Economic valuation of long-term timber contracts: Empirical evidence from Germany

• The use of long-term timber contracts was not always based upon transaction cost advantage or upon significant investments.
• It was often based on a cost-economizing rationale, as occurs with volume bundling, allowing for efficient price adjustment.
• This might explain why many enterprises used incomplete contracts, leaving price renegotiation options open.
• Despite claims of efficient contracts they may actually have harbored hopes of a larger future share of ex-post surplus.

The forest timber product economy has recently faced challenges that include: increasing competition between the timber and energy markets for available resources, changing demand for timber, and wood-processing over capacities. It has been observed throughout Europe and in Germany specifically, that often long-term timber contracts have been negotiated to cope with these challenges and problems concerning the exchange of timber. However, the use, and economic value of, long-term timber contracts have not been rationalized yet even where trade involves little or no specific investments. The economic explanation for the use of long-term timber contracts is therefore sought within the theoretical framework based on the insights of transaction cost theory. The presented case study on Germany used 68 semi-structured interviews with forest enterprises and sawmills represented by 71 individual decision makers. The interviews have been analyzed with a content analysis. The results show that motivation for the use of long-term timber contracts was not always based upon transaction cost advantage or upon significant investments, but also upon cost-economizing rationale such as that which occurs with the bundling of timber volume by allowing for efficient price adjustment. The tradeoff of flexibility and hazards of being bound in long-term timber contracts was the consequence.