— ^ S • \ **■ Division of Agricultural Sciences THE LUMBER IPUSTRY IN THE CENTRAL SIERRAiLEVADA REGION Dennis E. Teeguarden CALIFORNIA AGRICULTURAL EXPERIMENT STAT ION BULLETIN 811 ; ^F *4^> . -v\ rr^tel ^fciiiVjcr THIS BULLETIN reports studies of the structure, practices, and economic instability of the lumber industry in the Central Sierra Nevada Region, with special reference to the market environment of small, nonindustrial timber growers. Specifically, it • Describes market organization and structure at grower-processor and proc- essor-wholesaler market levels; • Discusses pricing practices and policies; • Analyzes structural and cyclical instability of the processing industry; • Identifies factors underlying industrial instability. Although the study deals with one specific area, the principal conclusions should be of interest to land owners and public forestry officials in other forest regions where small forest holdings are important elements in the land ownership pattern. APRIL, 1965 THE AUTHOR Dennis E. Teeguarden is Assistant Professor of Forestry and Assistant Forester in the Agricultural Experiment Station, Berkeley. [3] CONTENTS The Findings 5 Public Policy Implications 8 Nature and Objectives of the Study 9 Study area 10 Analytical concepts used in the study 12 Sources of data 14 I. Demand Structure for Stumpage and Logs 15 National market and industry trends 15 Structure of the lumber processing industry 17 Raw roundwood procurement 30 Lumber markets 32 II. Supply Structure for Stumpage and Logs 35 Public timber holdings 35 Structure of private commercial forest ownerships 36 Nature of small, nonindustrial private forest ownerships 37 Grower sawlog supply 40 III. Market Conduct: Buyer-Seller Relationships in Lumber Marketing 43 Processor lumber marketing practices 43 Pricing policies and practices 46 Nonprice policies and practices 48 Conclusions 50 IV. Market Conduct: Buyer-Seller Relationships in Timber Procurement 52 Market environment 52 Purchasing and selling practices 53 Pricing policies and practices 54 V. Structural Instability of the Lumber Processing Industry 59 Changes in industry structure and firm turnover 59 Causes of plant disappearance, 1956-1961 61 VI. Cyclical Fluctuations in the Lumber Processing Industry 65 Method of study 65 Duration, timing, and magnitude of cyclical fluctuations 66 Factors underlying cyclical instability 69 Industrial instability and market structure 70 Appendix 72 Literature Cited 75 [4] THE LUMBER INDUSTRY IN THE CENTRAL SIERRA NEVADA REGION 1 A study of its structure, practices, and economic instability with special reference to small, nonindustrial timber growers In the Central Sierra Nevada Region, the lumber processing industry is the principal buyer of raw roundwood, nearly all of which is sold to the industry as stumpage or logs. The economic perform- ance of the industry is therefore a key factor affecting prices and incomes re- ceived by forest owners, and has a sub- stantial impact on the overall regional economy as well. This bulletin deals with two dimensions of industry performance — pricing policies and other practices in procuring round- wood from private sellers, and economic stability. It describes the market struc- tures, examines the conduct of the differ- ent firms in their buying and selling mar- kets, analyzes patterns of turnover among processors, and investigates the impact of cyclical fluctuations in lumber demand on the processing industry. The study is chiefly concerned with industry perform- ance from the standpoint of small, non- industrial timber growers — commercial forest owners owning less than 5,000 acres and not operating a processing plant — who control nearly two-thirds of the private commercial forest in the region. The main conclusions of the study are: • Industry structure and apparent mar- ket conduct suggest the hypothesis that prices and pricing policies tend in the long-run to be effectively competitive, although in specific transactions or pos- sibly in short-run periods prices may not be identical to a competitive norm. • Processors providing market outlets to small growers constitute the most un- stable segment of the processing industry. • Greater stability might be achieved if the roundwood market can be reorgan- ized to reduce uncertainties and costs of wood procurement from small growers and thus provide an improved base for development of large-size, stable process- ing firms. The Findings Stumpage Market The structure of the lumber processing industry, principal buyer of roundwood in the Central Sierra Nevada Region, has been fluid since the war. Active sawmills increased from 27 in 1940 to 136 by 1946, then declined by 1961 to 19. In spite of these changes, the number of plants pro- ducing more than 10 million board feet annuallv remained nearly constant in the region from 1946 to 1961. Exit and entrv was largely confined to small-size plants which obtained a major portion of their timber requirements from small growers. These firms could enter and leave the in- dustry with relative ease because of their comparatively low fixed investments, readilv available local labor force, and a flexible timber supply. A characteristic of these small firms is that, regardless of cur- rent market conditions, some are unable to survive and go out of business while at the same time others find incentives to enter the industry. Only large-volume, fullv integrated processors producing 25 million board feet or more, and with substantial timber ownership, survived the changes in raw product supplv conditions and lumber prices which affected the industry during the period. The number of medium-size firms increased, but turnover among firms was high after 1956 when, having liqui- dated a timber inventory held in fee own- ership and faced with higher costs and uncertainties of purchasing timber in the 1 Submitted for publication February 14, 1964. [5] open market at a time when lumber prices had declined, many medium-size firms went out of business. Because of plant closures and growth of surviving firms, the Central Sierra lumber processing industry has become more concentrated since 1946. Still, the industry was only moderately concen- trated in 1960 when the eight largest firms accounted for 62 per cent of in- dustry output, and it has been highly fluid in number and identity of firms. Lo- cational advantages generally declined as log transportation became less costly, and roundwood supplies have apparently been highly responsive to changes in processor demand. Among sellers, there is a high degree of concentration of stumpage sales from federally owned national forests, but concentration is low among private sell- ers, particularly among the many, small nonindustrial timber growers — commer- cial forest owners who do not operate a wood processing plant and own less than 5,000 acres — whose market environment is the principal focus of this study. In a market where there are a few firms buying from many unorganized sellers, some form of price leadership on the buy- ing side might be expected to emerge. However, this and alternative hypotheses describing possible forms of conduct in oligopsonistic market structures (see page 13) are not consistent with the type of behavior which has existed in the Cen- tral Sierra lumber processing industry. Rather, firms have followed independent, rivalrous practices in pricing and other matters in the private timber market. Such a policy is favored by the easy entry conditions which have prevailed in the industry and by the low to moderate de- gree of concentration. Price results, in the long-run, should thus approximate effec- tively competitive levels. On the other hand, pricing does not operate in the same manner as in more organized markets dealing with a homo- geneous commodity, i.e., grain exchanges. There is no central market exchange where the forces of competition are focused. Buying and selling is conducted independently, person-vs-person, price being established through bilateral bar- gaining rather than by impersonal com- petitive forces. Furthermore, timber is not a homogeneous commodity, thus market quotations for average or specific units may not be accurate guides to market value in a specific sale. Generally, the seller is in a poorer position to appraise the value of his product than the buyer. J Thus, in pricing specific lots of timber, or in short-run periods, the attitudes and bargaining abilities of buyer and seller are important. Much depends on the at- titude of buyers when confronted with poorly informed sellers whose supply price may be below the prevailing mar- < ket price. If buyers take the long view, and if they want to maintain good re- lationships with timber growers and avoid problems of procuring wood require- ments, this would tend to result in prices approximating a competitive norm. If, however, buyers take advantage of their , superior market position and are uncon- cerned about future supply prospects or seller relationships, less than competitive prices may prevail and income may be distributed more in favor of buyers. This situation is likely to be short-lived in the processing industry because excess profits will rapidly attract new firms. No indi- vidual buyer can persistently enjoy suffi- cient market power to allow economic exploitation of the many small sellers. Timber prices paid by the processing in- dustry have remained close to competi- tive levels, even though some sellers have not received them. There is no indication that processors have persistently earned l extra-normal profit margins. A history of rapid turnover among processing firms, particularly small firms purchasing timber from small, nonindustrial growers, indi- cates that many firms have not been able to earn sufficient profits to stay in busi- * ness. «■ Lumber Market Lumber manufacturers who purchase timber supplies from small growers vary widely in size and degree of vertical inte- gration in processing. These two struc- - tural characteristics in turn largely con- trol their choice of market channels. The larger firms usually are integrated through all stages of manufacture and sell a finished product line in regular national [6 wholesale markets of many buyers and sellers. The smaller firms, producing less than 10 million board feet annually, sel- dom are integrated in the above sense, although some have developed close re- lationships with vertically related firms through common ownership or informal nonownership arrangements. If their product requires additional manufacture, it usually is marketed locally to other in- itial processors, planing mills, concentra- tors, or yard wholesalers. The local lum- ber market in 1960-1961 was composed of few buyers, and mills selling unfinished lumber locally found themselves in a poor bargaining and marketing position. Dur- ing 1955-1956 there were more buyers, and market conditions were more favor- able for unfinished-lumber producers. Be- cause lumber prices declined after 1956, many of the rough-lumber buyers stopped buying or went out of business. Structure and conduct of participants in the finished-lumber wholesale market suggest that pricing in this market is com- petitive. But, in the local unfinished-lum- ber market, there are few buyers; in pric- ing and other matters, they apparently have such a degree of market power that some producers have chosen to defend themselves against it by integrating via ownership or nonownership arrange- ments with vertically related remanufac- turing and marketing firms. This itself is indirect evidence of ineffective competi- tion. Additional evidence is that some un- finished-lumber producers contract finish- ing and/or drying when prices are rising or are high. If their market were com- petitive, so that price differentials re- flected normal remanufacturing and profit margins, there would be no incentive to do so. Size Economies and Market Organization Quantitative analysis of processing and distribution costs in relation to plant size, extent of vertical integration, and loca- tion were beyond the scope of this study. Yet scale in lumber processing is suffi- cientlv important to merit consideration in qualitative terms of its economic con- sequences. A major advantage of large scale in lumber manufacturing is the feasibility of installing planing and drying facilities for producing a finished product line. In- stallation of such equipment requires an output of about 60,000 board feet per day for efficient operation; this perhaps is one reason why few plants in the Cen- tral Sierra with a smaller output handle finished lumber. An integrated processing firm handling a completely finished prod- uct line can sell its output directly to regular wholesale channels. Without a finished product line, the firm must either sell to secondary processors locally or con- tract the additional processing with an- other firm. This involves additional costs and uncertainties that are avoided in fully integrated operations. Certain marketing advantages accrue to large firms handling a finished product line. Access to regular wholesale market channels also means access to a larger number of potential buyers and to a mar- ket in which demand is less unstable during business fluctuations than in the local market for unfinished lumber. No large, integrated lumber producers are primarily dependent on small, non- industrial timber growers; there is a gen- eral inverse relationship between size and extent of wood procurement from small growers. Processors who succeed in ex- panding the scale of their operations inev- itably shift their wood procurement from small growers to public and large private timber sellers. This suggests the hypothe- sis that firms obtaining wood from small growers tend to be small because of higher costs and other disadvantages associated with expanding raw material procurement from this source. Such ex- ternal diseconomies of scale may arise from a relatively rapid increase in pro- curement costs due to the numerous, scattered, small ownerships with com- paratively low timber volumes per acre. Uncertainties regarding the amount and nature of future timber supply might also tend to limit processor size. If the hv- pothesis is valid, then the characteristics of processing firms which provide a mar- ket for timber from small holdings is a direct consequence of the nature of these holdings. [7] Industrial Instability One aspect of an industry's performance is its ability to supply widely varying amounts of output without pronounced cost and price increases. On this basis the lumber industry in the Central Sierra might be judged to have performed well during the postwar years. Lumber and sawlog output were flexible with respect to price changes. But at the same time there existed a marked instability on the buying side of the private timber market. Adjustments in output and procurement to cyclically varying lumber demand, in particular, were more volatile among firms providing market outlets to small, nonindustrial growers than for other growers. Instability was experienced in terms of rapid entry, exit, and turnover of processing firms, and in relatively greater variations in output and procure- ment of firms which remained in busi- ness (though not necessarily active). Such behavior in turn reflects the nature of these firms, their low fixed-variable cost ratios, lack of vertical integration in manufacturing, and cyclically sensitive market outlets. Instability, in short, arises from the characteristics of industry and firm structures. Instability contributes directly to pric- ing problems in the stumpage market through the transient buyer. Processors, facing the prospect of a short business life, may be tempted to take advantage of seller ignorance in the complex process of pricing timber. The transient buyer has, in fact, often been blamed in cases where sellers were paid less than market price, and otherwise cheated or misled. The transient buyer is also a problem to the stable segment of the processing in- dustry since its raw material supply out- look is more uncertain as the result of grower dissatisfaction with his market experience. Public Policy Implications Improved management of small, non- industrial forest enterprises is an impor- tant goal of United States forest policies. In California, programs to provide tech- nical assistance, education and financial incentives for small forest owners have existed for many years. It has been proposed to intensify these programs and to embark on new efforts (Barrett, 1960). The proposals include measures to improve the marketing of products from small, nonindustrial timber-growing lands: increased technical assistance and education on marketing practices; train- ing of land owners and processors in inte- grated utilization; setting up of central- ized marketing services by government or industry; and price reporting. The purpose of this study is not to evaluate such programs as to their ef- fectiveness in promoting improvements or their justification in terms of economic or social benefits. Neither is the purpose to develop all implications of this study for public policy, either in general or for specific issues. Yet the findings do have implications for policies dealing with mar- ket improvement that merit brief discus- sion. Market performance probably could be improved by better market informa- tion. Development of a more organized market system with informational chan- nels connecting alternative buyers and , sellers and distributing price quotations would be helpful. Yet the characteristics of market structure, particularly inherent heterogeneity of standing timber, are such that price reporting appears neither feasible nor sufficiently accurate to pro- ' vide acceptable guides to price in specific transactions (Teeguarden et at., 1960; Zivnuska et ah, 1957). Increased aware- ness of the opportunities, problems, and methods of marketing on the part of growers through general education prob- ably would be more directly useful and < effective. But the nature of small, non- industrial growers suggests, as does past A experience, that education is not an end- all answer. The small grower usually has only secondary interests in the timber [8] enterprise, enters the market infrequently, and devotes few resources to growing timber or to marketing. The very large number of small growers and their un- stable tenure present major obstacles to public education and on-the-ground tech- nical assistance programs (Casamajor et al, 1960). Market instability can also be an im- portant obstacle to program effectiveness. Because timber is highly durable and storable for long periods, growers have considerable flexibility in adjusting their sales to market conditions; they can ride out periods of low prices if they can or are willing to forego current income. This is a major marketing advantage of timber growers. However, market instability con- tributes to market uncertainty, weakens market institutions, shortens planning horizons, increases discount rates, and undoubtedly is a major problem in the minds of many growers and processors. Thus, the effectiveness of public pro- grams aimed at improving market effi- ciency will be partly influenced by mar- ket instability and measures which can reduce it. If growers are uncertain about their ability to market their output, pub- lic programs will be less effective than they might otherwise be in a more stable market situation. Increased stability can conceivably result from efforts to stabilize aggregate lumber demand and from a reorganiza- tion of industry structure. Federal fiscal and monetary policies have resulted in more stable demand during the postwar years (Mead, 1960). These policies were intended to stabilize the overall United States economy rather than the lumber industry specifically, but they have had a beneficial effect on the industry. Even so, the prospects are that the lumber in- dustry will continue to experience cycli- cally volatile demand. The impact of such instability on the private timber market might be reduced if the process- ing industry itself were more stable. The development of large-size, fully inte- grated processing and marketing firms would provide a more stable market en- vironment. But it appears such units would be established only if a certain long-term source of timber supplies were available, and if assembly costs did not limit plant size. Apparently timber sup- ply conditions in the Central Sierra Nevada Region have not met these re- quirements. To introduce greater stability, funda- mental changes in the timber supply structure would be needed. Measures to reduce costs of assembly by investment in improved transportation systems, in- creased per-acre timber volumes, and larger sale units would help encourage the development and growth of large size, integrated processing units. Encour- agement of ownership consolidation and long-term marketing contracts would be important from the standpoint of reduc- ing assembly costs and market uncertain- ties. Marketing cooperatives for sellers would contribute to developing such changes by concentrating the sales of many small producers and by coordinat- ing long-term supply with mill require- ments. Historically, however, marketing cooperatives in forest products have not been very successful or important in the United States (Stoddard, 1961). And efforts to promote consolidation of small- forest ownerships through merger or out- right purchase are bound to be difficult in the face of the current opposite tend- ency in California: the fragmentation of such properties through subdivision and sale. The prospects for immediate major changes in this direction appear dim, but are of such fundamental impor- tance that they deserve serious study to determine whether feasible approaches are available. Nature and Objectives of the Study Omall, nonindustrial timber growers own 20 per cent of California's commer- cial forest land, and 43 per cent of the privately owned area. They supplied nearly half of the 77 billion board feet of timber harvested in California from 1947 to 1960. In the Central Sierra Nevada Region [9] small, nonindustrial holdings control two- thirds of all privately owned commercial forest land. Few growers are specialists in the timber business; most sell standing timber (stumpage) in the open market. This study investigates the market en- vironment in which these small growers are participants. Fluctuations in residential construction have caused pronounced cyclical fluctua- tions in lumber output and prices in the United States lumber industry (Zivnuska, 1952; Mead, 1960). California lumber producers experienced these fluctuations also, and in turn related cyclical variation in stumpage and log demand were ex- perienced by timber growers. Apparently, cyclical instability is more pronounced among industrial market outlets used by small timber growers than is generally true in the lumber industry. Yet there have been no studies of industrial market performance in California which confirm or explain this observation. The present study explores this aspect of industry per- formance, and attempts to identify the main factors underlying economic insta- bility in the industry. The findings should be useful in seeking means of achieving greater stability in wood markets. Published studies indicate that market structures associated with small growers may not be entirely satisfactory, par- ticularly if improved management of small forest holdings is to be achieved (U.S.D.A., Forest Service, 1958; Frazier, 1960; Bruce, 1959, 1961; Bolle, 1960; and Teeguarden et al., 1960). One impli- cation is that prices received by growers may not be determined by effectively competitive market forces. This hypothesis has not been explored in any of California's timber markets. The price results of a market are gener- ally thought to be affected by its struc- ture, i.e., the degree of concentration in buying and selling; ease of entry; sub- stitutability of products; and other fac- tors possibly unique to the market. Similarly, industrial instability appears related to market structure. This study, therefore, also examines industrial prac- tices and pricing policies at both the proc- essor-grower and processor-lumber buyer market levels. It is hoped that such in- formation will add to our understanding of the overall market environment faced by small growers and processors. Study Area The Central Sierra Nevada Region (fig- ure 1) was chosen as a study area for several reasons. Small, nonindustrial timber holdings have long been a pre- dominant feature of commercial forest ownership here. The lumber processing industry is a major component of the area's economy and has been subject to considerable instability during business recessions. There has been a steady exit of producers from the industry since 1946, thus affording an opportunity to examine the impact of these trends on industrial concentration and to determine if some elements of the industry were more adversely affected than others. Finally, previous studies in the region provided helpful data not available else- where in the state. All data pertaining to timber growers in this bulletin refer to ownerships within the study region. The processing plant population includes all firms operating within the larger three-county area, be- cause they represent the relevant market for growers in the region, and also be- cause census data on the lumber industry applies to county units and cannot be adjusted to a different geographical base. Located on the west slope of the Sierra Nevada, the region is essentially moun- tainous. Elevations along the western boundary, fronting the Sacramento Val- ley, average about 1,000 to 1,500 feet, and rise in a distance of about 40 miles to mountains ranging up to 9,000 feet along the eastern boundary. The relief of this mountainous terrain is primarily determined by five rivers whose deep canyons divide the region into a series of approximately parallel ridges extending east and west. The transportation system, both road and rail, conforms closely to this east-west oriented topography. The only major highway route going north- south is State Highway 49 in the foothills, [10] *■■■ Mam Rood > «*0* Study Area Boundary County Boundary Sawmill , 9 Lorge-Cut 25 million board feet.ormore % ,»**£ # Medium- Cut between 10 and 25 million board feet • Small- Cut less than 10 million boord feet : Fig. 1. The Central Sierra Nevada Region. connecting the region's urban centers, Placerville, Auburn, Grass Valley, and Nevada City. The region includes 1,870,000 acres, 1,248,000 acres (66 per cent) of which were classified in 1952 as commercial forest land suitable for growing timber crops. Another 489,000 acres (27 per cent) were classified as noncommercial forest land supporting mostly hardwoods and chaparral. The remaining 133,000 acres include nonforest land and land used for grazing or agriculture. Most of the agricultural land is between 1,000 and 3,000 feet in elevation, used mainly for livestock grazing and fruit farming. Much of the region's important second- growth pine forest, including some 400,000 acres, is in scattered tracts inter- spersed with agricultural land in ranch and farm ownerships at these lower ele- vations. Above 3,000 feet, the general altitudinal limit of agriculture, there is a relatively unbroken cover of commercial forest, which ends at about 7,000 feet of altitude. [ii] Commercial forests in the region are composed of the following timber types: Acres Pine— Douglas-fir— fir . . 726,000 Pine 409,000 Fir 76,000 Lodgepole pine 37,000 Total 1,248,000 The two major types (pine, and pine — Douglas-fir — fir) and the relatively small area of the fir type include the major commercially utilized tree species: Million % Ponderosa Pine (In- bd ft eluding Jeffrey pine) 165.9 35.3 White fir 158.1 33.6 Douglas-fir 72.3 15.3 California red fir 8.2 1.7 Sugar pine 46.4 9.9 Incense cedar 19.6 4.2 Total 470.5 100.0 These species account for virtually all the output of forest products in the re- gion. Lodgepole pine, western white pine, mountain hemlock, digger pine, and hardwoods are of negligible importance. Commercial forest ownership in the region closely approximates that of Cali- fornia as a whole: half is privately owned, the balance is held by public agencies, mainly the U.S. Forest Service in the El Dorado and Tahoe National Forests (table 9). Small, private ownerships, how- ever, are relatively more important in the region than statewide: 33 per cent of the total commercial forest land is in ownerships of less than 5,000 acres, com- pared to about 20 per cent statewide. Analytical Concepts Used in the Study Several important analytical concepts are used in this report. Their meaning is ex- plained here in order to provide the reader with an understanding of the ana- lytical basis of the study and to avoid ambiguities arising from use of terms sub- ject to various interpretations. A more detailed treatment of these concepts is given by Bain (1960). Market structure is used here to refer to characteristics of a market which influ- ence market behavior and performance. Economic theory suggests that the fol- lowing structural characteristics are par- ticularly important: (a) the degree of buyer and seller concentration, described by the number-size distribution of buy- ers and sellers; (b) the degree of product differentiation; and (c) the condition of entry to the market, referring to the ease with which new sellers and/or buyers may enter the market. Other character- istics which may be influential in forestry markets are these: (d) relation between costs, scale, and vertical integration; (e) difficulty of grading and measuring the product; (f) importance of bulkiness of product and transfer costs in relation to value; (g) whether production process in- volves weight losses or gains; (h) ratio of overhead costs to variable costs; (i) dura- bility and divisibility of the product; (j) continuity and length of the production process; (k) regularity of purchase or sale. The term "market structure" is used in reference to both buyers and sellers con- sidered as a group in a market, while the term "industry structure" refers to a single group of buyers or a single group of sellers. Market conduct refers to the "... patterns of behavior which enterprises follow in adapting or adjusting to the markets in which they buy or sell." (Bain, 1959, page 9.) Important aspects of conduct include: (a) the practices and policies employed by sellers or buyers in determining mar- ket channels, prices, output, or purchases; (b) means of coordinating price and prod- uct policies among competing firms; (c) sales promotion policy; and (d) use of competitive tactics against other rivals or potential entrants. Market performance refers to the eco- nomic results of an industry. Some impor- tant measures of performance are: price- cost margins; efficiency of production; size of sales promotion costs; progressive- ness in developing techniques and prod- ucts; attainment of acceptable conserva- tion practices; and degree of stability. Economic results of an industry are re- lated to its structure and conduct. 12] The concept "workably competitive in- dustry" is used to describe an industry whose structure, conduct, performance is judged aceptable in the light of certain ideal standards. Normative analysis of an industry thus requires a performance standard against which one may compare observed performance. On the other hand, market structure analysis can be positive in its orientation, attempting only to obtain facts and establish relation- ship between observed structure, con- duct, and performance. The objectives of this study fall in this latter approach. For example, consider the question of eco- nomic stability. No ideal standard of sta- bility against which to compare the lum- ber processing industry has been estab- lished, so objective normative analysis is precluded. However, degree of stability among different groups of firms can be established using one group as a bench- mark; furthermore, an explanation of the differences observed can be sought in market structure and conduct. In this way, a characteristic of industrial per- formance is measured and related to mar- ket structure. The question of what is "ideal" is left as a separate issue. The relevant market must be defined in an empirical study if the concepts defined above are to be meaningfully applied. Both the product and spatial dimensions of a market can be defined by the concept of substitutability. A market includes all sellers whose products or supplies can be substituted in the minds of buyers, and all alternative buyers whose demands for the product can be substituted in the minds of sellers. Such a definition may be too broad for empirical use if groups of firms whose products differ technically are included (for example, lumber, ce- ment, glass, and wallboard). Thus a mar- ket is considered here as a group of firms which fall in the same industry and whose products or demands are substitutable. An industry is a group of firms whose products have similar technical charac- teristics. The timber growing-lumber processing industry is considered to sat- isfy this definition. A perfectly competitive industry is a model concept featuring many sellers (or buyers), homogenous product, free entry, and perfect knowledge. Some industries, lumber among them, are thought to re- semble the competitive model in essential aspects if not exactly. In such an industry, each firm is so small relative to the entire market in which it operates that the firm itself cannot influence price. The follow- ing conduct is predicted: each seller be- haves as a price-taker, i.e., he acts as if prices were given and not affected by de- cisions internal to the enterprise. Since no individual firm can affect the market con- ditions faced by another firm, all firms be- have independently as if in isolation. Since the firm can control profits only through decisions regarding production techniques and output (i.e., costs), there is no motive for establishing a pricing policy. Competition takes a form wherein firms pursue their objective of increasing profits by reducing costs of operation. The following industry performance is predicted in the long run: if resources are mobile, the numbers of firms, output of firms, and scale of firms adjust so that production costs are minimized, profits equal normal return on investment, sell- ing costs are not incurred, and products are consistent with consumer wants (see Scitovsky, 1951). Such a system can be viewed as a standard of economic effi- ciency; it is for this reason interest often centers on the degree of competition ex- isting in industries and the factors which increase or decrease competition. Different structural charactertistics of a market may lead to a different type of conduct and performance. Since timber markets are often thought to be charac- terized by few rather than many buyers, it is appropriate to consider the oligop- sonistic model. An oligopsonistic industry is one where there are so few buying firms that the amount purchased by each can affect market price. Each firm may then formu- late policies which recognize profits are affected both by its purchases and its of- fering price. Furthermore, the amounts which a firm can purchase at a given price are not independent of the pricing polices of competing firms. Thus price and purchasing policies of rival firms are interdependent. Depending upon the de- gree of concentration, degree of product [13] differentiation, and conditions of entry, any of the following patterns may be ex- pected: (1) open or tacit collusion, the firms acting collectively to agree on mar- ket prices and market shares; (2) imper- fect collusion, where some or all firms attempt to establish pricing policies col- lectively but where some firms act inde- pendently or break agreed policy; (3) independent pricing, each firm following a fixed price policy in order to avoid in- ducing competitive adjustments by rival firms which are not predictable with cer- tainty; (4) open rivalry in pricing, pos- sibly leading to recurrent price wars; and (5) price-leadership, where one firm de- termines an industry price which in turn is accepted by other firms in the industry. Market conduct may follow competitive or monopolistic patterns, and so may performance vary from competitive to monopolistic results. Theory offers alter- native hypotheses describing probable patterns of behavior, but the analyst must proceed carefully and systematically in testing hypothetical relationships against observed facts. Sources of Data Data describing the ownership and mar- keting practices of small forest owners were obtained from an earlier study by the author and were based on personal interviews with 160 owners of small-forest properties during 1958. Data on the num- ber of forest owners, land and forest own- ership, and location of owners were obtained from the same study. Procedures and original data are reported by Tee- guarden et al. (1960). Primary data describing initial proc- essors were obtained from personal field interviews during August and September, 1960. All processors operating during this period were included in the survey; in all, 25 plant operators provided information relating to equipment, ownership, output, purchasing practices, and marketing channels. From August through Septem- ber, 1961, monthly data on lumber pro- duction and shipments were obtained from nine firms. Additional background material was obtained from informal in- terviews with lumber wholesalers, re- manufacturers, and other persons con- nected with or interested in the forest product industries. Information on plant closures which occurred between 1956 and 1961 was obtained from personal interviews with operators during August and September, 1962. Plants which had closed during this period were identified using a confi- dential listing of mills operating in 1956, compiled by the Pacific Southwest Forest and Range Experiment Station, and by field checks in 1961. Western Pine Association reports were used to obtain data on Western Pine Re- gion lumber production, shipments, and price indexes. Secondary sources included California Division of Forestry reports of annual log production in California; U. S. Forest Service forestry survey reports of forest products output and number of plants; and various U. S. government sta- tistical reports on the lumber industry. [14] I. Demand Structure for Stumpage and Logs .During the period 1946 to 1960 approxi- mately 99 per cent of the raw round- wood ouput in the Central Sierra was utilized as sawlogs by lumber manufac- turers. This study is concerned with mar- ket relationships between processors and raw round wood suppliers, particularly small timber growers, and between proc- essors and wholesale lumber buyers. This section describes certain structural characteristics of the lumber processing industry that influence the industry's or- ganization, marketing practices, and sta- bility. Important features include: the degree of market concentration in buying roundwood for processing and in selling lumber; history and conditions of entry and exit; plant location; product charac- teristics; extent of vertical integration; scale of operations; and lumber marketing channels. Before discussing these struc- tural characteristics, certain national trends in the industry will be reviewed as background to understanding industry development in the Central Sierra. National Market and Industry Trends The structure of the Central Sierra lum- ber processing industry changed mark- edly from 1941 to 1961. These changes in turn reflect economic forces acting on the United States lumber industry gen- erally. National trends since 1905 in im- portant measures of industry experience are presented in figures 2-5. J L J I L 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 I960 Fig. 2. Lumber production and consumption in the United States, 1905-1962. (Sources: Steer, 1948: U.S.D.A. Forest Service, 1958, 1963.) Neither secular nor short-run stability have been experienced by the lumber in- dustry. National lumber production and consumption reached an all-time peak in 1906, but by 1932 had declined to about one-third the 1906 level. From 1932 to 1950, the trend was sharply upward, with production increasing to slightly less than three times the 1932 level. The period from 1950 to 1961 was relatively stable, marking the end to more than two decades of expansion. During the 1950's population increased 21 per cent and per capita income 18 per cent, yet output Fig. 3. Per-capita consump- tion of lumber in the United States, 1905-1962. (Source: U.S.D.A. Forest Service, 1963.) 600 S 400 h °- 300 - 200 _ L'\ m - '"•*'"'•. - • \ / *' \ - \y 1 — 1— — 1 1 1 1 1 1 J I 1 _L- • 1910 1915 1920 1925 1930 1935 1940 194 5 1950 1955 I960 [15] II CM CO r»« 01 00 CM to CO CO a. a> .a E 3 OH CO CO 3 **- tr> CM 8 00 = TT H^ «* to CM CO o to 05 CD CT> CO 00 O O 00 "- 1 O t/> B EI .a E CO to to 5* 00 a> O0 CO in to "3- CM a> 3 to" CO 0" z CM CO ^8 00 O OO OO CM CO CM a. a> E c to CO O") rH 00 £: CO CM CM at 3 CM to r>» to _j = ■0 s-° 00 r^ 0" CO to to 01 <_, 00 r^ in £§ er> 00 ,_,' O 00 c/> C _ra Ql cd to rt in ^, ■» in CM CM "1 •^ "* CM *3" to Z *r ■* r-- ^ o> CO ■a 00 ivl CO CM CO ""* CM Q. a> E C J _ J T^- r^. _ CM O C to to o» to to 3 CM to r"» «* = T3 S^= r^ «* to 00 ^ H CO in to CM CO O 00 «2 a. a> to >* ,— ■ CO CO .Q to in 00 E CM r^ * PH to 3 r-~ to" CO 2 CO TT r-» _ _ _ O •d « 1 10 r~- <* CO O CM CO CM O Q. a> E c .. to O 00 ** a to m O =3 O «J- — 1 = -a S^ 3 CD CO in 00 in CO o> ^ to 10 to CO ^8 00 05 «5 a. CD 00 IO _ in a> J3 CO r-. CO to E to CO 3 to" erf z «* in .^ CD TO *- c E in 1- = TO TO J= tn CM 15 ii o-> Ei iSE = .5 X, "^ a. CTJ .— « ■O ~H OO CM CD v —' E ^ 00 a> ^ > s 00 90 80 70 60 50 40 30 - 20 - • 1 1 1 1 1 1 1 1 1 1 1910 1915 1920 1925 1330 1935 1940 1945 1950 1955 I960 Fig. 4. Rea! price index of lumber, United States, 1905-1962. (Source: U. S. Dept. of Labor, Bureau of Labor Statistics.) averaged levels achieved from 1920 to 1930. Production and consumption re- mained almost constant from 1950 to 1956, then declined under pressures of two recessions. The 1961 production was 20 per cent less than in 1950. Per capita lumber consumption has persistently declined, except for the 1934 to 1944 period, from a peak of about 530 board feet in 1906 to 200 board feet in 1961. This reflects rising lumber prices; 50 » 40 ^-U.S Totol 1910 1915 1920 1925 1930 1935 1940 194 5 1950 1955 I960 Fig. 5. Softwood lumber production in the United States, the West, and California, 1905- 1962. (Source: See figure 2, also May, 1953.) increases in associated user costs; in- creased competition from newly devel- oped substitute materials like plywood, paperboard products, and new metal products; decline in number of farms; and increasing proportion of population living in urban areas. Per capita con- sumption continued to fall during the 1950's even though average prices re- mained about constant and even declined after 1955. Falling prices and consump- tion show that in recent years the lumber industry has been confronted with down- ward shifts in demand and pressures to reduce output. The short-run movements in produc- tion, consumption, and prices for the post-war period show four cyclical move- ments, the last two, 1957-1958 and 1960-1961, being the most pronounced. Generally, however, the industry has en- joyed relative stability compared to pre- war years. Figure 5 suggests how these cyclical changes affected California pro- ducers. Until 1956 industry-wide fluctua- tions only moderated expansion of output in California; after 1956, industry-wide cyclical movements were repeated in California. Partly as a result of these trends in lumber markets, the structure of the United States lumber industry has under- gone pronounced change since 1947 (table 1). The total number of producing units declined sharply from 53,109 in 1947 to 30,918 in 1960. This decline was entirely confined to small operations pro- ducing less than 10 million board feet annually; medium- and large-size opera- tions actually increased in number. As a result, units producing 10 million feet or more increased their share of total output from 37 per cent in 1947 to 55 per cent in 1960. Even so, the structure of the United States lumber industry is still highly atomistic. Except for relatively brief stable peri- ods, California producers have generally expanded their share of United States lumber output (figure 5). In 1910, Cali- fornia output amounted to 4 per cent of the United States total; in 1925 it was 6 per cent; by 1945, it had risen to 13 per cent; it rose steadily to 16 per cent in the period 1945 to 1950. Stable and subse- [17] Table 2. PRODUCTION AND NUMBER OF ACTIVE LUMBER PROCESSING PLANTS, CENTRAL SIERRA NEVADA REGION, 1940-48, 1951, 1956, 1959-61 Year Active sawmills Change from previous year Lumber production Change from previous year Average production per mill 1940 Number 27 31 31 41 56 73 136 118 115 77 51 30 25 19 Number +4 + 10 + 15 + 17 +63 -18 -3 -38 -26 -21 -5 -6 Thousand bd ft 142,229 153,835 142,563 154,829 175.578 188,294 326,539 332,713 305,890 346,116 376,099 364,811 No data 289,884 Thousand bd ft +11,606 -11,272 + 12,263 +20,749 + 12,716 + 138,245 6,174 -26,823 +40,226 +29,983 -11,288 -74,927 Thousand bd ft 5,268 1941 4,962 1942 4,598 1943 3,776 1944 3,136 1945 2,579 1946 2,401 1948 2,819 1949 2,659 1951 4,495 1956 7,374 1959 12,160 I960 1961 15,257 Sources: May, 1953, 1957; data for 1959-61 from survey and estimates by the author. quently falling prices in the decade of the 1950's checked the industry's rate of growth, but its share of national produc- tion still increased to an all-time peak of 20 per cent in 1959. The Central Sierra Nevada counties generally shared in the rapid growth of California's lumber industry during the postwar years (table 2). The statewide 81 per cent increase in output from 1945 to 1951 was matched by similar increases in the region, which maintained its share of state production at about 7 per cent. However, producers in the three counties increased their share of California pine region production over the same period from 9 to 12 per cent, and by 1961, to 16 per cent. Even so, they account for only a small fraction of total softwood lumber production in the United States — about 1 per cent (1961). For this reason, the level of output in the region has little or no effect on the general softwood lum- ber price level. Structure of the Lumber Processing Industry On the basis of sawlog shipment patterns and evidence obtained in this study, it appears reasonable to conclude that for the most part the relevant market for stumpage and logs in the Central Sierra on the buying side includes processing firms located in El Dorado, Placer, and Nevada counties. May (1957) reported sawlog shipments to four neighboring counties in 1956, but 87 per cent of the sawlog volume harvested was delivered to plants within the three-county area. Of 29 firms purchasing timber in the Central Sierra in 1960, all but four were located within the counties; the remaining four, located in Sacramento, Sutter, and Ama- dor counties, purchased only part of their requirements in the region. The analysis of industry structure presented in this sec- tion can be viewed, therefore, as a rele- vant approximation of market structure on the buying side of the roundwood market. Number and Size of Processing Plants Reflecting nationwide economic trends, the number, size and identity of lumber processing plants in the Central Sierra have been highly fluid. A detailed analy- sis of structural changes in the industry, and the factors underlying them, is pre- sented in chapter V. However, because current conditions are best understood in the context of historical change, a brief [18] description of trends in plant number, plant size, and concentration patterns is given here. Since 1940, the Central Sierra process- ing industry has gone through two peri- ods of adjustment (table 2). During the war the industry grew slowly in number of plants and output, because of wartime restrictions which affected lumber de- mand and availability of labor, fuels, and other materials. The explosive postwar expansion came in response to large in- creases in residential construction and lumber prices (figure 4). During 1945-46, 80 new plants were established, and out- put nearly doubled. In 1946, 136 plants were in operation, compared to 27 in 1940. But by 1961 the number of plants had decreased to 19. This loss of plants, however, was accompanied by output in- creases up to 1956, a peak year of lumber prices. After that, plant reductions were followed by a contraction of output; in 1961 production was at the lowest level since 1945. Fluctuation in plant numbers was ac- companied by changes in average size of operation (table 2). From 1940 to 1946, the period of net entry, average plant size halved; but from 1946 to 1961, it in- creased more than sixfold. The average plant in 1961 was three times larger than its counterpart 20 years previously. Such changes are explained both by growth of individual firms and by changes in the number-size distribution of firms due to entry and exit. It may be surmised from the decline in average plant size that entries during the 1940- 1946 period were small plants whose an- nual output was substantially less than 5 million feet. Other evidence confirms this. Data obtained on 113 firms, operating in 1946, show that 53 had entered the in- dustry either in 1945 or 1946; and of these 53 firms, 46 were very small opera- tions producing less than 1 million feet. Industry number-size structures for four census years covering the period of net exit (1946-61) are shown in table 3. Over this period, decline in plant numbers was entirely due to reductions in the two small-plant classifications. Very small plants completely disappeared, while small plants declined from 48 to 6. Mor- +* a> r- CO O o o o-> O -6 OO O o 03 a. a. as J3 oo to to O") E 3 _J S m o oo oo" LO CM | s *" to CD 03 o o <— 1 O ,_' cr> CO to to LO (/) at Cl. 1—1 CD CTJ a_ ai -Q to CO CT3 LO E •■H >— 1 CD 3 2 to" O") LO to O < — ' o o "=r ,3.' O TS co to O co o 03 a. " CO Q. < 1 o 43 OO ,_, lO 0-3 E 3 2 CO to o CO CT> LU oo t^ O I^J to — ' S Co" cr>* CO to CO a> ^^ CM CO 1— — ' r- 03 ^J- 1 O co Q_ «o *"" ' to CM 2 >- CT5 CO a. 03 ■z. X3 00 CM o E CO *"■ LO 3 C3 Z LU cc ^ < 03 to *3- Q <: CM to ■d LO «3- o 03 > Q. CL LU 2 5 -Q to CM 00 to =r cc CO LO h- 03 CO LO 1-1 ^ j2 a. LU o c TO a. Q3 LU ja to CO 00 :r: E CM «* r-» I— ^ 2: o 03 »s- ■-I LO O to LO 00 O ■d *=s- O o Q3 h- Q_ o =5 a. S Q -Q rH to CM o-> O E 3 ^ to o o *3- CO LO as CO Q_ to ~ ' ^ CM !^ 00" LO to CM on rt "— ' CO LU 00 ^ s c 03 CM CM to => O OO LO to -J 03 Cu LO CO oo c 2. _CD a. 03 -Q -O CD OO 03 to TO E CO 1— 3 2 Q> ^-s DO Qj CT3 ■*- o_ <->■£ >-i - 1 E «.2 ^ «-2 "J5 03 E = "o 11 >< 03 03 > -' oS >- Q_ E ^ > to [19] CD o 00 OO en O o ,—i r~ o LO OO o CD «— ' c CD o CD to OO o - ,_ CM LO o CD OO LO o LO a> CD Cl CO Cl - en LO 1-1 oo CO en z O c CD oo oo o o O CJ 00 oo CO c o LU LO CO o cc C a> Cl rt < CO a. Q < > LU o to o CO o z •"■' 1—1 CO Z < cc Cd en LO ** **■ CO LU o o LO en o co oo CM o GO c o 0) Cl 1 < "o q: -a 1— o o^ rt 00 en 2. LU Cl CQ 2 cc o LO 00 s o cv en oo en to" CM CO o r^ LU to 1—1 *"■ ' •— ' CO JC en h- '—> z _^ — CD OO to en o ^ O LT a r- LO o (0 O o CD CL 1— c: o Cl _o o o o oc I-H Ol CO 2 0O LO Q£ Q_ DC LU CO S co =5 a "=}-' a. _o *- -O ■o -Q TO 1— o E CO c O CD cr o E _a a! CM V) C ' en c o c CO Cl "5 E CO S tality among very small firms was es- pecially pronounced from 1946-1951, while that of small firms was centered in the 1956-1961 period. It may be noted that increases in medium and large-size plants was primarily due to the growth of some small plants rather than to actual entry of new firms. Plant exit during the postwar period in- creased output concentration in the indus- try and, by implication, the concentration of procurement in the area. The data in table 3, while not ideal for the purpose, indicate the broad trends: some 57 small, medium and large plants accounted for 93 per cent of industry output in 1946; by 1961, 13 medium and large plants ac- counted for 89 per cent. The large reduc- tion in very small plants had a negligible effect on output concentration trends be- cause of the small proportion of produc- tion represented by these plants. But de- creases in plants producing 1.0 to 9.0 million feet evidently resulted in increas- ing concentration in medium and large plants. Fig. 6. Concentration of lumber output among initial processing firms, Central Sierra Nevada Region, 1960. 20 100 / s* y /ArcoH- Auburn ^r ^r J yArea I ^r 1 ^r Plocerville ^r 80 7 / /™"' " o. '// 1 60 o E 40 u 20 o Fig. 7. Concentration of lumber output among initial processing firms in three procure- ment areas, Central Sierra Nevada Region, 1960. Data obtained from field surveys in this study permitted separation of medium and large firms for the years 1956, 1959, and 1961 (table 4). The three largest firms increased their share of output over the five-year period from 29 to 38 per cent. Twelve medium and large plants had 65 " per cent of industry output in 1956, com- pared to 89 per cent for 13 such firms in 1961. Both medium- and large-size opera- tions increased their share of output, while that of small operations declined. * Plant size in the region varies widely. The 1959 output of 25 firms operating there in 1960 ranged from 2.7 to 50 mil- lion board feet. Processing firms in the area tended to be larger, on the average, than is true of the United States lumber industry generally. For example, average output per plant in 1959-1961 in the region was 13.7 million board feet, com- pared to a 1960 average of about 1 million feet for the entire United States industry (tables 3 and 4). Also, there is a greater proportion of plants and output in the medium- and large-size class in the region than for the whole United States. Al- though plants tend to be large compared to the United States industry, there are no really large plants in the area producing up to 100 million feet annually as in some areas in the West. No single firm dominates the lumber processing industry of the Central Sierra. Concentration is moderate. In 1960, the largest firm accounted for 16 per cent of the 1959 output, the four largest firms about 44 per cent, and the eight largest firms 62 per cent. At the other extreme, the eight smallest firms accounted for slightly more than 10 per cent (figure 6). In 1961, the largest firm accounted for 15 per cent of total industry output, the four largest 46 per cent, and the eight largest 67 per cent. Procurement activities of processing firms in the region tend to fall into par- ticular areas corresponding closely to county boundaries (figure 8). Concentra- tion of output in these areas is higher than for the three-county region as a whole (figure 7). In the Placerville and Auburn procurement areas, one or two firms dominate, accounting for 60 per cent or more of lumber production. Concen- tration is least pronounced in the Grass Valley area where the largest two firms account for 42 per cent of lumber pro- duction. The number of plants in these several areas range from 5 to 12, the largest number being in the Grass Valley area. This would indicate some timber sellers have a wider selection of buyers than others. However, more significance is attached to region-wide concentration pattern than to specific areas. An additional four firms outside the three-county area purchase some portion of their timber supplies in it. Thus, the degree of concentration in procurement as reflected by output data is probably slightly less than described. Conditions of Entry The facts just presented suggest that entry into the processing industry, at least on small scale, is comparatively easy. Plant numbers have fluctuated rapidly from year to year, with new plants entering in response to profit opportunities. [21] Past experience indicates also that entry was relatively easier for small, non- integrated plants, which purchase most of their timber supplies from private grow- ers than for large- volume operations. Establishment of a small-volume plant to produce rough green lumber requires relatively little capital, timber supplied from private, nonindustrial lands quickly increased in response to demand, and labor was readily available. As a result, small plants entered and left the industry relatively rapidly depending on current profit conditions. In contrast, large- volume plants usually involve large fixed investments, much longer planned periods of operation, and infrequent entry or exit. Such plants are seldom established unless there is an assured long-term source of timber. Although open-market timber supply has been relatively responsive to price changes, uncertainties of supply over long-term periods have caused operators to prefer control of adequate timber through fee ownership of large forest areas. Acquisition of a large forest area is, however, no longer very feasible because most forest land is already in large, industrial holdings or in numerous, scattered, very small properties whose purchase and consolidation would be ex- tremely difficult. Postwar entries of new, large -volume operations involved acqui- sition of existing firms with large timber ownerships, rather than the establishment of additional operations. Such enterprises are established on the basis of long-term prospects for acceptable returns on capi- tal investments, rather than in response to current, possibly short-term profit oppor- tunities that generally motivate the entry of small plants. Plant Location The location of lumber processing plants reflects certain technical and economic factors typical of the lumber industry. Logs are bulky and expensive to trans- port: trucking may cost a third or a half of the delivered cost of logs. In addition, processing causes significant weight losses — a thousand board feet of dry lum- ber weighs less than one-third of an equivalent volume of freshly cut logs (Zivnuska, 1961, p. 86). As a result, [22 processing plants tend to locate close to sources of timber supplies. Thus, in 1960 all but four processors had plants in the region and obtained timber within about a 50-60 mile radius. Plants in the region are located in a relatively narrow north-south belt along its western boundary even though most timber is procured in the central and eastern portions (figures 1 and 8). This is because the area slopes upward toward the east, and log-hauling costs are lower if hauling is from east-to-west rather than opposite direction. Also all rail shipping points and important lumber markets are located at lower elevations. Considerations which in the past favored location of processing plants in mountain areas have more recently favored valley locations. These changes include: lower transportation costs be- cause of improved equipment and road- ing; cost savings of railhead shipping facilities; opportunities for fuller log utili- zation; and need for larger plant procure- ment areas. Growth of a market for wood pulp chips and higher stumpage and log costs have motivated some processors to seek greater revenue from wood inputs by horizontal expansion into wood chip pro- duction. This may also require expansion of the lumber production enterprise (to fully exploit size economies) and of the firm's procurement area. However, a plant in a mountain area is essentially restricted to obtaining wood supplies on the divide where it is located because of the high cost of log transport across the steep canyons separating divides. By locating in the valley, each of the major divides is accessible and timber can be procured over the entire region at less cost than from a mountain location. A larger procurement area will also reduce supply uncertainties by having more al- ternative sources. A further important consideration is that because of current production and transportation costs, as well as chip prices, chip production is economically feasible if the plant is on railhead. This also favors valley locations since there is only one line in the northern part of the region. Finally, railhead ship- ] ping facilities eliminate a loading-unload- ing sequence in transferring lumber by truck from the plant to rail shipping points. These several factors are inter- related, of course. Installation of a large- volume operation generally involves an integrated enterprise with a large supply area and access to railhead shipping facili- ties. Increasingly these requirements are better realized in valley areas. The impact of these developments on plant location in the Central Sierra Nevada Region has not yet caused any great change. In 1956 only 7 per cent of sawlog output was delivered to plants at valley locations. From 1956 to 1961 several firms closed plants and relocated in the valley. Previously, consolidation of two large timber holdings through pur- chase resulted in the closure of several plants in the central and eastern parts of the region. Timber processed by these plants is now hauled to plants located in the lower foothills. Processing has gener- ally shifted west to lower elevations, and in some cases to the valley, but the bulk "\ ..... County Boundary Distance to Plant Supply Area Boundary $ Large-Cut 25 million board feet, or more Medium-Cut between 10 and 25 million board feet • Small- Cut less than 10 million boord feet *%,.»»• Fig. 8. Timber procurement areas of 16 lumber processing plants, Central Sierra Nevada Region, 1960. [23 of the region's sawlog production is still processed within the area. The locations of most plants in the region reflect decisions based on past rather than on current conditions. Of the 25 plants operating in 1960, 18 were built before 1949; seven were built before 1945; and only six were built after 1955. The reasons for the specific location of these plants may no longer be overriding although the advantages of relocating do not offset fixed investment values. As these plants depreciate, opportunities favoring relocation will gradually offset the opportunity costs of moving the enter- prise. If current trends are any indication, plants will relocate at points where the advantages discussed can be gained. Spatial Assembly Patterns To investigate the spatial organization of timber procurement in the region, proc- essors were asked to map their timber supply areas as of 1960. Supply area boundaries represented the processor's es- timate of feasible hauling distance under then current conditions. Information de- scribing plant supply areas was obtained from 16 plants. Figure 8 shows the procurement areas for the 16 firms providing information. A primary feature of wood assembly is the pronounced extent to which plant pro- curement areas overlap. One obvious rea- son for this is the concentration of plants in areas around Placerville, Grass Valley, and Nevada City. Another reason is that processing plant raw product require- ments differ. One firm, for example, pur- chased primarily cedar for manufacture into pencil stock for export abroad. This species is not preferred by other proces- sors in the region. Some firms process pri- marily young-growth timber, particularly those specializing in manufacture of deck- ing lumber; others handle mostly old- growth timber. Variation in size of head saw results in differing log size require- ments. For example, plants with large band saws process primarily logs ranging from 30 to over 60 inches in diameter, while most small plants equipped with circular saws process logs less than 30 inches in diameter. One large firm ex- changes logs 30 inches in diameter or less for the large logs of a nearby plant han- dling only small logs. However, all other firms in the area attempt to purchase wood meeting their particular require- ments. Generally, small plants share their pro- curement areas with a greater number of rival firms than do large processors. For example, of ten small processors inter- viewed, none had fewer than three rival firms buying in their procurement area, and most had six or more. In contrast, none of the large firms had more than two rival firms actually buying timber in their procurement area. This difference is partly due to the greater concentration of small plants in specific areas, compared to the more isolated location of large firms; and also because large firms purchase tim- ber primarily from national forests or from large private owners while smaller firms are more dependent on small, non- industrial private forests (table 6). Processing Firm Characteristics Ownership and business organization. All 25 processing firms active in 1960 were single-plant enterprises. Twenty were in- dependent firms; and five were owned by corporations or individuals who operated other processing plants or related remanu- facturing or sales facilities elsewhere in the state. Each of these five firms was or- ganized as a separate company, but op- erating policies were formulated and cor- related jointly with related organizations. Since the five firms produced unfinished lumber products which were then sold to or through the related firm, this involved coordination of vertically related process- ing and marketing activities. One large, two medium, and two small firms were so organized. [24] Individual proprietorships and partner- ships in 1960, as shown in the text table below, were the predominant forms of business organization — 17 of the 25 firms. Size of plant Form of business Small Medium Large organization No. % No. % No. % Single owner. Partnership . . Corporation . Total . 3 23 1 11 . 6 46 7 78 . 4 31 1 11 .13 100 9 100 3 100 3 100 Of the eight incorporated firms, all but one were closely held by a few principals, not having stock listed in organized ex- changes. Of the three large-volume plants, two were independently controlled by in- dividuals and one by a larger parent com- pany with diversified forest products manufacturing and sales operations throughout California. Typically, small- and medium-volume firms were organized as partnerships, often by persons with family relationships. The greater fre- quency of incorporation among small plants in comparison to medium-size plants reflects instances where the plant is a unit of one or more other operations controlled by the same persons or indi- viduals. Age of firms. Most processing firms, 18 of the 25, entered the industry since 1944. As shown below, smaller plants tended to be organized more recently. Year firm was organized Size of plant Small Medium Large No. % No. No. % 1956-1960 . 1950-1955 . 1945-1949 . 1940-1944 . Before 1940 3 23 - 3 23 3 6 46 2 - — 2 1 8 2 34 - 22 1 22 - 22 2 33 67 Of the 13 small-volume firms only one was in operation before 1945 although there were about 50 such firms that year. Only one firm entered the industry with a large-volume operation since 1944 and it was established by a large, diversified for- est products manufacturing corporation which has been in business since 1910. Since many firms enter the industry by purchasing the plant of another firm, or because some firms have relocated their plants or built new ones, age of plants dif- fers from the age of firms. Shown here is the 1960 distribution of plants by size and the year the plant first began operations at the current site. Year plant began producing at present location Size of plant Small Medium Large No. % No. % No. % 1956-1960 . 1950-1955 . 1945-1949 . 1940-1944 . Before 1940 23 3 33 - — 53 2 22 2 67 8 4 45 1 33 Total 13 100 9 100 3 100 Eighteen of the 25 plants were built after 1944, with the newer installations generally being represented by small- volume operations. The next text table shows the 1960 dis- tribution of plants according to the year the plant last changed ownership. Size of plant lastchanged Small Medium Large ownership No. % No. % No. % Total 13 100 9 100 3 100 No Change . 1956-1960 . 1950-1955 . 1945-1949 . 1940-1944 . Before 1940 Total 5 38 5 56 1 33 3 24 1 11 - — 5 38 1 11 1 33 - — 2 22 - — - — - — 1 34 13 100 9 100 3 100 f 25 1 Fourteen of the 25 plants were trans- ferred to ownership by a different firm at least once. As the table suggests, large- volume firms tended to enter the industry via purchase of existing facilities to a greater extent than smaller operations. However, the transfers have been much less recent. Vertical integration in timber. The term vertical integration as used here refers to instances where two or more vertically related stages of production and/or dis- tribution are combined within a single firm through ownership. For example, a common form of vertical integration in the lumber industry is ownership within a single firm of forest land and processing facilities. Some firms, in addition to per- forming timber growing and processing activities, are integrated through owner- ship of retail lumber outlets. Vertical in- tegration is related to firm size; smaller firms generally are confined to a more nar- row range of vertically related functions or activities. Lumber manufacturers in the Central Sierra owned about 165 thousand acres of commercial forest land in 1960, 13 per cent of the total commercial forest area in the region, and 26 per cent of the pri- vately owned portion. Of 25 firms, only 12 were integrated with timber growing activities, and to greatly varying degrees: four had less than 5,000 acres, six had 5,000 to 49,999 acres, and one firm had more than 50,000 acres. As the text table below shows, the frequency and extent of forest ownership is related to plant size. Average area Firms with of forest Firms holdings holdings Size of plant No. No. Acres Small 13 2 1,272 Medium 9 7 5,410 Large 3 3 39,590 Of the large firms, two had forest lands exceeding 30,000 acres. Among the me- dium-size firms, forest ownerships ranged up to 11,000 acres, with four firms ex- ceeding 5,000. One small firm had hold- ings of more than 5,000 acres. As this sug- gests, forest and timber ownership by processors is concentrated in large firms. These firms, as shown in the two text tables on page 27, in 1960 had 72 per cent of the industrially owned commercial forest area and 86 per cent of the esti- mated timber volume on this area. Table 5. FREQUENCY OF VARIOUS TYPES OF LUMBER MANUFACTURING EQUIPMENT, BY PLANT SIZE, CENTRAL SIERRA NEVADA REGION, 1960 Frequency of equipment types by plant size class, million bd ft Equipment Small (1.0-9.9) Medium (10.0-24.9) Large (25.0 or more) Number of plants Per cent Number of plants Per cent Number of plants Per cent Band saw 3 10 9 13 12 1 12 3 4 3 23 77 69 100 92 8 92 23 31 23 5 4 6 9 9 2 1 9 8 4 5 56 45 r i 66 100 100 22 11 100 89 45 56 3 1 3 3 2 2 2 3 3 3 100 Circle saw Cant gang saw.. .. 33 100 Edger Trimmer 100 Hog 67 67 67 100 Chipper Burner Drying yard Dry kiln 100 100 Planing mill Number of plants 13 9 3 [26 Total commercial the frequency with which plants with dif- Plants forest area owned ferent volumes have various types of Size of plant No^ % A^ %~ e q ui P"J ent ' P rovides a , rou g h measure of vertical integration m lumber processing Small 13 52 14,000 8.5 in relation to plant size. Some 11 of 25 Medium 9 36 31,870 19.4 plants in 1960 were fully integrated proc- Large* 3 12 118,771 72.1 essing operations in the above sense. As — indicated, relatively few of these were Total 25 100 164,641 100.0 small-volume plants. A typical small plant was equipped with a circular headsaw, Volume of cant g an g saw , edger, and trimmer, so Plants timber owned that lumber of standard lengths, widths, rprp and thicknesses was produced. Only one r , . _, iVr? 11 a, small-volume plant did not have the nec- Size of plant No. % bd ft % egsary equi ^ to perform all stages of Small 13 52 200 7 manufacturing through a sized board, and Medium 9 36 189 7 it produced untrimmed lumber. However, Large 3 12 2,400 86 seven plants had no drying or planing — equipment and produced and marketed Total 25 100 2,789 100 only rough green lumber. Three addi- TZ T~j ^ ^^ ^ ^ i tional plants were unequipped with plan- * Includes acreage held by one timber . i i • r -w •. i_ . holding company which also operates a plant ™Z ^ dr y m § facilities on site but mar- in this size class. keted their output through related firms which performed additional processing. While most large firms have sufficient In comparison, half the medium-volume forest ownership to sustain plant require- and all large-volume plants were fully ments either indefinitely or for long-term integrated processing operations, produc- periods, most medium and small firms are ing dry, finished lumber, primarily dependent on open-market pur- Economies of size. Because output is in- chases. The forest land acquisitions of creased by operating additional hours per these firms primarily reflect instances day or by adding additional headsaws where it was necessary to purchase land and associated equipment rough green to obtain timber, or to purchase land and lumber manufacturing costs are relatively timber to liquidate timber over a specific constant over wide ranges of output. But period of time. as additional stages of manufacture are Vertical integration in processing. The included, economies of size become more several stages of production in lumber important. Band headsaws, technically re- processing, once the log has been deliv- lated trimmers and edgers, and planing ered to the plant, include converting the facilities require approximately a mini- log to sawn boards, dimension stock, or mum output of 60,000 board feet per day, timbers on the head saw; edging and trim- or 12 to 15 million feet annually, for erfi- ming; planing; drying, either by air or cient operation. 2 This is reflected in the kilns; and, in the case of pattern stock, plant characteristics in table 5. Of the 11 cutting, tongues, grooving, beveling, and fully integrated plants, nine had a dailv special surfacing. output or capacity exceeding 60,000 Though the terminal stage of manufac- board feet. At volumes of 5 to 6 mil- ture varies according to species and lion feet per year, more or less tvpical of grade, a completely integrated processing most small plants, operating efficiency plant capable of producing a finished line precludes installation of planing equip- of products consists of planing and sur- ment an perhaps dry kilns, required to facing facilities in addition to headsaws, produce finished lumber. Operators find trimmers, and edgers. Table 5, showing that costs are lower if finishing is con- 2 Based on information provided by Herbert Sampert, former manager of the Elk Lumber Company. [27] tracted to a planing mill, or their margins greater if they produce an sell rough lumber. Processing cost data in relation to out- put level and stage of manufacture in California lumber manufacturing plants are not available, nor was it within the scope of this study to quantify such rela- tionships. Several qualitative statements regarding economies and advantages of size may be made, however. Band saw, fully integrated, large-vol- ume processing plants realize lower costs of finished lumber production than cir- cular saw, unintegrated, small plants. Apart from their greater speed of opera- tion, band saw installations cut a smaller kerf and produce a more uniform surface than circular headsaws which, particu- larly when cutting large logs, tend to "flutter." To assure a standard thickness in a circular headsaw installation, thicker boards are sawn and subsequently planed to standard size; as a result a smaller por- tion of the log is utilized. Another cost advantage of the integrated processing plant is that it can avoid additional trans- fer and associated business costs involved in contract finishing of rough dry or rough green lumber. An unintegrated producer, on the other hand, must pay additional costs for the shipping, unloading, and loading after finishing of rough green lum- ber that is contract finished by a planing mill. Additional advantages of large-size op- erations are: opportunities for horizontal integration into wood pulp chip produc- tion; specialized personal and better man- agement; improved position for obtaining credit; and extension of operating season. One major advantage of a large-size, inte- grated operation is that it gains access to regular national wholesale lumber mar- kets, which are more competitive than the local market for unfinished lumber prod- ucts and more stable over the business cycle (see pages 46 and 69). Nature of product mix. Lumber process- ing plants are typically multiple-product firms, producing different species, sizes, grades, and types of lumber. This reflects the nature of local forests, the commodity, and industrial practice. Economies of har- vesting generally preclude cutting a single commercial species except in pure, nearly pure, or heavily stocked stands. There is no organized log market where buyers can purchase logs of the particular spe- cies, size, or grade they may prefer to process. Processors therefore handle all the species occurring in their supply area. The primary species of lumber pro- duced in the Central Sierra are ponderosa pine, white fir, and Douglas-fir. In 1956, these species accounted for 81 per cent of the region's lumber output. Boards and dimension lumber are the most important lumber products, although some timbers are cut to special order. About 65 to 75 per cent of the region's lumber production in 1959 was boards, and most of the balance dimension lumber. 3 Processed logs yield many different lumber grades, sizes, and widths. Western Pine Association weekly price lists show, for example, 121 items of ponderosa pine, including 34 grades, and 51 items of white fir, including 27 grades. Ponderosa pine generally goes into yard, factory, and shop uses. Moulding, select, and shop grades are utilized in factory and shop uses, and the common grades in yard uses. Box, and often lower common grades, go to box manufacturers. White fir, and Douglas-fir, because of their strength are utilized in structual uses, and also in sheathing, flooring, concrete form work, interior trim, and paneling. Product mix grade-wise varies depend- ing upon the proportion of young-growth to old-growth timber which is processed. In 1959, the log volume processed by ten small-volume plants in the Central Sierra was 63 per cent young growth. In con- trast, 85 per cent of the volume handled by large plants was old growth; for seven 3 The term "lumber" as commonly used refers to a group of products, not a single homogene- ous commodity. The 1943 Census of Lumber Production defined lumber as including the following: boards, planks, sawed ties, scantlings, framing materials, sawed timbers, flooring, and lumber for dimension stock. Lumber is also classified by softwood or hardwood types, stage of manufacture (dry or green, rough surface or planed), grade and size. Thus lumber includes a number of products which vary in their characteristics and end-uses. [23] medium-volume plants old growth con- stituted 69 per cent of the log input. Be- cause of the high proportion of young growth processed, the product mix of small-volume producers runs heavily to the lower value, common grades of lum- ber which are demanded for general con- struction purposes and which are pro- duced in greatest volume. Compared to old growth, young growth logs yield a high proportion of yard-type lumber in common grades. A 1952 study of lumber grade recovery from second-growth pon- derosa pine in Mariposa County showed 85 per cent of the lumber recovered was in the common grades, 10 per cent in the shop, and the balance in high-value clears, selects, and moulding grades (Ziv- nuska et at., 1957). In comparison, old- growth may yield 30 to 40 per cent in upper grades. Variation in product mix in the industry also exists with respect to stage of manu- facture, i.e., whether the product is dried or green, surfaced smooth or rough. The following text table compares the distribu- tion of output by stage of manufacture, and shows the greater importance of rough and/or green lumber in the small and medium-size plants: Stage of manufacture Size of plant Small Medium Large Lumber sold comparatively large volumes being sold rough dry. Some small-volume producers contract planing and drying of common and lower shop grades, particularly when lumber prices are "high" and the market outlook is good. At the time of the survey, lumber prices had declined to a five-year low, and several small-volume producers avoided contract finishing because it was uncertain that expected prices would pro- vide sufficient margins over the additional costs. They tended to regard contract finishing as speculative, to be attempted only when the outlook was good for rising or stable prices at levels which justified additional processing costs. Seasonality. Lumber processing plants are typically seasonal operations; the degree of seasonality increases with decreasing plant size: Months of operation in 1959 Number of Plants Small Medium Large 4-5 6-7 8-9 10-11 12 Total 2 1 5 3 2 13 2 3 1 3 2 8 3 Rough green .... 41 34 Rough dry 10 16 22 Surfaced green ... 8 4 11 Surfaced dry 41 46 67 Total 100 100 100 Differences in stage of manufacture primarily depend on differences in the de- gree to which the several plant-size groups are verticallv integrated in proc- essing. They also reflect differences in marketing practice and outlets. Two of the three large processors, for example, sold -at least 70 per cent of their lumber surfaced dry; the other, with important remanufacturing outlets through a related firm, sold 37 per cent surfaced dry, with [29 This variation in seasonal utilization of plants arises from log supply conditions and differing log inventory policies among firms. Purchase of stumpage and logs is highly concentrated in the period June through October when ground and weather conditions permit logging. Large and some medium-volume plants pur- chase more wood supplies than they cur- rently require, in amounts equivalent to forecasted off-season needs. For a large plant processing about 2.5 million feet per month, this may require an investment of 500,000 dollars or more. Generally, few small firms invest in log inventories; log purchases are largely financed through revenues from sale of current lumber pro- duction and are limited to requirements of the current operating season. Small firms have small capital resources and they are unwilling to assume the risks associated with such investments. Raw Roundwood Procurement Supply Sources, 1959 Lumber processors obtain wood sup- plies from their own lands, other private nonindustrial growers, and federally owned national forests. Purchases from the latter two sources may be either di- rect, involving stumpage, or indirect from logging contractors who purchase stumpage for cutting and subsequent re- sale of cut logs. All processors obtained part of their 1959 wood requirements from supply sources other than their own. Table 6 shows the relative importance of timber supply sources for small, medium, and large firms, including timber purchased indirectly from logging contractors. Small processors obtained a very small proportion of their wood supply from their own lands; they got much of it (42 per cent) from small, nonindustrial hold- ings. Normally, they got 60 per cent or more, but one firm, which usually bought all its requirements from small holdings, contracted timber from a public reservoir site then being cleared for flooding, and four other plants that normally filled their needs from small holdings, bought fire- damaged timber from national forest lands. National forests and large private growers came next in importance as sources for the small plants. Procurement practices of medium and large firms differ from those of small firms but here, too, salvage of fire-filled and reservoir-cut timber in 1959 tended to distort the "normal" picture. For medium plants, firm-operated timber lands were the most important single roundwood source, the balance (63 per cent) came from other private and public sources. Large private owners supplied an insig- nificant share. All large processors had large forest holdings, but received 77 per cent of their log supply from other sources. Na- tional forests were the most important sources — 37 per cent of the total. One firm obtained a large portion of its 1959 supply from a site being cleared for a water reservoir, a temporary source. Its general policy was to obtain about 75 per cent of its timber requirements from firm-operated lands, and 25 per cent from national forests. The procurement pattern for large processors described in table 6 below understates therefore the proportion of supplies usually obtained from national forests and plant-owned sources. An estimated 50-60 per cent of the timber processed by these large firms is normally obtained from firm-owned forest lands. For reasons discussed below, a small proportion of the timber purchased by large-processors originates from small, nonindustrial timber growers; supplies delivered from this source usually are Table 6. DISTRIBUTION OF STUMPAGE AND LOG SUPPLIES OBTAINED FROM VARIOUS SOURCES, BY PLANT SIZE CLASS, CENTRAL SIERRA NEVADA REGION, 1959 Supply sources Plant size class, Plant owned lands* Other private lands National forests Other publicf million bd ft Large (5,000 acres or more) Small (les? than 5,000 acres) Total Per cent of supply Small (1.0-9.9) Medium (10.0-24.9) 5 37 23 12 3 5 42 27 3 33 33 37 3 32 100 100 Large (25.0 or more) inn * Lands controlled by the firm operating the plant, t Municipal water reservoir site. [30] Table 7. PERCENTAGE DISTRIBUTION OF STUMPAGE AND LOG VOLUME DELIVERED TO EACH PLANT SIZE CLASS, BY SUPPLY SOURCE, CENTRAL SIERRA NEVADA REGION, 1959 Plant size class, million bd ft Supply source* Small (1.0-9.9) Medium (10.0-24.9) Large (25.0 or more) Total Per cent of volume delivered Large-size private ownerships (5,000 acres or more) 39 41 19 6 18 52 34 43 7 47 94 100 Small-size private ownerships (less than 5,000 acres) 100 National forests 100 Other public 100 * Omits lands controlled by an individual plant, though large private and small private lands could include lands controlled by a plant other than that cutting the timber. purchased by independent loggers who then sell cut logs to processors. Other large private holdings, except for proc- essor-owned lands, are generally not im- portant as a supply source of any plant group, because the area of commercial forest held in this size of holding is small — less than 8 per cent of the total. The proportion of volume delivered to each processor size-group from each ownership group is shown in table 7. Tables 6 and 7 together describe supply and demand sources in terms of relative quantities delivered or sold in 1959 from or to the several types of suppliers and processors. As shown, market outlets for timber from small holdings are primarily repre- sented by small- and medium-size proc- essors; in 1959, these processors received more than 90 percent of the timber orig- inating from small forest holdings. In contrast, market outlets for timber sold from national forests are represented pri- marily by large, and large medium-size processors, the former being the more important. Factors Affecting Procurement Practices Processor procurement of timber from nonowned sources is importantly influ- enced by economies of size, lumber mar- ket outlets, and certain market institu- tions. Minimizing procurement costs of large- volume processing operations requires purchasing from sellers who can con- tract the sale of relatively large volumes. In addition, such plants require old- growth timber because of the importance of established markets for upper grades of lumber manufactured from old-growth and because higher value grades allow greater opportunity to cover high fixed costs in large-capacity headsaws, planing, drying, and pattern making facilities. Sellers meeting these requirements in- clude a few large nonindustrial timber owners and the national forests. Thus large processors purchase little timber from small growers. These small growers sell primarily young-growth timber and can only supply small volumes peri- odically. One large processor stated that "dealing with small owners is more trouble than it is worth." Timber ob- tained from small growers is usually pur- chased indirectly from logging contrac- tors. Small-volume processors find it diffi- cult to purchase timber from national forests and large private growers for the same reasons which are advantageous to large firms. Because of small capacitv, large-volume purchases are difficult un- less timber cutting can be extended over more than the normal period of one to three years. At the same time, down pay- ment and bonding requirements may ex- ceed the financial limitations of a small [31] firm. Small processors often cannot meet minimum standards set by the Forest Service for working capital, construction, logging, transportation, and milling equip- ment to log, haul, and manufacture a minimum volume per month. Many opera- tors say they cannot offer to pay prices as high as larger producers. As a result, small processors normally purchase a small por- tion of their timber requirements from national forests or other sellers of large volumes of old-growth. These processors necessarily obtain the bulk of their re- quirements from small, nonindustrial growers, either by direct purchase or in- directly from logging contractors. The market interdependence of small processors and small growers arises from common limits of size. The small grower periodically sells relatively small volumes because of small size and low per-acre volume. The financial standards he re- quires of buyers, as well as other terms and conditions of sale, are seldom strin- gent, which suits the limitations and pref- erences of small processors. But procure- ment costs tend to increase rapidly with the volume handled, due to the low vol- ume of purchases per unit of supply area and the large number of sellers that must be dealt with. Both assembly costs and uncertainties of procurement tend to limit plant size. Thus the small timber seller finds his market outlets are pri- marily represented by the small and smaller medium-volume plants while the latter are dependent to a large degree on small, private growers. Independent Logging Contractors Lumber processors do not purchase all their timber directly from growers; some rely entirely or partly on independent log- ging contractors to supply the plant with log requirements. Most firms which pur- chase public timber buy direct, either log- ging the timber themselves or contracting to have it done by a logger. Of 14 firms which purchased public timber in 1959, all but one followed this practice. Direct purchase and logging of private timber by processors is much less important. Of 20 firms which purchased private timber, eight purchased 50 per cent or more di- rectly; the remaining firms purchased an equivalent proportion from independent contractors. A study of market outlets used by small private timber sellers in 68 separate sales showed that 52 per cent were made to independent logging con- tractors or log buyers and 48 per cent directly to initial processors (Teeguarden et al., 1960, p. 37). Independent logging contractors are therefore important market intermediaries. Independent logging contractors per- form assembly and logging functions; they purchase standing timber from land owners, log the timber, provide associ- ated services, and then resell sawlogs to initial processors. They are not engaged in lumber manufacture. The term "inde- pendent" implies that these operators formulate their purchasing and pricing policies independent of those of proces- sors, but frequently procurement func- tions may be conducted jointly. For ex- ample, the logger may arrange the terms of purchase but the processor finances the down payment by advancing payment for logs to be delivered, and pays the seller directly. Usually the processor provides scaling services, both the contractor and grower receiving payment based on his measure of volume delivered. Sometimes processors help the logger finance the purchase of equipment. In such cases there may be a kind of vertical integra- tion through either formal or informal arrangements between processor and logger. The logger prefers such arrange- ments because he is assured an outlet for logs at a price which he knows in ad- vance of contracting for the purchase of standing timber, and because he may re- ceive assistance in financing the transac- tion. Small-volume processors in particu- lar like these arrangements which avoid investments in logging equipment, the fixed costs of conducting logging opera- tions, and the day-to-day administrative requirements associated with such activi- ties. By avoiding integration in logging, they reduce management problems, capi- tal needs, and achieve greater flexibilitiy in planning their operations. The number of timber operations in the region varied considerably between [32] 1948 and 1961 according to the Califor- nia Division of Forestry: Number of operators by county Year El Dorado Placer Nevada Total 1948 74 29 45 148 1949 65 27 29 121 1950 58 27 58 143 1951 59 46 80 185 1952 84 42 62 188 1953 95 69 95 259 1954 112 76 114 302 1955 110 95 126 331 1956 108 82 126 316 1957 97 84 95 276 1958 77 54 86 217 1959 76 57 97 230 1960 62 56 91 209 1961 53 50 77 180 Although the number of processing plants declined, expansion of timber out- put favored rapid entry during the 1949- 1955 period. After that contraction re- versed this trend, and the number of operators declined through 1960. Independent contracting firms are characteristically of small size compared to most processing plants. Assuming all operators conducted logging activities, average production per operator in 1959 was about 2.5 million board feet. There is large variation; some operators are farm- ers or ranchers who produce only a few thousand feet a year as a side line; others are full-time specialists who produce 3 or 4 million feet a year. Lumber Markets Outlets Lumber sales in this study were classified as direct to consumer, yard wholesale, office wholesale, remanufacturer, and re- tail yard. Sales direct to consumer include lum- ber sold through processor-owned retail stores or direct to large builders and gov- ernment agencies. Yard wholesale outlets include local firms who assemble, grade, dress, and dry unfinished or rough green lumber, and who in addition engage in regular wholesale marketing activities. Remanufacturing outlets include planing mills not engaged in wholesale business, box-making plants, sash and door manu- facturers, lumber manufacturers who pur- chase lumber for finishing in their own plants, and other secondary wood product manufacturers. Office wholesale outlets are represented by firms which purchase lumber from processors for resale to re- tail firms or other users, but who do not take physical possession of the lumber or maintain stocks. Sales to retail yards in- clude direct processor to retail firm sales which bypass wholesale intermediaries. Only two processors in the region oper- ated retail stores, and both were small, local enterprises. In 1959, 97 per cent of lumber sales in the region were made at wholesale, although to different types of buyers. The text table below shows the relative importance of different sales out- lets by plant size. Since sales through processor-owned retail firms were unim- portant, such sales were classified as direct to consumers and combined with sales direct to builders and government agencies. Size of Plant Market outlet Small Medium Large Lumber sold Direct to consumers 9 5- Retail yard 7 Remanufacture .... 29 24 11 Yard wholesalers . . 46 17 11 Office wholesalers .9 54 78 Total 100 100 100 None of the 25 processing firms studied in 1960 were vertically integrated through wholesale marketing operations, although, as mentioned, two operated local retail stores. Three firms, however, were related by common ownership to parent organi- zations involved in wholesale activities and sold large volumes to the related wholesale firm. Large-volume processors utilize office wholesale outlets more extensively than do small processors. The latter sold 75 per cent of their lumber to local vard wholesalers and remanufacturers (prima- [33] Western and Western Southern Pine Pine Region Region U.S. Output Output Output % % % 1 largest firm .. 8 5 4 4 largest firms . .21 13 10 8 largest firms ..24 17 13 The buying side of the wholesale market has a highly competitive structure also. Entry into the wholesale function is relatively easy, and Bureau of Census estimates show that in 1956 there were more than 4,000 wholesale lumber dis- tributors. Mead (1960) reported the fol- lowing wholesale distribution concentra- tion ratios, based upon volume of lumber produced and/or snipped. Wholesale market shares, 1959 Calif., Ore., and Wash. U.S. rily box makers and other initial proces- sors), while large processor sales to these buyers was 22 per cent of their 1959 sales. Differences in market outlets arise from differences in vertical integration in product manufacture. Large, integrated processors produce a completely manu- factured product line, and thus have ac- cess to regular office wholesale outlets. Such firms may, however, fill large fre- quent orders of shop grade lumber from sash and door manufacturers. In contrast, small processors produce unfinished lum- ber, which runs heavily to common and box grades, and thus necessarily market their output to buyers who perform addi- tional manufacturing or to buyers who use unsurfaced lumber. Such buyers include local yard wholesalers or concentrators, other lumber manufacturers, and local box makers. Sales Concentration Processors in the Central Sierra who sell finished lumber products through office wholesale channels ship their products to customers in nearly all states east of the Mississippi River, to the Southwest, and to points in California and Nevada. Sup- plies of the kinds of lumber produced here are highly substitutable with those available in other parts of California, the Western Pine Region, and the Southern Pine region. The relevant market in which such processors are participants is effec- tively nationwide in scope. This market has a low degree of concentration on both the selling and buying sides (see also Mead, 1960). In 1961, the eight largest producers in the Western Pine Region, 4 Western and Southern Pine regions com- bined, 5 and the United States accounted for the following percentage of produc- tion (data from The Lumberman, April 1962, p. 55; May, 1962, p. 58): * The Western Pine Region includes Alaska, Arizona, California, Colorado, Idaho, Montana, Nevada, New Mexico, Oregon, Utah, Washington, and Wyoming. 5 The Southern Pine Region includes Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina, Oklahoma, South Carolina, Tennessee, Texas, Vir- ginia, and West Virginia. 3 largest western wholesale companies. 7.5 4 largest producer-sellers 13.5 Total, all 7 sellers 21.0 3.6 7.9 11.5 Processors manufacturing rough green or rough dry lumber, which needs addi- tional manufacturing, sell in a much smaller market area than processors handling a finished product line with ac- cess to a nationwide market. Sellers of unfinished lumber market their output within a 50-mile radius of the Central Sierra. As a result, there are far fewer alternative market outlets. In 1960, about eight firms purchased unfinished lumber in the region, mostly from small proces- sors. However, there are many alternative sources of unfinished lumber since these buying firms can obtain their require- ments from other producers in the region or in neighboring areas. [34] II. Supply Structure for Stumpage and Logs In the preceding section the relevant market for stumpage and logs in the Central Sierra on the buying side was considered as including processing firms in the surrounding three-county area. From the viewpoint of buyers, the rele- vant market may include supplies from an area larger than the Central Sierra. On the other hand, these supplies appear small compared to the amount procured in the region itself. Thus, for purposes of this study, the relevant market on the selling side is considered to include sellers in the area defined as the Central Sierra Nevada Region. This section discusses public timber holdings in the region; the structure of private forest ownership; the nature of small, non-industrial timber growers; and grower sawlog supply response during the period 1947-1961. Public Timber Holdings A survey of forest ownership in the Central Sierra Nevada Region was con- ducted in 1957 (Teeguarden et ah, 1960, pp. 23-39). These ownership data are the most recent available, and it is believed that the distribution of forest area be- tween public and private ownership has remained unchanged since that year. Public ownership of commercial forest land in 1957 included 599,000 acres, 48.1 per cent of the region's total commercial forest area (table 9). Some 583,000 acres of this area were in federal ownership in the Eldorado and Tahoe National forests. County and municipal commercial forest, most of which is in domestic-and irriga- tion-water districts, amounted to 11,000 acres. State holdings totaled 5,000 acres. Utility companies controlled 32,000 acres. Commercial forest land owned by utili- ties, county and municipal agencies, and the state included less than 4 per cent of the total commercial forest area in the region; the remaining 96 per cent was almost evenly distributed between federal and private ownership. Thus the balance of this chapter is concerned solely with federal and private forest ownership (ex- cluding utility companies). Timber supplies from federally man- aged national forests are of major impor- tance in the region, and have become more so in recent years (table 8). National forest sawlog output rose from an average of 85 million board feet in 1947-1948 to an average of 316 million in 1960-1961. This increase resulted in an increasing share of aggregate output; by 1960-1961, national forest sales average 69 per cent of total sawlog output, compared to 30 per cent in 1947-1948. National forest market share increased especially rapidly after 1955, partly due to a reduction in private sawlog output and partly due to increases in public sales. Table 8. OUTPUT OF SAWL0GS FROM PRIVATE SOURCES AND FROM THE ELDORADO AND TAHOE NATIONAL FORESTS, CENTRAL SIERRA NEVADA REGION, 1947-1961 Year Total sawlog output* Timber cut from the National Forests f Estimated private cut} Ratio of public to total cut Million bd ft j 1947 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 247.9 325.5 280.0 386.8 452.6 451.3 467.3 384.2 446.9 437.1 301.6 313.4 403.8 472.5 448.5 79.3 92.9 26.2 82.8 141.4 105.2 97.0 108.0 169.0 134.0 104.2 137.1 169.5 292.0 342.4 168.6 232.6 253.8 304.0 311.2 346.1 370.3 276.2 277.9 303.1 197.4 176.3 234.3 180.5 106.1 0.32 0.28 0.09 0.21 0.31 23 21 0.28 0.37 31 0.34 0.45 0.42 62 0.76 * California Division of Forestry, 1948-1961. t U. S. Forest Service reports, Regional office, San Fran- cisco, California. J Obtained by subtracting national forest cut from total sawlog output. Includes a small amount of county and municipal sawlog cut. [35 Structure of Private Commer- cial Forest Ownerships In 1957 privately owned commercial for- est land in the Central Sierra Nevada Region included an estimated 617,000 acres, about 49 per cent of the total forest area. This privately owned area was held by more than 5,000 persons or firms whose ownerships ranged in size from holdings of a few acres to industrial hold- ings exceeding 50,000 acres. Private commercial forest ownership in the region is characterized by a few large and medium holdings (exceeding 5,000 acres) and a great many small holdings (5,000 acres or less) (table 9). Concentra- tion of private forest ownership is low, as shown here (information from table 9): Private Ownership 2 largest holdings . 4 largest holdings . 7 largest holdings . 9 largest holdings . 24 largest holdings . Total Private commercial commercial forest forest ownership ownership % % . . 10.1 20.4 . . 13.3 26.9 . . 15.4 31.1 . . 16.0 32.4 . . 19.4 39.2 This study is primarily concerned with markets for timber from nonindustrial forest holdings of less than 5,000 acres. Because most ownerships in the less than 5,000 acres size-class are nonindustrial holdings, the data in table 9 provide a measure of small, nonindustrial forest ownership structure. It is characterized by a great many, very small holdings — about 5,000 — which, in 1957, averaged 85 acres in size. These small holdings, however, included about 33 per cent of the total commercial forest area and 67 per cent of the privately owned area. Annual data reporting sales of timber by different sizes of forest-owning persons or firms are not available, so it is impos- sible to measure directly sales concentra- tion in the private sector of the timber market. Based on data in table 8 and information provided by processors, the 1959 sawlog output in the region was esti- mated to be distributed about as follows: Table 9. COMMERCIAL FOREST LAND BY SIZE OF OWNERSHIP, CENTRAL SIERRA NEVADA REGION, 1957 Ownerships Total acreage Size of ownership, acres Number Per cent Thousand acres Per cent 1- 179 4,258 373 244 90 43 15 2 3 2 2 84.6 7.4 4.8 1.7 0.8 0.3 0.2 0.2 135 68 81 48 43 42 8 26 40 126 10 8 180- 379 5 4 380- 699 6 5 700- 1,299 3 8 1,300- 2,599 3 4 2,600- 4,999 3 4 5,000- 9,999 6 10, 000-19,999 2 1 20,000-29, 999 3 2 30, 000-49 ,999 50,000 and over 10 1 All private ownerships 5,032 100.0 617 583 16 32 1,248 49 3 Federal 46 8 Other public 1 3 Utilities 2 6 Total 5,032 100.0 100 Sources: Teeguarden et al., 1960, app. tables 11, 12; and unpublished survey data, School of Forestry, Univ. of California, Berkeley. [36] 1959 sawlog output National forests 42 Other public 11 Industrial forest holdings. . 22 Nonindustrial forest holdings Medium and large private 5 Small private 20 100 These estimates show that some 5,000 small growers were the source of 20 per cent of the 1959 sawlog output. Assuming all wood from industrial lands is harvested by controlling firms, small growers ac- counted for four-fifths of the private open market supply. Nature of Small, Nonindustrial Private Forest Ownerships Characteristics of the small, nonindustrial private growers in the area (less than 5,000 acres) are reported in greater detail in Teeguarden et at., 1960, especially ap- pendix tables 6, 7, and 8. As shown in the text table in the column on the right, nearly all of these owners are either timber-holding individuals, range-live- stock farmers, or "other classified owners." Timber-holding individuals are persons holding timber for future commercial operations, primarily for stumpage sale to contract loggers or initial processors. Few are principally employed or connected with the forest industries. Ownerships Land area Type of ownership No. % Acres (1,000) % Timber operating companies . Timber 9 0.1 15 2.3 holding companies . Timber 23 0.4 18 2.8 operating individuals . 18 0.3 4 0.6 Timber holding individuals . 577 9.5 146 22.8 Range- livestock- farming companies . Range- — — — — livestock- farming individuals . 607 10.1 200 31.2 Other farmers . . . 312 5.2 23 3.6 Recreational property owners .... 224 3.8 21 3.3 Other classified owners .... 4,288 70.5 213 33.3 Unknown . . 14 0.2 1 0.1 Total 6,071 100.0 641 100.0 Table 10. PERCENTAGE DISTRIBUTION OF SMALL FOREST OWNERSHIPS AND LAND AREA BY THREE TYPES OF OWNERSHIPS AND BY SIZE, CENTRAL SIERRA NEVADA REGION, 1957 Type of ownership Size of ownership, acres Timber holding individual Range-livestock farming individual Other classified Owners Area Owners Area Owners Area Per cent 0- 179 180- 379 380-1,299 1,300-4,999 57.2 23.3 16.8 2.6 19.9 23.3 34.2 23.2 51.4 19.8 24.4 4.4 13.0 15.5 42.0 29.5 93.9 3.1 2.6 0.3 52.6 13.1 26.3 8.0 Total 100.0 100.0 100.0 100.0 100.0 100.0 Source: Teeguarden et al., 1960, app. tables 6, 7. [37 "Other classified owners" include per- sons or firms holding land for residential or business purposes only, mining claims, persons holding idle land for future re- sale, and miscellaneous owners holding land for purposes not logically belonging to other categories. They dominate non- industrial forest ownership in numbers but, because of their very small size, in 1957 controlled only a third of the total area held in properties of less than 5,000 acres. Range-livestock farmers and timber holders, who comprised 20 per cent of the ownerships, held 54 per cent of the area (see text table above). This text table and table 10 indicate that range-livestock farmers and timber holders tend to have larger land and forest holdings than the miscellaneous group. Even so, compared to the size of enterprise commonly re- garded necessary for intensive timber management, most such enterprises are very small, averaging less than 300 acres in size. Typically, small private forest owners do not live on the property. Many live outside the Central Sierra region, some even outside California. As shown in table 11, the large group of "other classified" owners tend to be absentees, while range- livestock farmers more frequently are resi- dents within the region. Because a resi- dent in table 1 1 is defined as a person who lives in the region, not necessarily on the property, it actually understates the ex- tent of absenteeism. Table 12 shows the distribution of 160 owners identified ac- cording to whether they lived on their property or elsewhere. The table shows only 17 per cent of commercial forest acreage was held by owners living on their property. Size and type of small nonindustrial forest holdings suggest that timber grow- ing is a secondary activity and, corre- spondingly, that owners seldom are specialists in forest management. Since type of ownership may not accurately re- flect the actual present use of forest land, the text table below, based on land use characteristics in 1958 of 160 ownerships with 29,000 acres of commerical forest area, is perhaps more suggestive of the importance of forestry activities. Table 11. DISTRIBUTION OF SELECTED TYPES OF PRIVATE LAND OWNERSHIPS BY LOCATION OF OWNER, CENTRAL SIERRA NEVADA REGION, 1957 Type ol ownership Location of owner Timber holding individual Range-livestocking farmer Other classified owners Total Number Per cent Number Percent Number Per cent Number Per cent Resident* 297 272 9 51 47 2 388 212 8 64 35 1 2,806 1,483 65 35 3,491 1,961 18 64 Nonresident!. 36 Unknown Total 578 100 608 100 4,289 100 5,470 100 Nonresidents Central Valley 101 82 27 37 25 119 42 49 2 510 574 140 145 114 730 698 167 231 141 San Francisco Bay Region Other Northern California Southern California Outside California Total 272 212 1,483 1,961 * Address listed with the county assessor's office within the regional study area. t Address listed with the county assessor's office outside the regional study area. Source: Teeguarden et al., 1960, app. table 8. [38] Table 12. DISTRIBUTION OF 160 SMALL FOREST OWNERSHIPS, BY RESIDENCE OF OWNER, CENTRAL SIERRA NEVADA REGION, 1958 Ownerships Land area Commercial forest Residence Number Per cent Thousand Acres Per cent Thousand Acres Per cent Resident on property 62 33 65 39 21 40 16 17 24 28 30 42 5 11 13 17 Nonresident but in study area. . Nonresident outside study area. 37 46 Total 160 100 57 100 39 100 Source: Based on field interviews in 1958. See Teeguarden et al., 1960, for survey procedure. Distribution of Primary land use commercial forest area % Ranching 32 Timber production 9 Recreation 8 Residential 8 Multiple use and other 36 Idle 7 100 Source: Based on field interviews in 1958; Teeguarden et al., 1960, for survey method. The multiple-use category includes in- stances where a combination of activities were currently integrated on the same property, though not necessarily on the same land unit. Ranching and timber pro- duction are commonly combined and some owners use their land for recrea- tional purposes as well as for timber pro- duction. Although a relatively small proportion of commercial forest was pri- marily used for timber operations, such use may often be an occasional secondary activity. Many owners who did not indi- cate that timber operations were of cur- rent importance, expected to engage in such such activity at various times in the future. It was estimated that on perhaps 80 per cent of the area, timber harvesting activities were likely to be engaged in at intervals. Owners, however, devote little time to these activities and perform few of the functions normally involved with harvest- ing and marketing operations. Table 13 shows the occupational characteristics of 160 owners interviewed in 1958. Ranchers farmers, and timber operators, who were employed full time in managing the en- tire land enterprise, included one-fourth of the owners and had 38 per cent of the commercial forest area. The remaining owners, with the exception of the retired, were employed in other occupations, prin- cipally business and a variety of clerical and industrial occupations. Because small owners lack specializa- tion and are limited in size, their produc- tion and marketing functions are largely restricted to holding land and timber, and to business aspects of arranging timber sales. Timber is sold on the stump, rather than in log form at roadside or delivered to the processing plant. Logging, trans- portation of logs, product measurement, and frequently choice of the timber cut, are performed by the buyer. The small timber grower is an infre- quent market participant. Of 160 sellers interviewed in 1958, 55 or approximatelv a third had not marketed timber over the period 1953 to 1958. Of those who had sold timber, four-fifths sold only once dur- ing the five-year period. In summary, a typical small, nonindus- trial timber growing-selling "enterprise" is very small, with an unspecialized, fre- quently absentee manager. Timber sales are periodic and usually infrequent. Mar- keting is of secondary managerial interest, except possibly when timber is to be sold. The primary marketing functions per- formed include making the decision to sell or not sell and making the necessary business arrangements incidental to ownership transfer. [39 Table 13. DISTRIBUTION OF 160 SMALL FOREST OWNERSHIPS BY OCCUPATION OF OWNER, CENTRAL SIERRA NEVADA REGION, 1958 Occupation Range-livestock farmer. . . Other farmer Timber operator or holder. Operator of other business Professional White-collar worker Skilled wage earner Unskilled wage earner.... Housewife Retired Other Unknown Total Holdings Number 24 10 4 32 8 6 11 11 9 16 4 25 160 Per cent 100.0 Total land area Thousand acres 57 Per cent 38.6 5.3 3.5 19.3 3.5 7.0 1.7 3.5 100.0 Commercial forest land Thousand acres 29 Per cent 27.5 3.4 7.0 20.7 3.4 7.0 13.8 13.8 3.4 100.0 * Less than 500 acres. Source: Based on field interviews in 1958. See Teeguarden et al., 1960, for survey method. Grower Sawlog Supply Sawlog output in the Central Sierra Nevada Region ranged from 247 to 472 million board feet during the 1947 to 1961 period. Output generally increased from 1947 to 1955, then declined through the recession years of 1957-1958. Low prices in 1960 an 1961 doubtless would have resulted in further reductions in out- put but due to salvage logging following several major forest fires, output during this period actually increased to a post- war high (table 8). Sawlog output during the postwar period varied from year to year on the average by 16 per cent, and in some years by more than 25 per cent. These year-to- year fluctuations correspond closely to changes in lumber prices in the West and United States and to nationwide changes in lumber production. Thus output varia- tion in the Central Sierra apparently was primarily related to factors affecting the demand for lumber rather than to supply conditions within the region itself. The magnitude of variation in sawlog output in the Central Sierra suggests a further hypothesis that output was relatively flexible with respect to price changes. To quantify a relationship between prices and sawlog output, data covering the period 1948 to 1959 were analyzed using statistical multiple regression pro- cedures. In the statistical models em- ployed, prices were treated as indepen- dent, exogenous variables and sawlog output as dependent on price levels. The basis for this approach lies in the fact that lumber output in the Central Sierra is such a small fraction (less than 1 per cent) of output in the Western Pine Region that producers can sell any amount at the prevailing market prices, i.e., the demand for lumber of any species in the region is "perfectly elastic" at market price. Output in the region can then be considered as being dependent on lumber price levels and factors affecting the cost of supply. The latter was presumed relatively stable during the period while demand — equivalent to the market prices in this case — fluctuated, thus generating differ- ent sawlog outputs. Sawlog output (all species), public, pri- vate, and total, was related to ponderosa pine and white fir lumber prices. These two species account for 70 per cent of the timber output in the region. Lumber prices were used because sawlog prices are not available for the Central Sierra. However, sawlog prices follow lumber prices closely over time. Western Pine Association f.o.b. mill price indexes, de- flated with the U. S. Department of Labor all-commodity wholesale price index, [40] were used as measures of relative price levels. Data used in the analysis are shown in appendix table A-l. Data for 1947 were eliminated to avoid influences from the ending of World War II; be- cause of unusual salvage operations in the Central Sierra in 1960 and 1961, data for these years were also eliminated. Regression analysis of these data showed, for the private sector, a high de- gree of correlation between sawlog out- put and prices. About 72 per cent of the variation in private sawlog output in the region during 1948-1959 was associated with price changes, the effect of pon- derosa pine price changes being especially important. The statistical equation re- lating output to price showed that on the average a one-dollar change in ponderosa pine price was associated with an output change in the same direction of about 6.3 million board feet. 6 For white fir, a one dollar change in price was associated with an output change in the same direction of 4.7 million board feet. Analysis of data for the public sector did not yield significant nor meaningful results. Evidently variation in public sawlog output was related to a more com- plex set of factors than were identified in this study — pine and fir prices and trend. Total (public and private) sawlog out- put in the Central Sierra was also highly correlated with price movements. Analy- sis showed about 90 per cent of the varia- tion in output of sawlogs during 1948- 1959 was associated with changes in the price of ponderosa and white fir lumber. As for the private sector, ponderosa pine price changes were especially important compared to white fir. On the average a one-dollar change in ponderosa pine price was associated with an output change in the same direction of about 12.5 million board feet. 7 A one-dollar change in white fir price was associated with an output change of 4.7 million feet. It should be stressed that the price- quantity relationships established above are not in any way comparable to the supply curve of economic theory. The latter refers to a price-output schedule for a specific commodity under certain specified conditions of technology, wages, and other input costs. In contrast, the statistical analysis presented here seeks only to explain variations in total output of five species of sawlogs in terms of variation in factors believed to have had a significant influence on output levels. To measure the relative flexibility of total sawlog output in the region with respect to price changes, the statistical equation relating total output to prices was used to derive coefficients of price elasticity. Price elasticity equals the per- centage change in quantity divided by the corresponding percentage change in price; it is a measure of the degree of flexibility in output at a point in response to price change. If this ratio is greater than 1, output may be said to be flexible or "elastic"; if less than 1, "inelastic." The coefficient of price elasticity of output in relation to average ponderosa pine price was 1.8, indicating a 10 per cent increase in price of ponderosa pine lumber at average price levels was associ- ated with a 18 per cent increase in output. This ratio increases with lower pine prices, and decreases with higher prices. For white fir, the coefficient at average price levels was 0.6. 6 The following regression equation was obtained: Q = -488.171 + 6.299P 2 + 4.711P 3 (2.615) (1.734) R 2 = 0.717; n - 12; figures in parentheses are t-ratios. Equation was fitted to data in appen- dix table 1 . Q = total sawlog output, million board feet, in El Dorado, Placer, and Nevada counties. P 2 = ponderosa pine lumber price index. P 3 = white fir lumber price index. 7 The following regression equation was obtained: Q = -577.241 + 9.314P 2 + 4.221P 3 (5.514) (2.215) R 2 = 0.896; n = 12; figures in parentheses are t-ratios. Equation was fitted to data in appen- dix table 1. Notation is given in footnote 6. [41] In summary, statistical evidence tends to support the hypothesis that fluctuations in aggregate sawlog output in the Central Sierra during the period 1948-1959 were primarily associated with changes in de- mand as expressed in changes in the price of ponderosa pine and white fir lumber. Variation in these price factors accounts for most of the annual variation in total output and private output. This does not mean other factors were not influential — as indeed they apparently are in the public sector — but over the period as a whole pine and fir prices were of major importance. It appears also that output in the region tended, on the average, to be flexible or elastic with respect to price movement. Knowledge of the quantitative relation- ship between sawlog output and price contributes to our understanding of other aspects of this study. Subsequently we discuss pricing practices in the procure- ment of raw roundwood, and it should be borne in mind that a price-elastic timber supply — such as has apparently existed in the Central Sierra in recent years — is more conducive to competitive relation- ships between buying firms in oligopson- istic markets than an inelastic supply. A flexible timber supply situation doubtless explains in part how new, nontimber own- ing firms enter, survive, and grow in the processing stages of the industry. Finally, from the standpoint of industrial stability in wood markets, since supply is price- elastic, we would expect adjustments to cyclically varying demand to be ex- pressed proportionately more through changes in output than in price. [42] III. Market Conduct: Buyer-Seller Relationships in Lumber Marketing J. his section discusses selling and pric- ing practices used by initial processors in marketing lumber. The factors affecting these practices reflect characteristics of industry structure. Before examining the pricing policies of processors in selling markets, it will be helpful to describe the common selling practices and some of the peculiar interfirm relationships. Processor Lumber Marketing » Practices Lumber producers in the Central Sierra Nevada sell the bulk of their output to office wholesalers, who function as mar- ket intermediaries between the manufac- turers and retail lumber firms, govern- ment agencies, and industrial buyers; to local lumber concentrators, including yard wholesalers, planing mills, and other initial processors; and direct to industrial users, primarily box manufacturers lo- cated in California. The relative impor- tance of these several outlets, as discussed in the previous chapter, is related to firm size and extent of manufacturing. Proces- sors who are integrated through all stages of manufacture sell most of their output directly to office wholesalers; processors producing unfinished lumber sell pri- marily to local concentrators and/or to box manufacturers. This section discusses the common industry practices used in arranging lumber sales to these several l \ important market outlets. Wholesale Practices Terms of sale. Lumber manufacturers who sell directly to office wholesale out- lets usually follow standard Western Pine v Association terms and conditions of sale and market lumber under association standard grades and sizes. Buyer and seller may make any mu- tually acceptable agreement, but in its absence association terms and conditions apply. The items commonly included are I terms of delivery, payment, claims, rein- spection of shipments, delay, and can- cellation. Sales may be made f.o.b. mill, f.a.s., or delivered with the price including cost of delivery. If prices include cost of de- livery, sales are made f.o.b. car, mill basis, plus estimated freight to destination, the actual freight to be paid by the buyer. Freight charges are based on published rates and association schedules of esti- mated weight for different species, grades, and thicknesses. The buyer always pays a freight charge based on standard asso- ciation weights. But if the shipment is underweight relative to the standard, the difference in freight charges is paid to the mill. For this reason, processors may pre- fer to sell on a delivered basis rather than f.o.b. mill. In practice, the railroad or trucker bills the buyer for freight charges based on actual weight. If the shipment is underweight, the buyer pays the ship- per for actual weight charges and the mill for the difference. However, the buyer never pays more than the standard weights require — if the shipment is over- weight, the mill pays the additional freight charge. Federal or state taxes on freight charges are paid by the buyer. If the sale is "direct to trade," i.e., a wholesaler or commission man is not in- volved, the terms of payment are cash, less 2 per cent of the invoice amount (after deducting actual freight charge) if mailed within a certain number of days after arrival of the shipment. According to association terms, the period within which a discount is allowed is five days, but all the processors studied allowed at least 10 days and in one case 15 days. After this time, the full amount of the invoice is payable within 30 to 60 days after date of the invoice. Sales to wholesale outlets are based on the same terms: a 2 per cent discount is allowed if payment is made within 10 or 15 days after date of invoicing, and die entire amount is due within 30 to 60 days. In addition, a 5 per cent commission is given the wholesaler. One large processor [43 allowed 3 to 5 per cent commissions de- pending on the species, lower percentage commissions being given for the high value species. A sale unit usually involves a truck and trailer load, or in the case of shipments to eastern buyers, a railroad car lot. Pur- chase orders and invoices list species, grades, widths, thicknesses, and often the acceptable proportion of different lengths. Grade and other specifications are accord- ing to Western Pine Association rules, unless buyer and seller agree to different terms. Processor-wholesaler relationships. Proc- essors who market finished lumber di- rectly through office wholesale firms gen- erally operate under two different policies regarding relationships with the whole- saler. Sixteen of 22 firms interviewed marketed their output in one of the fol- lowing ways. The first way is to sell to a wholesale clientele comprised of several or many firms strictly on an individual order basis. The processor-wholesaler relationship only involves negotiation of sale terms on individual orders and exchange of market information. Although the proc- essor may deal regularly with the same group of wholesalers, there are no con- tractual ties. This marketing policy is used by large-volume producers, and some medium and small-volume firms, who are not tied by common ownership to verti- cally related marketing or remanufactur- ing firms. A second method, used by some small and medium-volume producers, is to sell all output through a single wholesaler rather than to engage in market-wide sell- ing. The processor then avoids certain sales and administrative costs and realizes other advantages of stable customer re- lationships. The wholesaler finds advan- tages in specializing in the purchase and sale of the output of a few plants whose production schedule, inventories, and product characteristics are well known to him. Competitive pressures from retail lumber buyers have motivated some wholesalers to seek this type of arrange- ment with lumber producers. Direct pur- chase from the mill by retail firms is often feasible in California because producers are near to consumer markets. Both the mills and retail buyers can benefit from direct sale by eliminating the wholesale margin. By contracting to act as the wholesale representative of the mill, a wholesale organization can protect itself from direct purchase competition. In cases where all sales are contracted through a single wholesaler, a kind of integrated relationship may exist in the conduct of certain decision-making and financing functions. One wholesaler inter- viewed sells each mill's output at market price in exchange for a 5 per cent com- mission. The processors are informed by the wholesaler of market trends and ad- vised on the kinds of lumber they should be producing. The wholesaler may ad- vance cash on unsold lumber inventories if processors require funds to meet ac- counts payable on a weekly or bi-monthly basis. Stumpage purchased from the Forest Service or other sellers, for ex- ample, must be paid for each week al- though the lumber may not be sold for 90 days or more. The processor, in ar- ranging this credit with the wholesaler, is able to obtain a source of working capital without using bank credit sources. Marketing decisions in such relation- ships are the final responsibility of the processor, but in the day-to-day conduct of business the wholesaler may partici- pate to such an extent that they become joint decisions. For example, the proces- sor and wholesaler may establish a mill price list based on information from cur- rent sales, contacts with their buyers, price-reporting services, the processor's inventories and production schedules, and their expectations of future prices. The wholesaler may then enter price agree- ments without consulting the processor on every transaction, using the price list as a framework of agreed limits on his independent action. Another type of processor-wholesaler relationship exists where the processing plant, though an independent firm, has an organizational relationship with an- other vertically related firm controlled by the same principals. Five such plants were included in the study: one large- volume plant, three medium-volume plants, and one small plant. These plants [44] ship rough green or rough dry lumber to the related firm, which dries and surfaces the lumber and provides regular whole- sale marketing services. The selling firm is paid the wholesale market price, less additional processing costs and the cus- tomary wholesale discounts. In all cases, the buying firm handles selling price de- cisions. The selling firm is essentially a producing organization, the buying firm a marketing organization; their activities are integrated in fact if not in formal legal terms. In two cases these arrange- ments evolved between firms originally independent but whose owners subse- quently acquired joint interests in each other's enterprises in order to obtain the advantages of integrated operations. One large plant was a vertical extension of a large wholesale firm which also engaged in box and other types of forest products manufacturing. Two medium-volume plants were also vertical extensions of remanufacturing and wholesale firms. Marketing Practices of Unfinished Lumber Producers Generally the producer of unfinished lumber must choose between two alter- natives: to sell lumber to concentrators, including yard wholesalers, planing mills or other processors; or to contract drying and finishing before selling to regular wholesale outlets. Seven processors em- ploying both practices were interviewed; all were small-volume operations pur- chasing most of their timber from small timber owners. Processors who sell unfinished lumber to concentrators usually contract the sale of their entire output to one buyer in early spring of each operating season. Price is determined by negotiated agree- ment and remains fixed through the sea- son, unless market conditions change to such an extent that price is renegotiated. The processor ships daily, holding no in- ventories. Sale may be on a mill run or a grade basis, but all plants studied were selling lumber by grades. However, grad- ing practice is considerably simplified compared to regular Western Pine Asso- ciation grading procedures. Rough green pine usually is sold in 7/4-inch thickness in three broad grade groups: moulding and better, shops, and common. Similar groupings may be used for white fir. Though the lumber is shipped in 7/4-inch thicknesses, payment is usually on a 6/4- inch basis. The 1/4-inch difference is allowance for assumed losses in remanu- facturing, and provides insurance that the buyer can manufacture a standard board of 6/4- or 3/4-inch thickness. The buyer normally pays the processor once .each week, taking a 2 per cent cash dis- count as in wholesale transactions. Price may be f.o.b. mill, or delivered, depend- ing on whether the processor can provide trucking services. Grading and measure- ment is performed by the buyer and pay- ment based on his invoice. Because the lumber is neither sold according to asso- ciation rules nor by an association mem- ber, disputes over grading or tally are not subject to association reinspection and arbitration. Adjustments are at the discretion of the buyer. Some small-volume processors sell box lumber to box-making firms under similar arrangements but contract the finishing of other lumber grades for subsequent sale through regular wholesale outlets. Two processors indicated that the firm purchasing their box lumber also pro- vided secondary processing services, dry- ing and planing other grades, and in addi- tion performing regular wholesale func- tions for the mill. The buying firm charged for the remanufacturing, took a 2 per cent cash discount if payment was made in 10 days after sale of finished lumber, and received the normal 5 per cent wholesale commission. Agreements regarding volume and price of box lum- ber were made at the beginning of the season. Lumber sold at wholesale was priced by the buyer, usually without prior consultation with the processor. How- ever, in one case, if the amount sold was large, the processor was consulted. The relationship between the processor and buyer thus involves informal integration of production and marketing activities. The processor is primarily engaged in timber procurement and sawing logs into rough, green lumber; his primary deci- sion is to produce or not to produce under [45] prevailing processing costs and lumber price conditions. Finishing, grading, measurement, and marketing of the final product is handled by the buyer. Factors Affecting Marketing Practices Factors that account for differing mar- keting practices in the lumber processing industry appear to fall into two cate- gories: those associated with the charac- teristics of the firm, its size and product line; and those related to market struc- ture. Large and medium-volume producers with an output of 15 million board feet or more normally produce a completely finished line of lumber. Such producers not only have access to regular wholesale outlets but also can maintain a sales or- ganization for dealing with a relatively large number of wholesale buyers. The wholesale distribution industry itself is comprised of some 4,000 firms. Thus processors who can sell directly to regular wholesale outlets face a market structure of many buyers, and there is no strategic motive to deal with only one. In fact, with a large sales volume, it may be necessary to deal with a large number. Most important, a producer of finished lumber who has access to wholesale out- lets can decide between two alternatives: he can maintain a sales organization and numerous wholesale accounts or can rely on a single wholesaler under an arrange- ment in which the wholesaler may take over some of the firm's marketing func- tions. The decision does not involve any consideration of market structure since there is a large number of buyers with which the producer can do business. In contrast, there appear to be impor- tant reasons for smaller-volume firms pro- ducing an unfinished product to, in effect, integrate their operations through non- ownership arrangements with those of a buyer who can provide necessary remanu- facturing and/or marketing services, or to contract all output to single buyer on a direct-sale basis. Because the product must be further manufactured before entering regular wholesale channels, the processor's market is essentially restricted to local buyers who purchase unfinished lumber for remanuf acture or who can pro- vide such services. During the study, such / buyers included about 8 firms. Faced with a market of few buyers, processors prefer to have assurance that their output can be sold at some minimum price be- fore undertaking production. Arranging sale of output to a specific buyer in ad- vance of the producing season avoids . some uncertainties regarding market out- lets and prices. At the same time, special- ized marketing and refinishing services may be obtained. The uncertainties of selling in a market of few buyers partially explains why some processors in the region have developed integrated operations through common ownership of vertically related producing and marketing organizations. On the other hand, small-volume producers of *\ unfinished lumber have been a relatively uncertain source of supply. Thus buyers have had similar incentives to integrate backward to initial processing functions. Pricing Policies and Practices Pricing policies in the lumber process- ing industry in the Central Sierra Nevada largely reflect the structure of the indus- try's selling markets. In perfectly com- petitive markets, each seller (or buyer) is so small relative to the entire market in ' which he operates that no firm can in- fluence prices by its own actions. Firms behave as price-takers, accepting market- fc| determined prices. In this sense, firms in the industry do not operate under any kind of pricing policy. Economic theory and industry experience both point to the ' conclusion that processors in the Central Sierra are essentially in a position of ac- cepting prices which are determined in M a market in which individual firms have no significant influence. Processors who sell in either nation- wide or local wholesale outlets deal in a «' market of many sellers. Correspondingly, no firm in the region has a significant * share of the market in which it is a par- ticipant. As mentioned, lumber producers in the 11 western states provide alterna- tive sources of supply for the many wholesale buyers in California and else- *i [46] where in the United States. Concentration in both selling and buying is very low, i.e., the market has a highly competitive structure. The largest firm in the Central Sierra selling in national wholesale out- lets handled 1.2 per cent of the total 1960 ponderosa pine and white fir output of the Western Pine Region. Processors sell- ing locally also participate in a market of many sellers (but one of relatively few buyers) since all processors in the Central Sierra and nearby counties provide alter- native sources of supply to buyers. Typi- cally, these local sellers account for less than 3 per cent of the Central Sierra lum- h ber production. A further consideration is the ease of entry into the processing industry, as evidenced by its highly fluid structure. These facts all point to a com- petitive industry structure and market- determined prices, since no firm has suf- ficient market power to influence either - price or the demand facing rival sellers. The experience of the industry sup- ports this hypothesis. All processors inter- viewed in the study emphasized that the prices received for lumber were market- determined and unaffected by their own individual actions or sales policies. The largest processor indicated that his prices were determined by "what the market was offering," and that marketing deci- sions were primarily "one of selling or not selling at that price." Other processors described their pricing experience in similar terms. Some processors pointed out that there were so many sellers, and their output was such a small fraction v of total sold, that they could not possibly influence prices. Their view of market structure and its consequence for their ability to affect selling prices corre- sponded to theoretical arguments. The fact that the industry is a price taker is reflected also in the frequent statements made by processors that a major problem faced by them is the industry's inability to affect price levels even when current margins are low or nonexistent. In a recent study similar conclusions were reached by Mead (1964, p. 79). "The behavior of wholesale lumber prices reflects the highly competitive structure of the industry. There is an extremely high degree of price flexibil- ity demonstrated on a weekly or monthly basis. Wholesalers offer lum- ber at prices advertised by weekly mailings to prospective customers. However, the market price is arrived at by means of telephone conversa- tions, and the price is highly respon- sive to rapid changes in supply and de- mand expectations. "Lumber prices are clearly market determined. They move upward with market strength and downward with market weakness . . ." Processors selling finished lumber di- rectly through wholesale outlets generally are in more or less continuous contact with buyers by telephone or teletype, ex- changing market information and arrang- ing individual transactions. Processors formulate their notion of market price on the basis of recent buyer offerings, what other known sellers are receiving, asso- ciation market reports, and reports of other price-reporting services such as Crow's Price Reporter 8 or Random Lengths Weekly Price Guide. 9 Their de- cision of whether to sell at market prices is influenced by expectations as to future prices and by current inventories of lum- ber in certain grades and species. Their decision to accept or reject a particular purchase offer may be based on the same factors plus a view as to what the pre- vailing market price is. When a trans- action is proposed, by either buyer or seller, both parties regard price as the most important item in the sales agree- ment. Some "haggling" or "bargaining" may take place through the wholesale intermediary in determining price, as each party attempts to implement his understanding of current market price or to trade in on the advantages of existing alternatives (for example, alternative buy- ers expected to offer higher prices, expec- tations that prices may increase or de- crease soon, preference to let inventories Issued weekly by C. C. Crow Publications, Inc., Portland, Oregon. Published weekly by Random Lengths Publishing Co., Eugene, Oregon. [47] of a particular grade accumulate for later sale with other items). Or else either party may declare a "firm price" on a take-it- or-leave-it basis. About 6 processors peri- odically issued price lists which were dis- tributed to their wholesalers. As a rule these merely served as a starting point for reaching agreement on price rather than representing a fixed, quoted price. On both sides, the price-making process is aimed at identifying market price as a consensus opinion of the many traders in the market but adjusted if possible to take advantage of known or presumed alternatives. Both parties have access to essentially the same information and participate in a highly organized market system. Neither can influence market price but under changing demand and supply conditions devote resources to gathering and interpreting market infor- mation needed in formulating price agreements. If all output is marketed through a single wholesaler he may assume some of the price-discovery and decision func- tions of the seller. Or if sales are made to a buying firm which is related to the processor through common ownership, the former may assume these functions completely. Although the buyer-seller re- lationship is different in such cases from instances where the processors deal with a number of buyers on an individual order basis, the price-making process is generally similar to that described above. The wholesaler or related firm conducts the important functions of collecting market price information, advising on price quotations, and bargaining with retail or other types of buyers. Decisions regarding acceptance of orders at offered prices, or making price quotations, may in both cases require final approval of the processor but, as noted previously, these agents may have some autonomy regarding such decisions. Price-making in direct sale of un- finished lumber to local buyers, concen- trators or box-manufacturers, is con- ducted in a different setting and manner. The processor is not in daily contact with a market of many buyers, whether these be wholesalers or retail and industrial buyers dealt with through a wholesaler. Usually the processor's entire output is sold to one or two buyers rather than in small lots on an individual order basis. Institutions organized for the purpose of collecting and disseminating market price information do not exist. The market sys- tem in general is less organized than regu- lar wholesale markets. More important, processors producing and marketing un- finished lumber locally participate in a market of few rather than many buyers. Buyers would be expected then to have considerable control over price. Processors selling unfinished lumber locally usually agree on a set price with the buyer at the beginning of the oper- ating season. This price is not changed unless market conditions for finished lumber change to such an extent that the buyer renegotiates or announces a new price. In effect, price is determined by the buyer's offer, as often are the product specifications. Processors are largely con- fined to accepting the terms offered or not operating at all since there are few if any other market outlets. Processors contracting the finishing of rough green lumber and its later resale by a wholesaler price their product in a setting and manner essentially like that of any firm selling through wholesale outlets. The primary difference is that pricing decisions are made by the whole- sale intermediary, not the seller, who participates in the process to only a limited degree. Nonprice Policies and Practices In an industry composed of many firms selling a line of homogeneous products, nonprice practices are not likely to be an important aspect of intra-industry compe- tition. Processors could sell all of any product they wished at prevailing prices, so there would be no incentive to use nonprice practices to expand sales or achieve some control over price. And be- cause prices are not affected by any actions of the firm, it need not avoid competitive reactions from other firms through nonprice competitive devices. Some forms of market conduct reveal- ing the functioning of nonprice compe- 48] tition would be the existence of promo- tional and advertising activities at the . firm level and seller promoted concessions in terms of sale. Processors, however, do not regard nonprice practices as being a significant means of winning or main- taining pricing advantages or of expand- ing sales. None of the firms engaged in advertising or promotion except indi- rectly through association membership, where such effort is not identified with any particular firm. Lumber products are not branded, although 15 plants which are members of the Western Pine Association do stamp mill numbers on • their products to help identify the pro- ducing mill in event of disputes over grading or manufacturing standards. Such stamps are primarily used to insure the buyer that the lumber has been manu- factured and graded according to associa- ation standards. In general, processors - cannot be said to have any policies pri- marily intended to differentiate their products from those of other competitors, a characteristic of the lumber industry which has been noted in other studies gjj (Zivnuska, 1961; Domar, 1960). The requirements of transferring ownership, of determining the point of sale, grade composition of shipment, and 4 method of payment, make some nonprice practices in the form of variations in terms of sale almost inevitable. But due to the nature of industry structure, no single firm can secure an enduring advan- tage by altering nonprice terms. Changes in such terms essentially represent one x mode of adjusting to changing market conditions in recognition of the fact that the "real price" paid or received is af- fected by the nonprice terms as well as by price itself. For example, when market conditions are forcing price declines and sales have decreased, buyers may begin „ to demand more favorable terms. Sellers in turn may have little choice except to meet such demands. The importance of nonprice concessions vary depending on their magnitude and purpose. Conces- sions in nonprice terms are a matter of adjusting to market conditions, not a de- liberate policy to enable the firm to gain price advantages. The most important nonprice terms include point of sale, credit and dis- counts, composition of the shipment, and grading and measurement standards. Point of sale. Processors selling and ship- ping lumber to points within the state and in the east sometimes prefer to price on a delivered basis rather than f .o.b. mill in order to gain on underweight in shipping costs. This may become a ne- gotiable item with buyers located in the state. When market conditions are poor and mill sales have declined, buyers may insist on f.o.b. pricing and a mill pick-up with their own trucks to gain on under- weight themselves. Credit and discount. Terms of payment in wholesale practice commonly pro- vide for cash payment within 30 to 60 days and a discount if payment is within 15 days. When sales are declining, buyers may demand extensions on the time al- lowed for payment and discounts. Sellers have obvious incentives to follow such practice if their circumstances allow it. Firms whose working capital or credit sources permit such alterations in the terms of sale enjoy an advantage over those who cannot do the same. Composition of the shipment. Buyers generally order shipments of mixed spe- cies, grades, widths, lengths, and thick- nesses. However, the exact composition of a shipment may be a negotiable item. For example, the buyer may ask that the shipment run more heavily to certain items than the seller ordinarily prefers given his inventories and the usual mix. On the other hand, heavy demand may develop for particular items which the mill can sell readily while other items move slowly; as inventories accumulate the seller may push these items in bar- gaining with buyers on the items they prefer most. Some mills, because of the character of their log inputs, may be in a better position to meet such demands than others. Or they may carry sufficient inventories to meet demands for ship- ments of one or a few particular items, providing these are distributed over all orders so that stocks are not depleted at more rapid rates than production. Grading and measurement. The rules and standards for product grading and measurement in marketing finished lum- [49] ber through wholesale outlets are well de- fined, institutionalized practices. There is apparently no significant nonprice com- petition involving "tightening" of grading practice at this market level when there are downward pressures on market price, or the opposite when price moves up. But in the marketing of rough green lumber, processors regard this practice as a non- price factor of significant importance from the standpoint of the price actually being paid. Buyers usually require that sale be based on their grade and tally of the lumber sold. In grading, many boards are marginal between two different grades, and whether the board is placed in the higher-value grade is a matter of personal subjective judgment and chance. Rather than, or in addition to, changing price when there are downward or up- ward movements in final product prices, buyers may alter subjective grading standards, rejecting or accepting the marginal board in a higher grade, as the case may be. After remanufacturing, the board may be regraded and placed in a higher grade. Essentially, the processor assumes the costs of the uncertainties in- volved in grading. Another nonprice factor affecting the seller net revenues is shipping and tally thicknesses. In 1955 some buyers of rough green lumber asked producers to ship lumber sawed to 7/4-inch instead of 6/4-inch thickness. They claimed that 6/4 lumber frequently did not actually measure out at that thickness because of poor thickness control at the mill. Mar- ket conditions at the time were generally good and buyers offered higher prices for boards sawn to larger thicknesses, so pro- ducers agreed to the change. Afterwards market prices for finished lumber began to decline and buyers put pressure on producers to ship a 7/4-inch board but to receive payment for the basis of a 6/4-inch board. They argued that many boards did not actually meet the 6/4 standard and in any case 1/4 inch was lost in resawing and planing. At present it is standard practice for 7/4-inch rough green lumber to be tallied on a 6/4-inch basis when sold. The buyer customarily gains some volume by first sizing all boards which qualify to 7/4-inch thick- ness. In essence, the seller is required to insure a 6/4 board by adding 1/4 inch as a margin for remanufacturing, yet the distribution of boards 7/4-inch and thicker allows some recovery of the 1/4- inch margin by the buyer which he may not pay for. Such practice may eventually be reflected in the price paid, but it con- fuses the unit of measure and erodes the meaning of prices and price competition. Conclusions Initial processors of lumber in the Cen- < tral Sierra behave as price-takers in their selling markets. Statements concerning price determination and the unimpor- tance of nonprice competition support this conclusion which is also consistent with what would be expected from the characteristics of industry structure. This conclusion applies to initial proc- essors of timber from small woodlands, defining small and medium-volume proc- essors as constituting this group. How- ever, competitive conditions on the buying side of markets in which these processors sell range from the highly competitive nationwide wholesale lum- ber market to a buyer-dominated local market. Processors with access to the former market receive competitive or market-determined prices. Since there are few buyers in the local market, it can be expected that their bargaining power may give them some control over prices. The evidence in support of this hypothe- sis is fragmentary and indirect. Initial processors selling locally have com- * plained of unfair buyer practices in grad- ing and measurement, and of their inability to extract concessions in these and pricing matters. One indication of the absence of competition in buying is the fact that some local firms originally producing and marketing unfinished lum- t, ber have integrated their operations via common ownership or nonowner- << ship arrangements with vertically re- lated remanufacturing and marketing firms, ostensibly to avoid the problems just cited. An inordinate degree of mar- ket power in markets of few buyers or sellers provides incentives for the weaker side of the market to integrate [50 vertically into activities conducted by the at a fixed price per thousand board feet strong side (Stigler, 1947&, p. 210). when prices are declining to low levels Related evidence is the practice of some and there are fewer outlets. This again producers to contract lumber drying possibly reflects the absence of effec- and/or finishing when prices are rising. tive competition and related marketing If local unfinished lumber prices re- uncertainties. Under contract sawing ar- flected these price changes fully, initial rangements, the processor is assured pay- processors would have little incentive to ment of his variable and at least part of assume the additional expense and un- his fixed costs of production. If he oper- certainties of contract finishing. Also, ates independently, marketing his output some processors shift to contract sawing locally, the outlook is less certain. [51] IV. Market Conduct: Buyer-Seller Relationships in Timber Procurement J. his section discusses certain aspects of the private timber market environment; procurement practices; and pricing poli- cies and practices. Some conclusions re- garding the pricing performance of the industry are stated as hypotheses. Market Environment The purchase and sale of privately owned timber is conducted in an un- organized market setting. Although the procurement activities of initial proc- essors are centered in three geographic areas, there is no central exchange, mar- ket center, or organized institutional sys- tem where information regarding all potential buyers or sellers and market conditions can be obtained. No organiza- tions coordinate marketing activities of either buyers or sellers. Transactions are negotiated at scattered locations between individuals, person to person, rather than in a central market of many anonymous traders. Timber is sold in nonstandard- ized lots which vary in location, quality, ease of logging, and species composition. Channels for the distribution of market information are informally organized and rely primarily on verbal methods. Processors buy wood in log form, de- livered at the plant, and as stumpage or standing timber, which is then logged. The buyers are specialized and experts in purchasing standing timber. This is not true of small nonindustrial timber grow- ers, who usually sell standing timber, are infrequent market participants, and rarely maintain any continuing market relationship with a particular buyer or group of buyers. They are not regular sellers; their market relationship with buyers is interrupted by relatively long periods of inactivity. Some forest owners are unaware that there is a demand for their timber. Some do not know what prices are being offered by local buyers (Teeguarden et al, 1960, pp. 30-47). Under such conditions, buyers cannot [52 rely on announced prices alone to co- ordinate wood deliveries with their re- quirements. They must "shop" or "pros- pect" for potential sellers of timber. Since there is no market institution through i which potential sellers can be located, buyers rely on various "hit or miss" pro- cedures described by one as "an art in itself." The most common procedure em- ployed by buyers is simply to search a given area for merchantable timber, identify the owner or owners by local A inquiry or examination of the tax rolls, and then offer to buy the timber. Once a particular tract is purchased, adjacent land owners may also be approached. Buyers usually initiate the sale, func- tion as important coordinators of demand and supply, and perform logging, as- + sembly, and processing services. Sellers are relatively passive participants; they perform few of the marketing functions handled by sellers in many agricultural markets. Their raw product supply re- sponses are solicited by processors' and independent operators' reactions to « changes in lumber demand and profit margins. As the margins of buyers * change, they reduce or intensify their prospecting efforts. Because the amount of timber on a particular property in any short period, such as several years, is relatively fixed, this requires contacting J more or fewer owners and cutting on more or fewer properties. The seller's de- cision, regardless of the level of demand price, is to cut and sell his timber or wait until some future date. Processors encounter two kinds of un- certainties in wood procurement: those of locating potential sellers without knowing in advance whether their tim- < ber can be purchased; and those of fore- casting the available timber supply at different price levels over various inter- vals of time. If supply is relatively elastic at expected price levels, industry pro- curement policies can be based on rea- sonably certain knowledge that adequate « ] supplies will be available. However, the volume cut and delivered to processors in any short period need not correspond to actual forest growth and to sustainable supply over a longer period. The indi- vidual processor has no means of coor- dinating current and prospective mill requirements with long-term market sup- ply, and information on which forecasts might be based is unavailable and un- certain. These uncertainties can be avoided by integrated ownership of forest lands, by leasing, or by long-term con- tracts to manage and purchase the output of land owners. Actually, few firms, par- ticularly small and medium-volume ones, have accomplished integration by owner- ship, nor is this a very feasible alternative for many. Long-term leases, contem- plated by one firm but abandoned be- cause of expected instability of forest ownership, have not been attempted. Evidently the industry has had no major problems in procuring its wood requirements in the postwar period. As shown earlier, the supply of sawlogs was relatively elastic, permitting rather large adjustments in log deliveries depending on plant demand. This is one major rea- son why firms unintegrated through for- est ownership continue to characterize the industry and to enter and leave it with apparent ease. Important problems, from the view- points of both buyers and sellers of timber, arise from certain physical input- output and cost relationships which are interrelated in primary timber production and harvesting of logs. The primary ex- ample is the interdependency between economies of scale in log production and the affect of residual stand volume after cutting on the future physical growth of the stand. The buyer is interested in re- moving sufficient volume to minimize average total unit costs of logging, while the seller's future revenues are primarily affected by volumes left after logging. Any increase in the buyer's net revenue due to lower logging costs may reduce the present net worth of the seller's revenues from future sales. Another ex- ample is the effect of the buyer's opera- tion on the residual stand in terms of damage. His choice of equipment and the care exercised in logging affect the amount of damage done to the residual stand and soil, and thus affect the seller's future revenues. On the other hand, the buyer's costs and revenues are also af- fected by these same factors. Purchasing and Selling Practices Industry procurement practices include both forward buying of timber for future cutting and purchase for immediate de- livery. Some firms attempt to acquire at least part of their requirements several years in advance, and contracts for cut- ting over even longer periods are not uncommon on large ownerships. Pur- chase of federal government-owned tim- ber may often involve cutting contracts extending over two or three years, espe- cially in large sales. In 1960, the total volume under contract by the industry for future cutting was 192 million feet, equi- valent to about half the 1959 lumber output. Purchase of timber for current cutting is characteristic of small-volume opera- tions. Forward purchases of such plants were equivalent to 5 per cent of the total volume under contract in 1960, and to about 10 per cent of their 1959 lumber production. Medium-size firms, with 56 per cent of the total 1960 contracted vol- ume, had a contracted volume equal to 74 per cent of their 1959 output; the balance of the contracted volume, held by three large firms, amounted to 64 per cent of their 1959 production. Forward buying is therefore mainly conducted by medium and large-volume plants, and mainly in conjunction with buying from public and large private timber owners since practically all timber purchased from small, nonindustrial owners is for current cutting. The purchase and sale of timber typi- cally includes buyer-supplied services. The buyer may construct roads, repair or improve culverts, do stand-improve- ment work, or dispose slash. These serv- ices are priced indirectly in setting the [53] purchase price of the timber, and con- stitute important nonprice benefits to the seller and nonprice costs to the buyer. At the same time, product measurement and cutting methods affect the net rev- enue of both buyer and seller. Marketing contracts. For these and other reasons, terms of sale other than price are important to buyer and seller alike. Processors prefer to formalize these in written contracts; all those interviewed did so, usually with contracts provided by themselves. The practices of small, private timber sellers differ, however, from those of processors. Sales are as fre- quently made by verbal agreements as by written contracts (Teeguarden et al., 1960, pp. 41-42). An explanation of this difference is that evidently small sellers frequently deal on a verbal basis when selling to independent logging contrac- tors. If a written contract is used, it is rarely provided by the sellers. There is no standard contract used by either purchasers or sellers. The contract may be simple, including only the price, a statement whether it is to be paid in a single lump sum (based on the esti- mated volume) or as the timber is cut and a description of the timber to be cut, (for example, all merchantable trees as determined by the buyer or all trees larger than a certain minimum diameter), or it may be a more elaborate agreement covering such additional items as scaling method, time limit for removal of pur- chased timber, liability for taxes, as- signability of the contract, liabilities connected with loss of the timber due to fire, damage to the property, personal injuries of workers, and responsibility for slash disposal. For a more detailed discussion of marketing contracts see Teeguarden et al, 1960, pp. 41-47. Evidently the majority of small, non- industrial sellers are satisfied with the performance of buyers with respect to nonprice terms of sale in marketing con- tracts. And, though some observers have felt that cutting practices on small, non- industrial forest lands have left much to be desired if productivity is to be maintained or improved, it appears that such cutting has conformed with mini- mum standards specified by administra- tive code in the forest practice rules. In an earlier study, four-fifths of the sellers interviewed were satisfied both with the logging and buyer compliance with other sale terms (Teeguarden et al, 1960, p. 42). Specific complaints of those not satisfied included failure of the buyer to provide scale tickets as proof of the volume purchased, cutting of trees not designated for removal, failure to dispose of slash as agreed, failure to pay for all timber removed, and failure to affect physical improvements as agreed. These problems sometimes arise from genuine misunderstandings as to terms of sale when unwritten contracts are used, the fact that sellers seldom oversee the ac- tivities of the buyer while the timber is being logged, and to unethical practices by buyers. Pricing Policies and Practices In the lumber processing industry, pricing the raw product is not as simple as in the theoretical perfectly competitive market where buyers may purchase all they wish of a homogeneous commodity at market- determined prices. Timber is hetero- geneous; each lot, by merit of differing location, quality, species composition, ease of logging, and other factors, consti- tutes a different product compared to other lots. Buying is not carried out in an environment of many, anonymous sellers, but in person-to-person transactions in which the buyer assumes a dominant role. This section discusses pricing practices, and presents a hypothesis regarding the nature of price results in the roundwood market. Structural Factors Affecting Pricing Policies A number of structural factors suggest the hypothesis that prices of raw roundwood are likely to be effectively competitive in nature, even though price results are not brought about in the same way as in lum- ber markets and may not be identical to competitive results in the short-run or in specific transactions. [54] 1. Concentration in purchasing private timber, though greater than in the indus- try's selling market, is low to moderate in the region. In their buying activities, processors undoubtedly have more market power than in their selling activities; still none would appear sufficiently large to significantly affect roundwood prices by his own actions. Among firms purchasing most private timber (the small and medium plant group), none accounted for more than about 8 per cent of the volume of logs delivered to such plants in 1960. Some firms do dominate buying in their local area, but their pricing policies are limited by the presence of all buyers in the three-county area and some firms out- side it. Improvements in transportation have substantially decreased locational advantages and increased competition in the timber market. 2. The conditions of entry into the in- dustry, particularly for plants which pur- chase wood from nonindustrial growers, have been easy. Competitive pricing poli- cies are favored by easy entry since any other policy would be upset by new firms attracted into the industry. 3. Timber supply at the initial processor level has been highly flexible. This al- lowed firms to enter the industry rather rapidly when the level of lumber demand provided otherwise sufficient incentives to invest in processing facilities. At the same time, the motives for avoiding price com- petition through some type of collusive conduct are lacking under conditions of elastic raw product supply since proc- essors can, without large or futile price increases, adjust their volume of wood purchases to changes in their product prices. Industry structure and evidence that regional timber supply is responsive to price changes indicates that processors are likely to regard their plant supply as being highly elastic at market price levels. This suggests the hypothesis that buying firms are likely to follow independent, rivalrous competitive pricing policies and that prices in the industry would tend toward effectively competitive levels. Pricing Practices The proposition that the pricing of timber by the industry is likely to be character- ized by independent, rivalrous, essentially competitive behavior does appear to be in accordance with industry experience. Al- ternative forms of conduct (see page 12) are not consistent with available informa- tion, nor probable in the light of the several structural factors discussed above. Some form of price leadership might be expected in view of the disparity of firm size. However, according to processors and observation, there are no price leaders in the industry. Processors are, of course, aware of prices being paid by rival firms, but no single firm sets an industry price which is then followed by other firms. None of the processors interviewed in- dicated the prices paid by larger firms were any more significant to pricing deci- sions than those offered by other firms. One reason, perhaps, for the absence of price leadership is that large firms gener- ally purchase old growth from the na- tional forests and a few large private properties, while small and medium- volume firms buy virtually all the private timber sold in the open market. There are no dominant firms in the latter group. Collusive action in the industry is im- probable: there are too many firms, and entry of new firms is easv and rapid. The observations of persons familiar with the industry and discussions with processors both indicate that collusive action has not operated in the industry. As noted previously, the motivations for collusive behavior are lacking under conditions of a highly elastic timber supply. If the degree of interdependence be- tween processing firms in their procure- ment activities was so pronounced that each avoided changes in prices for fear of retaliatory reactions from competitors, rigidity in prices, purchases, and output would be expected (the kinked supply curve hypothesis, see Stigler, 1957a). Yet, as shown earlier, the aggregate volume of purchases and output by the industry has varied widely from year to year, closely following lumber prices. Analysis of the average prices paid for private, second-growth ponderosa pine stumpage in 32 separate sales over the period 1953 to 1958 points to a flexibility of prices rather than any rigidity (figures from [55 J Teeguarden et al, 1960, table 12; and Western Pine Association): Year Ponderosa pine lumber price index (1933 = 100) Average stumpage price for second-growth ponderosa pine stumpage 1953 ., 92 $10.00 1954 . 87 8.00 1955 ., 90 12.70 1956 ., 92 13.40 1957 .. 86 10.50 1958 ., 83 12.50 Forms of conduct other than rivalrous, essentially competitive behavior in pric- ing are not consistent either with indus- try structure, direct observation, or the gross measure of industry performance shown by price flexibility. In interviews, processors emphasized several factors affecting their pricing practices: the in- dependence of their own actions, the com- petition encountered from existing and potential rival firms in their procurement areas, and the necessity of appraising non- standardized tracts or lots of timber to estimate the profit margin opportunity to provide a basis for negotiating sale terms. In pricing stumpage, processors have in mind some concept of an average market price that is determined by aggregative competitive forces and which limits ap- proximately the lowest price offered. Terms such as "market price," "competi- tion," "the average price paid by all mills," and "what others are paying," indi- cate primary considerations in determin- ing price offers. This may suggest that pricing practices in the industry follow "average pricing" methods frequently associated with oligopsonistic industries. However, processors have little hesitation to offer more than going prices if they are unable to obtain desired volumes at these prices. One processor, for example, indi- cated that the firm paid "market price," but if necessary paid the price necessary to obtain desired amounts of timber. The frequent existence of substantial price ranges in actual transactions discounts any meaningful concept of average pric- ing. Another indication of the competitive nature of pricing in the industry is the fact that many firms have left the industry in the past 10 years as a result of low or nonexistent profit margins because prod- uct prices have declined, and costs, par- ticularly stumpage, increased. Former operators of such plants indicated they were unable to purchase timber at suffi- ciently low prices to continue their opera- tions. This is further evidence that proc- essors cannot simply arrive at buying prices for timber by subtracting costs of processing and assembly and desired profit margins from lumber prices. The testimony of former operators suggest the opposite, that their offering prices were largely controlled by industry-established price levels. The process of price-making in indi- vidual transactions is conducted in an en- vironment far removed from a perfectly competitive market, however. Two factors are important in this respect. The first is that, although there are many sellers and a moderate number of buyers, transac- tions are usually arranged between an individual buyer an seller. This method of sale arises from the dispersed nature of the product, the absence of any central or organized market system in which all potential buyers and sellers are contacted simultaneously, and the unwillingness or inability of sellers to arrange auction sales. Once a processor or log buyer has located a seller, agreement is reached on terms without the presence of alternative buyers or sellers. The second factor is the neces- sity of explicitly evaluating the effect on stumpage value of location, costs of log- ging, species composition, and quality. Variation in such factors preclude com- plete reliance on average market prices as guides to acceptable price terms in minds of both buyer and seller. Thus processors typically attempt to estimate the residual value of stumpage in a particular tract by subtracting expected logging, hauling, and processing costs, plus a margin for profit, from revenues expected from the sale of sawn lumber. The estimates so de- rived may then be used in negotiating price terms with the seller. The sale of timber resembles a barter between two persons, with the terms of sale being determined by person-to-per- son negoiation. A precise degree of de- terminateness in price determination is [56] not attainable in a barter situation. Among the range of possible outcomes, the final contract is affected by the comparative bargaining power of the two parties (see Stigler, 1947&, p. 79, for the analytical development of this point). Bargaining power in this context can be interpreted to mean the possession of alternatives in the form of adequate and accurate market information regarding buyers and market prices. If products are sufficiently homo- geneous that average market-price data provide an accurate basis for defining al- ternatives, and if participants are aware at least of their price alternatives, terms presumably would tend to approximate competitively established market price levels. If, as in the case of timber, the product is relatively heterogeneous, the range of outcomes is greater and the skill of participants more significant. In the buyer-seller relationship in the timber market, the buyer is dominant: he initiates the sale, frequently provides market information and services, and usually establishes the price. Generally, the seller only decides whether or not to sell at the price offered. Analysis of 68 individual transactions showed that in 71 per cent of the cases price was established by the unilateral offer of a single buyer. The general acceptance by sellers of the terms offered them is indicated by the fact that in only about a fourth of the cases was price established by the seller's offer or by bilateral bargaining (Tee- guarden et ah, 1960, p. 40). The equity of terms resulting from such contracts depends to an important degree on pos- session of adequate market information. Apparently most small, nonindustrial growers-sellers are aware of their market alternatives insofar as they possess infor- mation on the general level of established average market prices. This was indicated by an earlier study in which sellers in 72 per cent of 68 sales claimed knowledge of price (Teeguarden et ah, 1960). It may thus be presumed that not only were such sellers able to evaluate the reasonableness of price offered them, but that they also received prices corresponding approxi- mately to competitive price levels. In the absence of adequate data, there is no direct or precise method of evalu- ating the performance of the industry with respect to its price results in the ag- gregate or in individual transactions. It is alleged that frequently sellers are paid less than buyers would be willing to pay if the seller were better informed about market prices. A previous study showed that sellers were likely to receive higher prices if they were informed about prices, if they had knowledge of buyers, or if they solicited offers from two or more buyers. This is not to be unexpected in view of the importance of adequate infor- mation in a barter situation. Industrial instability also affects pricing. Many proc- essing firms enter the industry, but leave again after a short time. Growers and processors have both recognized the problems caused by transient buyers who, operating under short planning periods, can take advantage of market imperfections existing in individual trans- actions and often obtain timber for less than competitively established industry prices. Reportedly, many sellers who were misled or cheated found that they had dealt with the less permanent, respon- sible, and forward looking segment of the industry. It would appear, however, that sellers, in general, have been satisfied with the equity aspects of price and non- price terms offered by processors. The hypothesis that the pricing per- formance of the industry, in the aggregate and over a period of time, probably cor- responds to that of a competitive market, appears reasonable in the light of a num- ber of considerations. A moderate degree of concentration in procurement and ease of entry establish conditions favor- able to the rivalrous, essentially competi- tive relationships between purchasers that presently exist. Ease of entry and a past history of rapid entry and exit support die impression that there is little opportunity to maintain extra-normal profit margins via depressed timber prices. Data pre- sented in the following chapter point out in fact that profit conditions since 1956 have not only failed to attract new en- trants, but have actually motivated a sub- stantial exit of small and medium-size producers. As shown previously, the sup- ply of private timber has been highly flexible at the regional level, and likely 57] more so at the firm level. The fact that few processors purchasing private timber are integrated in forest ownership to any significant extent further indicates that they probably regard their supply as elastic, and that price in the industry is probably essentially competitive. Avail- able information on actual prices shows that prices are flexible over time moving upward or downward with changes in lumber prices. This again implies that competitive forces are sufficient to bring about adjustments in price when shifts in market conditions affect operator mar- gins. The validity of the hypothesis partly depends on the pricing policies of buyers when dealing with sellers whose market and technical knowledge concerning costs, quality, and other factors is so poor that their supply price can be less than what buyers would be willing to pay. If buyers take the long view, if they are interested in maintaining good relations with sellers and avoiding decreasing price elasticity of supply because of seller dissatisfaction with price terms, if they realize monop- oloid profit practices will only be tem- porarily enjoyed until additional and per- haps excess capacity enters the industry, it would be expected that sellers should receive effectively competitive prices. If the opposite view is taken, divergent re- sults may be experienced at least over short periods or in specific individual transactions. In the past, transient pur- chasers have undoubtedly taken advan- tage of their dominant position in setting price terms. The present attitude of the industry, however, seems to be one of treating sellers fairly in pricing and other matters. Existing processing firms have survived a period of profit pressures and they expect to remain in business. The maintenance of good relationships with sellers is an important aspect of their pro- curement policies. They realize that tak- ing advantage of the existing situation can only lead to long-term difficulties in obtaining timber requirements. [58] V. Structural Instability of the Lumber Processing Industry Ihe last two sections of this bulletin will investigate the hypothesis, suggested previously, that industrial market outlets used by small, nonindustrial timber grow- ers are more unstable than other segments of the industry. The term instability is used in these two chapters to refer pri- marily to phenomena arising from short- term cyclical or business fluctuations. This section investigates structural instability due to entry and exit in the lumber proc- essing industry. The next analyzes the cyclical sales-output performance of a group of processing firms, and summarizes both chapters in a discussion of the rela- tion of market structure to industrial in- stability. Changes in Industry Struc- ture and Firm Turnover In the Central Sierra lumber processing industry the distribution of firms and out- put by plant-size class has undergone pronounced changes since 1941. As shown in tables 2 and 3, a period of entry (1941 to 1946) was followed by a period (1947 to 1961) when exits exceed entrants. The changes over the 20-year period were particularly concentrated in the small plant class. Tables 2 and 3 measure net changes between census years; they do not show actual plant turnover, nor do they reveal shifts of plants or firms between size classes due to growth. The data, there- fore, provide an overly simple picture of the change that occurred. It was possible, however, to identify new entrants, exits, and plant transfers for three pairs of v census years covering the period of net plant exit. These data, summarized in table 14, record changes observable from comparing listings of firms operating plants in the paired years and thus do not detect entry and exit of firms in the inter- vening four-year period. As shown in the i text table on page 62, 10 of 29 small- volume plants which disappeared be- tween 1956 and 1961 lasted four years or less. Thus the data probably understate actual entry and exit. Table 14 shows that, until 1956, indus- trial instability involving entry, exits, and plant turnover was largely concen- trated in the small-plant group. Practically all entrants and exits during the 1946- 1951 and 1951-1956 periods were at- tributed to this group. Turnover in the small-plant group was relatively high: four-fifths of the plants listed in 1946 had disappeared by 1951, and two-thirds of those listed in 1951 had disappeared by 1956. Information on plant transfers for the first period is not available, but of the plants operating in 1951, about one-fifth had been transferred to new ownership by 1956. During the 1956-1961 period, insta- bility was also centered in the small- volume group: 84 per cent of the plants listed in 1956 had disappeared by 1961. There were no entrants, the net change in number of plants being attributed entirely to exits. Even though the medium-size plants increased from nine to ten, exits in- cluded five of the original eight plants. Since the entire period was dominated by an excess of exits over entrants, it is interesting to note the ratios: for the period 1946-1951, there was about one entry per two exits; for 1951-1956, the ratio was one entrant per three exits; and for 1956-1961, there was one entrant per six exits. Evidently the impact of market and profit conditions became progres- sively more severe, particularly after 1951. It is significant, however, to note that while economic conditions motivated a substantial exit of processors, others evi- dently anticipated satisfactory returns on newly invested capital, as evidenced bv entries. The record indicates some of these entrants erred in their expectations, since many stayed in operation onlv briefly. Relative changes in industry structure were caused by shifting of plants between size-classes as well as by exit and entry. It was possible to determine the extent of [59] rvi o co 73 >- en CO ^ UJ £5 !±! oo oo UJ H - 1 o < Q= en Ll_ r A o LO en nr i — i a CO *d: 2 <£ -• _cd" TO CD E<± ■ CD CO oo CO o o in co • oo oo oo oo 00^- CO o S>„E CUD ■ CO CO o o o o —. CO TO O - , ,»_, in CSI T3 v—' -Q B O co to cd E eS "Si So ■ in cd o o O CO o o in cd to ro o CO V) s»> c TO o_ CD tocd • CD Ol in a in o in *r • CO OO «3- C — ' o — < CD ■" H >— ' /— ^ a> o co E oo OO oo O O o o TO O -■o in CSI s*' in E? CD co co m CSI CSj .— i CSI O) ^2 N ""' CD TO CD r^ cd -a- oc CO OO CM CO o cr <3" CD e/> "E C0 TO tz x 1= TO TO TO CZ TO o O O a. a> f= ai = v£f CO c -Q ?- J3 cu « H - co to ~- cd — ■° Factors Underlying Cyclical Instability As shown small firms experienced the greatest degree of instability during busi- ness cycles. The small firm group is also ► the most important market outlet utilized by small timber growers. Thus these small growers, by nature of their market outlets, are tied to a cyclically unstable market. Some of the factors which underlie greater cyclical instability of these small firms were implied in the text table on page 66. These small firms characteristi- cally are not vertically integrated through * timber ownership or all stages of lumber manufacture. Lack of fully integrated plant operations is largely due to insuffi- cient volume to justify investments in planing and drying equipment. Vertical integration controls the type of markets to which such firms have access and through S the effect of integration on the ratio of variable to fixed production cost their susceptability to cyclical price changes. Small, unintegrated processors handling unfinished lumber have little choice but to market their output locally to buyers who perform finishing and/or wholesale h marketing functions, rather than in na- tional wholesale markets. Typically de- mand in the local market area is cyclically less stable than at the national wholesale level: there are few buyers, and the na- ture of their business is such that they cease to buy unfinished lumber from small ^ producers during market declines. Most local buyers are producers of lumber also. k Rather than maintaining sufficient capac- ity to meet orders during periods of high demand, they buy additional rough lum- ber from other producers to meet their requirements. When demand declines and the firm can fill orders from its own output it ceases to buy from rough-lumber producers. On the other hand, yard whole- salers who operate finishing facilities dis- continue buying and processing unfin- ished lumber during cyclical lows to con- centrate on wholesale lumber marketing activities. The lumber output of small producers, largely manufactured from young-growth timber, runs heavily to common grades which are utilized pri- marily in construction, are produced in large volumes, and which are therefore affected more severely by demand changes than better grades of lumber (Zivnuska, 1952, p. 125). Thus product line and marketing channels tie the small, unintegrated lumber producer to the least stable level of the market. At the same time, firms which are not integrated through timber ownership are unable to ride out recessionary periods of low profit margins of low-cost stumpage. Related to the extent of vertical inte- gration is the relationship between fixed investments and variable costs of produc- tion. Firms which are not vertically inte- grated through timber ownership or com- plete manufacturing operate with a lower ratio of fixed to variable costs than firms which are so integrated. The ratio of fixed to variable costs affects the abil- ity of the firm to continue operations in the face of price declines : the lower the ratio of fixed to variable costs, the more sensitive the firm is to such changes. In the short run, if prices are less than total costs, a firm can minimize its losses by continuing to operate only if prices at least cover variable costs. Thus, if two firms had identical total costs, the one with the higher variable costs, or con- versely with the lower fixed costs, would be more susceptible to a drop in prices. The characteristics of the firms indicate that associated with decreasing plant size and extent of vertical integration would be a shift in cost structures involving de- creasing importance of fixed costs and rel- atively greater importance of variable costs. Such differences in cost structure [69] would also contribute to the greater oper- ating sensitivity of small, unintegrated producers to cyclical price declines. These may not be the only factors af- fecting cyclical instability. Another ele- ment sometimes mentioned is sufficient capital and/or credit to enable continued operation in the face of short-term losses (Bolle, 1960, p. 5). It would be expected, however, that a firm's strength in this re- spect would be related to its size, market- ing position, and value of fixed invest- ments, and thus to the extent of vertical integration. Thus firms which are small, which are tied to relatively unstable market outlets, and whose fixed invest- ment is small, are not likely to survive recessionary periods on accumulated capital or on borrowed funds. The factors underlying the greater cyclical instability among processors providing market out- lets for small growers, while perhaps numerous, are related to smallness, ab- sence of vertical integration, and unstable markets. Industrial Instability and Market Structure The discussion in this and the preced- ing section confirm the hypothesis that economic instability is more pronounced among industrial market outlets utilized primarily by small timber growers than other segments of the industry. Put another wav, the demand for timber sup- plied by these small growers is more volatile over business cycles than that faced by other growers. Instability arises from rapid exit and entry of plants consti- tuting market outlets; and from relatively greater cyclical variation in output and procurement of plants which continue or temporarily cease operations rather than going out of business. Instability arises from certain features of industrial market structure. The de- mand for timber from small, nonindustrial forest holdings is primarily represented by small- and medium-size lumber pro- ducers, especially the former. These proc- essors can adjust rapidly and to a more pronounced degree to changes in demand than larger producers, and are obliged to do so since their markets are compara- tively more unstable. Their fixed produc- 4 tion costs are relatively low, due to small size and lack of vertical integration* and * thus are more sensitive to cyclical price changes. In addition, because of compara- tively low fixed investment in plant facili- ties, entry and exit is relatively easy. Low investment requirements, a flexible timber and labor supply, a reservoir of willing entrepreneurs, and unstable demand lead ^ to large variations in output over the busi- ness cycle and high degree of entry into and exit from the industry. Similar conclusions were reached by Bolle (1960, p. 6) in a study of the timber market in the Upper Flathead Valley of * Montana: { While setting up a large sawmill re- quires considerable capital, setting up a small sawmill does not. So long as this condition exists, rapid increase in the number of small sawmills can be ex- pected whenever demand is high and i profits are foreseen . . . But just as ease of entry leads to increasing numbers of small mills in periods of rising demand, so it leads to contraction in periods of declining demand. It tends to make a cyclic industry even more cyclical than it would otherwise be; and the small sawmill is, in fact, the most cyclic sec- tor of the timber industry. 4 As the supply area for the small saw- mill in the Flathead Valley, the wood- lot is tied to the most cyclic and un- stable sector of the timber industry. In a Washington study, Bruce (1961) con- cluded: Factors expected to be associated <* with stability are least likely to be prev- alent in sawmill operations obtaining timber from nonindustrial forests. Im- plicit in such a conclusion is that the market available to the nonindustrial forest land owners (typically the smaller woodland owners) is more un- -« stable than are markets available to other timber producers. Apparentiy the small woodland owners and the type of sawmill operation obtaining timber from the woodland owner each con- tribute to the other's uncertaintv or market instability. 4 Fundamentally, instability of industrial market outlets associated with small ' [70] growers arises from the nature of the supply structure: the large number of ,. small,* unspecialized timber owners-grow- ers, their scattered pattern, and the un- % certainties of long-term timber supply from such owners. These factors largely determine the characteristics of the proc- essing industry purchasing wood from f small growers, and are not conducive to large-size, fully integrated processing firms (Zivnuska, 1961, p. 86). Instead the , diseconomies and uncertainies of procure- ment tend to favor the establishment of small, nonintegrated, low fixed-invest- ment processing plants whose structural - characteristics determine both their flexi- bility and instability in the face of cyclical market changes. The nature of this sector of the industry is in short a logical conse- quence of the timber supply structure. It is not our purpose here to evaluate the desirability of increasing the stability ^ of market outlets available to small grow- ers, or to evaluate alternative means of accomplishing such changes. From the social point of view, the problems as- sociated with instability may be accept- able as the cost of attaining a desirable degree of economic flexibility. However, if increased stability were to be sought, the relation of market structure to the k problem is crucial to consideration of al- ternative public policies. Bringing greater stability to marketing institutions and demand rests directly on the develop- ment of large-scale, fully integrated proc- essing plants, and indirectly on such changes in supply conditions which will v promote investment in such processing and marketing facilities. Such changes * might include, for example, measures to reduce procurement and assembly costs, 4 by further improvement of transportation, consolidation of ownerships, and heavier per acre timber volumes. Reduction in • procurement uncertainties would also be favored by larger, more specialized tim- ber growing firms with long-term plan- ning horizons, and by the development of nonownership means of integrating the objectives and functions of separately owned timber growing and processing enterprises. Effect of Public Timber Sale Policies In discussing aspects of market struc- ture affecting the stability of markets faced by small growers, it is important also to recognize the influence of federal timber sale policies. As indicated earlier, from 1947 to 1961 national forest timber sales averaged 33 per cent of total volume sold in the Central Sierra counties. Ac- counting for such a large share of the market, federal policies regarding output or sales unavoidably have some effect on the market for private timber. Statistical analysis of sawlog output from national forest holdings and lumber prices failed to reveal a significant, mean- ingful relationship between these varia- bles. This does not prove price plays no role in coordinating public timber sales with market demand, but it does suggest the hypothesis that the public timber sup- ply schedule may be highly inflexible with respect to short-term price changes. If so, it follows the burden of making adjust- ments to cyclical changes in demand falls primarily on private timber sellers; in short, federal policy may contribute to the volatile character of the private timber market. It should be emphasized the re- sult of our analysis suggests but does not confirm the hypothesis. Much more de- finitive research is needed on factors de- termining the volume of public timber sales and their economic impact in the timber market than was within the scope of this studv. [71] ACKNOWLEDGEMENTS This study was conducted in the California Agricultural Experiment Station as a contributing project to Western Regional Marketing Project WM-42, "The Market Structure and Marketing Practices Associated with Initial Processors of Timber Ob- tained from Small Woodlands." The author expresses appreciation to John A. Zivnuska, Professor of Forestry, for his assistance in formulating and initiating the research work reported in this bulletin, and to many individuals and firms in the lumber industry who provided information and granted access to business records. APPENDIX Appendix Table A-l. SAWLOG OUTPUT IN EL DORADO, PLACER, AND NEVADA COUNTIES AND RELATED LUMBER PRICE VARIABLES, 1948-1959 Year Total sawlog output Public sawlog output Private sawlog output Ponderosa lumber pine price index* White fir lumber price indexf Million bd ft 69.54 69 92 76.62 80.64 81.82 83.71 79.15 81.97 81.10 73.56 69.63 74.95 1948 325.5 280.0 386.8 452.6 451.3 467.3 384 2 446.9 437.1 301.6 313.4 403.8 92 9 26 .2 82 8 141.4 105.2 97.0 108.0 169.0 134.0 104.2 137.1 169.5 232 6 253.8 304.0 311.2 346.1 370.3 276.2 277.9 303.1 197.4 176.3 234.3 61 50 1949 53 00 1950 63 17 1951 63 21 1952 63 15 1953 61 62 1954 56 46 1955 62 85 1956 61 14 1957 52 57 1958 50 76 1959 57 48 * Index constructed by dividing Western Pine Association price index (1933 wholesale price index (1947-1949 = 100). t Index constructed by dividing Western Pine Association price index (1942-1949 modify wholesale price index (1947-1949 = 100). Sources: Cols. 1-3 — see text, table 8. Cols. 4-5 — Western Pine Association Quarterly Statistical Summary, 1948-1960; U. S. Department of Labor 100) by U. S. Department of Labor all commodity 100) by U. S. Department of Labor all com- [72] Appendix Table A-2. COMPARISONS OF DURATION AND AMPLITUDE OF CYCLICAL VARIATION IN LUMBER SHIPMENTS FOR WESTERN PINE ASSOCIATION AND NINE SAMPLE FIRMS, BY PLANT SIZE RANKING, CENTRAL SIERRA NEVADA REGION Plants by size rank Western Pine Association . Large mills 1 2 3 Average Medium mills 4 > 5 Average Small mills " 6 7 8 9 Western Pine Association Large mills 1 - 2 3 Average Medium mills 4 5 V Average f Small mills 6 * t 9 Average Western Pine Association f* Large Mills 1 2 M 3 Average Peak 2/53 2/56 11/56 4/56 3/56 3/56 2/56 3/56 4/56 Dates Trough Peak Cycle duration-months trough Trough- peak Peak- peak Cycle amplitude Peak- trough Trough- peak Peak- peak Cycle 1 1/54 2/56 25 36 23 NO INFORMATION 2/58 11/57 1/58 2/58 6/56 6/56 9/56 1/53 8/54 4/56 19 20 39 54 73 127 19 20 39 54 73 127 2/53 6/52 5/53 1/54 3/56 3/56 3 19 34 26 37 35 44 110 63 111 107 221 11 30 36 77 87 164 NO INFORMATION Cycle 2 NO INFORMATION 3/59 3/59 1/59 3/59 22 34 44 87 82 139 119 129 NO INFORMATION 3/56 9/57 4/59 18 19 37 187 151 338 18 19 37 187 151 338 :ycle 2A NO INFORMATION 2/57 11/56 11/56 [73] 3/58 3/59 25 12 37 17 30 29 47 140 112 126 231 201 216 40 Plants by size rank Medium mills 4 5 Average Small mills 6 7 8 9 Average Western Pine Association Large mills 2 3 Average Medium mills 4 5 Average Small mills 6 7 8 9 Average Western Pine Association Large mills 1 2 3 Average Medium mills 4 5 Average Small mills 6 7 8 9 Average Appendix Table A-2 (cont inued) Dates Cycleduration-months Cycle amplitude Peak Trough Peak Peak- trough Trough- peak Peak- peak Peak- trough Trough- peak Peak- peak Cycle 2A (continued) 3/56 3/56 11/56 11/56 8/57 2/57 1/57 10/56 1/57 3/59 3/59 3/59 1/59 3/59 4/59 4/59 4/59 2/58 11/57 1/58 2/58 4/58 1/57 9/57 10/59 10/59 6/59 6/59 8/59 8/59 9/59 NO INFORMATION 1/56 4/56 | 11/56 | 3 | 7 | 10 | 46 NO INFORMATION 3/56 4/56 11/56 5 5 10 54 10 50 Cycle 2B NO INFORMATION NO INFORMATION 1/59 3/59 1/59 3/59 4/59 4/59 4/59 12 28 21 13 12 27 NO INFORMATION 42 46 84 19 28 171 328 196 Cycle 3 NO INFORMATION 12/59 1/60 11/59 11/59 1/60 4 4 NO INFORMATION 42 30 49 3/60 12/59 10 50 190 70 9/56 8/57 6 11 17 89 82 11/56 2/57 8 4 12 122 134 7 8 14 105 108 104 76 125 115 120 87 433 185 235 9/59 1/60 6 5 11 8 7 26 25 103 53 172 152 126 LITERATURE CITED Baine, Joe S. 1959. Industrial organization. John Wiley and Sons, Inc., New York. Barrett, Leonard I. 1960. Special problems of the small forest owner in the United States. Fifth World For- estry Congress, Seattle, Wash., pp. 1137-50. Bolle, Arnold 1960. The timber industry and the market for woodlot products in the Upper Flathead Valley. Mont. Forest and Cons. Exp. Sta. Bull. 16. Missoula, Mont. Bruce, Richard 1959. Marketing sawlogs and pulpwood from small woodland holdings. Wash. Agr. Exp. Sta. Bull. 599. Pullman, Wash. 1961. Sawmill practices and economic stability. Wash. Agr. Exp. Sta. Bull. 631. Pullman, Wash. Burns, Arthur, and Wesley Mitchell 1946. Measuring business cycles. Nat. Bur. of Econ. Res., New York. California Dpvision of Forestry 1848-1961. Production of California timber operators. Yearly reports, Sacramento, Calif. Casamajor, Paul, Dennis E. Teeguarden, and John A. Zivnuska 1960. Timber marketing and land ownership in Mendocino County. Calif. Agr. Exp. Sta. Bull. 772. Berkeley. Clodius, Rorert L., and Willard F. Mueller 1961. Market structure analysis as an orientation for research in agricultural economics. J. Farm Econ. 43 (3): 515-53 Domar, L. L. 1960. Sales policies of Western Pine Association lumber manufacturers. Unpubl. Master's Thesis, School of Bus. Adm., Univ. of Calif., Berkeley. Frazier, George D. 1960. Small nonindustrial forest owners in northern Idaho. Idaho Agr. Exp. Sta. Bull. 317. Moscow, Idaho. Maisel, Sherman J. 1963. The theory of fluctuations in residential construction starts. Amer. Econ. Review 53(3):359-83. May, Richard M. 1953. A century of lumber production in California and Nevada. Calif. Forest and Range Exp. Sta. Forest Survey Release 20. Berkeley. 1957. Lumber production in California, 1956. Calif. Forest and Range Exp. Sta. Forest Survey Release 30. Berkeley. 1958. Output of timber products in California, 1956. Calif. Forest and Range Exp. Sta. Forest Survey Release 35. Berkeley. Mead, Walter 1960. The changing cyclical character of residential construction and its impact on lum- ber production and prices. Proc. Thirty-Sixth Ann. Conf. Western Econ. Assn., pp. 32-39. 1964. Mergers and economic concentration in the Douglas-fir lumber industry. U. S. For- est Serv. Res. Paper PNW 9. SCITOVSKY, TlBOR 1951. Welfare and competition; the economics of a fully employed economy. Richard D. Irwin, Inc. Chicago. Steer, Henry B. 1948. Lumber production in the United States, 1799-1946. U. S. Dept. Agr. Misc. Publ. 669. Washington, D.C. r 75 1 Stigler, George J. 1947a. The kinky oligopoly demand curve and rigid prices. J. Political Econ. 55(5) : 432-47. 1947&. The theory of price. The Macmillan Co., New York. Stoddard, Charles H. 1961. The small private forest in the United States. Resources for the Future, Inc., Wash., D.C. Teeguarden, Dennis E., Paul Casamajor, and John A. Zivnuska 1960. Timber marketing and land ownership in the central Sierra Nevada Region. Calif. Agr. Exp. Sta. Bull. 774. Berkeley. U. S. Department of Agriculture, Forest Service 1958. Timber resources for America's future. U. S. Gov. Printing Office, Wash., D.C. 1963. The demand and price situation for forest products, 1963. U. S. Dept. Agr. Misc. Publ. 953. Wash., D.C. U. S. Department of Commerce, Bureau of Census 1947-1961. Facts for industry, lumber production and mill stocks. Yearly reports. Western Pine Association 1948-1960. Statistical summary. Quarterly and yearly reports. Portland, Oregon. Zivnuska, John A. 1952. Business cycles, building cycles, and commercial forestry. Inst, of Public Relations, New York. 1961. Economic factors in the organization of the forest products industries. Paper pre- sented at the 14th Yale Industrial Forestry Seminar, Corvallis, Ore. (Mimeographed). Zivnuska, John A., R. F. Grah, and E. A. Shideler 1957. Log grades and lumber values in a second-growth pine operation. Calif. Forestry and Forest Products No. 1, School of Forestry, Univ. of Calif., Berkeley. * - 6m-4,'65(F1429)J.F. [76