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CHAPTER 62
ECONOMIC CONSIDERATIONS
Chapter Index
1 Introduction 62-3
1.1 Goal of chapter 62-3
1.2 Overview 62-3
2 Economic rotation 62-4
2.1 What is economic rotation 62-4
2.2 Components of economic rotation 62-4
2.2.1 Establishment costs 62-5
2.2.2 Annual costs 62-5
2.2.3 Current and future timber prices 62-6
2.2.4 Annual growth and log grade changes 62-6
2.2.5 Revenue from commercial thinning 62-7
2.2.6 Revenue from harvest 62-8
2.2.7 Discount rate 62-8
3 Biological versus economic rotation 62-10
4 Economics of uneven aged management 62-11
5 Product considerations 62-11
6 Access to markets 62-12
7 Valuing non-timber forest resources 62-13
8 Forest economics in the value chain 62-13
8.1 Landowners 62-13
8.2 Loggers 62-14
8.3 Mills 62-14
8.4 Communities 62-15
9 References 62-16
Appendix A- Glossary 62-18
Appendix B- Formulas 62-23
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Tables and Figures
Table 1. The future value of establishment costs for a Michigan jack pine stand .................................. 62-5
Table 2. Relationship between grade change, value increase, and rates of return in a red oak tree. ....... 62-7
Table 3. Net present value of thinned and unthinned stands in Maine.................................................... 62-7
Table 4. Net present value per acre of a red pine stand at various discount rates .................................. 62-9
Figure 2. Economic rotation .................................................................................................................. 62-10
Figure 3. Biological versus economic rotation age ............................................................................... 62-10
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1 Introduction
1.1 Goal of chapter
The goal of this chapter is to review economic aspects of forest management in order to more fully
integrate them with ecological and social aspects of management in Wisconsin. The considerations
presented will assist foresters in understanding economic aspects of management when writing and
implementing forest plans and designing and implementing harvests. These economic considerations are
intended to be used in combination with WDNR silviculture and forest management guidelines to
address integrated resource management objectives. This chapter does not attempt to explain all aspects
of forest economics or recommend specific management actions but is limited to defining general forest
economics subjects that are relevant to silviculture in Wisconsin. Not all management that is financially
attractive is sustainable. The Wisconsin Forest Management Guidelines (WDNR, 2011) provide a more
comprehensive overview of additional forest economics topics to assist in private land management.
1.2 Overview
Forest management practices are prescribed to satisfy sustainable landowner goals and achieve stand or
property level objectives. In forest management, individual trees, stands, and forests each have different
kinds of benefits and values. The most easily recognized is the revenue generated when timber is
harvested. Activities designed to achieve many management objectives can be costly and may not be
undertaken by the landowner unless there is an offsetting revenue stream. Timber revenue creates an
opportunity to achieve objectives. The economic benefits extend to the landowner, the logger, the mills,
the local communities that receive tax revenue and the indirect benefits of forest industry employees
spending their wages in the community. Protecting both short-term and long-term values and economic
benefits ensures the sustainability of the forest industry in Wisconsin. This chapter will discuss factors
that affect forest management including economic rotation age, economic considerations of even versus
uneven aged management, product considerations, access to markets, non-timber forest resources, and
the forestry value chain. The chapter is designed as an introduction to basic forest economic concepts,
with additional resources listed in the reference section.
A fundamental question in forest management is when to harvest trees. With even-aged management,
this question becomes “what is the optimal rotation age?” The economic rotation age maximizes the net
present value of the stand and forest type being considered. The economic rotation age may consider
only financial returns but could also include non-timber benefits. Adding non-timber benefits may more
accurately reflect landowner objectives, especially when the objectives are not easily quantified. The
components of an economic rotation are discussed in section 2.
Forestry textbooks that discuss even versus uneven aged management often assume that even aged
management leads to higher timber volumes and net present values based on financial returns. This is
not always the case and depending on the species uneven aged stands managed in a steady state can
provide better long run returns and higher quality trees. Section 3 will explain the importance of several
key economic differences between even and uneven aged stands.
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Quality forest products have historically demanded higher prices in the market. It is important to
understand what markets are available and to plan harvests that utilize current markets and consider
future markets when considering long term management. Log grade is one measure to determine the
quality and value of a tree. Section 4 will discuss the basics of log grading and market considerations.
There are many things that affect the financial returns on a timber sale. Access to markets, including the
distance to the nearest mill and the marketability of the species, are two of many factors affecting timber
prices. Forest landowners must have access to markets for their wood products if these lands are to
remain financially productive. Section 5 will discuss the basics of market access and the importance of
considering potential markets for trees.
The final section will look at valuing non-timber resources. Most discussions on forest economics focus
on timber resources. But non-timber forest resources such as wildlife habitat or recreation may provide
value to landowners. Section 6 will briefly discuss the economics of valuing non-timber forest resources.
The final section will look at the role of forest economics in the value chain. Forest economics is a
consideration by landowners, loggers, log buyers, truckers, primary and secondary processors and
communities.
2 Economic rotation
2.1 What is economic rotation
The economic rotation age is that which maximizes the net present value (NPV) or willingness to pay
for bare land, of a stand managed with an even aged regeneration system. The economic rotation age
must compare the annual growth in timber value against the cost of holding the timber for an extra year.
It must consider the marginal benefits and marginal costs of growing the forest one additional year.
2.2 Components of economic rotation
The economic rotation is the rotation age that maximizes the net present value. Calculating the economic
rotation age requires knowledge of the various cash flows associated with a single or multiple rotations
of a stand. One complication in determining economic rotation age is that the timing of a cost or revenue
can have a large effect on the value of the cost or revenue. To determine the net present value, all the
costs and revenues of owning the forest are discounted back to the present year. The formulas used to
discount costs and revenues to the present are presented in Appendix B. This section will look at seven
types of costs and revenues that influence the economic rotation age:
establishment costs (e.g., site preparation, tree planting, etc.)
annual costs of ownership and management
annual stand growth and log grade changes
current and future timber prices
revenue from commercial thinning
revenue from harvest
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discount rate
2.2.1 Establishment costs
Site preparation and reforestation costs vary by location, current stand conditions, prior stand history,
landowner preferences, desired future stand objectives and budget. For a reforestation investment to be
financially viable, the present value of the estimated future returns must exceed the cost of reforestation.
High reforestation costs generally do not change the economic rotation age of a forest but may decrease
the overall returns if there is not a subsequent increase in revenue when the trees are harvested. The cost
of regeneration and site preparation methods needs to be compared to the future yield and quality of the
forest. For example if it costs $300 per acre to seed or plant a jack pine stand versus natural
regeneration, assuming a 50 year rotation and a 4% discount rate (Section 2.2.7) you need to earn $2100
more per acre at harvest to pay for the establishment costs. A present value is a value that is expressed in
terms of dollars received immediately. A future value is a value that is expressed in terms of dollars
received at some future time. In this case, it is a future value being calculated ($2100 additional future
dollars) and the additional amount of income needed per acre to offset the planting costs, assuming all
other factors (annual costs, growth rates, timber prices, etc.) are the same.
The additional income needed to offset various planting costs is shown in Table 1. A recent study by the
Michigan DNR found that successful natural regeneration on a red pine stand costs about $60/acre while
planting averaged $230/acre. However, a failed natural regeneration costs $400/acre. This is due to the
cost of regeneration surveys, additional administration expenses and additional roller chopping and/or
herbicide site preparation.
Table 1. The future value of establishment costs for a Michigan jack pine stand
Additional income nee
ded at harvest to offset planting costs
Establishment cost
(per acre)
Rotation age 50 Rotation age 60 Rotation age 70
$100
$711
$1,052
$1,557
$200
$1,421
$2,104
$3,114
$300
$2,132
$3,156
$4,671
$400
$2,843
$4,208
$6,229
$500
$3,553
$5,260
$7,786
2.2.2 Annual costs
Annual costs may include property taxes, certification, fertilization, management services (i.e.
management planning, value estimation, etc.), fire protection, stand maintenance or other activities.
Annual revenues may include money received from selling non-timber forest products or payments for
ecosystem services, which may include incentives provided to landowners. The revenues can be actual
or anticipated. Due to compounding of money, minimizing annual costs or maximizing annual revenues
is often the best way to increase returns to a forest stand. High annual costs shorten the economic
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rotation age, decrease the total returns on the stand, and may cause the landowner to choose a less costly
and less productive silvicultural alternative.
Example: Lands enrolled in MFL incur lower property taxes than lands not enrolled in MFL. A red pine
plantation that is enrolled in MFL and pays $11/acre in taxes has an economic rotation age of 57 years
and a NPV of $755/acre. The same plantation that is not enrolled in MFL and pays $35/acre in taxes has
an economic rotation of 51 years and a NPV of $277/acre. High annual costs shorten the economic
rotation age and decrease the total returns on the stand.
2.2.3 Current and future timber prices
Future log and pulpwood prices can be calculated by inflating current prices and modified if there is an
expectation of a price increase or decrease for a tree species or a management practice. For instance, a
landowner may think certified wood will receive a price premium or a specific species will be in higher
demand. Log prices are determined by wood availability, consumer preferences and other market
fluctuations outside the control of foresters. Higher expected timber prices generally lengthen the
economic rotation age. Timber Mart North is a popular document for tracking current timber prices.
Example 1: Since 1996, prices for red pine have fluctuated from $29-$80/ cord and $90-$200/mbf
(Prentiss and Carlisle, 2014). If we assume the property is enrolled in MFL, a 4% rate of return and that
the stand will receive 4 thinnings beginning in year 27, the economic rotation age ranges from 57 to 75
years. If we receive the lowest prices at the final harvest and the intermediate thinnings, the rotation age
is 57 years and the NPV is $804/acre. If we assume we will receive the highest prices at the final
rotation and the intermediate thinnings, the rotation age is 75 years and the NPV is $2,543/acre.
2.2.4 Annual growth and log grade changes
As trees age, they grow both in height and diameter. As such, their total volume increases, usually
making them more valuable. Trees may be worth more per unit volume as they increase from lower
value to higher value products. Foresters can help maximize growth through forest management actions
such as timber stand improvement practices and intermediate thinnings. Well managed stands that
maximize their annual growth are often higher in value than unmanaged stands. Annual growth is used
to calculate the mean annual increment (MAI), periodic annual increment (PAI), and biological rotation
ages.
As trees increase in size, some logs may be moved into a higher grade. If a tree is close to the next grade
it may be economical to postpone harvesting it until the next stand entry. Error! Reference source not
found. demonstrates the relationship between grade change and value increase for a red oak tree. Where
a grade change occurs, the rate of return for postponing harvest is relatively large. But unless a grade
change occurs in the most valuable portion of the tree, the rate of return for postponing harvest can be
quite low. Table 2 demonstrates the change in rates of return as a tree moves up in grade. In table 1, the
rate of return on the entire tree is 4.5%, demonstrating the importance of the value change for the butt
log. In a situation like this, where (a) the rate of return in the butt log is low, (b) the grade change for
upper portions is uncertain and (c) holding the tree another 10 years increases risk to the valuable butt
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log, the economic forester may very well decide that postponing harvest is not the most rational course
of action.
Table 2. Relationship between grade change, value increase, and rates of return in a red oak tree.
Year 1 Year 10 Internal Rate of
Return
Value Increase
6” pulp stick, .024
cord, $0.12
8” sawbolt, 10 board
feet, $1.00
23.5% $0.88
8” sawbolt 10” grade 2 log, 30
board feet, $8.82
24% $7.82
10” grade 2 log 12” grade 1 log, 40
board feet, $19.00
8.0% $10.18
12” grade 1 log 14”veneer log, 60
board feet, $46.20
9.5% $27.20
14” veneer log 16” prime veneer log,
80 board feet, $97.44
8.0% $51.24
16” prime veneer log 18” prime veneer log,
110 board feet, $133.98
3.0% $36.54
18” prime veneer log 20” prime veneer log,
140 board feet, $170.52
2.5% $36.54
Change in entire tree
4.5%
$124.40
Source: WDNR, 2011
Each wood using industry has preferences and specifications. At some point trees can lose value if they
decrease in quality or exceed the mills maximum size requirements. Most mills will accept large
diameter logs but there may be quality challenges due to site conditions or past stand management.
Managing a forest to improve growth, vigor, quality and diversity usually maximizes financial returns. It
is also important to consider the impact of harvesting an individual tree on the stand-level management
objectives. While individual tree rates of return may be a consideration, this information needs to
evaluated in the context of stand-level management objectives.
2.2.5 Revenue from commercial thinning
When modelling a stand, the revenues from thinning are discounted back to the present time from the
year they occur and the revenues are assumed to be reinvested (back in forestry or in an alternative
investment) at the assumed discount rate. Thinnings generally do not change the economic rotation age
but will increase the NPV of the stand by providing intermediate income, higher quality trees and higher
merchantable stand volume. Table 33 demonstrates the difference in NPV (assuming a 4% discount rate)
for thinned and un-thinned conifer and mixed wood stands in Maine.
Table 3. Net present value of thinned and unthinned stands in Maine
Site Index Stand Type Thinning NPV
60 Pure Conifer No $834-$1116
Yes $1022-$1457
Mixed Forest No $825-$1093
Yes $928-$1463
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80 Pure Conifer No $1531-$1821
Yes $1846-$2679
Mixed Forest No $1470-$1771
Yes $1754-$2665
Source: Saunders, et al, 2008
2.2.6 Revenue from harvest
The revenue from harvest is determined by tree, stand and market characteristics. Tree characteristics
include the species, quality, and size (diameter and height). Stand characteristics include the type of
silviculture system and type of harvest (Ex. clear cutting versus shelterwood or single-tree selection),
harvest volume, site accessibility, and distance to market. Market characteristics include current demand
for the products, what mills are currently accepting, currency exchange rates and other factors. Demand
changes may be due to change in consumer preferences or the general strength of the economy and these
can be difficult to predict when trying to determine economic rotation age. Most forestry costs increase
along with the inflation rate but stumpage prices may increase or decrease at other rates as supply and
demand change. For example, a red maple stand with a 20% lower stumpage price than expected lowers
the NPV by 15% and the economic rotation age by 9 years. This assumes a landowner is enrolled in
MFL, a discount rate of 4% and all other costs and benefits being equal under both stumpage prices.
2.2.7 Discount rate
The discount rate is the most critical component in understanding forest economics, economic rotation
ages and net present values. Most individuals feel a dollar received today is worth more than a dollar to
be received in the future. The discount rate is the rate at which future values are discounted to the
present. The higher the discount rate, the lower the present value of the forest.
Discount rates can be expressed in either real or nominal terms. A real discount rate has been adjusted
for inflation while a nominal discount rate includes inflation. For example, if the nominal rate is 8
percent and the inflation rate is 2 percent, the correct way to convert the nominal rate is (1.08/1.02)-1 =
.0588 = a real discount rate of 5.88%. Most forestry analyses are conducted using real discount rates, but
use of nominal rates is acceptable. The key is to match the type of cash flow with the type of discount
rate, i.e. if a real rate is used, cash flows should be inflation-adjusted.
Landowners decide on a discount rate by considering their alternative rate of return. That is, if they did
not invest in forestry, what rate of return could they earn in an alternative investment? The rate of return
is higher or lower depending on the riskiness of the investment. Investors require higher rates of return
to take on greater risk. Landowners must decide on a forestry discount rate by considering the rate of
return they could achieve in alternative investments, but adjusting for the riskiness of forestry compared
to the riskiness of the alternative investments. If forestry is judged to be less risky than the alternative
investment, then the forestry discount rate might be set lower than the alternative rate of return, and of
course vice versa.
Risk can be divided into two components: market or unique. Market risk is the degree of sensitivity of
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the investment to the market as a whole and influenced by interest rate changes, general price swings,
and demand for the product. Unique risk is the portion of risk specific to the product and includes fire
and wind damage, changes in intrinsic values of the forest, poor silviculture, or changes to preferences
for certified wood.
Companies and individuals have a discount rate they apply to revenue and expense decisions but these
change as the economy changes. Today real discount rates for forestry are generally between 3-7%. At
the WDNR we generally use a real discount rate of 4%. In a red pine stand with four thinnings the
economic rotation age varies from 51-100 years based on a real discount rate of 3-5% as shown in Table
4. The table below is based on a single red pine stand and individual stands would produce different
rotation ages.
Table 4. Net present value per acre of a red pine stand at various discount rates
Discount rate
3%
4%
5%
Rotation age
50
$1,370
$895
$588
70
$
1,523
$913
$561
100
$1,614
$877
$510
Economic
rotation age
100 years 74 years 51 years
This assumes a price of $36/cord and $144/mbf, annual costs of $4, and thinnings at 27, 37, 47 and 62
years and 1/3 of the timber cut at each thinning.
As a stand ages the timber value growth declines. A rational investor chooses to harvest when the timber
value growth is equal to the chosen discount rate. Harvesting when timber is growing faster than the
discount rate is not maximizing returns because you are still earning more than alternative investments.
Harvesting timber when the timber value growth is lower than the discount rate means you are not
maximizing returns as you are better off to cut the trees and invest them in an alternative investment.
Figure 6 demonstrates the relationship between timber value growth, age of the stand and the discount
rate.
Timber Value Growth (percent)
Age of stand (in years)
r (discount rate)
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Figure 6. Economic rotation
3 Biological versus economic rotation
The rotation age that maximizes the mean annual increment (MAI) is defined as the biological rotation.
The biological rotation age seeks to maximize the long-term sustained yield (i.e., volume yield over
multiple rotations) from a forest. In general, biological rotations do not consider financial costs and
benefits of harvesting and are unlikely to maximize economic returns on the forest investment while
economic rotations may not yield the highest ecological or social benefits. Stands may also be managed
on an extended rotation which does not maximize the financial rotation but may provide other ecological
benefits. Each rotation has various costs and benefits. The rotation age should be based on landowner
objectives. If a tree has reached financial maturity, carrying it until the next entry causes a loss in value
due to discount rates and risk of it losing value. In most cases the maximum NPV and MAI are not
sharp peaks with steep declines on either side of the maximum but usually a gradual plateau. The
gradual plateau allows for flexibility in interpreting the most efficient rotation. Figure 7 illustrates the
biological rotation that maximizes MAI and the economic rotation that maximizes NPV. An extended
rotation generally does not maximize financial benefits but may reflect other landowner objectives.
Figure 7. Biological versus economic rotation age
1.7
1.8
1.9
2.0
2.1
2.2
2.3
2.4
2.5
2.6
$750
$800
$850
$900
$950
$1,000
$1,050
$1,100
$1,150
50
53
56
59
62
65
68
71
74
77
80
83
86
89
92
95
98
101
104
107
110
113
116
119
Mean Annual Increment (cu ft/year)
Net Present Value
Age
NPV (trees only)
MAI, cu ft/year
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4 Economics of uneven aged management
The economic goal of uneven aged management is a steady state which can provide stable returns
indefinitely. In a steady state, the present value of the harvest is directly proportional to the periodic
value of the harvest. The most important economic consideration is to leave desirable species and grades
in each cut, specifically trees with the highest potential to increase in value. Ideally the rate of increase
for each tree in the stand should be greater than the alternative rate of return. Steady economic returns
are important in even aged management as well and it is important to consider both the NPV and the
long run steady returns from a stand.
Existing studies provide evidence that uneven aged management can provide economics returns that are
similar to even aged management. Studies have shown that partial cutting can provide steady, long-term
rates of return between 4 and 6 percent (Buongiorno et al, 1994; McCauley and Trimble 1972; Miller,
1991; and Reed et al, 1986). The key economic considerations in uneven aged management are the
distribution of trees by size (or age) and the frequency of harvests. Uneven aged management is
characterized by periodic harvesting and any economic analysis should consider the frequency of
harvests and how much of the stand should be harvested at each entry.
5 Product considerations
Higher quality products usually command higher prices in the market. Log and lumber grades are as
important as volume in the economics of producing sawlogs. There is a relationship between log and
lumber grades. Log grades for softwood and hardwood lumber start with the same general steps:
1) Establish four grading faces
2) Determine number and length of clear cuttings on each face
3) Determine grade based on second worst face
Most log grading focuses on identifying veneer and the rest is identified as sawlog although in reality
there are three USFS hardwood log grades (F1, F2, F3) and two softwood grades. Veneer is not an
official USFS grade but is important. For more information on log grading the USFS offers several
publications (Rast, et al, 1973, Hanks et al, 1980). USFS log grades are not commonly used throughout
Wisconsin and often the Northern Hardwood Log Grading Rules published by Great Lakes Timber
Professionals Association are more common.
The hardwood and softwood log grades have sometimes been applied to logs in standing trees. Problems
often are encountered when estimating bark diameters and other factors. These difficulties are
compounded when trying to grade the upper logs. An alternative to grading logs in standing trees is
available in several publications (Miller and Hanks, 1986; and Brisbin and Sonderman, 1971). It
presents a system of tree grades that only require consideration of the butt log.
USFS log grades are used to predict the yield of lumber by grade. The National Hardwood Lumber
Association (NHLA) established yield tables that predict the volume of lumber by USFS grade, species
and diameter class. NHLA lumber grades are based on the minimum size of the board, the size cutting
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permitted, the maximum number of cuttings permitted and the area of the board required in clear face
cuttings. There are five NHLA hardwood lumber grades: FAS, selects, 1, 2 and 3. Softwoods lumber
grades were established by the American Softwood Lumber Standard. Softwood lumber grades can be
classified into three major categories of use: yard lumber, structural lumber, and factory and shop
lumber. More information on lumber grades is available from the USFS (McDonald and Krestchmann,
1999) and UW-Extension (Govett, 2008).
It is important to consider log and tree grades when evaluating the economics of a stand. If you are
unsure, it is important to find a training session in your area to learn more about the factors involved in
determining log and tree grades.
It is important to manage for short and long term markets. It is also important to manage for quality and
quantity but to achieve this goal it helps to understand what the local markets are currently accepting.
Preferences for certain species change over time and impact the price mills are willing to pay.
Researching local markets will help to maximize economic returns for landowners.
6 Access to markets
There are many things that affect the bid price on a forest. Access to markets, including distance to the
nearest mill, access within the property, seasonality and the marketability of the species all influence bid
prices. Access to markets varies depending on location in the state. Currently, landowners in Northeast
Wisconsin are closer to a variety of local mills than landowners in Southwestern Wisconsin. Mills buy a
diversity of tree species and size classes and being closer to a variety of mills provides more
opportunities and often higher returns for landowners. Bid prices are also influenced by fuel prices as
they affect the cost of running equipment in the woods and the cost to transport the logs to the mill.
Landowners that are further from mills will be impacted by an increase in transportation costs.
Optimizing efficiencies in the woods will lower costs and increases the returns on the forestry
investment. Access within the property helps increase the timber sale marketability. Having established
roads or trails reduces logging costs. The distance from the landing to the logging site is important,
generally distances over ½ mile lower stumpage prices. An established landing saves the logger time
and leads to more competitive bids. The topography of the site affects the overall returns on the forest.
Sites with well-drained soils on level terrain are easier to operate compared to wet, steep or rocky sites
which lead to slower machine operation and higher machine maintenance costs.
Access issues are not limited to terrain or distance from mills. Access can also be a seasonal issue. When
considering the seasonality of a sale, factors such as seasonal hunting restrictions, frozen ground
restrictions, the presence of threatened, rare or endangered species, archeological sites, oak wilt
restrictions or other constraints can limit the opportunity to harvest and may result in lower bids.
Often a timber sale prospectus will include details that may lead to lower bids for the landowner. A
prospectus or contract may include seasonal hunting limitations or language that limits harvesting to
“frozen ground only”. Removing broad seasonal restrictions and allowing harvests on “frozen or dry”
ground may garner higher bids.
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7 Valuing non-timber forest resources
Forests are often valued for their non-timber resources such as wildlife habitat or recreation. Valuing
non-timber resources is generally expressed as an annual dollar benefit. The WDNR forest management
guidelines state that “There are many benefits from owning and managing forests. Stocks and bonds are
usually purchased for the sole purpose of making money, and their financial performance is judged on
that basis alone. But forests are more than mere collections of trees, and landowners benefit from a wide
array of non-timber goods and services like berries and mushrooms, recreational enjoyment, aesthetics,
water quality, and wildlife. Some of these are traded in the marketplace, for example income from
leasing hunting rights, but most are not, and there is no easy way to determine their value to the
landowner. These non-market benefits can have significant value though, as evidenced by the prices
paid for forestland. Even land that is a long distance from a population center and has no unusual
attractions, such as lakes or streams, will typically be bought and sold for much more than its value for
timber production alone. Investment analysis that focuses only on costs and returns from timber
production will ignore important non-market benefits, and will provide an incomplete measure of total
investment performance” (WDNR, 2011).
Non-timber values are generally defined as direct, indirect and existence values. Direct use values are
things that involve direct human interaction. For example, non-timber forest products, recreation and
hunting are all direct use values. Indirect use refers to values that do not require human involvement.
Existence values are the values that people have for non-timber resources existing. Existence values are
often cultural uses or the importance of places. Most non-timber forest valuation focuses on direct and
indirect use values. Not considering the non-timber values can create problems with inefficient
allocation of resources or uninformed management decisions.
8 Forest economics in the value chain
The forest industry has an extensive history in Wisconsin and to continue forestry in the future we need
to maintain economically-viable and ecologically sustainable returns. Forest economics can help make
fully informed management decisions for landowners, loggers, log buyers, truckers, primary and
secondary processors and communities.
8.1 Landowners
Forest landowners are the base of the economic chain. Private forest land owners may work with
foresters to develop forest management plans and conduct timber sales. The timber sales can be
purchased by loggers, timber haulers, primary processors, and even secondary processors. After the sale
is purchased a logger harvests the selected trees, a timber hauler delivers them to a mill, which processes
the logs into any of several possible products. At all stages of the value-chain the owner of the timber or
logs tries to steer the products into their highest value use. This optimization is unique for everyone as
costs and benefits are different and units may be difficult to define. Foresters can help by looking for
ways to remain flexible in writing and interpreting management plans, lay out of harvests and working
with members of the forest industry.
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Landowners usually consider long and short term costs and benefits. Landowners, even those that derive
other benefits from the forests, may hope to receive a financial return. Small landowners may not have
maximizing financial returns as their primary goal but they often cannot afford to own forest land and
practice sound management without a modest return for their effort. By understanding forest economics,
landowners may be able to meet other ownership and management objectives (for example, invest
financial returns into habitat management). For industrial owners, maximizing returns is usually the
primary management objective. The returns on the forest are influenced by the landowner objectives and
may vary due to the size of the forest, access, available capital, silvicultural methods, and expected
services. Managing forests as cost-effectively as possible requires an understanding of the financial
aspects of decisions.
8.2 Loggers
A significant cost in the forestry value chain is the costs associated with harvesting and transporting the
wood. A forester is a key part of helping minimize costs associated with harvesting and transporting.
Inaccurate cruises, inappropriate harvesting restrictions, poor harvest layouts or access issues all lead to
higher costs to the logger and lower returns to the logger and landowner. A recent study found that
harvesting in the Lake States was 34-37% of the total supply chain costs (Gibeault and Coutu, 2014).
The study also found transportation costs averaged $0.19 per ton per mile in the Lake States and account
for 27% of the supply chain costs. Haul distances in the Lake States averaged 106 miles for conifer, 114
miles for hardwood and 72 miles for aspen (Gibeault and Coutu, 2014 and Baker et. al., 2013).
A 2013 study of felling productivity in Minnesota found that for every 1% increase in volume of
merchantable timber, productivity increased 0.3% (Goychuk, et. al., 2011). The study also found that
skidding productivity was improved by increases in the number and size of skid trails and landings and
the shape of the tract.
Loggers have money tied up in capital expenses and they need the equipment running all year in order to
afford to continue operating and have money available for other investments such as purchasing
stumpage. A study of Wisconsin loggers found the median capital investment was $223,000 and the
most productive operations (more than 15,000 cords per year) had median capital investments of $2
million (Rickenbach, et. al. , 2015).
8.3 Mills
Wisconsin has almost 1,300 forest products companies and 92% of the wood harvested in Wisconsin is
used by Wisconsin manufacturers. Capital investment in sawmills and paper mills continues to increase.
Mills need a steady sustainable source of wood to continue operations by maintaining equipment and
investing in upgrades. The cost of an average paper mill is $1 billion. The annual capital investment in
the US paper industry averages $10 billion/year (Glass, 2014). In 2013, the US paper industry spent $6.2
billion on capital investments and the wood products industry spent $3.6 billion. The paper industry is
the most capital intensive industry in the nation. Understanding what mills will accept and ensuring that
they have a year round supply of wood helps protect the jobs of the 55,000 people employed in paper
and wood products mills in Wisconsin.
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April 2016 62-15 HB24315.62
8.4 Communities
Forestry is important to rural communities. It provides jobs, forest industry employees spend money in
local businesses and communities rely on tax revenue. The forest industry employs almost 60,000
people in Wisconsin. They earn $3.6 billion in wages and the money they spend in their communities
supports schools, hospitals, retail, restaurants, and other services. County forest timber sale revenues are
used to offset local tax levies. Lands enrolled in MFL receive a reduced property tax and in return they
pay a yield tax when they harvest. The yield tax is returned to counties and municipalities. The yield tax
brings in approximately $1.5 million a year in Wisconsin and the municipality where the timber was
harvested receives 80% while the county receives the remaining 20%. The rates for the yield tax are
based on the species and products harvested. In addition, local communities rely on a sustained yield of
products from the local forests. Healthy, well managed forests provide more economic benefits to a
community than degraded, unmanaged forests.
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April 2016 62-16 HB24315.62
9 References
Baker, S., D. Greene, T. Harris, R. Mei. 2013. Regional cost analysis and indices for conventional
timber harvesting operations. Wood Supply Research Institute.
Brisbin, R. and D. Sonderman. 1971. Tree grades for eastern white pine. USFS Research Paper NE-214.
30pp.
Buongiorno, J., S. Dahir, H. Lu and C. Lin. 1994. Tree size diversity and economic returns in uneven
aged forest stands. Forest Science 40(1): 83-103
Cunningham, K. 2006. Forest landowners guide to field grading hardwood trees. University of
Arkansas. Division of Agriculture and Extension. Publication number FSA5014. 8pp.
Davies, Karl. 1999. The Myth of Low Tree Value Growth Rates. Massachusetts Woodland Steward. 29
(4).
Gibeault, F and P. Coutu. 2014. Wood supply chain component costs analysis: A comparison of
Wisconsin and U.S. regional costs. Steigerwaldt Land Services, prepared for Great Lakes Timber
Professionals Association. 41pp
Glass, B. 2014. Timber Trends. Campbell Global. 20pp.
Govett, R. 2008. Wisconsin local-use dimension lumber grading. University of Wisconsin Extension and
Wisconsin Department of Natural Resources.
Goychuk, D. M. Kilgore, C. Blinn, J. Coggins, R. Kolka. 2011. The effect of timber harvesting
guidelines on felling and skidding productivity in Northern Minnesota. Forest Science. 57(5): 393-407.
Hanks, L., G. Gammon, R. Brisbin, E. Rast. 1980. Hardwood log grades and lumber grade yields for
factory lumber logs. USFS Research Paper NE-468. 95pp
Klemperer, D. 1996. Forest Resource Economics and Finance. McGraw-Hill publishing.
McCauley, O. and G. Trimble. 1972. Forestry returns evaluated for uneven age management in two
Appalachian woodlots. Research Paper NE-244. Radnor, PA: USDA, Forest Service, Northeastern
Experiment Station, 12pp
McDonald, K. and D. Krestchmann. 1999. Commercial Lumber. Wood handbook-Wood as an
engineering material. USFS. FPL-GTR-113. Chapter 5.
Miller, G. 1991. Practicing uneven age management: does it pay? Some economic considerations.
Proceedings, Uneven Aged Management of Hardwoods in the Northeast. April 9-10. Lambertville, NJ.
Miller, G.; L. Hanks, H. Wiant. 1986. A key for the Forest Service hardwood tree grades. Northern
Journal of Applied Forestry. 3 (1986): 19-22.
North Central Research Station. 2006. Red pine management guide: A handbook to red pine
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April 2016 62-17 HB24315.62
management in the North Central region.
Penn State Extension. 2008. To cut or not to cut: tree value and deciding when to harvest timber. Penn
State College of Agriculture Sciences.
Prentiss & Carlisle. 2014 Timber Mart North Price Report. Volume 20, number 2.
Rast, E.; D. Sonderman, G. Gammon. 1973. A guide to hardwood log grading. USFS GTR NE. 31pp.
Reed, D., M. Holmes, and J. Johnson. 1986. A 22-year study of stand development and financial return
in northern hardwoods. Northern Journal of Applied Forestry. 3:35-38.
Rickenback, M., M. Vokoun, S. Saunders. 2015. Wisconsin logging sector: status and future direction.
University of Wisconsin-Extension. 23pp.
Saunders, M., R. Wagner, R. Seymour. Thinning regimes for spruce-fir stands in Northeastern United
States and Eastern Canada. Cooperative Forestry Research Unit, University of Maine. 186pp
Wisconsin Department of Natural Resources. 2011. Wisconsin forest management guidelines. Pub-FR-
226 2011.
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April 2016 62-18 HB24315.62
Appendix A- Glossary
Ad Valorem Tax-a tax levied as a percentage of asset value
Allowable cut-volume of timber that may be harvested during a given period to maintain sustained
production
Allowable-cut effect-allocation of anticipated future forest timber yields to the present allowable cut;
this is employed to increase current harvest levels (especially when constrained by evenflow) by
spreading anticipated future growth over all the years in the rotation
Alternative rate of return-the percent rate of return on capital in an investor’s best alternative.
Amortization-the process of gradually reducing some monetary amount over time, can referrer to
income tax calculations where some cost is gradually deducted over time.
Annualized cost (or revenue)-an equal annual payment with the same present value as payments that
are not annual. May be calculated for a fixed or infinite time horizon
Annuity-equal payments at regular intervals (for example monthly or yearly)
Appraisal-the procedure for finding market value of an asset
Benefit-cost ratio- ratio obtained by dividing the anticipated benefits of a project by its anticipated
costs. Either gross or net benefits may be used as the numerator
Bequest value-our willingness to pay for the opportunity to transfer resources to future generations
Biological rotation-a rotation age based on a biological, not economical, criterion and is usually based
on maximum mean annual increment
Board foot-unit of measurement represented by a 12- by 12- by 1-inch unfinished board
Capital-Plant, equipment, and related facilities used to produce goods and services
Capital budgeting-deciding how to invest money, the capital budget sot that its value to the investor is
maximized
Capital gain-difference between the sale prices and the purchase cost of an asset.
Capitalization rate-see discount rate
Capitalize-to find the present value or to discount. In income tax calculations it means to carry forward
ta capital expense and deduct it form sale proceeds of an asset to find taxable income
Commercial thinning-partial harvesting of a stand of trees for economic gains from the harvested trees
and to accelerate the growth of the trees left standing
Commercial timber-standing timber that can be sold for wood products and is available for harvest
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Compound interest-earnings accruing as a percentage of capital value such that earnings occur on the
original capital and on all previous earnings
Compounding-refers to the process whereby a current capital investment (present value) grows over
time to a larger future value
Constant dollars-values expressed in real dollars of some base year, excluding inflation
Consumer price index (CPI)-an index of average prices for a typical market basket of consumer goods.
The index is set at 100 for a specified base year. The annual rate of change in the CPI is the
inflation rate for consumer goods.
Contingent valuation-a way to value nonmarket good and services by asking users the maximum
amount they would be willing to pay for them (willingness to pay_ or the minimum
compensation they’d require to willingly give them up (willingness to sell).
Cost of capital-the interest rate firms pay on capital raised for investment
Current dollars-values in dollars of the year in which they actually occur, including inflation. Also
known as nominal dollars
Cutting cycle-In uneven aged management, the number of years between partial cuts
Deflate-to deflate a current dollar value means to express it in constant dollars of a base year n,
removing inflation
Depletion-in income tax calculation, the deduction made for original purchase cost when assets are sold
Depreciation-an account charge for the wearing out of assets
Direct effects-income and employment resulting directly from constructing and operating a project
Discount rate-The interest rate at which future values are discounted to present values
Discounted cash flow-In evaluating investment opportunities, the various costs and benefits anticipated
in future years discounted to the present. These values are expressed by either (a) their
difference, giving a net present value, b) the benefit-cost ratio, or (c) calculating the discount rate
that equates them, giving the internal rate of return
Discounting-the process whereby a future value is reduced to arrive at the present value
Economics-the study of how best to allocate or distribute resources to maximize human well-being
Equity-the portion of a firm’s assets on which no debt is owed to creditors
Even aged-refers to forest in which trees have been established at about the same time and are thus
roughly the same age
Existence value-consumers’ willingness to pay for the assurance that something remains in existence,
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April 2016 62-20 HB24315.62
even if they may never use it
Expected value-the sum of the possible values multiplied by their probabilities of occurrence (usually
used to refer to an expected cost or expected revenue)
Expensing-In income tax calculation, the practice of deducting or subtracting allowable costs from
income to arrive at the taxable income
Fee timber-timber that a firm owns outright on its lands, derived from the legal term, “ownership in fee
simple”
Financial maturity- the age beyond which an assets’ growth rate is unacceptable or less than the
owner’s minimum acceptable rate of return. Can refer to a forest or individual trees
Financial rotation-rotation of tree crops determined solely by financial considerations (which are
related to biological production potential) in order to obtain the highest monetary values over
time, in terms of optimum net present value
Fixed costs-costs that remain fixed as a firm’s output increases
Forest value growth percent-annual percent rate of change in the liquidation value of trees and land
Future value-the value of any income or wealth accumulated with compound interest to a specified
future date
Gross domestic product (GDP)-the market value of all goods and services produced by residents of a
nation in a year, excludes income of residents
Holding value-the owner’s net present value of future cash flows from an asset
Hurdle rate-a minimum acceptable rate of return or hurdle that new investments must clear before they
are acceptable to an investor
Indirect effects- The impact of local industries buying goods and services from other local industries.
Induced effects-The effect of income spent by employees
Impacts-total changes to the economy as a result of an event. Impacts=direct effects+ indirect effects+
induced effects
Inflation-a general increase in prices of all goods and services in an economy, usually expressed as an
inflation rate.
Input output analysis-a technique for measuring interdependencies between different sectors of an
economy and making economic forecasts
Interest- the payment made to lenders of money, often expressed as an interest rate
Internal rate of return-for a given project, the interest rate at which the present value of revenues
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April 2016 62-21 HB24315.62
equals the present value of costs
Machine rate-cost per unit of time for owning and operating a logging machine or other piece of
equipment
Managed forest law- a landowner incentive program that encourages sustainable forestry on private
woodlands in Wisconsin
Marginal-in economics, added or extra, as opposed to total
Mean annual increment-average annual timber volume growth per unit area
Minimum acceptable rate of return-the lowest rate of return that will induce an investor to willingly
invest
Model-a simplified representation of an actual process, situation or object
Multiplier effect-the multiplied amounts of income, employment or sales beyond the initial amounts.
For example a 1.5 multiplier on employment means that for every 100 employees another 50
people are employed due to indirect or induced effects
Net income-total revenue minus total cost (usually synonymous with profit)
Net present value-present value of future revenues minus present value of future costs
Nominal-with respect to values or rates of return, in current dollars, including inflation
Nonmarket-not traded in the market for a price
Pareto optimum-a resource allocation where no change can make anyone better off without making
someone else worse off
Payback period-the number of years it takes to recover the final capital invested in a project
Periodic-occurring at regular intervals of more than one year (in this chapter)
Present value-any future value discount to a present value. Discounting is the reverse of compounding
Producer price index (PPI)- an index of average prices for a mix of industrial outputs, excluding
services for each year. The index is set to 100 for a base year.
Property tax-an annual tax levied as a percentage of property value.
Public good-a good or service not easily parceled out and sold. You can’t exclude those who don’t pay
for the good from receiving its benefits.
Rate of return-earnings on capital
Real-with respect to monetary values, excluding inflation
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Regeneration-process by which trees are reestablished
Reinvestment rate-the rate of return at which you assume future income from a project could be
reinvested
Reservation price-the minimum stumpage price that will induce a forest owner to sell or plant forest
Risk-the variation in expected cash flow. The possibility of loss
Risk adjusted discount rate-the interest rate for discounting risky cash flows
Rotation-age, in years, at which timber is harvested
Roundwood-harvested wood in round or log form
Sawtimber-live trees capable of yielding sawlogs
Short run-in economics, the period of time for which some inputs are fixed
Stumpage value-the estimated or actual amount that buyers would pay for standing timber
Sunk costs-costs that have already been incurred
Supply-in economics, supply refers to the quantities of a good or service that a producer or group of
producers will supply per unit of time at different prices
Sustained yield-a commitment to continued long-term wood output through an even flow of timber
Trade-off-in a system of interrelated inputs and outputs, a trade-off refers to the process whereby
changing one output can change other outputs
Utility-in economics, human satisfaction or well-being
Valuation-the procedure for finding an individual investor’s value of an asset
Value added-the difference between the sale price of goods sold and cost of materials and supplies used
in production
Variable costs-costs that change as a firms output changes
Willingness to pay-a maximum monetary amount an individual is willing to pay for good or service
Willingness to pay for land-starting with bare land, WPL is the net present value of all future expected
cash flows discounted at some rate of return.
Yield tax-a tax levied as a percentage of harvested stumpage value
Source: Klemperer, 1996
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Appendix B- Formulas
Decision Tree for Present Value and Future Value Formulas
Number of
Payments
Time
Between
Payments
Evaluation
Period
Time of
Value
Formula Formula Name
One Terminating Future
=
1
+
Future value of
an amount
Present
=
1
+
Present value of
an amount
Series Annual Terminating Future
=
1
+
−
1
Future value of a
terminating
annual series
Present
=
1
−
1
+
−
Present Value of
a terminating
annual series
Perpetual Future
=
Present
=
Present value of
a perpetual
annual series
Periodic Terminating Future
=
1
+
−
1
1
+
−
1
Future Value of
a terminating
periodic series
Present
=
1
−
1
+
−
1
+
−
1
Present value of
a terminating
periodic series
Perpetual
Future
=
Present
=
1
+
−
1
Present value of
a perpetual
periodic series
(Faustmann
Formula)
r
Annual interest rate/100
Vo
Present value (or initial value)
Vn
Future value after n years (including interest)
n
Number of years of compoundi
ng or discounting
P
Amount of fixed payment each time in a series (occurring annually or every t years)
t
Number of years between periodic occurrences of p
Source: Klemperer, 19
WISCONSIN DEPARTMENT OF NATURAL RESOURCES
NOTICE OF FINAL GUIDANCE & CERTIFICATION
Pursuant to ch. 227, Wis. Stats., the Wisconsin Department of Natural Resources has finalized and hereby certifies the
following guidance document.
DOCUMENT ID
FA-20-0001
DOCUMENT TITLE
Silviculture Handbook
PROGRAM/BUREAU
Forest Economics and Ecology, Applied Forestry Bureau
STATUTORY AUTHORITY OR LEGAL CITATION
S. 823.075, Wis. Stats. & NR 1.25, Wis. Admin. Code
DATE SENT TO LEGISLATIVE REFERENCE BUREAU (FOR PUBLIC COMMENTS)
2/10/2020
DATE FINALIZED
4/6/2020
DNR CERTIFICATION
I have reviewed this guidance document or proposed guidance document and I certify that it complies with sections
227.10 and 227.11 of the Wisconsin Statutes. I further certify that the guidance document or proposed guidance
document contains no standard, requirement, or threshold that is not explicitly required or explicitly permitted by a
statute or a rule that has been lawfully promulgated. I further certify that the guidance document or proposed guidance
document contains no standard, requirement, or threshold that is more restrictive than a standard, requirement, or
threshold contained in the Wisconsin Statutes.
March 27, 2020
Signature Date
