TIMBER MANAGEMENT

1
TIMBER MANAGEMENT FOREST ECONOMICS TOPICS

• Goal and constraints
• The regulated forest
• Rotation age
• Time value of money (present value)
• Supply demand
• Wood products industries

2
TIMBER MANAGEMENTDEFINITION

• Application of analytical techniques to aid in
  choice of a timber-production regime that
  contributes most to landowners objectives

3
TIMBER MANAGEMENTTHE GOAL

• To find the management scenario with highest
  value, subject to
• Constraints
• Internal
• External
• Compatibility with other resource uses
• Quantitative analyses necessary (many possible
  scenarios constraints exist)

4
TIMBER MANAGEMENTTHE CONSTRAINTS

• Internal constraints determine forest
  productivity, e.g.
• Climate
• Soil
• Species
• External constraints involve politics
  economics, e.g.
• Legislation
• Taxation
• Markets

5
TIMBER MANAGEMENTTHE CONSTRAINTS

• Internal external constraints determine
  compatibility or incompatibility of various
  forest resource uses

6
THE REGULATED FOREST

• DEFINITION
• Regulated Forest ? a forest producing a
  consistent continuous product flow
• By definition, provides sustained yield
• Requires manipulation of forest structure

7
THE REGULATED FOREST

• Allowable Cut ? sustained-yield amount of
  timber harvestable per time period
• Allowable cut depends on
• Predicted growth
• Predicted losses due to
• Fire
• Insects
• Disease

8
THE REGULATED FOREST

• May be achieved by
• 1. Even-aged management
• Rotation age concept is associated with
  even-aged management
• 2. Uneven-aged management
• Cutting cycle concept is associated with
  uneven-aged management

9
EVEN-AGED MANAGEMENT

• Key Decision determination of rotation age
• How to determine rotation age?
• 1. Determine landowners objective
• 2. Determine value of objective for each year
  of growth (based on growth curve)
• 3. Select as rotation age the age that maximizes
  the value of the objective

10
EVEN-AGED MANAGEMENT(continued)

• Common landowner objectives
• Wood volume production
• Monetary profit

11
EVEN-AGED MANAGEMENT (continued)

• Objective 1 Maximize harvest volume
• Objective is achieved by maximizing mean annual
  increment ( MAI )
• MAI stand volume / stand age
• So . . . we . . .
• Compute MAI for each possible stand age
• Choose the age with highest MAI as the optimal
  rotation age

12
YOUR TURN MAXIMIZE MAI
Given the growth yield table below, what
rotation age would maximize MAI? What is MAI at
that age?
Yield of Even-Aged Loblolly Pine (Site Index 70)
Stand Age Volume (bd. ft.) 20
900 30 6,200 40 13,400 50 17,200
60 19,100 70 20,600 80 21,800
13
EVEN-AGED MANAGEMENT (continued)

• Objective 2 Maximize profit
• Profit depends on amounts and timing of
• Revenues
• Expenses
• We must consider time value of money

14
TIME VALUE OF MONEY

• Present Value (PV) ? todays worth of money
  received or spent in future
• PV depends on
• Interest rate
• Time

15
PRESENT VALUE (PV) EXAMPLE AND FORMULA

• E.g.,
• If you receive 105 one year from now . . .
• . . . and if annual interest rate is 5 . . .
• PV of this money is 100
• General Formula PV V / (1 i)t
• V ? future monetary amount
• i ? interest rate per time period
• t ? number of time periods

16
MAXIMIZATION OF PROFIT

• Maximization of profit requires maximization of
  NET PRESENT VALUE (NPV)
• NPV PV of revenues - PV of expenses

17
YOUR TURNNET PRESENT VALUE

• Suppose that it would cost 2000 per acre today
  to prune your young black walnut plantation. If
  you prune, your revenue when you harvest the
  trees in 30 years will be 4000 per acre higher
  than if you do not prune the trees.
• Should you prune your black walnuts? (Assume a
  5 annual interest rate.)

18
WOOD PRODUCTS ECONOMICS

• Significant economic activity
• 1.2 million people employed
• 7 of manufacturing employment
• 2 of U.S. GNP

19
LUMBER

• Competitive industry
• Many firms (thousands)
• Absence of product differentiation
• Sawmill capital costs relatively low
• Two distinct sectors
• Hardwood (relatively small sector)
• Softwood (large sector)

20
LUMBER

• PERFECT COMPETITION
• 1. Firm cant influence price (price taker)
• 2. Firm has freedom to enter exit market

21
LAWS OF SUPPLY DEMAND

• Demand
• Quantity consumers wish to purchase
• A flow (i.e. a quantity per unit time)
• Demand falls with increasing prices
• (As consumers substitute alternatives)
• Demand may change for other reasons, e.g.
• Price changes in complements
• Price changes in substitutes

22
LAWS OF SUPPLY DEMAND
23
LAWS OF SUPPLY DEMAND

• Supply
• Quantity producers wish to sell
• A flow (i.e. a quantity per unit time)
• Supply rises with increasing prices
• (Because producers desire higher profits)
• Supply may change for other reasons, e.g.
• Price changes in other commodities
• Price changes in factors of production

24
LAWS OF SUPPLY DEMAND
25
LAWS OF SUPPLY DEMAND
Demand Curve
Supply Curve
Equilibrium Level of Production
Equilibrium Price
26
LAWS OF SUPPLY DEMAND
What happens to demand curve if mortgage interest
rates fall? What would be the resulting effect on
price?
Supply Curve
Demand Curve
27
LAWS OF SUPPLY DEMAND

• Laws are really hypotheses
• May not work so well for nonrenewable natural
  resources or manufactured goods

28
LUMBERPRICES, DEMAND SUPPLY

• Prices rising (since mid-1960s)
• Softwood prices volatile
• Demand varies with construction activity
• Construction activity varies with interest rates
• But supply responds slowly to demand
• Hardwood prices more stable
• Depends less on construction
• Substantial secondary market (e.g., furniture)

29
LUMBERPRICES, DEMAND SUPPLY

• The future?
• Supply not likely to increase
• Prices likely to remain high or increase, but . .
  .
• Nonwood substitutes may avoid price increases
• Predictions often fraught with unreliability!!!

30
PULP PAPER OVERVIEW

• South produces 70 of U.S. virgin pulp
• A few very large firms
• Often vertically integrated
• Grow fiber
• Produce pulp
• Manufacture paper from pulp
• Often also own lumber plywood mills
• Firms can influence product prices
• Small firms have little price control
• ? Price Leadership phenomenon

31
PULP PAPERPRICES, DEMAND SUPPLY

• Paper products ubiquitous
• Demand parallels GNP
• 20,000 tons consumed per 1 million GNP
• National recessions/expansions control demand
• Per capita consumption increasing over time
  (because per capita GNP increasing)

32
PULP PAPERPRICES, DEMAND SUPPLY

• The future?
• Concentration may increase (due to high cost of
  entry into the market)
• Supply of pulpwood may be sufficient (large,
  high-quality timber not required)
• Substitutes for wood fiber?
• Beware of economic predictions!!!

33
TIMBER SUPPLY ISSUES

• National Forests
• Harvest unresponsive to prices and declining
• This contributes to price volatility
• In future supply demand may balance only if
  prices increase substantially (beware
  predictions!)