Economics of forestland use and even aged rotations
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Economics of Forestland Use and Even-Aged Rotations. Land tends to be used for the activity that generates the greatest NPV of future satisfaction to the present owner. Once the land use is determined the same maximization of NPV defines how that use will be carried out. Stand Level Decisions.

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Economics of forestland use and even aged rotations

Economics of Forestland Use and Even-Aged Rotations

Land tends to be used for the activity that generates the greatest NPV of future satisfaction to the present owner.

Once the land use is determined the same maximization of NPV defines how that use will be carried out.


Stand level decisions
Stand Level Decisions

  • Assumptions

    • Competitive market conditions

      • Landowners are price takers

    • Non-monetary values ignored

    • All cash flows and interest rates are real

    • Taxes “ignored”

      • Assume cash flows are after taxes, or

      • Assume public agency context

    • Cash flows are “expected values”

    • Discount rate may also need to be increased to account for increased level of risk


Expected value
Expected Value

  • Way to account for the risk associated with an investment

  • Weighted average outcome

    • Weights are probabilities of possible outcomes

    • Example

      • 80% of time investment expected to yield $1,000

      • 20% of time investment expected to yield $500

      • Expected value is,

        0.80x $1,000 + 0.20 x $500 = $900


Land use in an unregulated market land will be purchased by highest bidder
Land Use In An Unregulated Market -land will be purchased by highest bidder

  • Example

    • rural tract of cutover timberland of all one site quality,

    • not suitable for agriculture because of slope and soil type,

    • three basic land uses are possible

      • Even-aged sawtimber production

      • Even-aged pulpwood production

      • Grazing


Land use in an unregulated market land will be purchased by highest bidder1
Land Use In An Unregulated Market -land will be purchased by highest bidder

  • Example

    • Potential buyers will

      • project their expected cost and revenue stream from the tract

      • Estimate a WPL∞ (SEV) using their minimum acceptable rate of return (MAR)


Wpl sev
WPL∞ (SEV)

t

t

Ry(1+r) (t-y) -

Cy(1+r) (t-y)

a – c

y=0

y=0

=

+

r

(1+r)t - 1

Ny

t

(Ry– Cy) (1+r) (t-y)

a - c

y=0

=

+

r

(1+r)t- 1


R irr if pay wpl for land
r = IRR if pay WPL∞ for land

WPL∞ = Capital value of periodic series at interest rate r

If put WPL∞on right hand side as a cost, NPV = 0


t

(Ry– Cy) (1+r) (t-y)

y=0

a - c

-

WPL∞

=

0

+

r

(1+r)t- 1


Compare wpl
Compare WPL

  • Even-aged sawtimber

  • Pulpwood rotation

  • Grazing


Even aged sawtimber
Even-Aged Sawtimber

  • Costs ($/A)

    • reforestation of $150

    • rotation of 40 years, t = 40

    • thinning of $50 in year 10 and every 40 years thereafter

    • annual cost of $4

  • Revenues ($/A)

    • final harvest of $3,500 every 40 years

    • thinning of $300 in year 20 and every 40 years thereafter

  • WPL∞ = Excel Spreadsheet


Even aged pulpwood
Even-Aged Pulpwood

  • Costs ($/A)

    • reforestation of $150

    • rotation of 20 years, t = 20

    • annual cost of $4

  • Revenue ($/A)

    • Final harvest of $1,000 every 20 years

  • WPL∞ = Excel Spreadsheet


Grazing
Grazing

  • annual net revenue of $20 per A

  • initial seeding cost of $175

  • WPL∞ = Excel Spreadsheet



Market value of land doesn t usually equal wpl of a given investor
Market value of land doesn’t usually equal WPL of land ∞ of a given investor

  • Market value is result of WPL∞ of all interested buyers, and their willingness to bid more than their WPL∞

  • Land itself can be treated as a separate investment

    • Calculate WPL1, the willingness to pay for bare land with land sale after one rotation


Wpl 1
WPL of land 1 =

t

t

Lt

Ry

Cy

-

+

(1+r)y

(1+r)y

(1+r)t

y=0

y=0

How much investor would pay for land assuming the land is sold at end of first rotation for Lt

WPL1 for sawtimber example = Excel Spreadsheet


Implication
Implication of land

  • Investor willing to pay $446, $25 more per A, if assume can sell land for $600 per A at end of first rotation. Recall that WPL∞ was $421 per A

  • If Lt = WPL1 in the equation for WPL1, then WPL1 = WPL∞


Sensitivity analyses
Sensitivity Analyses of land

  • Recalculate WPL with different assumptions about important variables

    • MAR

    • Productivity

    • Product prices

    • Increases in annual costs

    • etc.


Market allocation of land uses
Market Allocation of Land Uses of land

  • Theoretically yields private optimum land use pattern

  • Social optimum may be different

  • How does government try to get closer to social optimum?

    • Planning and Zoning

    • Purchase of private land for public uses

    • Conservation easements


Capital performance indicators
Capital Performance Indicators of land

  • Assessment of the return your capital is earning, e.g.

    • General measure,

      • ROI, return on investment,

      • IRR is a ROI measure

    • Measure for stock

      • Price-Earnings ratio (P/E)

    • Measure for bonds

      • Yield


Capital performance indicators1
Capital Performance Indicators of land

Price-Earnings Ratios (P/E) for Stock


Capital performance indicators2
Capital Performance Indicators of land

  • Measures for forest-related investments

    • Overall measure

      • IRR

    • Individual tree

      • Financial maturity

    • Forest

      • Forest value growth % for forest


Annual value growth as of forest capital
Annual Value Growth As % of Forest Capital of land

  • “Profits” should be measured in terms of capital tied up, not in absolute terms

    • Example,

      • $100 per acre generated with $1,000 of capital is 10% return on investment,

      • $100 per acre earned with $10,000 of capital is 1% return

    • Concept used for “financial maturity” of an individual tree”


Annual value growth as of forest capital1
Annual Value Growth As % of Forest Capital of land

  • Calculation should include,

    • Market value of the land, Ly, in the value of the “forest” capital,

    • Timber value based on “stumpage value” assuming liquidation of timber for even-aged management.

      • Liquidation value is sum of stumpage value and land value

    • Annual value growth should be reduced/increased by sum of annual revenues minus annual costs (a-c)


Annual value growth as of forest capital2
Annual Value Growth As % of Forest Capital of land

Annual forest value growth %

(Hy+1 +Ly+1) – (Hy + Ly) + (a-c)

Hy + Ly

=

Example, Table 7-3


Multi year value growth as of forest capital
Multi-Year Value Growth As % of Forest Capital of land

 Without net annual revenue (a-c)

1/n

(

)

Hy+n + Ly+n

Hy + Ly

Forest value growth %

=

- 1

 With net annual revenue (a-c)

Must determine iteratively, like for IRR


Holding value hv of forestland
Holding Value (HV) of Forestland of land

  • NPV of holding the forest and selling land and timber at the optimal rotation age for the timber

  • Answers the question: Should I liquidate my investment now or wait until rotation age?

t-y

[

]

Rq

(1+r)q

Cq

(1+r)q

HVy=

-

q=0



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