Financial valuation and the optimal rotation of a fully regulated forest

Abstract

This paper demonstrates a new approach to identifying and characterizing the optimal number of age classes in a fully regulated (i.e., normal) forest. We introduce an equilibrium condition for the normal forest requiring that it is financially justified to maintain the steady income forest configuration. We apply two valuation approaches to derive the main conclusion that the Faustmann rotation is the optimal harvest age of a normal forest. Both approaches utilize the standard Fisherian method of asset valuation. The first valuation approach imposes a steady income stream requirement, whereas the second approach is free of such a requirement. The second approach can be interpreted as enforcing market discipline on the normal forest configurations in a competitive equilibrium and picking the only normal forest that can be sustained in competitive equilibrium, namely, the forest with the number of age classes corresponding to the Faustmann rotation age. Our results also highlight an alternative way of deriving and interpreting the so-called zero-profit condition that can be applied to determining the optimal number of age classes in a regulated forest.

Forest Land Expectation Value or Maximum Sustained Yield? Resolving A Long-Standing Paradox

“…They determined the rotation ages using a rents framework but then evaluated the PV using a Faustmann single stand approach, which assumed what they were trying to prove. Kuusela and Lintunen [5] performed a similar comparison based on buyers using a bare land LEV to evaluate and manage their purchase. Tahvonen and Viitala [6] used a "divisible capital" formulation (each stand had an independent capital base) which forced their analyses to occur at the stand scale using the Faustmann formula.…”

“…The income each year is given by Equation (4b). If the discounted income for an infinite series of annual harvests is computed instead of periodic harvests, the PV is given by Equation (5).…”

“…These two approaches yield very different timber rotation ages and harvest volumes. The recent literature characterizes the conflicting views as a rents or steady income (maximum sustained yield, MSY) framework vs. maximizing financial value [4][5][6]. The conflict can also be characterized between the ownership level and stand level analyses [7].…”

“…Many economic analyses evaluate management based on a single stand (e.g., [4,8,9]) without comparing the results from a rents approach. In fact, the LEV has been claimed to apply to a regulated forest for determining the rotation age (e.g., [4,5,10,11]). Note that these authors assert that it is not just a matter of preference but is a proven best solution.…”

Assessing the Economic Resilience of Different Management Systems to Severe Forest Disturbance

“…The economic return expected from bare forestland is referred to in the literature as the willingness to pay for forestland (WPL). WPL theory is a common framework in forest economics (Manley and Bare 2001 ; Kuusela and Lintunen 2019 ), which Faustmann first systematically documented and applied (Samuelson 2000 ). Moog ( 2020 ) recently described the background of this theory in the context of rotation forestry.…”