Continuous timber harvest — Costly restriction or profitable solution?

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In timber production, sustainability means maintaining resources by balancing timber harvest with timber growth. In forest management, sustainability also refers to a constant and steady flow of income. The aim of this study is to resolve the contradiction, whether a sustainable/continuous flow of timber income is a costly (income-reducing) restriction, or a comparatively profitable (income-increasing) solution. For that we relax the common assumption of a perfect capital market and consider differing borrowing and lending rates to incorporate the aspect of financial viability into forest management decisions.Based on an established forest production model, we construct a synchronized “normal” forest enterprise and confront it with an interest rate on a perfect capital market and transform the forest enterprise to be optimal under the Faustmann-Pressler-Ohlin rule (FPO-rule). We do this by strictly following the FPO-harvesting-pattern, which immediately yields a perpetual non-constant (intermittent) flow of timber income. Alternatively, we simulate a long-term continuous forest enterprise transition, which ultimately results in a new normal forest structure with constant timber income. In a second step, we re-run the forest enterprise transitions under varying borrowing and lending rates, that differ as a function of capital availability within an imperfect capital market model. In both approaches, we derive and compare the maximum annual payout of the two alternative transition paths for an infinite time-horizon.Our results show, that the normal forest enterprise structure no longer holds when the rotation age is adjusted to be optimal under the FPO-rule when capital markets are perfect. We highlight why the normal forest structure is often referred to as a costly restriction towards the question of the optimal harvesting age due to inefficient investment and financing costs. In an imperfect capital market, with differing borrowing and lending rates, creating a new normal forest stand structure appears to be economically favorable compared to a stand structure which yields non-constant income.While our analysis does not provide universally valid evidence for the optimality of a normal forest, we are able to show that a constant flow of income can be favorable compared to non-constant income when the assumption of a perfect capital market is relaxed.