Unique Characteristics of Forests and Their Management (Economic) Implications

• Joint production• Externalities• Non-marketed outputs• Wide variety of “types” of owners

Management Decisions Complicated by

Management Decisions Complicated by

– Immobility of trees• Location utility

– Inventory vs. economic supply

– Long production period

– Dual nature of trees• Capital (factory &

machinery)• Product

JOINT PRODUCTION

Joint Production

• Forest provides multiple (joint) “outputs”– Wood– Water– Wildlife habitat– Recreation, etc.

• How does a manager simultaneously determine appropriate level of output of each considering tradeoffstradeoffs among outputs?

Joint Production

– Production function is a biological growth process• Highest cost input

is time, an opportunity cost

– Opportunity to sell now instead of later

Production Function

• Relationship between inputs (age) and outputs (volume)

Input (age)

Output

(stocking level)

Inflection point

Biological maturity

Production Function

Volume Longleaf Pine, SI 80, Natural Stand (Schumacher & Coile, 1960)

0

100

200300

400

500

600

700800

900

1000

0 20 40 60 80 100

Age

Cu

bic

Fe

et

Externalities

Externalities• Positive - decision to do one thing

results in unintended but positive result– e.g., attract new species of bird

Purple Gallinule

Externalities• Negative - decision to do one thing

results in unintended but negative result– displace indigenous species of bird

Indigo Bunting

Non-Marketed Outputs

How can production decisions be made without knowledge of value of

output?

• Not being exchanged in a market doesn’t mean something doesn’t have value

• Value can be estimated by,– “Cost” to produce the output

• Cost of purchased inputs• Value of other outputs given up

– What consumers would be willing to pay if they had to

Types of Owners –

Who’s making the management decisions

Types or Owners• Issue is mix of types of

owners in an ecosystem– Public

• Federal • State• County• Local

– Private• Industrial• Non-industrial

– Investor– Farmer– NGO (non-governmental

organization), e.g. land trust

Context In Which Decisions Are Made

Matters!• What is affect of

type of owner?– Public agency– Integrated

industrial firm– Private non-

industrial (NIPF)– Timber Investment

Management Organization (TIMO)

Public Agencies

• Management objectives set by large number and variety of interest groups

• Conflicts among interest groups difficult to resolve

• Political pressures may dictate budget and land use decisions

IntegratedIndustrial

Firms• Profit motivated• Forest practices constrained by AF&PA

Sustainable Forestry Program, public pressure, and regulations

• Most productive forest land• Forest land is security for conversion

facilities

NIPF

• Largest class of forest owner

• Highly variable motives for owning land

• Management of any type may be low priority

• Aesthetics and wildlife frequently a high priority

TIMO

• Private equity capital

• Acquire lands sold by vertically integrated firms (also buy conversion facilities)

• Tax benefits passed through to owners with no corporate income tax

• Land need to be “churned” every 10 to 15 years, making long-term management questionable

Immobility of Trees

Immobility of Trees• Location Utility

– Forests have value in part based on their location

– Trees have in-place value as part of a forest– Conversion value requires harvesting and

transportation of cut products

Inventory vs. Supply*

* Term always used in economic context in this course

Inventory vs. Economic Supply

• Inventory is total physical volume present– US Forest Service

Forest Inventory Analysis (FIA)

• Estimate of total volume

Inventory vs. Economic Supply

• Economic supply is amount of timber owners are willing to sell at some price over a specified time period– Can’t measure directly

• Deduced from observed market equilibrium points

Long Production Period

Long Production Period

• High ratio of inventory to output– Inventory of 3

to 6 MBF per acre yields growth of 100 to 500 bd.ft. per acre per year

– 3% ratio

PAI as % of Stocking

0

1

2

3

4

5

6

7

8

0 20 40 60 80 100

Years

Pe

rce

nt

Long Production Period

• Growing stock is “capital”– Has monetary value– Holding it for another year incurs an

“opportunity cost”, • income not realized and used for something else

• Growth is the output– Growth is inventoried, added to growing stock

Long Production Period

• Opportunity cost is measured by income foregone– Value of growing stock times return that could

be earned if growing stock was converted to cash and invested elsewhere

– Potential earnings measured by an interest rate that reflects earnings from other investment opportunities available to the owner

Long Production Period

• Example– Growing stock is worth $100,000 today if sold

on the stump– If left to grow another year growing stock

would be worth $110,000– If growing stock is sold and the $100,000

invested elsewhere it would be worth $120,000 one year later.

– Return on timber is $10,000 or 10%– Return elsewhere is $20,000 or 20%

Dual Nature of Trees

• Capital– Land – fixed input– Timber growing stock – variable input

• Product produced – Annual increase in volume, i.e. timber growth– Other non-timber products and benefits

Dual nature of treesLevel of capital investment

• Typical factory– Size of building, and – Number and capacity

of machines

• Forest– Acres of forestland– Volume of timber

growing stock

Dual nature of treesOperating decisions

• Rate at which machines are operated– Speed and hours per

week

• “Rotation” length– Increasing rotation

length in turn increases capital investment

Perspective Matters:

Individual Tree, Stand, Forest,

Ecosystem

Perspective Matters

• Decisions based on a single tree– Diameter

limit– Crop tree

selection– Financial

maturity

Perspective Matters

• Decisions based on a stand– Even-aged

• Optimal rotation length

– Uneven-aged• Single tree

selectionTwo-age shelterwood

Perspective Matters

• Decisions based on multiple stands– Unregulated

• Irregular harvest

– Regulated• Regular

harvestEven-aged Hardwood Stands on Daniel Boone National Forest

Perspective Matters

• Decisions based on ecosystems– Multiple

objectives– Must

manage across pro-perty lines

Forested ridges in Central PA are important watersheds