Discount Rates for Nonindustrial Private Forest Landowners in Mississippi: How High a Hurdle?

Abstract

Mississippi forest landowners were surveyed to determine average discount rates or “hurdle rates”—the lowest rates of return they consider acceptable—for 3 nonforestry investments, and for 5, 15, and 25 yr forestry investments. The survey included 829 individuals who owned at least 20 ac of uncultivated land and had harvested timber during a recent 5 yr period; survey results are therefore oriented toward commercially active forest landowners. On average, the private nonindustrial forest landowners included in the survey expect timberland investments to earn higher rates of compound interest than relatively low-risk bank savings accounts and certificates of deposit. Relatively short-term (5 yr) timberland investments, however, have lower minimum rates of return than stocks, bonds, and mutual funds. With forestry investments, all else equal, Mississippi nonindustrial private forest landowners prefer shorter time periods—average hurdle rates in nominal terms before taxes were 8.0% for forestry investments lasting 5 yr, 11.3% for those lasting 15 yr, and 13.1% for those lasting 25 yr. Household income significantly influenced the lowest rate of return considered acceptable for 5 yr forestry investments—the rate was 9% for landowners with annual incomes above $50,000 and 7.4% for landowners with annual incomes below $50,000. On a hurdle rate basis, higher income private landowners in Mississippi generally find forestry investments lasting 15 yr to be competitive with stocks, bonds, and mutual funds. However, Mississippi landowners' 13.1% required rate of return for 25 yr forestry investments was higher than the rate considered acceptable for the other investments included in the survey. Reforestation tax incentives, cost-shares, and related public policies that reduce the front-end costs incurred by NIPF landowners tend to increase the projected rate of return for relatively long-term reforestation investments. South. J. Appl. For. 26(1):26–31.

Post-Faustmann Forest Resource Economics

“…Such open-ended questions are difficult for those who have limited knowledge of investing. Bullard et al (2002) also find that hurdle rates increase with length of investment, possibly due to an increasing uncertainty premium with time or variation in discount rates over different time horizons, e.g. Kirby and Petry 2004;Harrison et al 2002).…”

“…The average (nominal) hurdle rates from studies in Mississippi (Bullard et al 2002) and North Carolina (Kronrad and De Steiguer 1983) are 15 and 13 % respectively. Two studies were based on stated preference methods, where landowners were asked directly about their discount rates, and one study was based on observed behavior.…”

“…For example, Bullard et al (2002) asked respondents ''What is the lowest interest rate you consider acceptable for a timberland investment'' lasting 5, 15, and 25 years. For example, Bullard et al (2002) asked respondents ''What is the lowest interest rate you consider acceptable for a timberland investment'' lasting 5, 15, and 25 years.…”

Financial analysis of diameter-limit cut stands in northern hardwoods

“…Klemperer (1996) and Davis et al (2001) defined the real discount rate as the earnings rate expected for projects of a given risk class net of inflation. Klemperer (1996), Davis et al (2001) and Bullard et al (2002) discussed why there is no unique earnings rate for landowners; in addition, Klemperer (1996) stated that there is 'no universal risk premium'. Rather, a landowner's real discount rate depends on a number of factors unique to that landowner, including their time preference, objectives, alternative uses of capital and degree of risk aversion, as well as the variability of returns associated with each investment.…”

The Silvicultural and Economic Impact of Professional Forestry Assistance on Timber Harvests on Non-Industrial, Private Forestland in West Virginia

“…Given that NIPF owners are a numerous and diverse group, it is difficult to derive a single discount rate, or even a relatively narrow range of discount rates, that might be appropriate for analyzing forestry practices on NIPF land. Previous research has suggested real discount rates applicable to NIPFs ranging from less than 3% to well over 10% (Atmadja and Sills 2009;Bullard et al 2002;Kronrad and de Steiguer 1983). Among the factors affecting the discount rate used by NIPFs are time period of the investment, acreage owned, and the landowner's annual income.…”