Rotation length and discount rates

Abstract

SummaryWhen valuing a commercial plantation, forest risk is commonly incorporated in the discount rate. Determination of the most economic rotation length is heavily dependent on the discount rate selected. Commonly the discount rates that are used for economic evaluation and for determining rotation length are the same.A single-stand simulation model was developed to analyse the rotation length of radiata pine. Two approaches were examined: one building risk and uncertainty into the value of β in the determination of discount rate and the other explicitly building part of the risk into a deterministic analysis.The analysis shows that explicitly building some of the risk components into the analysis increases the optimum economic rotation length, sometimes considerably.In the examples presented, the objective rotation length is increased by as much as 10 years, which is considerable in a crop with a common rotation length of about 35 years. The exact increase will depend on what each forest grower deems to be the appropriate assumptions, but the assumptions made in this article are reasonable.Organisations would need to carry out their own analyses using their own biometric models and economic data, but the conclusion is that longer rotation lengths are implied if at least a part of the risk is considered explicitly rather than simply by adjusting the discount rate. The conclusion is believed to have widespread applicability.