIIiiiilllliiillllliillliilt u -173- in transporting the pulpwood from the forest to the point of title trans- fer. The fact that the hauling costs vary with the type of road can make this a very critical point in cost calculations. The result of so many different methods of stumpage price deter- mination is widely varying prices. Differences between the highest and lowest accepted prices for stumpage on state forests were $2.00 per cord for aspen, $2.50 for pine, $h.00 for balsam fir, $6.75 for spruce, $2.50 for hemlock, and $2.15 fer the miscellaneous hardwoods in the Upper Peninsula (Table 13). In the Lower Peninsula, the variations were not as great, but were $0.65 for aspen, $3.00 for pine, $2.50 for balsam fir, $3.25 for spruce, and $1.00 for the miscellaneous hardwoods. Prices paid by reporting pulp companies show a much smaller spread, but tended to be higher than the median indicated by state forest prices. The smaller variations in Lower Michigan prices are due to differences in hauling distances tempered by sliding price scales. The wide differences TABLE 13.- Range of stumpage prices on state forests in Michigan by species: 1958 ~.—v— 'Upper Peninsula Lower Peninsula Species Prices in Dollars Prices in Dollars per Cord per Cord Aspen 1.00 - 3.00 0.75 - 1.h0 Pine 1.50 - h.00 1.00 - b.00 Balsam Fir 1.00 - 5.00 1.50 - b.00 Spruce 2.00 - 8.75 1.75 - 5.00 Hemlock 1.50 - 3.00 ----- Miscellaneous Hardwoods 0.35 - 2.50 0.50 - 1.50 Source: Forestry Division, Michigan.Department of Conservation, Lansing, Michigan -17h- between the maximum and minimum prices accepted in the Upper Peninsula are caused by accessibility difficulties and development expenses. The effects of competition between buyers and the negotiating abili- ties of the buyers and sellers is shown in the comparison of the average stumpage prices received by state, Federal, and private landowners (Table 1h). 'With the exception of aspen and pine, the private landowners re- ceive higher stumpage prices than the public agencies, with the difference becoming quite substantial in the Lower Peninsula. Prices in the Upper Peninsula are from $0.50 to $1.00 higher than in the Lower Peninsula if pine and the miscellaneous hardwoods are excepted. The higher private prices are not at all surprising when the methods of pricing on public lands and the differences in location are considered. The average private sale is based onprices received from other recent sales. As the best sources of this information are the public agencies, it is quite natural that the sellers accept their prices, but as minimum. The private lands are usually better located in regard to transportation facilities, and have fewer cutting restrictions than the public lands, permitting the private landowners to demand an increase in price based on the decrease in the other production costs. The buyer, on the other hand, is willing to pay a higher stumpage price, not only because of the lower costs of production, but also because of the methods of payment. The ability to produce pulpwood without having to make large advance pay- ments encourages the use of private lands at higher prices by the small producers. Logging Costs Logging costs, for the purposes of this study, are those costs .moeawccowpmosv noosconu one «asseappaa .hquSoo eooznasn Scum mooann opsbana ens .nmmanowzflamnwmcwq acoapmsuonnoo mo pcoapnmmon cmwanoazn.coana>an hupmopoh on» Bonk mooann spawn .npnonom choapm: on» no unoua>noasm on» Eopm unseen Hmnoeoh «coasom mm.m ---- m>.o ma.: m~.m mN.H ops>aam mm.o ulna No.4 0H.m ~©.~ mm.H ovmpm er ma.a unuu >H.© mo.m w:.m mo.H Hanupom alw sauna—anon .333 om.m nun: mp.» om.: nan: wm.H opsbaam 00.0 oo.m H~.~ mm.: mm.m 4m.~ opspm om.o o~.m mo.~ mm.: m>.~ mm.m Heaouuh . .; _ «Hennaaom gonna u n choc hon numHHon u a neoosenwm nonmouqsq nsoosmaaooufix xooasom uosnmm ham smuasm scam comn4 enouom mmma «seasons he gwmwnoaz_ca anonzocnma pmonom opwbwna ens oHHnun kn cobaooon wooden omsasspm coonnasn mmmeopd n.4H names -176- incurred between felling standing trees and depositing the pulp sticks at roadside for transportation. The logging operation may be divided into felling and bucking, peeling (if required), skidding, developmental costs and general overhead costs. The felling and bucking operation is normally carried on by the same man or team. The tree is felled, usually with a power saw, limbs trimmed off to the minimum acceptable top diameter, the top out off and the bare stem cut or bucked into pulpwood sticks (normally 100 inches in length) in one operation.1 The operator is paid on the basis of the number of sticks or pieces produced. The price per piece varies between species and be- tween operations, but normally falls between $0.08 and $0.12 per piece. For comparison purposes, however, all costs will be given on a per cord basis (Table 15). § The wide variation in felling and bucking costs is due primarily to the physical factors of the work. The differences in the number and size of the trees out, the quality of the timber, the density and composition of the stand, and the total volume per acre cause changes in the piece rate as they affect the ease of logging. The rate increases as the amount of time and energy required to produce a cord of pulpwood increases. This may give rise to differences in the felling and bucking costs where the pulpwood stick is to be peeled or left rough. The Forest Service found that the felling and bucking costs for aspen were $0.17 per cord more for the peeled pulpwood in the Upper Peninsula and $0.15 more in Lower Michigan. -r 1The procedure of skidding the trimmed and topped stems to the woods loading deck before bucking is not as common in the Lake States as it is in the South. Thus, felling and bucking is considered one operation for cost purposes. IIIPmMQHIHMmWoonaz «coon—mad: 53335 pnoEomsnmz snack .obapoonan hhmaoaama .xoocecmm ooabnom ununoh eaasnamunn< senses: ooabnom anoaoh .m .D ”coupon oo.m om.m am.m pm.HH m~.ma mo.oH m>.ma pm.ma Hmpoa om.o mm.m m4.~ pm.m m~.N om.H m>.m om.H manoo servo om.a ea.~ ms.~ m~.m m;.; ea.~ ms.: ea.m maneeasm as as as says oo.m 8.: SA 3% mm...“ 3.0 $6 Z.m museum a menace wasunanom hung: or oo.m mu.» m>.m No.m mm.mH >m.ca Hm.~H ~m.oa Hmpoa 7 1 om.o mm.o mo.o No.0 No.0 mm.o mm.o mw.o npaou heave om.a mm.~ -.H om.a mo.m mH.m ma.m wH.e scavenge ---: nun: nun: om.m nun: mm.: uuuu mm.: maaaoom 8.... 3.: RA 8A 2.... me 86 «mm manage a manta casuaacom Apnea n u upon you nanHon u n mecca emaom eoavom awaom enauom sauce eoaoum space nunsm 38qu SE lacuna: sound nah smnasm cashew mmma ”semanoaz_na coomnann mnaoseoan ca uoausonw mpmoo mcammoa cmmnm>4 u.mH mqm I I \ /I\ \\\Q\ //\\\ x/ \x/ \ ////\ N ‘/ K ,/ \\ .NJAMN . AWI, K. nunMw < \/ mWNW\. .«\sII:1\\*II TI.TII Til ashram. .J\ New ....GcmTW 030.3 3% 33V 7700 39/35 -1814- the price for spruce exceeded the previous highs and showed an upward trend. The lack of rapid change is due to the type of market. There exists a large number of sellers, each too small in operation for his actions to have any great effect upon his competitors, attempting to sell an undif- ferentiated product to one or more of a small number of buyers, each large enough in operation for his actions to have a very decided effect upon his competitors. Thus, the prices for pulpwood, being determined by the pulp companies, become stable. No company wishes to raise prices, which would cause an increase in its costs of production and would he immediately countered by a similar increase on the part of its rivals. An equal reluc- tance to lower prices is due to the fact that such a reduction, if not fol- lowed at once by the other mills, would cause a reduction in procurement and a curtailing of the pulpwood supply as the sellers turn to the mills offering the higher prices. Since almost all Michigan pulpwood is pro- cured under contracts with periods of three to six months, price changes-- particularly price reductions--are difficult to establish with the expec- tation that the other pulp mills will rapidly follow. The oligopsonistic market for pulpwood in Michigan automatically tends toward a stable price. As an oligopsonistic market tends toward price stability and as the pulp companies set pulpwood prices, the question arises as to the "fair- ness" of these stable, buyer-determined prices. The actual determination of what constitutes a "fair" price for pulpwood is beyond the scope of this study, but certain comparisons can be made to indicate the differences in returns received by the pulpwood producer and the pulpwood buyer on the basis of the prices each receives for his final product, and an examination made of the prices offered by the various mills. -185- Comparison of Pulpwood and Pulp and Paper Prices Pulpwood prices have not maintained their relationship with pulp and paper prices over the last ten years. Since 1951, pulpwood costs have made up a steadily decreasing percentage of the cost of paper products. The pulp and paper industry has managed to keep its raw material costs well below the average costs for all wholesale commodities while, except in 1950, managing to keep paper prices above them (Fig. 17). The removal of the World War II ceiling prices and the postwar boom caused paper prices to rise almost h5 index points by l9h9, while Lake States pulpwood prices rose 80 points. After a slight recession in l9h9, which lowered paper prices, but did not affect pulpwood prices, the Korean ‘War increased the demand for paper products, and prices rose 25 points in 1950. The accelerator effect upon pulpwood increased its price almost h5 points over the 19h? level. However, by 1953 pulpwood prices had declined to an index of 130 while paper prices had risen to 170. Following a slight decline in 1953, paper prices rose in 1957, to an index of 19h while pulp- wood prices rose to 13h. It is interesting to note that the price index .for Southern pine pulpwood has shown a sinilar trend, except that it has always risen and has always been higher than the Lake States pulpwood price index except from June 1950 to late 1951. The Southern pine pulp- wood index increased in 1950, but then leveled out in 1951 rather than de— clining. The regularity of the index rise and the stability of the pla— teaus indicates a well controlled price, much more so than that of the Lake States pulpwood. Thus, it appears that pulpwood prices are not following even the general pattern of paper prices so that the gap between the two is ~186— Amman. ..o .m .copmfiemmz 692% .m .2 .03m peommm mpmcem «monsomv wmmanoqma "OOH u mama warez mmoflecfi refine magma new QHSQ can refine poosmasm n .wa .wflm m0. wa Mei mtmx \MQ inane SQ a 5 _ _ _ _ _ _ _ _ v \ «\\4\\ TI.rII¢II .\ :1 a \ b lllll 1 % Q0$Q§m§ than ,\ ,\./ A .. TI ..l T... .\ ,\ ./ \ roxdflku N§Q§WWk§oW K \\ 2 _ .. --{ a \\ muck \Qoxxxxoo murwmugh we. nxy\ nwa 9v\ 3\ 0Q Com. XJO/V/ ED/é’o/ -187— constantly increasing. In addition, it appears that pulpwood prices are failing to maintain their position in regard to the price of all wholesale commodities, and they are failing to increase with their own costs. In the ten—year period 19h7-l956, labor costs rose 38 percent while paper prices rose 39 Percent and the paper industry profits rose 70 percent even after taxes (Stoddard, 1959, p. hl). In the same period, pulpwood production in the Lake States increased 2h percent. It is somewhat strange that production should increase while the costs of production are increasing faster than price. 0n the supply side, it may be said that as the costs are increasing faster than the price, the operator must sell more cords in order to maintain his income at the pre- vious level. This automatically insures thegnflx>nnlls an increasing quantity'so no further increases in price are necessary to bring forth the extra pulpwood supply needed to meet an increasing demand for paper pro- ducts. Economically, this may be correct, but examination of a similar price situation in the Canadian pulp and paper industry found that such trends in prices and costs'were due entirely to restrictive trade prac— tices on the part of the industry (Canadian Restrictive Trade Practices Commission, 1958). Pulpwood Prices in Michigan .Prices for Michigan—produced softwood pulpwood tend to be higher than elsewhere in the nation while hardwood pulpwood prices are approximately 'the same in all regions (U. S. Forest Service and Commodity Stabilization Service, 1958, p. 9). The difference in prices for the same species is (hie primarily to labor costs and accessibility of the timber, although the quality of the Lake States softwood pulpwood may be a factor. —l88- In the Lake States, the price for any particular species varies very little, and the more limited the area the more uniform the price becomes. Michigan prices appear to vary considerably due to differences in procure- ment methods and the use of middlemen by the pulp mills involved (Table 16). The price paid for pulpwood delivered at the pulp mill is the base price paid, but middleman fees and graduated hauling bonuses may increase it. The price decreases as pulp mill buyers procure pulpwood at points other than the mill woodyard and the companies absorb the additional trans- portation expenses. Quoted prices may seem to differ remarkably as they may be given for pulpwood delivered at the pulp mill (plus varying distance- of—haul additions), delivered on board railcars at designated railroad sidings, or delivered at roadside. However, if the maximum f. o. b. rail- car prices are used for study, most of the differences due to the various procurement methods are eliminated and a veny definite pattern emerges. In most cases, variations between pulp company prices for a given species will fall within the $0.50 to $1.00 middleman fee, and will almost indi- cate if the company employs the services of a middleman, and, if so, the type of middleman employed. The use of the maximum f. o. b. railcar price also eliminates price variations for those mills which purchase pulpwood directly from the producers and employ both types of middlemen. Peeled pulpwood brings a higher price than the rough wood of the same species and exhibits the greatest variation in the prices offered by the mills. Peeled hardwoods other than aspen and white birch have the greatest variation--showing a price difference of as much as $8.00 per cord above the f. o. b. railcar price of the rough hardwood pulp- wood. The price increase ranges from $h.OO to $6.00 for spruce, and $5.00 to $5.50 for balsam fir. The average price increases for peeled TABLE l6.- Maximum prices offered for Michigan produced pulpwood by'Michigm - —189- and Wisconsin pulp mills by species and method of delivery: 1958 l Aspen and White Birch Spruce Rough Peeled Rough Peeled Mill Number and Rail- Rail- Rail- Rail— Location Mill car Mill car Mill car Mill car - - Dollars per Cord - - Lower Peninsula 1 12.00 16.50 2 12.50 11.00 18.00 16.00 3 17.00 b 12.00 5 22.50 19.50 23.00 28.00 6 21.00 16.50 Upper Peninsula 7 13.00 8 21.50 20.00 29.50 28.00 9 19.50 28.50 27.00 10 20.50 19.00 29.50 28.00 3h.5O 33.00 Wisconsin 11 22.00 20.50 30.00 28.50 35.00 33.50 12 13.00 19.00 27.00 32.00 13 13.00 19.00 27.00 32.00 1h 27.00 32.00 15 19.00 16 17 27.00 18 21.00 27.50 32.50 19 1h.00 21.00 28.00 3h.00 20 1h.00 21.00 29.00 3h.00 21 20.50 19.00 29.50 29.00 3h.50 33.00 22 20.00 28.00 23 Source: Pulp mill questionnaires TABLE 16.- Continued -190- Balsam Fir Pine Hemlock IMiscellaneous Hardwoods Rough Peeled Rough Rough Rough Rail— Rail- Rail- Rail- Rail- Mill 081' Mill car Mill car Mill car Mill car - Dollars per Cord - - 16.50 16.50 16.50 13.00 18.00 16.00 18.00 16.00 28.00 '23.00 28.00 2h.50 23.00 23.50 22.00 18.50 2h.50 23.00 29.50 28.00 25.00 23.50 30.00 28.50 22.00 27.00 22.00 27.00 22.00 27.00 20.00 13.00 22.00 19.00 21.00 26.50 18.00 18.00 2h.00 29.00 19.00 2h.00 29.00 19.00 2h.50 23.00 29.50 28.00 23.00 20.00 ~191- pulpwood is approximately $5.00 per cord. This price increase for peeled pulpwood is an arbitrary recognition of the increase in the costs of production and of the increase in the volume of solid wood per cord resulting from the removal of the bark. It usually exceeds the costs of peeling by $0.75 to $1.50, and on a percentage basis is equal to or greater than the 15 percent increase in solid wood per cord. Comparison of prices for the different species gives an excellent reason why the Lake States pulp mills are turning more and more to using greater quantities of aspen and the other hardwoods in place of increasing consumption of the old favorites, spruce and balsam fir. The development of a $10 to $15 difference in per-cord costs can represent a very large sum when considered in relation to the total consumption. However, the technological demands of the paper making industry still require the more expensive pulpwood to maintain paper quality. Average Michigan pulpwood prices, f. o. b. railcar, are $27.77 per rough cord for spruce, $22.36 for balsam fir, $18.71 for hemlock, $17.00 for pine, and $13.00 for aspen and the other hardwoods. Peeling will in- crease these prices bY'$h.90 for spruce, $h.hh for balsam fir, and $6.27 for aspen. However, in terms of the two major divisions of the state, aspen, pine, and hemlock are from $2.00 to $3.00 per cord higher in the Upper Peninsula than in Lower Michigan while the other species are almost the same regardless of location. The variations in price among the different species are due primarily to the quantity and location of the supply, although differences in pro- duction costs are slightly reflected. For example, spruce removal is reaching its maximum allowable cut on public lands and is being exceeded -192- on the easily accessible private lands. The remaining private stands are more difficult to enter due to the physical aspects of the site. The higher prices paid for spruce are necessary to encourage the entrepreneur to undertake production, and as pulpwood harvesting on the more difficult sites requires special equipment and ability, the price difference between spruce and the other species is not necessarily proportional to the actual differences in the costs of production. This is best shown when spruce is compared with another species such as aspen. Aspen stands are ubiquitous and the allowable out far exceeds the actual cut. Because of its abundance and ease of access, aspen is the favorite of the unskilled, part-time pro— ducer, who has little equipment. As a result, the costs of production of spruce exceed those for aspen by $9.03, but the price received for spruce exceeds that for aspen by $1h.77. Although in pulpwood marketing, as in marketing most rough forest products, the price is determined by the buyer, the spruce and balsam fir buyer must offer a price which yields the producer a greater return on his managerial ability than is normally the case. Those species which require-- if the term may be used--professiona1 services yield a higher ratio of re- turn when comparing costs and prices than those which can be harvested by—- again a term--amateurs. Competition All pulp mills do not procure pulpwood in the same area, do not use the same rail sidings, and do not have the same distances of haul; yet the prices offered by the pulp mills for a given species are almost the same. Price competition between pulp mills for Michigan produced pulpwood is almost completely lacking. In most cases, the differences in quoted -l93- maximum f. o. b. railcar prices may be explained as differences in pro- curement methods as they fall within the middleman fee range. The few instances where price differences exceed this may possibly be explained as a time lag in price following. Price leadership may be present in the pricing of Michigan pulpwood. It is not possible in this study to determine to what extent it is being used and where the leadership lies, but the existing price structure and past movements indicate that some sort of pricing arrangement exists, and procurement agents for the smaller pulp mills do base their prices on those of the larger mills. Logically, in the Lower Peninsula, price leadership would be by species, with the leader for a given species being the pulp mill consuming the greatest quantity of that species, but in the Upper Peninsula where there are a greater number of mills competing for the same species, it is more difficult to place leadership. In fact, the ex— istence of a single price leader is questionable. In all probability, the leadership role, if it occurs, passes from one to another of the larger mills in no prescribed manner. The consistent charge of collusion makes the data available subject to possible inadequacies. The lack of price competition does not preclude the presence of all competition in pulpwood procurement. The pulp mill procurement agents vie in their efforts to provide the producers with stumpage and credit while the pulp companies grant hauling bonuses and roadside purchases to en- courage producers to deal with them. The rapidity of payment is very :hmportant in this non-price competition. The best measure of this type of competition is the total cost to the pulp company of the pulpwood delivered at the mill yard. Because of differences in freight rates and hauling distances, the pulp mills absorb -19h- different transportation costs. Rail rates from a single loading point often differ for the pulp mills accepting pulpwood at this point, causing large differences in the total costs of the pulpwood. Because of this, the costs of pulpwood for one mill may be the price plus a few dollars per cord for transportation, while another mill, paying the same price, is paying almost half the price of the pulpwood for transportation. The total cost of the pulpwood for the second mill is almost half again as much as for the first. This difference in the costs of procurement indi- cates there is competition between the pulp companies for pulpwood, but the pulpwood producer does not necessarily benefit from it in terms of an increased price. Although pulpwood prices in Michigan are more or less fixed by the pulp companies, they are affected to some extent by the costs of produc- tion. In Lower‘Michigan, where the differences in total procurement of a given species permits one mill to dominate the market for the species, prices tend to be the minimum which will induce a seller to market his pulpwood. However, as this price must cover at least what a producer considers to be his costs of production, it cannot fall below a certain level. As a result, prices for the more accessible pulpwood in the Lower Peninsula are from $1.00 to $2.00 per cord less than for the same species in the Upper Peninsula because of an almost equal reduction in the cost of production. Competition for Michigan produced pulpwood is not reflected in the market price, but rather in the costs to the pulp mills. The attracting of the sellers is based upon the offering of aids rather than price in— creases. The prices offered, set by the pulp companies and maintained by -195- a reluctance to enter into price competition, are based upon minimum costs of production plus an allowance for skill and equipment for those species more difficult to harvest. 'CHAPTER XIII PULPWOOD TRANSPORTATION1 The transportation of pulpwood is a complex subject. It extends beyond being a simple cost of production in that the pulp companies often assume part of this cost. The use of sliding price scales for pulpwood delivered at the mill and purchases of pulpwood on railcars and at roadside shift the payment of transportation charges to the buyers as a cost of procurement. The reduction in price accompanying the transfer of the point of title exchange away from the pulp mill is seldom equal to the additional transportation cost. While the mills are not equi- distant from the source of supply, the purchase price is the same for all mills. Thus, the assumption of the transportation costs acts as a major form of non-price competition between the pulp mills. Michigan-produced pulpwood moved to market in 1958 almost equally by truck and rail, but there were great differences in the use of the lMuch of the material in this chapter was published in the Michigan Quarterly under the title "Transportation Costs to Pulpwood Shippers in Lower Michigan.“ (James and Lewis, 1960”.) -196- -197- two methods by the various markets (Table 17).'1 Trucks delivered directly TABLE l7.- Receipts of Michigan-produced pulpwood at Michigan and Wisconsin pulp mills by method of delivery: 1958 Percentage of Receipts by Destination Method of Delivery Truck Rail Michigan Mills Lower Peninsula 82.11 17.6 Upper Peninsula 57.1; 142.6 All Michigan Mills 73.2 26.8 All Wisconsin Mills 15.6 811.1; All Mills 53.8 1.16.2 to the mill some 82 percent of the Michigan-produced pulpwood consumed by Lower Michigan pulp mills, but they moved only 16 percent of the Michigan- produced pulpwood consumed by the Wisconsin mills. Such differences in- dicate variations in length of haul, payment procedures, competitive con- ditions, and carrier regulations and rates. In general, the Wisconsin mills, being further from the pulpwood production areas than the Michigan mills, have to procure more of their wood with longer hauls. As trucking costs are greater for the longer hauls than rail charges, plus the fact that delivery in Wisconsin is in the interstate commerce category, truck- ing tends to be relatively expensive. In addition, competition from the 1Pulpwood imported into the state by water transportation is a special case and will be omitted. Almost no Michigan-produced pulpwood is. transported by water. -198- Upper Peninsula mills tends to force the'Wisconsin mills to pay the same price and absorb the transportation costs or to pay higher prices. The present attitude of the pulp companies toward price competition makes the latter course unacceptable. The Upper Michigan pulp mills had the shortest lengths of haul of all the areas studied: maximums of 100 miles by truck and 137 miles by rail. Nevertheless, only 57 percent of their pulpwood was delivered at the mill by truck. Competition from the Wisconsin mills causes them by buy pulpwood on the railcar, especially in the western half of the Peninsula. The shorter distance of haul and the absence of interstate commerce regulations tends to make the general trucking costs lower than for the Wisconsin mills. This permits much more use of truck delivery, primarily from the eastern part of the Upper Peninsula. As 100 miles is the maximum length of haul, not the average, the $1.50 per cord addition to the railcar price for mill-delivered wood should cover much of the transportation costs of an average haul. In the Lower Peninsula, the pulp companies received wood from a maximum of 250 miles by truck and hOO miles by rail, but rail-delivered pulpwood accounted for less than 20 percent of the total consumption. ‘The pmevalence of truck-delivered pulpwood is due primarily to the lack (Jf competition, the presence of sliding price scales, and roadside pur- chase by one of the largest consumers of Michigan—produced pulpwood. In addition, two pulp mills, consuming 50 percent of the pulpwood produced iii the Lower Peninsula, are located quite close to the sources of pulp- wood (within 150 miles), and one restricts its entire procurement to truck delivered pulpwood. -l99- Truck Transportation Truck transportation is normally the responsibility of the pulp— wood seller and is considered a cost of production. However, the pulp companies have recognized this cost as one which they can help the pro- ducer to reduce. One Lower Michigan mill purchases Michigan-produced pulpwood at roadside and provides the necessary transportation at pulp company expense, six Lower Michigan pulp mills provide sliding price scales for pulpwood delivered at the mill to pay higher prices for longer distances of haul. ‘With the exception of four Michigan mills, two of which are consuming less than 200 cords per year, all the pulp mills in Michigan and Wisconsin designate rail loading points at which they will purchase Michigan—produced pulpwood to eliminate long truck hauls by producers. The use of roadside purchase of pulpwood is limited to one pulp company.1 The pulpwood is purchased at a price of $h.00 per cord less for aspen and $5.50 per cord less for pine and hemlock than is paid for the same pulpwood f. o. b. railcar. Procurement by this method is Ithmited to areas beyond a 75-mile radius of the mill. Transportation is contracted with a common carrier at a rate schedule as follows: Distance of Haul Rate per Mile per Cord (Miles) (Dollars) Less than 100 0.065 100 - 150 0.055 More than 150 0.0h9 1Two‘wisconsin pulp mills also purchase at roadside, but they procure no Michigan—produced pulpwood in this manner. -200- Hauling costs for distances exceeding 75 miles for aSpen and 85 miles for pine and hemlock are greater than the differences in the prices paid for the pulpwood while hauling costs incurred for distances exceed— ing 100 miles are greater than the maximum sliding scale price increase for pulpwood delivered directly to the mill by the producers. Producer truck hauling of pulpwood may be divided into three classes: short hauls to rail sidings, long hauls to rail sidings, and hauls to the pulp mills. The short hauls to the rail sidings are usually from 5 to 10 miles while the long hauls rarely exceed 30 miles; the median distance is 15 miles. In order to determine the cost, the pulpwood seller negotiates a contract hauling rate with a local trucker. Usually, this rate also includes the cost of transferring pulpwood from the truck to the railcar. If the transfer cost is not included, an additional cost of approximately $1.00 per cord may be incurred in loading the railcar. The distance of haul to the pulp mills in Lower Michigan has a very 'wide spread, ranging from.10 to 250 miles depending on the mill receiving the pulpwood and the species delivered. In Lower Michigan, the median hauling distances are quite variable: 200 miles for rough spruce and “balsam fir and 70 miles for peeled aspen going to one mill, 90 miles for ITngh aspen and pine and 65 miles for peeled aspen to another, 60 miles for'all species to a third mill, and 100 miles for all species to other rmills. All pulp companies pay a higher price for mill-delivered pulpwood .and assume unloading costs in recognition of the increased hauling costs -u: the seller and the savings in procurement costs to the company. Some Michigan mills have gone further. Six of the seven pulp mills in Lower Michigan use a sliding price scale or hauling bonus to encourage delivery of pulpwood at the mill by -201- the producers. The sliding scale is normally based on a $0.50 per cord increase in hauling distance beyond the first 50 miles, but variations do exist (Table 18). In comparison with the $0.065 per cord per mile TABLE 18.- Sliding price scale additions to the base price for different distances of haul used by six Lower Michigan pulp mills for truck de- livered pulpwood: 1958 Mills Distance of Haul A B C D E F Miles Dollars per Cord 0 - 25 26 - 50 0.80 0.50 51 - 75 1.20 0.50 0.50 1.00 0.50 76 - 100 1.60 1.00 1.00 1.00 0-50 101 - 125 2.00 1.50 1.50 1.00 1.50 1.00 126 - 150 1.00 2.00 1.00 151 — 175 1.50 2.50 1.50 176 - 200 1.50 3.00 1.50 Over 200 3.00 3.00 2.00 rate, it would appear that the price increase of $0.01 per cord-mile does not cover the costs of transportation, but as the direct haul to the mill automatically increases the price approximately $5.00 per cord .above the roadside price and.$l.50 over the f. o. b. railcar price, while eliminating a.$1.00 per cord handling charge in the latter case, the -202- hauling bonus makes direct delivery even more attractive. However, the sliding scale price increase is more of an attempt to reduce the rate at which hauling costs make inroads upon the margin rather than an effort by the pulp companies to absorb all the hauling costs. Truck-hauling rates for delivering pulpwood to the mill or to the rail sidings are a function of distance, road conditions, bargaining ability, and local rate patterns. For the longer hauls which exceed 75 miles, most pulpwood truckers in Lower Michigan follow the formula used by the common carrier transporting roadside purchases, but the rates for the shorter hauls are negotiated. As a result, the short—haul rates tend to be somewhat variable, but on the average they are $3.00 for hauls of 10 miles or less, $h.00 at 20 miles, $5.00 at to miles, and $6.00 at 90 miles (Table 19). Formula rates are calculated at $h.87 per cord for 75 miles, $6.50 for 100 miles, $8.25 for 150 miles, $9.80 for 200 miles, and $12.25 for 250 miles. These rates are the costs of transportation to the seller and do not necessarily reflect the costs to the truckers. Although no detailed study has been made, it was found that many truckers do not understand the nature of fixed costs, and sometimes underestimate their actual costs of