1. Unique Aspects 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 Product produced 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 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

33. 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

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 Uneven-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