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GUIDELINES for . . .
Spacer graphic Developing Stand Density Management Regimes

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Economic Principles of Timber Production

Introduction

      These principles provide a production economics background for evaluating stand density management options. Production economics is the process of determining which, among all treatment options capable of meeting forest management objectives, will maximize the return on treatment investment for the forest estate owner. This approach is consistent with the philosophy that the purpose of stand density management is to achieve the timber and non-timber production objectives of a forest management plan.

      These stand-level economics principles are not intended to address social welfare objectives such as income distribution or employment creation. In the following section, "Forest planning considerations," economic issues are addressed at the forest level.

Density management activities as investments

      Stands in BC exhibit great variability in growing conditions and capacity for timber production. This results in a wide range of economic conditions for making silviculture investment decisions. Assessing the economics of a proposed silviculture activity requires information about benefits and costs of the activity from the time of stand establishment to the time of expected harvest. Costs and benefits may be actual if they have occurred, or expected if they are anticipated in the future. Expected costs or benefits are estimates, and may differ from actual costs and benefits when they occur. Estimation therefore involves accounting for the uncertainty surrounding their actual values.

      Information about the timing of stand activities is also required, since various costs and benefits usually occur during different time periods over the life of a stand. Economic analysis converts all costs and benefits to value in today's dollars. This conversion process is referred to as discounting (see "Selecting a discount rate"). The net present value (NPV) is the sum of all discounted benefits of silviculture activity or regime, less discounted costs (see Stone 1992, 1996b for further discussion on NPV analysis and procedures).

      Regeneration costs such as site preparation and planting are incurred within the first few years, whereas density management costs are incurred between stand age 10 and 30. Final stand net revenues (revenue less harvest cost) are obtained at the end of the expected rotation period. The procedure for calculating the NPV of a density management treatment in a single stand is straightforward; the NPV of a juvenile spaced stand is compared to that of the same stand without spacing.

      In order to make economic comparisons between different stands or different treatments, however, NPV must be calculated over the same time period. That is, for each present value, the starting point must be the same for each stand or treatment, and the end point must be the same expected rotation length. Since the timing of different stand treatments and the rotation lengths of different stands are rarely the same, it is often impossible to compare treatments and stands in this manner. In these circumstances, the NPVs must be converted to a site value.

      A site value is the present value of an infinite number of successive rotations on a site managed under the same regime. An economic comparison of two or more stand management regimes is made possible by calculating and comparing the site value of each, even though they may differ in the timing of stand treatments or expected final harvest.

      Economic analysis provides a means of ranking the economic attractiveness of treatment options, thereby allowing appropriate allocation of silviculture expenditures. Ranking criteria may reflect either profit maximization or cost minimization objectives. Either single treatment or multiple treatment regime options may be analysed in this manner. A preferred treatment or regime selected in this manner may be applied to other similar stands (stand type/site quality) within the same management unit without the need for further, separate analyses.

      From this brief overview of stand-level investment procedures, one can see that both the timing and relative value of treatment costs and benefits are important factors in the calculation of NPV and site value.

      The link between pre-commercial thinning and commercial thinning is discussed by MacLeod (1997) and White (1997), and an economic analysis of spacing as it relates to commercial thinning is reported by Stone (1992, 1996b).

Revenue assumptions

      Future forest product market conditions must be predicted in order to compare the economic efficiency of various silviculture investments. Because the timber production benefits of silviculture investments are usually not obtained for 40 to 80 years, estimating future forest product prices is fraught with uncertainty. The assumptions used to make them are key considerations in an economic analysis. Three factors influence revenue forecasts; valuation point, real price changes and the relationship between piece size (tree or log) and price.

Valuation point

      For simplicity, the value of harvested timber can be derived from the selling price of manufactured end products. A common practice is to evaluate the timber as it moves up manufacturing stages to a point where a market price for a product can be determined. At that point any wood quality differences that affect the product are reflected in the price.

      In the coastal region of BC the end-product values are derived from log transactions on the Vancouver Log Market (B.C. Ministry of Forests 1995b). In the interior, where log markets are uncommon, a market value is derived from processed lumber and residual wood chips (B.C. Ministry of Forests 1995a).

Real price changes

      Since the effect of a silviculture treatment on stand revenue will not be realized for a considerable time, the potential for change in the real value of wood products, either upwards or downwards, should be considered (see Appendix 1). An important principle applies; time itself has no effect on prices. Rather, market supply and demand forces, which change over time, are the cause of price changes.

      Simple price-trend models are sometimes used inappropriately to predict future prices. They assume the forces of supply and demand which caused past price changes are closely correlated with time, and will continue in the future. This assumption may not be valid, and caution is advised in using historical price trends to predict future product values.

Piece size and price

      Currently, a large log commands a higher price per cubic metre than a small log, all other wood quality characteristics held constant. This price premium is due to the larger dimension and usually more highly valued products that can be manufactured from large logs, as well as the higher product recovery rates associated with a larger piece size. However, many other characteristics influence the price of a log. Stand density management treatments affect a number of log quality characteristics, such as log taper, knot size and distribution, number of growth rings per inch, and the proportion of lower strength juvenile wood (not always lower strength). These stand density-related characteristics may have important impacts on future stand values (Jozsa and Middleton 1994; Middleton et al. 1995).

      Whether the price premiums associated with larger piece sizes will be maintained in the future depends on how future markets will value piece size and stand density-related wood quality characteristics. Changes in harvesting systems, manufacturing processes and wood products design will likely encourage better utilization of small dimension logs, higher recovery rates during manufacturing, and greater use of engineered wood products as substitutes for large dimension timber components.

      The revenue assumptions used in an economic analysis must be clearly defined, and the analyst should provide evidence supporting all assumptions. Assumptions must also be consistently applied in comparisons of different density management options. For example, an assumption of increasing real prices for large logs made in an analysis of a juvenile spacing option must also be made for an analysis of a commercial thinning option. Different prices in a comparative analysis would allow no basis for comparison.


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Copyright 1999 Province of British Columbia
Forest Practices Branch
BC Ministry of Forests
This page was last updated January 1999

Comments to: Tim Ebata <Tim.Ebata@gems8.gov.bc.ca>