Temperate Forest Economics
Summary and Keywords
The world’s forest cover is approximately 4 billion hectares (10 billion acres). Of this total, approximately one-half is temperate forests. These range from the subtropics to roughly 65 degrees in latitude. As we move toward the equator, the forests would generally be considered tropical or subtropical, while forest above the 65th latitude might be considered boreal. Only a relatively small fraction of the forests that are temperate are managed in any significant manner. The major types of management can vary from serious forest protection to selective harvesting, with considerations for regeneration. Intensive forestry exists in the form of plantation forestry and is similar to agricultural cropping. Seedlings are planted, and the trees are managed in various ways while growing (e.g. fertilizers, herbicides, thinnings) and then harvested at a mature age. Typically, the cycle of planting and management then begins anew.
Approximately 200 million hectares of forests are managed beyond simply minimal protection and natural regeneration. Recent estimates suggest that over 100 million hectares globally are intensively managed planted forests. The largest representatives of these forests are found in the Northern Hemisphere (e.g., the United States), China, and various countries of Europe, especially the Nordic countries. However, Brazil, Chile, New Zealand, and Australia are important producers while being in the Southern Hemisphere. A high percentage of managed forests are designed to produce industrial wood for construction and for pulp and paper production.
Finally, in some countries like China, planted forests are intended to replace forests destroyed decades and even centuries ago. Many of these planted forests are intended to provide environmental services, including water capture and control, erosion control and soil protection, flood control, and habitat for wild life. Recently, forests are being considered as a vehicle to help control global warming. In addition, afforestation and/or reforestation may help address damages after a disturbance such as a fire. In China, the “green wall” has been established to prevent shoreline erosion in major coastal areas.
The world’s forests cover approximately one-third of global land area, or about 4 billion hectares (10 billion acres), ranging roughly from the equator to about 65 degrees in latitude in both hemispheres. About one-third of the total forest area consists of temperate forests, both deciduous and coniferous, which can be found in both the Northern and Southern Hemispheres between about 25 and 50 degrees in latitude. Closer to the equator, forests become subtropical or tropical, while forests above 50 degrees are typically boreal.
Temperate deciduous forests tend to grow in lower latitudes. They are found in eastern and central North America, Europe and much of Asia, parts of Australia, and southern portions of South America. Most are in regions with adequate precipitation, hot summers and cold winters, and relatively good soils.
Temperate coniferous forests include inland pine, spruce, and fir forests, as well as temperate rainforest. All these are usually found in locations that have warm summers, cool winters, and substantial precipitation. Most temperate rainforests are found along the rainy coastlines of temperate regions such as the Pacific Northwest, coastal Alaska and western Canada, and parts of New Zealand.
Precipitation in coniferous forests varies from 300 to 900 millimeters (mm) annually. However, some coastal temperate coniferous rainforests receive much higher levels of precipitation, up to 2000 mm. In the lower latitudes, precipitation is more evenly distributed throughout the year.
Concern has been expressed over widespread loss of timberlands to other uses (e.g., agricultural and development). In recent years, however, the area of temperate forests has remained relatively stable in forested areas in North America, Europe, and much of temperate Asia or has expanded, for example, in China (FAO, 2015). Most of the contemporary net deforestation today is occurring in tropical forests, for example, in Indonesia and Brazil.
Forests produce a variety of outputs both commercial and environmental. In addition to timber production temperate forests produce important environmental outputs.
These outputs include water, air purification, wildlife, biodiversity, carbon sequestration, and recreation to name a few. Forests can produce many of these outputs without human management, and natural unmanaged forests have been doing so for eons. Additionally, even when being managed by humans primarily for timber, most of the environmental outputs continue to be produced incidentally as a nonmarket by-product. This is particularly true when the forest land use does not change and forest cover is regenerated after harvest. Thus, the sustainable management for timber is largely complementary to the continued incidental production of the various environmental outputs.
The Forest Production Function
The production function is the underlying set of physical, ecological, and biological relationships that control the characteristics of the forest that results. These relationships interact with site and climate conditions, as well as natural inputs such as natural seed sources. Humans can add management inputs to the production function, such as tree harvests, investments in tree planting, weed control, and fertilization, and thereby influence and modify the nature of the resulting forest.
As described earlier, forests grow on sites that have appropriate natural conditions for the forest type and species, including soils, temperatures, and adequate precipitation. In many cases, a site suitable for forests will revert to grasses at lower levels of precipitation. Temperate broadleaf and mixed deciduous forests in the United States are often known as “oak–hickory forests” and typically represent multiple species, that are of various or uneven-aged with a host of different behavioral patterns. By contrast, coniferous forests tend to be more even aged and more oriented to a single or few species. This is particularly true for commercial species, including a number of species that grow in forests found extensively in the U.S. South and are often grouped under the name “southern pine.” Many of these “southern pine” species have been widely introduced throughout the world, including parts of South America. Other U.S. trees such as Douglas fir and Monterey pine, found the Pacific Northwest and California, have been widely introduced into New Zealand, Australia, and Chile. Although these species normally regenerate naturally in their home locations, under many conditions commercial forests of these species are planted artificially.
In unmanaged situations, many conifer species regenerate naturally following a disturbance. Species that are shade intolerant require bountiful sunlight for regeneration and cannot successfully regenerate in a dense forest setting, but a disturbance that opens the forest canopy will promote the regrowth of these species, sometimes called “pioneer species.” This provides a rationale for clear-cutting to manage sustainable pine forests. Some species, however, such as spruce, are shade tolerant and will successfully regenerate in a dark forest understory.
Although some deciduous species, such as beech, are commercially planted in homogeneous even-aged stands, most deciduous species with commercial value, such as maple, oak, and walnut, are usually found in mixed-species stands, harvested selectively, and typically allowed to regenerate naturally or with only minimal human management. Other deciduous trees, such as certain eucalyptus species, are often used commercially in tree plantations, although generally in subtropical regions. However, most commercially planted trees in temperate regions are conifers.
Management and Harvesting Regimes
In many respects, commercial forest management uses our understanding of the forest production function to increase forest productivity. Quality hardwoods are usually drawn from natural forests. Conifers, especially for pulp and paper but also for lumber, are harvested either from natural forests or, increasingly, from planted and managed forests, many resembling agricultural cropping and often referred to as forest plantations.
Forest plantations particularly mimic the natural system to promote regeneration and growth, especially after a forest-clearing event such as a wildfire. With management, a logging clear-cut creates forest floor conditions similar in some respects to those that arise after a wildfire and provides an opportunity for planting to substitute for natural regeneration.
Natural temperate forests are often even aged, and humans use clear-cut approaches in harvesting. Even-aged forests are common among pine and other conifers, both planted and naturally regenerated, because of the regeneration characteristics of the species. For example, most Pinus species are pioneer species that tend to naturally regenerate after a disturbance. Under the right conditions, including seed sources, a pine forest is likely to regenerate naturally after a natural cover-clearing catastrophe such as a wildfire. In the case of a clear-cut logged-over pine forest, after the forest has been cleared by humans, natural regeneration of pine is likely to occur. Also, in many regions, such as New England and the U.S. South, pine is likely to become established naturally on former agricultural sites that have been abandoned.
Management can take advantage of these natural characteristics. For example, a logged-over forest area can be modified to enhance natural regeneration through maintenance of seed trees and use of other regeneration-promoting techniques. Additionally, planting can be done to facilitate rapid regeneration, sometimes by using genetically improved stock to facilitate quicker growth or other desired characteristics.
In the post–World War II period, abandoned farmlands provided habitat for the spontaneous regeneration of pine. The next step was simply for humans to assist the regeneration. This led fairly quickly to an agricultural-type management system, with forest farms that involved planting, protection, management, and harvest, followed by a new planting. The major difference between agriculture and forest farming is largely in the time dimension of the activity, in that trees require years and often several decades.
Through much of history, forests were an open-access resource lacking any clear, well-defined, and enforceable ownership. For millennia, wood collected from natural and old-growth forests typically involved only the costs of finding the desired wood, felling it, and transporting the desired portions to the desired location for use. However, depending on the technology of the time, the effort and costs involved could be substantial. Obtaining wood continued largely in this mode until more recent times.
Early History of Forest Resources
Throughout history and undoubtedly prehistory, forests have been an economic asset used and traded as a resource. For example, history records that the Phoenicians harvested wood from the cedars of Lebanon and transported it by ship to Egypt as long ago as 2300 bce.
Decrease in forest availability has sometimes led to economic concerns. Long-term forest availability has appeared to decrease as accessible forests have declined, while demand has increased. Localized concerns about wood availability date back at least to the Roman era, when wood for shipbuilding became scarce in some locations. During the late medieval period, concerns arose in parts of Europe and elsewhere. In the colonial period, the British forbade the felling of certain large trees in North America, as they were saving these for future use as ship masts.
With the discovery and development of new geographic regions, there were generally plentiful natural forest resources to meet new localized demand. This situation persisted in much of the world until around the middle of the 20th century.
In some regions well endowed with natural forests, such as areas within the United States and Canada in the first half of the 20th century, the problem was how rapidly, from a financial viewpoint, to harvest (or draw down) these forests. A literature developed that was somewhat similar to that in the mining industry, as reflected in Hotelling (1931) (see, e.g., Lyon, 1981; Walker, 1971).
Early Forest Management
As forestland gradually came under various ownerships, de facto or de jure, the formerly open-access forests came increasingly under management involving at least some degree of controlled access and protection, and the owner might impose a felling fee (stumpage price) for the wood. Where felling was done by the owner, an implicit opportunity cost might be appropriate. Over the centuries, the nature of costs changed only modestly, reflecting slowing changes in technology, including transport.
Although there is evidence that forest management occurred in China about two millennia ago and that some tree husbandry activities took place in Mesopotamia well before that, conscious forest management that laid the groundwork for present-day practices was largely developed in central and western Europe in the late Middle Ages and early Renaissance period. Building on the natural tendencies of forests, forest management gradually added inputs, taking advantage of the knowledge of the underlying production function and biological relationships.
Because forests are a renewable resource, felling can be offset by natural regeneration, and in many places felling may not have exceeded natural regrowth. However, as harvest increases led to growing scarcity, the notion of management to assist regeneration and regrowth made more sense. Indeed, the concept of a sustainable production system gained adherents. A management system oriented toward achieving an appropriate balance between harvest and growth gradually developed. Initially, it was largely a biological concept focusing on maintaining the sustainability of the biological harvest (Heske, 1938; Gould, 1964).
The Onset of Scarcity in U.S. Forests
U.S. forests are largely temperate. Deciduous forests dominate in much of the Northeast and some mountain areas in the East; both coniferous and deciduous forests are found in the middle of the country; and coniferous forests prevail in the Rocky Mountains and on the West Coast. A similar distribution applies to Canada, but the temperate forests are increasingly replaced by boreal forests as one moves north.
In the United States, the wild forests were initially an impediment to development and expansion. As settlement expanded, forests were gradually cleared, both to obtain timber and to open up land for agriculture (Clawson, 1979). Concerns about the availability of U.S. forests began to arise in the late 19th century, with the recognition that forests were an important source of both timber and water, but they were being rapidly depleted. By the middle of the 20th century, about one-third of the forestlands had been cleared, and much of the land had been converted to other uses (Clawson, 1979).
The initial response was to create forest reserves in the 1890s, later called national forests. These reserves consisted of forestland set aside under government ownership and management, which in the early years largely involved forest protection and modest forest harvests. Little other management was undertaken, and the replacement of harvested trees was left to natural regeneration. After World War II, however, the national forests were increasingly viewed as a source of timber, and so the era of forest management, especially on private lands, began.
The Concept of Sustainable Forestry
The late 18th and early 19th centuries saw the development of the concept of sustainability in Europe and the examination of various forms of balancing production (Davis, 1966). The ideal form of sustainable management was to develop a number of equal-size forest cohorts ranging from young to harvest age (Fernow, 1913; Gould, 1964). After the oldest cohort was harvested, it was restocked with seedlings and became the youngest cohort. In this case, the harvest volume from the oldest cohort would just equal the total growth of the entire forest, with the forest stock or volume remaining constant. This process could be continued indefinitely, with harvest equaling net growth and no net change in the total stock. This system is often called a normal or regulated forest. In the ideal scenario, the forest is managed so that the volume of the periodic harvest from the oldest cohort equals the net growth volume that occurred over the entire forest system during that period.
Given balanced forest age structures in a regulated forest, an annual harvest of a certain volume, such as a harvest of the oldest cohort of trees, can be maintained in perpetuity. This outcome requires that the reduction in forest stock associated with the harvest be just offset by the increase in forest stock due to growth that occurs in the remaining forest.
A broader view of a regulated forest suggests that sustainable management need not be confined to a single forest site. Increased stocking from growth can be occurring on one forest site, offsetting declined stocking that occurs on another site. Such multisite management is commonly undertaken by large forest companies with numerous forest-growing sites and allows the maintenance of aggregate stable stocking over multiple sites, although not on any one site (see Sedjo & Lyon, 1990).
The Transition to Modern Forest Economics
Economic issues in forestry can be addressed on several fronts. The first is as an asset in a global context. The second regards nonmarket environmental issues. Finally, there are financial issues related to wood as a commodity at both the industry and individual firm levels.
The world once had a surfeit of forests. In the early American period, much of the Western Hemisphere was covered with plentiful natural forest. This was also the case in other newly emerging regions, such as Africa and parts of Asia.
At the global level, concerns are sometimes expressed that the rate of forest drawdown is excessive from a social point of view. In this context, neither forest management nor the concept of sustainable yield has much attraction. More broadly, where the global stock is a concern, a contemporary question is whether the market is properly functioning for the forest stock. Often, the implicit assumption is that the markets are not working for forestry and rates of deforestation are excessive.
This view concerning harvests was the one commonly held in the United States from the late 1800s into the mid- to late 1900s and served as a major justification for creating the national forest system in the early 1900s. However, the question of the adequacy of U.S. forests from a commodity-availability perspective was not addressed until much later (by Peter Berck in 1979). U.S. timber was given a very low valuation, with most of the costs related to harvesting and transport. As late as 1979, Berck found the financial rates of return to management and investment on U.S. old-growth natural forests to be very modest. The appropriate economic question in a surplus wood environment has little to do with the rotation length, but rather addresses the question of the optimal rate of drawdown of the excess stock. For the United States, Berck found the drawdown rate appropriate. Similarly, the work of Sedjo and Lyon (1990) suggests the global adequacy of wood for commodity purposes. Additionally, Lyon (1981) has shown how the question of the economically optimal rate of drawdown of a nonrenewable mining resource, as examined by Hotelling (1931), applies to the drawdown of an old-growth forest. The major difference is the existence of a renewability factor associated with trees for forests that is not present for minerals.
Finally, forests generate a host of noncommodity, often nonpriced environmental outputs. A large literature exists on these issues (see Bowes & Krutilla, 1989; World Commission on Environment and Development, 1987).
Management of Forests as Commodities
Forest management for the timber commodity is a financial proposition. To be financially justified, the costs of obtaining the wood must not exceed its market price as an input into the production of wood products such as lumber, pulp and paper, and biofuels. As an economic activity, modern forest management must look at the costs and benefits of the forestry venture, usually monetized, and the aggregated string of costs is compared to benefits. Since tree growing is a multiple-year operation, the discount rate is important to account for the amount of time associated with costs and returns. In many cases, the choice of the appropriate discount rate is a critical but difficult one and can generate a degree of contention. When benefits exceed costs, the venture is viewed as economically justified; when costs exceed benefits, it is not.
Forest management typically involves the application of silvicultural inputs to modify the forest’s underlying natural ecological system. The costs of a timber operation typically consist of the direct expenditures associated with regeneration, such as costs for site preparation, seedlings, and planting, as well as other management and protection costs, such as those for fertilization, thinning, and weed, disease, and infestation control. Additional costs are associated with harvest and the transport of logs to a mill. Actual or implicit rental costs associated with the use of the land should also be included.
The various silvicultural inputs can be viewed separately to determine whether each is economically justified and, if they are, to determine the optimal amount of the input (for example, how much would fertilizer cost per acre and how much extra revenue would it generate?). As in most of economics, the input should be added until the marginal benefit (revenue) is equal to the marginal input cost. Additionally, the amount of input applied could be fine-tuned to provide the optimal return on a cost-return basis.
The Economics of Forestry
The economics of forestry depends largely on the type of forest under management and harvesting. Management of temperate forest ranges from selective logging of high-valued temperate hardwoods to intensive management of pine plantations.
Selective management ordinarily involves the selection of desired high-valued hardwood trees, such as walnut, cherry, or maple. Generally, management is minimal and involves protecting a naturally occurring forest, and harvest is limited to felling only selected trees. Regeneration normally occurs naturally. In some cases, a hardwood forest is clear-cut, but this is typically the case when the essence of the forest is changed, as when land is converted to conifers or agriculture.
Today, intensive management is usually applied to produce most of the wood for construction and for pulp and paper. Faustmann (1995) calculated the value of forests in cases where the trees are planted on bare ground and maintained until they are harvested with a clear-cut forest. His calculations use the rotation time of the optimal financial harvest. This approach is generally followed in the most intensively managed forests, but since different types of wood are used for various purposes, the rotation times may vary depending on the desired tree characteristics, including log size.
Logs that will go to a sawmill to produce wood for construction projects need to be larger, and thus the harvest will require management for a longer rotation. Complicating this situation is the fact that the same forest may be producing both large logs for sawmills and smaller logs for pulp and paper mills. This twofold production may require more than one harvest of the same forest, with one or more commercial thinnings undertaken to provide smaller-diameter wood for the pulp and paper mill, followed by a final harvest involving the clear-cutting of the remaining forest, which now consists only of large trees intended for the sawmill. Note that a relatively large number of smaller trees are removed during the initial commercial thinnings. This approach serves two functions: first, to obtain wood for the pulp and paper mill, and second, to allow the remaining trees to grow faster because of reduced competition in the forest.
From an economic viewpoint, this management approach allows the investor to adjust inputs at several points, such as the timing and harvest levels of both partial commercial thinnings and final harvest. Such management can provide a mix of both high-valued sawlogs and lower-valued pulp logs. Time is an important factor affecting financial returns. Earlier harvests, for example, allow for early revenues. So there is a trade-off between earlier revenues from smaller harvests and larger revenues from later harvests.
Economics for Temperate Forest’s Industrial Wood
Most of the world’s managed forests are found in temperate climatic zones. For wood as a commodity, the major economic question deals largely with the question of forest management for industrial wood production on specific sites. Management in temperate forest systems is generally applied to single-species, even-aged forests that are established by natural or artificial processes and managed to some age level where harvesting occurs. Management consists of providing various practices or inputs to the forest that will ultimately increase its value. Examples of a host of alternative single-species, even-aged plantation management regimes under various conditions and their associated economic returns can be found in Sedjo (1983). Various inputs can increase growth rates and wood volumes. In this context, one can view management as using and modifying the underlying production function as a guide to its economic management.
At the forest stand level, an element of forestry economics deals with the question of the optimal financial harvest rotation for a growing commercial forest stand. As discussed earlier, the breakthrough in the optimum economic harvest of forestry came from Faustmann’s paper (1995), which showed that with a positive societal discount rate, the income-maximizing financial rotation is determined by incremental growth rather than by average growth as suggested by biology and is somewhat less than the maximum biological rotation. This result is achieved if harvest occurs when the average annual increment of volume growth begins to decline. Not surprisingly, although the Faustmann rule applies to maximize the financial returns based on volume, the harvesting rule is likely to be modified where quality aspects are considered for wood that is particularly valuable for certain characteristics, such as straightness or density.
As described earlier, contemporary intensive management may involve harvesting multiple times over a growing cycle as part of a thinning operation that first generates small logs for pulp and then conducts a final harvest for logs for construction materials from sawmills. In the United States, such an approach is common with coniferous forests, usually southern pine planted, managed, and harvested in the South and Douglas fir commonly planted in the Pacific Northwest.
A qualification is in order here, as not all commercial temperate forest wood comes from managed forests. Indeed, although forests have been used for wood material for millennia, managed commercial forests, though dominant today, did not become significant wood suppliers until after the late 1900s. Nevertheless, it has been estimated that over 50% of the world’s industrial wood now comes from planted or managed forests (Sohngen, Mendelsohn, & Sedjo, 1999).
While temperate forests produce a host of environmental products, these are viewed as nonmarket outputs and as being produced incidentally with the production of timber. The concept of economic optimization, when applied to temperate forest management, optimizes financial returns through judicious application of various inputs, both by volume of inputs and in timing. In the simplest version, a single homogeneous product—logs—is produced for inputs into construction materials. A second homogeneous output of forests would be pulp logs for inputs into pulp and paper production.
There are a variety of forest types and alternative management regimes. The simplest management regime is simply to selectively harvest from protected forests. This is common in parts of the temperate forests, where natural regeneration is relied on for regrowth, and even more common in tropical forests.
A common management regime in temperate forests is to establish a single-species, even-aged forest and manage it for harvest. Management can be oriented toward a final product of timber, pulpwood, or some combination of both. The cost components include the land, land preparation, planting, seedlings, protection, and fertilizer. Later costs include thinnings where undertaken, final harvests, and transport to mills for processing. Revenues include the value of thinnings, where these have commercial value, and the final value of the logs delivered to the mill.
The objective is to maximize the net present value or, alternatively, the internal rate of return of the entire operation of costs and revenues. Some basics apply. Inputs that are applied earlier presumably generate early benefits to the operations but are costly to the final value, since the opportunity costs require a lengthy time period before they can be captured in the product revenues. Conversely, revenues that are captured early, such as thinning values, are beneficial because early revenues are not as highly discounted as revenues that occur later. Thus, to the extent possible, it is advantageous to defer costs to the future while capturing revenues early.
Significant questions remain with regard to the respective roles of natural forest versus plantation forests as a future source of timber. The trend since the 1950s has been toward an increased fraction of the total timber originating in planted forests. A related question is that of the future of the forest’s environmental outputs. However, the conditions are favorable in that both natural and planted forests generate significant environmental outputs regardless of human management, although the natural forest environmental outputs are no doubt greater. The primary challenge is to maintain lands in forests on a continuing basis.
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