Land Expectation Value Research Articles

Economics of species change subject to risk of climate change and increasing information: a (quasi-)option value analysis

In the context of climate change, several forest adaptation options have to be advocated such as a shift to more resistant species. We provide an economic analysis of timber species change as a tool for adapting forests to climate change. We use the framework of cost–benefit analysis, taking uncertainty into account both exogenously (sensitivity analysis) and endogenously [(quasi-)option value calculations]. We apply the method to assess the economic rationale for converting Norway spruce stands to Douglas-fir in the French Black Mountain. We find that the Douglas-fir conversion is land expectation value (LEV) maximizing under a wide range of a priori (subjective) probabilities attached to high mortality of Norway spruce under climate change (for probabilities higher than 0.25–0.31). If information about the impacts of climate change is expected to increase over time, and given the large sunk costs attached to conversion, a delay strategy may be preferable to transition and to status quo when the impacts of climate change on Norway spruce mortality are sufficiently ambiguous. In such cases, getting information earlier increases the LEV by €5–60/ha. Beyond the specifics of the case study, this paper suggests that quasi-option value is a relevant tool to provide insights to forest owners dealing with adaptation decisions in the context of climate change.

Financial potential of rubber plantations considering rubberwood production: Wood and crop production nexus

Globalization and urbanization have significantly increased the food and non-food commodity demand for the last century, and it is vital to consider a business strategy with economical and ecological sustainability. The objective of this study was to project the contribution of wood to the financial performance of rubber plantations. We adopted cost and revenue data of rubber plantations in Cambodia and utilized land expectation value (LEV) as the criterion for profitability analysis. Among the top-ten rubber-producing countries in pan-tropics, the areas of rubber plantation were equivalent to from 1% to 90% of forest plantations and 0.3%–10.2% of total forest areas. Rubberwood revenue accounts for about 4%–10% of the 30th year LEV in rubber plantations at discount rates of 2% y−1–10% y−1, and this was sufficient to cover the cost of re-establishing the plantations. The proportion of the 30th year LEV contributed by wood revenue increased under conditions normally associated with a more difficult business environment, i.e., at higher wage costs, and lower latex revenue. We found that the wood revenue can improve the profitability of rubber plantations by up to 40% depending on the price of the rubberwood. We assert that timber from wood producing commodity plantations should be encouragingly utilized as industrial timber by linking the wood production in the management strategy of the plantations.

A Forest-Profit Expectations Dataset for New Zealand, 1990–2008

In this paper, we construct a dataset of annual expected forest profits in New Zealand from 1990–2008 at a fine spatial resolution. We do not include land values in any of our profit calculations. We estimate four measures of expected forest profits based around net present value (NPV), land expectation value (LEV), equal annual equivalent (EAE), and internal rate of return (IRR). Our estimates of expected profits are based on the assumption that land owners form their expectations adaptively; that is, they use recent data on prices and costs to form expectations. We illustrate our data by showing regional variation in each of our measures, changes over time in NPV on land in forest in 2008, and variation in NPV over space in 2008. The final dataset, working datasets, and the code used in this work are publicly available to the research community and can be accessed from the authors’ website: http://www.motu.org.nz/building-capacity/dataset/u10073_forest_profit_expectations_dataset.

Economical sustainability of pinestraw raking in slash pine stands in the southeastern United States

Raking pinestraw for use as landscape mulch has gained popularity over the last two decades in the southern U.S. as an intermediate income source for forest landowners, despite uncertainties associated with its long term impact on soil fertility. A Reed model was utilized to ascertain the effects of pinestraw raking on the profitability of slash pine stands. A model that estimates yearly needlefall was employed to determine the nutrient removals due to pinestraw raking. The land expectation value (LEV) for the intensively yearly raked unthinned and thinned stands was $6091ha−1 and $5142ha−1, respectively. Corresponding removals of carbon (C) and nitrogen (N) were 12Mgha−1 and 233kgha−1, and 11Mgha−1 and 182kgha−1 for unthinned and thinned stands, respectively. Stands intensively managed for pinestraw raking were more profitable than those extensively managed, although nutrient removals were greater under the intensive management scenario. Extensively managed and raked stands were more efficient in terms of nutrient removal and economic revenues. From a land stewardship perspective, managing for pinestraw on higher productivity stands may be more efficient in terms of realizing increased economic returns for similar levels of nutrient removal.

Carbon sequestration and uneven-aged management of loblolly pine stands in the Southern USA: A joint optimization approach

Forest carbon sequestration is regarded as a viable and cost effective option for reducing global greenhouse gas emissions. Several studies have analyzed the effects of joint management of carbon and timber under different even-aged forest management scenarios. However, research specifically focused on the inclusion of carbon sequestration benefits into uneven-aged management has received little attention. Using the USDA Forest Vegetation Simulator (FVS)-Southern Variant to generate growth and yield data, this study assessed management and financial effects of carbon benefits on the optimum uneven-aged management of loblolly pine stands. We applied the generalized Faustmann formula for uneven-aged management to calculate the land expectation value (LEV) at various levels of residual basal area and cutting cycle. Considering a biologically maximum stocking of 80ft2/acre immediately before the harvest, this study determined the optimum management regimes of uneven-aged loblolly pine stands. This study also carried out sensitivity analyses to assess the effects of changes in interest rate, stumpage prices, and future land value and site productivity. In the joint management scenarios of timber production and carbon sequestration, carbon benefits could not alter the optimum management regimes of uneven-aged loblolly pine stands significantly. The stumpage prices and future land values were found to be less influential to the optimum joint management regimes. The percentage increase in financial returns was relatively more prominent in less productive sites.

Impact of payments for carbon sequestered in wood products and avoided carbon emissions on the profitability of NIPF landowners in the US South

This study determines economic impact of payments for carbon sequestered in wood products and avoided carbon emissions due to use of forest biomass for electricity generation instead of fossil fuels on the profitability of non-industrial private forest (NIPF) landowners in the US South. Penalties for carbon emitted at the time of undertaking various silvicultural activities and exponential decay of wood products were also considered. We used life-cycle assessment to evaluate carbon emissions from various silvicultural activities. We modified the traditional Faustmann forest rotation model to incorporate identified carbon payments and penalties. Slash pine (Pinus elliottii) was selected as a representative species. We found that the overall global warming impact (GWI) for managing a hectare of intensively managed slash pine plantation was 6539kg carbon dioxide equivalent. The maximum land expectation value (LEV) for the scenario when all carbon payments and penalties along with payments for timber products were considered was $1299/ha using a 20year rotation age. This value is about 71% higher than the LEV when only payments for timber products were taken into account ($760/ha using a 21year rotation age). Our results clearly indicate that emerging carbon markets could greatly benefit southern NIPF landowners.

VOLUMETRIC AND ECONOMIC OPTIMAL ROTATIONS FOR FIREWOOD PRODUCTION OF Eucalyptus urophylla IN IPAMERI, STATE OF GOIAS

This work analyzes the volumetric and economic production of Eucalyptus urophylla S. T. Blake stands oriented to firewood production in a three-years cutting cycle, in the region of Ipameri, State of Goias. 1,545 trees were measured and rigorously scaled. The volume data obtained was adjusted by Schumacher log-reciprocal model. The volumetrically optimal rotation was defined by the Mean Annual Increment and Land Expectation Value maximization criteria. The optimal rotation ages were between 5 and 6 years, and the economically optimal rotations were around 3 years of age. In relation to the sampled data, it may be inferred that the optimal harvest age should be at age 4.Keywords: Biological rotation age; increments; forest management. ResumoRotações volumétrica e econômica ótimas para produção de lenha de Eucalyptus urophylla em Ipameri, estado de Goiás. Este trabalho analisa a produção volumétrica e econômica de talhões de Eucalyptus urophylla S. T. Blake destinados à produção de lenha em ciclos de corte de três anos, na região de Ipameri, Goiás. Foram medidas e posteriormente cubadas rigorosamente 1.545 árvores. Os volumes obtidos foram ajustados ao modelo log recíproco de Schumacher. Obteve-se a otimização da rotação volumétrica pela maximização do incremento médio anual e do valor esperado da terra. As rotações volumetricamente ótimas identificaram a idade entre 5 e 6 anos, e as rotações economicamente ótimas ficaram em torno de três anos de idade. Com base nos dados coletados, se infere que a rotação ótima de corte deveria ficar na idade de 4 anos.Palavras-chave: Idade de corte; incrementos; manejo florestal.

Impact of the New Zealand Emissions Trading Scheme on forest valuation

The New Zealand Emissions Trading Scheme poses challenges for forest valuation. A Faustmann Land Expectation Value (LEV) can be calculated for the two recurring cashflow streams — one associated with forestry operations and the other associated with annual carbon trading. However the requirement to surrender carbon units (a) for removals at the time of harvest; and (b) for the subsequent decay of residues, means that the carbon component of crop value is negative from about mid-rotation. This negative value persists after harvesting when there is no forestry crop value to offset it. An additional issue is determining the appropriate discount rate for cashflows arising from carbon trading. A complication is that although LEV and crop value decrease as discount rate increases, carbon value increases. This confirms that the preferred approach to deal with risk and uncertainty is to adjust cashflows rather than the discount rate.

Further generalization of Faustmann's formula for stochastic interest rates

Markov decision process (MDP) models generalize Faustmann's formula by recognizing that future stand states, prices, and interest rates, are not known exactly. Buongiorno (Forest Science 47(4) 2001) presents a dynamic programming and a linear programming formulation of the MDP model with a fixed interest rate. Both formulations are generalized here to account for a stochastic interest rate. The objective function is the expected present value of returns over an infinite horizon. It gives, like Faustmann's formula, the value of the land and the eventual standing trees. The changes between stand states, prices, and interest rate, are represented by Markov chains. Faustmann's formula is a special case where the change from one state to another has 0 or 1 probability, and the interest rate is constant. The MDP model applies to any stand state, even- or uneven-aged, and the best decisions are tied uniquely to the current system state. An example shows the effects of recognizing variations in interest rate on the land expectation value, and the cost of ignoring them.

Economic analysis of exploitation and regeneration in plantations with problematic site productivity

Abstract Although intensive managed plantations clearly increase the growth and yield of forests several papers refer to declining forest productivity. Therefore in this paper we study the impact of declining forest productivity on the land expectation value and the optimal rotation length. We start from the research by Lu and Chang (1996) and try to fill the gap between the stable site productivity (“best”) and the site mining (“worst”) cases. For that we extend the classical Faustmann model by availability of different recovering technologies. In general the model allows the analysis of the two plantation groups: “mining the site by high productive plantation followed by management of degraded areas” and “high productive plantation and regeneration cycling” with the same comparative static. The model, analysis and comparison with the two extreme cases in Lu and Chang (1996) leads to a detailed understanding of land use management when site productivity decline is possible. Particularly the relation between declining periods with intensive land use and land use alternatives after declining periods with regeneration can be well understood. Findings are: Not ever declining process asks for regeneration. Many declining processes can be stopped at early times by high cash flows after mining periods. Shortenings of the regeneration time can boost site mining intensities.

A financial evaluation of two contrasting silvicultural systems applicable to Pinus taeda grown in north-east Uruguay

The Loblolly pine (Pinus taeda L.) plantation area in north-east Uruguay was 108 000 ha in 2008. Recent industrial capacity developments have resulted in major structural changes. Silvicultural system selection depends on site productivity, costs, timber prices and public policies. This study aimed to assess economic returns for two silvicultural systems in north-east Uruguay, in scenarios with and without a plantation subsidy: System I, with a short, 12-year rotation, primarily for small logs; and System II, with a longer, 24-year rotation. For System I, the underbark volume was 198 m3 ha−1 (mean annual increment16.5 m3 ha−1 y−1) and land expectation value (LEV) at a 9.7% discount rate was US$561 ha−1 and US$442 ha−1, with and without subsidy, respectively. System II resulted in 318 m3 ha−1 underbark volume (13.2 m3 ha−1 y−1) and the LEV was US$860 ha−1 and US$771 ha−1, with and without subsidy, respectively. System I was more profitable than extensive cattle husbandry only when the distance to mill was equal to or less than 60 km and wood millyard prices were equal to or higher than US$27.8 m−3 and US$28.8 m−3 with and without subsidy, respectively. Values for System II, in which the main product was a mix of sawlog diameters, were positive and higher than those for System I, both with and without subsidy. If a company invested in forest plantations without due provision for early silvicultural treatments, such as pruning and precommercial thinning, a high risk of financial loss would ensue. Long-rotation sawtimber regimes similar to System II would be more profitable and offer a lower risk of financial losses. The results suggest subsidy withdrawal in Uruguay should not lead to changes in silvicultural systems; in fact, it rendered regimes designed for low-value wood, such as System I, even less advisable.

A method to evaluate the option of storing carbon in your forest

Managing the forest to store carbon is a relatively new concept. Various regional greenhouse gas initiatives and new Federal legislation are providing financial incentives for forest owners to manage for carbon in addition to other forest products. These incentives are intended for landowners who engage in activities that go beyond business as usual practices. Managing for carbon will likely involve foregoing other investment alternatives and increasing rotation lengths. The analysis approach demonstrated here provides a relatively simple method for an owner to compare traditional forest management and regular harvests with letting the trees grow to accumulate more carbon in the forest. Several financial decision statistics are considered and demonstrated with examples. A derivative of land expectation value, called rotation equivalent value, is shown to be a useful decision tool for comparing carbon storage with other management options having different rotation lengths.

When and to what extent do risk premia work? Cases of threat and optimal rotation

Abstract As with financial risk in markets, physical risk (threat or hazard) has sometimes been treated by adding a premium to the discount rate for NPV calculations applied to forestry options. A discount premium reflecting the rate of threat gives the correct rotation for a perpetual succession of crops, and, by simple adjustment, the correct land expectation value, but only if the threat occurs at a constant rate throughout the rotation and if destruction – if it happens at all – is complete. This is true irrespective of the number of intermediate cash flows (e.g. from thinnings). If some value can be salvaged following the destructive event, neither optimal rotation nor NPV is correctly determined by using a threat premium. Partial salvage of value may make the rotation longer or shorter than the threat-free one. A threat-adjusted rate does not give a correct result when threat level changes during the rotation. These findings are illustrated with thinned, wind-susceptible crops in the UK, and crops subject to illicit felling in India.

Effects of carbon sequestration rewards on forest management—An empirical application of adjusted Faustmann Formulae

This paper assesses the effects that different economic instruments to reward carbon sequestration services might have on forest management, especially on the optimal rotation period. Three different carbon crediting schemes are considered, which are based on different accounting rules. The schemes are different with respect to the question whether and how to account for carbon emissions. The forest valuation method used for calculation is based on the land expectation value (LEV), which was adjusted for the value of carbon sequestration services. Changes in the LEV and optimal rotation are expected to be induced by the amount and interactions of carbon and timber prices, harvesting and regeneration costs, and interest rates. The optimal economic rotation period is calculated for single stands as well as for whole forest enterprises (fully regulated “normal” forests). Crediting the carbon sequestration of single stands—starting from the time of regeneration—is comparable to rewarding afforestation projects. When crediting forest enterprises with existing timber and carbon stocks, additional carbon sequestration compared to a reference is rewarded. The findings reveal that, depending on the carbon price level, the optimal rotation period is increased in all considered crediting schemes, but with different intensity. If wood removals have to be accounted as carbon emissions this has the most significant effect on the optimal rotation period for forest stands and enterprises. In this case the increase of the optimal rotation period by rising carbon prices is boosted additionally by rising interest rates. Different thinning regimes, however, have only little impact on the time of maximum LEV under carbon crediting schemes.

Some indirect costs of forest certification

Summary Forest certification is designed to assure consumers that the wood products they purchase come from sustainably managed forests. Certified forests must meet certain standards that vary with the certification scheme. However, certification generally promotes environmental objectives by restricting forest management options in ways that may reduce wood and fibre production and increase the cost of delivering wood to market. For example, some aspects of certification programmes can discourage creation of new forest plantations and application of herbicide and fertilizer. These restrictions have costs which often are difficult to quantify. Bounds on the opportunity costs of restricting silvicultural options are explored by comparing a natural pine regime to plantation management regimes with and without herbicide using some basic economic criteria. In this analysis, a plantation regime with herbicide had nearly four times the land expectation value ( le V) of a natural pine regime and almost double the le V of a plantation without herbicide treatment.

PRIVATE FOREST DEVELOPMENT PROSPECT IN JAYAPURA REGENCY, PAPUA

Land availability in Jayawijaya District is not directly opening the opportunity for developing community forest in this region. The main factors that influencing the success of community forest development are the selection of appropriate species, the silviculture technique that implemented and the financial feasibility of it. This research conducted in Jayawijaya District and it aim to investigating technical, socio-culture, and financial feasibility in developing community forest in this region. Collected data are tabulated and calculated by using Microsoft Excel Program. The calculations of Net Present Value (NPV), Benefit Cost Ratio (BCR), Internal Rate of Return (IRR) are worked for private forest with pure exertion system in Ibele's forest region. Besides that, Land Expectation Value (LEV) is also calculated by using Faustmann formula. Processed data are analyzed descriptively. The result of this research reveals that (a.) based on forest area allocation there are 198.515 ha available for developing private forest, (b.) there is planting culture as the part of cultivation technique exertion of Dani tribe in Jayawijaya District, (c.) based on financial feasibility study, the exertion of private forest are feasible for 15 years and 25 years cycle scenarios with 5% and 10% discount rates. The 25 years cycle scenario with 5% discount rate has the largest value of LEV, which is Rp. 61.371.850,19/ha

Can native tree species plantations in Panama compete with Teak plantations? An economic estimation

Panama has the highest rate of change in the area of primary forests within Central America. However, to meet growing timber demands, it became popular over the last decades to establish plantations made up of foreign species such as Tectona grandis or Pinus spp. In the majority of the cases the species used are well known; their characteristics such as growth performance have been reviewed intensively and can be accessed in numerous publications. Characteristics of Panama’s native tree species of commercial relevance such as Hieronyma alchorneoides, Swietenia macrophylla and Terminalia amazonia are largely unknown and have been investigated within the study at hand. Using valuation methods of financial mathematics, the competitive position of these three indigenous species was assessed, the results compared to those of T. grandis stands in the same area. Land costs and taxes were not considered, as they would be the same for all species. Financial estimates for indigenous species will enlarge their acceptance for use in reforestation and plantation projects. Using the NPV method and applying the standard scenario, the profitability of T. grandis is lower than that of T. amazonia and S. macrophylla and lies only slightly above the profitability calculated for H. alchorneoides. This result clearly indicates that the investigated native tree species are comparable with T. grandis regarding their economic profitability. Besides its ecological impact, growing native tree species is now also economically legitimate. By calculating land expectation values for all tree species, ideal rotation lengths could be determined. For these species, considerable flexibility exists regarding the optimal rotation length.

Evaluation of Loblolly Pine Management Regimes in Mississippi for Biomass Supplies: A Simulation Approach

Abstract Alternative management regimes of loblolly pine (Pinus taeda) plantations were evaluated and compared for joint production of timber and biomass and exclusively for biomass production in Mississippi. The PTAEDA3.1 computerized yield simulator was used to predict growth effects of various site preparation techniques, initial planting densities, and thinning activities. Evaluation criteria included land expectation values (LEVs) and mean annual increment. Results indicated that sites with a site index of 50–70 (base age 25) yielded average annual stem residues of 0.86–1.20 tons/ac, from which 39.8–47.4 gallons of ethanol could be produced. Inclusion of pulpwood as a feedstock would approximately double biofuel production. Culminating sustainable annual outputs of total stem biomass exclusively for biofuel production using intensive site preparation was unprofitable on all sites because of high site preparation costs and low biomass prices. Sensitivity analyses indicated that LEVs and optimal management strategies were sensitive to changes in price of biomass relative to that of sawtimber. The rise of the relative biomass price would increase woody biomass availability for biofuels. It would also boost intensive management practices, such as intensive site preparation, closer initial tree spacings, earlier thinnings, and shorter rotation ages.

Financial breakeven point for competition control in longleaf pine (Pinus palustris Mill.) reestablishment

Reestablishment of longleaf pine (Pinus palustris Mill.) in the American South is a priority of conservation groups. Its original Pre-European natural range of 38 million ha has been reduced by 95% and it is one of the most endangered ecosystems in the US. The species undergoes a grass stage where no stem development takes place that can last 7 years or longer. Competition control can limit this grass stage and increase economic returns. The amount of competition control cost that equals the cost of the grass stage delay would be the most one would want to expend in reducing the grass stage delay. This breakeven amount can be determined using land expectation value methodology and a simple calculation technique is presented. A case study shows that each additional year of a grass stage delay decreases the bare land value of a longleaf pine stand by about 6% annually. A longleaf pine stand with no grass stage delay worth $2,500 per ha would be worth $1,768 per ha with a 5-year grass stage delay. One could spend up to $478 per ha to eliminate this 5-year grass stage delay and still break-even.

Did Pressler fully understand how to use the indicator per cent?

A classical problem in forest economics is the determination of the optimal rotation age. It is commonly acknowledged that Martin Faustmann and Max Robert Pressler contributed the most to the solution of this problem. Faustmann formulated the renowned land expectation value formula, which laid the foundation for economic analyses of the optimal rotation problem. He also provided several hints on how to correctly solve the problem. Pressler's work focused on the growth of the capital in a forest stand. He invented the concept of Indicator Per Cent, and argued that the Indicator Per Cent should be used to guide forestry decision-making. Pressler correctly stated how to use the Indicator Per Cent to determine when a stand should be harvested. However, his suggestions about the choice among silviculture options indicate that he did not fully understand the economic implication of the Indicator Per Cent.