Land expectation values for spruce and beech calculated with Monte Carlo modelling techniques

doi:10.1016/S1389-9341(01)00045-4

Forest Policy and Economics

Volume 2, Issue 2, June 2001, Pages 157-166

https://doi.org/10.1016/S1389-9341(01)00045-4 Get rights and content

Abstract

This study presents a model for including natural risks (such as storm or insects) in the calculation of land expectation values. Applying this model, an answer has been found to the question as to whether consideration of risk would lead to changing recommendations regarding the choice of species and the length of rotation periods from the point of view of profitability. The study is based on well-founded, empirical growth data and survival probabilities for a specific region in southern Germany. It shows that spruce is the more profitable species, even if its survival probability is noticeably lower than that of beech, especially when the trees are older. When survival probabilities are considered, the economic superiority of spruce is not affected, but their optimum rotation period is reduced from 90 to 80 years.

Introduction

Using the Faustmann formula (Faustmann, 1849), it is possible to assess a potential purchaser's willingness to pay for bare land which then can be used for forestry. It also provides a basis for finding the optimum thinning concept and rotation period of a forest stand, at a given site for a given constant interest rate and for constant timber prices and harvesting costs. Today, the Faustmann formula is still internationally acknowledged as the first scientific approach for calculating the optimum rotation period of a forest (Samuelson, 1976, Pertz, 1983). The Faustmann formula can be written as: $B_{0} = A_{u} + ∑ a=1 u D_{a} ·i^{u−a} −c·i^{u} i^{u} −1 −V$ where B₀=land expectation value; A_u=harvesting yield at the end of the rotation period; u=length of rotation period; D_a=thinning yields at the age a; i=interest factor; c=costs for replanting; and V=capital for administration.

However the Faustmann formula and its usage has also been criticised. It has been argued that the application of the Faustmann formula leads to the non-sustainable exploitation of forests. This criticism was disputed earlier in Endres (1919). Another criticism is that the Faustmann formula only takes into account profits from the sale of timber and ignores other economic benefits. But these benefits, are harder to assess and calculate. The fundamental criticism however, is that the design of the Faustmann formula is based on steady state assumptions: As it can be seen in Eq. (1), forest growth, harvesting concepts, roundwood prices, costs and interest rates are considered as constants for the whole time-span (Samuelson, 1976, Pertz, 1983). Particularly the assumption that all future payments and repayments will remain constant (the amount and the period of payment), leads to the rejection of the Faustmann formula to calculate the optimum land rent in Germany (Dieterich, 1950).

In this paper a modified model is used to calculate the land expectation values. The improvement consists of the inclusion of a risk factor for natural damages and the economic consequences thereof. In this example of spruce and beech stands and for a specific region in southern Germany, the risk of natural stand damage and the subsequent effect of declining roundwood prices is integrated into the simulation of land expectation values. After the storm damage in 1990 in southern Germany, a great number of forest enterprises replanted the damaged areas with broad-leafed trees because they are less at risk than conifers. However, when natural risks are not considered in forest economic analysis, conifers are usually more advantageous than broad-leafed trees. The study will show whether the planting of broad-leafed trees instead of conifers to increase the stability of the stand, can also be recommended from an economic point of view.

Section snippets

Database and methodological approach

The study is based on growth data for a specific region in southern Germany. The region is characterised by the following climatic and site data (Table 1). The site characteristics of the region show favourable growth conditions (Table 1). Using German yield tables, the yield class is the highest in Germany [productivity index: top height 40 m at an age of 100 years (Assmann and Franz, 1963)] for spruce and more than yield class I.0 (moderate thinning, Wiedemann, 1957) for beech. It must be

Simulation model

The Faustmann formula delivers the net present value of an afforestation, estimated with payments for infinite time. A simulation, however requires a finite time horizon. As long-term financial projections influence net present values only marginally, a simulation over a sufficiently long period of time will lead to almost the same results as an analysis for infinite time. In this case a simulation time-span of 1000 years is considered to be adequate. A diagram of the simulation model is shown

Land expectation values without consideration of risk

Before the impact of risk on land expectation values can be assessed, it is necessary to compute the risk-free land expectation values as a reference. By comparing these respective values, with and without the influence of natural catastrophes, it is possible to assess whether spruce and beech are to be maintained or whether their relative advantages regarding the net present value change when uncertainty as part of the reality is included and reflected in the decision model.

Fig. 6 shows the

Conclusions

In this study, the question as to whether beech stands can reach higher land expectation values than spruce stands when the risks of storm and insect damage are considered, has been examined. The study is based on growth data for spruce and beech stands in a specific region of southern Germany. This site is characterised by very good growth conditions for both spruce and beech stands. This allows for the transfer of the results only to other regions with comparable soil and climate conditions.

References (13)

E. Assmann et al.
W.-G. Bitter
ZMP-Bilanz Forst und Holz 1999
(1999)
R. Bräunig et al.
Waldumbau, kalamitaetsrisiken und finanzielle erfolgskennzahlen
(1998)
M. Dieter
Beruecksichtigung von risiko bei forstbetrieblichen entscheidungen
(1997)
V. Dieterich
Forstliche Betriebswirtschaftslehre, Band 1
(1950)
M. Endres
Lehrbuch der Waldwertrechnung und Forststatik
(1919)

There are more references available in the full text version of this article.

Cited by (61)

Enhancing multifunctionality in European boreal forests: The potential role of Triad landscape functional zoning
2023, Journal of Environmental Management
Land-use policies aim at enhancing the sustainable use of natural resources. The Triad approach has been suggested to balance the social, ecological, and economic demands of forested landscapes. The core idea is to enhance multifunctionality at the landscape level by allocating landscape zones with specific management priorities, i.e., production (intensive management), multiple use (extensive management), and conservation (forest reserves). We tested the efficiency of the Triad approach and identified the respective proportion of above-mentioned zones needed to enhance multifunctionality in Finnish forest landscapes. Through a simulation and optimization framework, we explored a range of scenarios of the three zones and evaluated how changing their relative proportion (each ranging from 0 to 100%) impacted landscape multifunctionality, measured by various biodiversity and ecosystem service indicators. The results show that maximizing multifunctionality required around 20% forest area managed intensively, 50% extensively, and 30% allocated to forest reserves. In our case studies, such landscape zoning represented a good compromise between the studied multifunctionality components and maintained 61% of the maximum achievable net present value (i.e., total timber economic value). Allocating specific proportion of the landscape to a management zone had distinctive effects on the optimized economic or multifunctionality values. Net present value was only moderately impacted by shifting from intensive to extensive management, while multifunctionality benefited from less intensive and more diverse management regimes. This is the first study to apply Triad in a European boreal forest landscape, highlighting the usefulness of this approach. Our results show the potential of the Triad approach in promoting forest multifunctionality, as well as a strong trade-off between net present value and multifunctionality. We conclude that simply applying the Triad approach does not implicitly contribute to an overall increase in forest multifunctionality, as careful forest management planning still requires clear landscape objectives.
Quantifying the consequences of disturbances on wood revenues with Impulse Response Functions
2022, Forest Policy and Economics
Citation Excerpt :
For instance, increasing the harvest volume of spruce by a factor of 2 reduced revenues by about 28% (Fig. 2), which is close to the 30% in Staupendahl and Möhring (2011). Assuming the same regional intensity but a transregional extent (by considering the additional calamity dummy variable, Table 1), we received a reduction of about 48% (cf. 50% in Dieter, 2001, but for net revenues). This shows that explicitly linking the decline in wood revenues to the assumed disturbance severity and its spatial extent is important for interpreting its simulated economic impact.
Forest disturbances in Europe are very likely to increase in frequency and intensity. Assessing their economic consequences is required to identify feasible adaptation strategies. Such economic calculations depend on estimates for the reduction in revenues after disturbance events. These losses can be caused by both a lower wood quality as well as an oversupply on the wood markets. Despite its importance, data-driven approaches to quantify the consequences of disturbances on wood revenues in Central Europe are rare. We applied econometric time series analysis with Structural Vector Autoregressive (SVAR) models to harvest and sales data from Hesse, Germany. Additionally, we derived estimates for reductions in wood revenues for integration in bioeconomic simulation models. Our analyses indicate that the observed losses in wood revenues for spruce after disturbances are mainly due to an oversupply on the wood markets, rather than a loss in wood quality. In addition, the results suggest that calamities of transregional extent or multiple disturbances in subsequent years are likely to reduce wood revenues beyond the assumptions often used in bioeconomic simulation models. Although our results for beech were more ambiguous, they indicate that losses in revenues for beech after disturbances in the past were mainly due to a reduced wood quality. Our study highlights the importance of taking a differentiated view on the consequences of disturbances on wood revenues, considering their spatial extent and species-specific mechanisms.
Economic losses from natural disturbances in Norway spruce forests – A quantification using Monte-Carlo simulations
2021, Ecological Economics
Changing forest disturbance regimes pose a major challenge for current day forestry. Yet our understanding of the economic impacts of disturbances remains incomplete. Existing valuations of losses from natural disturbances commonly exclude extreme events and neglect impacts on standing timber. Here we develop a new methodology to assess the economic impact of natural disturbances addressing these limitations. We couple an empirical function of forest growth with survival modelling for the example of Norway spruce (Picea abies), using Monte-Carlo simulations to quantify the economic losses from natural disturbances. We illustrate the effect of extreme disturbance events by analyzing the lowest (worst) 5% of simulated economic returns. Ranging between € −2,611 and −34,416 per hectare, disturbance-induced economic losses varied greatly, depending on the valuation approach applied. Accounting for extreme events and disturbance impacts on standing timber resulted in 262–1218% higher losses compared to damages derived with common valuation approaches that neglect these aspects. Furthermore, we demonstrate that refraining from salvage logging after extreme disturbances does not necessarily result in major economic losses for forest owners, indicating a potential cost-effective avenue to improve forest biodiversity. Our approach presents an important step towards quantifying the economic impacts of changing forest disturbance regimes.
How considering multiple criteria, uncertainty scenarios and biological interactions may influence the optimal silvicultural strategy for a mixed forest
2020, Forest Policy and Economics
Assessing pre-defined strategies remains the status quo for studies supporting silvicultural decision-making for future forest management, yet, such strategies may not fully address decision-makers' preferences and uncertainty attitudes. We develop a continuous stand-level optimisation approach that integrates multiple decision criteria, uncertain input data based on ellipsoidal uncertainty sets and biological interactions. The optimisation aims to derive silvicultural strategies that closely align with the objectives and uncertainty attitudes of decision-makers. The novel approach optimises tree species composition and harvesting regimes simultaneously. In our example, the decision criteria are the soil expectation value (SEV), the volume of timber harvested, the sum of cash flows and the average amount of carbon stored in the forest. We use input data for Norway spruce (Picea abies), Silver fir (Abies alba) and European beech (Fagus sylvatica), and integrate biological stand-level interactions represented by a) enhanced survival of tree species in mixed forests and b) the growth response of trees remaining after partial harvesting. The resulting optimal silvicultural strategies ranged from a clear-cutting system (when maximising SEV and ignoring uncertainty) to continuous cover forestry (maximising SEV and considering uncertainty). Our analyses did not support single species forestry – even the clear-cutting system suggested a mixed rather than pure forest. Silvicultural strategies that consider multiple criteria stored up to 47% more carbon than the clear-cutting system, but their SEVs were up to 39% lower. Biological interactions influence the optimal stand composition and harvesting regime, while establishment costs and the discount rate affect the level achieved for each management criterion. Lower survival due to changes in climate hardly influenced the model results. Our optimisation approach is flexible and may integrate many more and different criteria. It is useful to derive silvicultural strategies to guide science-based recommendations for various forest decision-makers.
Economic impact of growth effects in mixed stands of Norway spruce and European beech – A simulation based study
2019, Forest Policy and Economics
Productivity in mixed forest stands is often higher than that in pure forest stands. Economic analyses usually exclude this phenomenon. In our study, we assess the consequences of an increased productivity in mixed forests for the economically optimal proportions of tree species in forest stands. The economic model applied centers around the Modern Portfolio Theory with the Value-at-Risk as the objective function. The methodological approach encompasses a structured Monte Carlo simulation to generate distributions of returns for different scenarios. Risks include price fluctuations for raw wood as well as natural hazards. The study's major novelty is that it combines well-researched productivity relations in mixed forests with recent empirical survival models for mixed and pure stands to address site variability across Bavaria.
We parametrized the model with simulated growth data for Norway spruce and European beech for various climatic and geological conditions. From the results, we conclude that decision makers can increase the Value-at-Risk of forest portfolios when overyielding occurs, by choosing higher shares of beech. Climatic conditions and the extent of overyielding strongly influence optimal stand composition. Using Value-at-Risk as a risk measure that regards both expected returns and their variation, however, leads to the observation that increased risk aversion rather favors higher shares of spruce in forest stands, despite its higher biophysical risks.
Assessing the timber value: A case study in the Italian Alps
2018, Forest Policy and Economics
In the Piedmont region, in North-West Italy, the abundance of unmanaged woods has led to negative environmental and economic consequences, generating a decrease in the ecosystem services supplied and in the provision of low-value timber products. In this context, increased logging activities could create new development opportunities for the rural areas in which most of the abandoned stands are situated.
This work analyses a forest harvest by creating a model to evaluate its timber value. The economic results were analysed to investigate the structural and logistic factors influencing the profitability of a harvest. The results obtained revealed that a small profit margin is achievable for small local logging companies, even if strongly influenced by the hourly costs of labourers.
To quantify the influence of each factor of the model on the timber value, a sensitivity analysis was performed. Then, to test the robustness of the results a Monte Carlo simulation was carried out simultaneously varying the factors involved. Finally, a scenario analysis was performed, in which the standard conditions referring to the most common private forest company typologies were examined.
Overall, these methods were found to be suitable for our aims and capable of supplying important results to analyse a forest harvest from an economic perspective.

View all citing articles on Scopus

View full text

Land expectation values for spruce and beech calculated with Monte Carlo modelling techniques

Abstract

Introduction

Section snippets

Database and methodological approach

Simulation model

Land expectation values without consideration of risk

Conclusions

ZMP-Bilanz Forst und Holz 1999

Waldumbau, kalamitaetsrisiken und finanzielle erfolgskennzahlen

Beruecksichtigung von risiko bei forstbetrieblichen entscheidungen

Forstliche Betriebswirtschaftslehre, Band 1

Lehrbuch der Waldwertrechnung und Forststatik