Transcript Economics of Forestland Use and Even

Economics of Forestland Use
and Even-Aged Rotations
Land tends to be used for the activity
that generates the greatest NPV of
future satisfaction to the present owner.
Once the land use is determined the
same maximization of NPV defines how
that use will be carried out.
Stand Level Decisions
• Assumptions
– Competitive market conditions
• Landowners are price takers
– Nonmonetary values ignored
– All cash flows and interest rates are real
– Taxes “ignored”
• Assume cash flows are after taxes, or
• Assume public agency context
– Cash flows are “expected values”
– Discount rate may also need to be increased
to account for increased level of risk
Expected Value
• Way to account for the risk associated with
an investment
• Weighted average outcome
– Weights are probabilities of possible
outcomes
– Example
• 80% of time investment expected to yield $1,000
• 20% of time investment expected to yield $500
• Expected value is,
0.80x $1,000 + 0.20 x $500 = $900
Land Use In An Unregulated Market
-
land will be purchased by highest bidder
• Example
– rural tract of cutover timberland of all one site
quality,
– not suitable for agriculture because of slope
and soil type,
– three basic land uses are possible
• Even-aged sawtimber production
• Even-aged pulpwood production
• Grazing
Land Use In An Unregulated Market
-
land will be purchased by highest bidder
• Example
– Potential buyers will
• project their expected cost and revenue stream
from the tract
• Estimate a WPL∞ (SEV) using their minimum
acceptable rate of return (MAR)
WPL∞ (SEV)
t
∑
=
t
Ry(1+r) (t-y) - ∑ Cy(1+r) (t-y)
a–c
y=0
y=0
+
r
(1+r)t - 1
t
∑
Ny
(Ry – Cy) (1+r) (t-y)
a-c
y=0
=
+
(1+r)t - 1
r
r = IRR
if
pay WPL∞ for land
WPL∞ = Capital value of periodic series
at interest rate r
If put WPL∞ on right hand side as a
cost, NPV = 0
t
∑
(Ry – Cy) (1+r) (t-y)
y=0
a-c
+
(1+r)t - 1
r
- WPL∞
=
0
Even-Aged Sawtimber
• Costs ($/A)
– reforestation of $150
– rotation of 40 years, t = 40
– thinning of $50 in year 10 and every 40 years
thereafter
– annual cost of $4
• Revenues ($/A)
– final harvest of $3,500 every 40 years
– thinning of $300 in year 20 and every 40 years
thereafter
• WPL∞ = Excel Spreadsheet
Even-Aged Pulpwood
• Costs ($/A)
– reforestation of $150
– rotation of 20 years, t = 20
– annual cost of $4
• Revenue ($/A)
– Final harvest of $1,000 every 20 years
• WPL∞ = Excel Spreadsheet
Grazing
• annual net revenue of $20 per A
• initial seeding cost of $175
• WPL∞ = Excel Spreadsheet
maximum WPL
$450
Sawtimber producers
would tend to win
bidding for this type of
land
$400
$350
$/A
$300
$250
$200
$150
$100
$50
$0
Sawtimber
Pulpwood
Grazing
Market value of land doesn’t
usually equal WPL∞ of a given
investor
• Market value is result of WPL∞ of all
interested buyers, and their willingness to
bid more than their WPL∞
• Land itself can be treated as a separate
investment
– Calculate WPL1, the willingness to pay for
bare land with land sale after one rotation
WPL1 =
t
∑
y=0
Ry
(1+r)y
t
-
∑
y=0
Cy
(1+r)y
Lt
+
(1+r)t
How much investor would pay for land
assuming the land is sold at end of first
rotation for Lt
WPL1 for sawtimber example = Excel Spreadsheet
Implication
• Investor willing to pay $446, $25 more per
A, if assume can sell land for $600 per A at
end of first rotation. Recall that WPL∞ was
$421 per A
• If Lt = WPL1 in the equation for WPL1, then
WPL1 = WPL∞
Sensitivity Analyses
• Recalculate WPL with different
assumptions about important variables
– MAR
– Productivity
– Product prices
– Increases in annual costs
– etc.
Market Allocation of Land Uses
• Theoretically yields private optimum land
use pattern
• Social optimum may be different
• How does government try to get closer to
social optimum?
– Planning and Zoning
– Purchase of private land for public uses
– Conservation easements
Capital Performance Indicators
• Assessment of the return your capital is
earning, e.g.
– General measure,
• ROI, return on investment,
• IRR is a ROI measure
– Measure for stock
• Price-Earnings ratio (P/E)
– Measure for bonds
• Yield
Capital Performance Indicators
Price-Earnings Ratios (P/E) for Stock
Capital Performance Indicators
• Measures for forest-related investments
– Overall measure
• IRR
– Individual tree
• Financial maturity
– Forest
• Forest value growth % for forest
Annual Value Growth As % of
Forest Capital
• “Profits” should be measured in terms of
capital tied up, not in absolute terms
– Example,
• $100 per acre generated with $1,000 of capital is
10% return on investment,
• $100 per acre earned with $10,000 of capital is 1%
return
– Concept used for “financial maturity” of an
individual tree”
Annual Value Growth As % of Forest
Capital
• Calculation should include,
– Market value of the land, Ly, in the value of the
“forest” capital,
– Timber value based on “stumpage value”
assuming liquidation of timber for even-aged
management.
• Liquidation value is sum of stumpage value and
land value
– Annual value growth should be
reduced/increased by sum of annual
revenues minus annual costs (a-c)
Annual Value Growth As % of Forest
Capital
Annual
forest
value
=
growth %
(Hy+1 +Ly+1) – (Hy + Ly) + (a-c)
Hy + Ly
Example, Table 7-3
Multi-Year Value Growth As % of
Forest Capital

Without net annual revenue (a-c)
Forest value
growth %

=
(
Hy+n + Ly+n
Hy + Ly
)
With net annual revenue (a-c)
Must determine iteratively, like for IRR
1/n
-1
Holding Value (HV) of Forestland
• NPV of holding the forest and selling land
and timber at the optimal rotation age for
the timber
• Answers the question: Should I liquidate
my investment now or wait until rotation
age?
t-y
HVy =
∑
q=0
[
Rq
(1+r)q
-
Cq
(1+r)q
]
Loblolly Pine Pulpwood Forest Values
$2,000
$1,800
$1,600
$1,400
$/A
$1,200
Land value
$1,000
Liquidation value
Optimum
rotation
age
$800
$600
Holding value
$400
$200
$0
0
5
10
15
Year
20
25
30