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

–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. tradeoffsHow does a manager simultaneously determine appropriate level of output of each considering tradeoffs 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

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

Integrated Industrial 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

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

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

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 trees Level 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 trees Operating 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 selection Two-age shelterwood

Perspective Matters Decisions based on multiple stands –Unregulated Irregular harvest –Regulated Regular harvest Even-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