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