Determining Econometric Relationships between Timber Sale Notice Provisions and High Bids Received on Timber Offerings from the Alabama Department of Conservation/State Lands Division By

An econometric analysis was conducted with the intent of discovering the relationship between contractual provisions, as specified in timber sale notices, with high bids received for those timber sales. Specifically, the goal of this study was to determine the relationship between high bids for timber tracts and certain contractual stipulations that have not previously been explored to any great extent (such as requirements of landowner assistance and performance bonds, and adherence to forestry Best Management Practices). Data collected from 105 timber sales conducted by the Alabama State Lands Division of the Department of Conservation from 1966 through 1997 were analyzed using a simple linear regression model. The dependent variable was high bid price per acre. Independent variables included various physical characteristics, number of bidders per timber sale, and specific contractual stipulations that have not been previously examined econometrically. The results indicate that certain contractual provisions – such as landowner assistance and bonding requirements – exhibit negative and significant relationships with high bids received for Alabama state timber sales, as expected. A dummy variable that related to forestry Best Management Practices provisions exhibited a positive and significant relationship with high bid prices per acre. This result was unexpected. 1 The authors are, respectively, Forest Economist, Louisiana State University Agricultural Center, P.O. Box 25100, Baton Rouge, La. and Assistant Professor of Forest Resource Management/Extension Specialist, School of Forestry, Auburn University, Auburn, Al. 36830. Introduction Efficient contracting is important to the free flow of goods and services in a market economy. Welldefined property rights increase the efficiency with which contracting parties exchange goods and services (Meade 1965, Castle 1978). Contracts define the rules by which parties exchange rights to property, and ensure performance during and after the exchange. Contracting for timber property rights most often involves two or more parties negotiating for exchange of the rights associated with a bundle of physical goods. However, contracting can be very complex, involving several parties bidding on timber offered by the landowner. The winning bidder often contracts with other parties to harvest and haul the stumpage from the land. She may even contract with mills to buy the stumpage after she harvests it. Further, the complexity of the contracts themselves can range from informal verbal agreements to elaborate arrangements for the exchange of large volumes of timber. From the resource owner’s perspective, one critical aspect of contracting is the amount he receives for the timber. Often, when landowners are ready to sell their timber, they put their tract up for sale and solicit bids from interested parties. It is in the landowner’s best interest to provide as much accurate information as possible in order to reduce information-gathering costs faced by potential bidders. This approach creates a tendency to attract more bidders. Potential bidders will analyze the costs and revenues associated with the proffered timber tract based on the provided information and the information they gather themselves. The bid that is submitted is a reflection of the accuracy of the collected information. Physical characteristics, such as volume of pine sawtimber or pulpwood on a proffered tract, have long been perceived as important indicators of bid amounts. However, other timber sale or contractual characteristics may exhibit positive or negative relationships with bid prices. Contractual restrictions made by the seller may negatively impact bid prices. For example, if a seller contractually obligates the buyer to harvest only specifically marked trees instead of clearcutting the entire tract, costs per acre are likely to increase, since the buyer will face higher per-acre harvesting costs. Therefore, many types of contractual restrictions, such as requiring re-planting of harvested areas, observance of forestry Best Management Practices (BMP’s), contract lengths, and other on-site restrictions may cause the bidder to lower her bid price. This is not to say that contractual restrictions are bad. On the contrary, contractual restrictions are expressions by the seller regarding her wishes for the timber tract, and as such are attempts at utility-maximizing behavior. However, they may come at a cost, which sellers calculate and equate on the margin with the benefits that could be gained were the restrictions not in the contract. In a world of imperfect information, however, these calculations may be less than perfect and research into the costs of these restrictions in the field of forestry are few. The purpose of this study is to analyze timber sale notices published by the State Lands Division of the Alabama Department of Conservation to determine the econometric relationships (if any) between contractual provisions contained in those notices and the high bid for the timber sale. LITERATURE REVIEW Bid price determinant studies have been conducted regarding public timber sales (Anderson (1969), Brannman, et. al. (1979), and Johnson (1979)), and private timber sales (Cubbage, et. al. (1985), Hubbard and Abt (1989), Munn and Rucker (1994), and Puttock, et. al. (1990)). They have determined that bid prices are a function of such determinants as the type of sale method employed, assistance from professional foresters (for private timber sales), contractual provisions such as contract length and the type of payment method chosen, and tract characteristics (volume of timber, harvesting costs, types of species on the tract, quality of timber, and ease of access. Guttenberg (1956) analyzed 334 southern pine sawtimber sales from national forests in Texas, Louisiana and Mississippi for a period of January 1949 through March 1955. His focus was in relating stumpage price variations to physical, measurable timber characteristics, such as volume sold, cut per acre, and quality. He found that purchasers tend to pay a premium for higher quality timber, that stumpage prices paid increases with the total volume offered and with its volume per acre, that stumpage prices paid decreased with increases in hardwood/pine ratios, and that stumpage prices are associated with changes in the wholesale market price for southern pine lumber. His results were consistent for all three states. There have been numerous other studies of bidding behavior in timber markets. THEORY AND METHODS The typical market participants involved in exchanging property rights associated with Alabama state-owned timber include the Alabama State Lands Division (on the seller side) and wood dealers, lumber mills, and paper mills (on the buyer side). The State Lands Division prepares a timber sale notice (TSN) which contains information it hopes will attract a significant number of buyers to the sale. The TSN contains such provisions as tract location, tract composition, and expected contractual arrangements. Historically, these contractual arrangements included the time period for which the contract was in effect, whether or not a security bond must be forwarded and the amount of that bond, and other basic contractual obligations. When new economic forces arise, there exists a need and a desire to define (or re-define) property rights so that externalities are internalized (Demsetz 1967). Such is the case with the State Lands Division. In the 1980’s and 1990’s, the State—reflecting the character of a public which had evolved a higher environmental acumen—acknowledged (through their contractual provisions) there were externalities associated with its timber sales. For example, the harvesting techniques used on its timber tracts may have caused undesirable environmental damage. In some cases, the State Lands Division required winning bidders to prepare and replant a site after harvesting it. Therefore, in certain (not necessarily all) timber sale notices, the State Lands Division wrote provisions which signaled the potential bidders that they would be required to follow best management – type provisions and would have to provide landowner assistance (such as engaging in site preparation, installing firebreaks around the site, and replanting). It is the degree of explicitness extant in a contract that determines the amount of inefficiency present. The State Lands Division, facing increasing marginal costs associated with supplying additional units of information, and decreasing marginal benefit gained from supplying marginal units of this information, supplies its optimal amount of information in the precursor to the contract, the timber sale notice (TSN). Bidders utilize the information provided in the TSN to prepare bids. Bidders are not, however, “information takers.” They also gather information necessary to provide what they hope to be a winning bid. This includes tract accessibility, logability, and other factors affecting both their ability to log and harvesting costs. They will also ascertain, through timber cruises, the quality and quantity of timber available. They may also contact the State Lands Division to provide them with more elaborate information regarding contractual provisions. Perfect information rarely exists in the market economy, yet information is garnered and transferred by contracting parties in an attempt at contracting efficiency. The goal is to achieve as much information as possible at a “reasonable” cost. The public timber sale notice provided by the State Lands Division represents the method by which it conveys information regarding the timber sale to potential bidders. These bidders will adjust their bids based both on information they acquire regarding the physical characteristics of the site (usually through a first-hand site survey) and on the contractual restrictions put forth in the TSN by the State Lands Division. The model used in this study is a hedonic model developed for analysis of consumer choice by Grilches (1971), Rosen (1974), and Freeman (1979). It relies heavily upon the theoretical framework developed by Munn and Rucker (1994) in their analysis of the role of consultants in private timber sales. The hedonic model represents the equilibrium price that is determined by supply and demand and is assumed to be exogenous to individuals. The selling price for a given State Lands Division timber sale is dependent upon physical and contractual characteristics and is represented by the following hedonic equation: ) ,... , ( 2 1 n z z z f P =