Unique Characteristics of Forests and Their Management (Economic) Implications

1. Unique Characteristics of Forests and Their Management (Economic) Implications

2. Management Decisions Complicated by • Joint production • Externalities • Non-marketed outputs • Wide variety of “types” of owners

3. Management Decisions Complicated by • Immobility of trees • Location utility • Inventory vs. economic supply • Long production period • Dual nature of trees • Capital (factory & machinery) • Product

4. JOINT PRODUCTION

5. 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 tradeoffs among outputs?

6. Joint Production • Production function is a biological growth process • Highest cost input is time, an opportunity cost • Opportunity to sell now instead of later

7. Production Function • Relationship between inputs (age) and outputs (volume) Output (stocking level) Input (age) Inflection point Biological maturity

8. Production Function

9. Externalities

10. Externalities • Positive - decision to do one thing results in unintended but positive result • e.g., attract new species of bird Purple Gallinule

11. Externalities • Negative - decision to do one thing results in unintended but negative result • displace indigenous species of bird Indigo Bunting

12. Non-Marketed Outputs

13. 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

14. Types of Owners – Who’s making the management decisions

15. 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

16. 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)

17. 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

18. 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

19. 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

20. 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

21. Immobility of Trees

22. 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

23. Inventory vs. Supply* * Term always used in economic context in this course

24. Inventory vs. Economic Supply • Inventory is total physical volume present • US Forest Service Forest Inventory Analysis (FIA) • Estimate of total volume

25. 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

26. Long Production Period

27. 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

28. 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

29. 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

30. 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%

31. 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

32. 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

33. 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

34. Perspective Matters: Individual Tree, Stand, Forest, Ecosystem

35. Perspective Matters • Decisions based on a single tree • Diameter limit • Crop tree selection • Financial maturity

36. Perspective Matters • Decisions based on a stand • Even-aged • Optimal rotation length • Uneven-aged • Single tree selection Two-age shelterwood

37. Perspective Matters • Decisions based on multiple stands • Unregulated • Irregular harvest • Regulated • Regular harvest Even-aged Hardwood Stands on Daniel Boone National Forest

38. Perspective Matters • Decisions based on ecosystems • Multiple objectives • Must manage across pro-perty lines Forested ridges in Central PA are important watersheds