Optimal Financial Returns of Loblolly Pine in East Texas by

The profitability of managing loblolly pine (Pinus taeda L.) on nonindustrial private forest lands in East Texas depends on the frequency, timing and intensity of commercial thinning(s), and the timing of the final harvest. The landowner's alternative rate of return (ARR), stumpage prices, labor costs, and management practices also have an effect on profitability. To determine the best management regime, PTAEDA2, a forest stand simulator, was used to predict stand growth, and economic analyses were conducted to determine financial optimality. Variables employed included site indices ranging from 50 to 90 (base age 25), thinning intensities of 20, 25, 30 or 35 percent of basal area removal, rotations up to 60 years in length, and a choice of 0, 1, 2, or 3 thinnings during the rotation. Cash flow analyses were conducted on the results of each operable thinning and harvest regime using real ARRs from 2.5 to 15.0 percent. Soil expectation value was used as the financial criteria to determine the optimal financial thinning and harvest schedule. A total of 1,897,164 operable thinning and harvest combinations and cash flow analyses were calculated. Results indicate that given current stumpage prices and labor costs, if a landowner has a real ARR of 15.0 percent, forest management is only profitable on site index 90 and better land. Forest management is profitable on site index 80 and 90 land for landowners with an ARR of 12.5 percent. Forest investment is profitable on site indices 70, 80 and 90 land for landowners with an ARR of 10.0 percent. For a real ARR of 7.5 percent, forest management is profitable on site indices 60 through 90. Management is profitable on site indices 50 through 90 using real ARRs of 2.5 and 5.0 percent. 1 Ph.D. Candidate and Associate Professor of Forest Economics respectively, Arthur Temple College of Forestry, Stephen F. Austin State University, Nacogdoches, TX 75962-6109. ECONOMIC EVALUATION CRITERIA The two most common questions asked by nonindustrial private forest landowners are: Is forest management a good investment? And if it is, how profitable is it? Landowners consider the forest as a store of wealth or capital. Depending on the site quality of their land and their alternative investments, forest landowners need to know if timber is a good investment and how to maximize financial profits. Forest management decisions concerning optimal financial thinning and harvest schedules often involve capital budgeting. The capital budgeting problem concerns whether to accept or reject investments, and how to invest money so that financial returns are maximized (Klemperer 1996). Of the various types of economic efficiency analyses developed over the years, net present worth (NPW), internal rate of return (IRR), benefit-cost ratio (B/C) and payback (or payout) period are considered as four significant criteria for evaluating feasible candidate projects (Klemperer 1996). In this study, NPW and IRR were chosen as financial tools to measure profitability of forest investment. NPW is the sum of the discounted revenues minus the sum of the discounted costs of a project. IRR is the discount rate which makes NPW equal to zero. NPW indicates how much forest landowners will earn in dollar terms; IRR indicates how much they will earn in percentage terms. Even though IRR is a useful tool for measuring the worth of a project, it may lead a landowner to make an incorrect choice among mutually exclusive projects (Gittinger 1982). Klemperer (1996) illustrated that project selection using IRR and using NPW are not always consistent. Assume that the NPWs of two projects are plotted over a range of interest rates. If their curves do not cross, then using NPW or IRR will result in selecting the same project. If they do cross, IRR and NPW may yield different project selections. NPW enjoys greater theoretical support than IRR as a capital budgeting criterion (Klemperer 1996). METHODS This study was designed to determine the profitability of managing loblolly pine on nonindustrial private forestland. PTAEDA2 (Burkhart et al. 1987), a forest stand simulator, was utilized to predict stand growth data on diameter, height and volume for cutover, site-prepared areas from establishment to final harvest. PTAEDA2 was combined with a program to calculate cash flow tables, NPW and SEV (soil expectation value). The combined dynamic program was developed to simultaneously determine the optimal timing and intensity for thinning(s) and the optimal rotation age for loblolly pine plantations on nonindustrial private forestland. Site indices ranging from 50 to 90 for loblolly pine (base age 25) were employed in these analyses. The maximum rotation was set at age sixty with a choice of zero, one, two or three thinnings during the rotation. The method for the first thinning would be a combination of low and row thinning; the method for the second and third thinning would be a low thinning only. The first thinning could not be conducted until the stand was at least 10 years of age. The minimum years between thinnings, or between a thinning and the final harvest, could not be less than 5 years. For all the dynamic runs, a “thinning and final harvest” regime would be considered to be operable only if it passed the following two threshold constraints: 1) every thinning or final harvest had to yield a minimum of six cords of pulpwood and/or sawtimber per acre, and 2) the number of residual trees after each thinning had to be at least eighty per acre. Four thinning intensities, 20, 25, 30 or 35 percent basal area removal, were calculated for each possible thinning. Six real alternative rates of return (ARR), which span the range of earning rates available to most landowners, were chosen for the economic analyses: 2.5, 5.0, 7.5, 10.0, 12.5 and 15.0 percent. The annual real price increase of sawtimber and pulpwood, and annual real cost increase of labor were assumed to be 2.0, 1.0 and 1.1 percent, respectively. The price of sawtimber was assumed to be $450 per thousand board feet (Doyle log rule), and pulpwood was priced at $35 per cord. Assumed management activities, frequency and labor costs are presented in Table 1. Table 1. Management activities, frequency and labor costs. Activity Cost Frequency Start End Boundary location $20/acre Once only Year 0 Boundary maintenance $2/acre Every 10 years Year 10 Final harvest Management plans (initial) $5/acre Once only Year 0 Management plans (updates) $10/acre Every 10 years Year 10 Final harvest Site preparation (chop) $90/acre Once only Year 0 Site preparation (herbicide) $85/acre Once only Year 0 Hand planting, labor $45/acre Once only Year 0 Seedlings $30/acre Once only Year 0 Burning $40/acre Every 5 years Year 10 Final harvest Mark and administer 10% As necessary Pulpwood/sawtimber sale (percentage of gross) Economic Approach Soil expectation value (SEV) was used as the efficiency criteria to select the most profitable thinning and harvest schedule. SEV is the NPW of bare forestland used for timber production over multiple rotations (Davis and Johnson 1987). In order to avoid the possible inconsistency between using NPW and IRR to select projects, this study determined the most profitable thinning and harvest schedule by calculating the NPWs and SEVs of all operable management regimes. For each site index and real alternative rate of return (ARR), the management regime which had the highest SEV was chosen as the optimal financial “thinning and final harvest” schedule. In order to obtain the rate of return earned on money invested, IRR was calculated using the specific cash flow table of each of the optimal management regimes. RESULTS The variables used in this study included site indices ranging from 50 to 90 (base age 25), thinning intensities of 20, 25, 30 or 35 percent of basal area removal, rotations up to 60 years in length, a choice of 0, 1, 2, or 3 thinnings during the rotation, and ARRs ranging from 2.5 to 15%. A total of 1,897,164 operable management regimes, NPWs and SEVs were calculated (Table 2). Results indicate that, for site index 50 land, forest management is profitable only for landowners whose real ARR is 2.5 or 5.0 percent . For site index 60 land, forest investment is profitable for landowners who have real ARRs of 2.5, 5.0 or 7.5 percent. For site index 70 land, forest management is profitable for landowners who have real ARRs of 2.5, 5.0, 7.5 or 10.0 percent. Forest management is profitable for landowners who have ARRs of 2.5, 5.0, 7.5, 10.0 or 12.5 percent on site index 80 land. Forest management is a good investment on site index 90 land for all six real ARRs. The NPWs and IRRs of the “thinning and final harvest” schedules which maximize SEV are presented in Tables 3 and 4, respectively. All monetary values are presented on a per acre basis. Site Index 50 A total of 98,412 operable management regimes and economic analyses were calculated for site index 50 land (Table 2). Forest management is profitable using an ARR of 2.5 and 5.0 percent. The best “thinning and final harvest” schedule for 5.0 percent ARR will generate an NPW of $149.26 per acre (Table 3). This means that if the landowner already owned the land and followed this best schedule, he would earn 5.0 percent on every dollar invested plus $149.26 per acre for managing one rotation. The real rate of return earned on conducting this best schedule is 5.95 percent (Table 4). This indicates that landowners whose ARR is 5.0 percent will earn a rate of 5.95 percent on their investment if the best management regime is practiced on this site index. Site Index 60 A total of 281,772 operable management regimes and economic analyses were calculated for site index 60 land (Table 2). NPWs for 2.5, 5.0 and 7.5 percent ARR are $2,183.27, $473.43 and $70.13 per acre, respectively. This corresponds with real IRRs of 6.37, 7.89 and 8.31 percent, respectively (Tables 3 and 4). For the landowner who has an ARR of 7.5 percent, 8.31 percent is the estimated maximum rate of return that forest investment could earn on this site index. Table 2. Number of economic analyses calculated. Number of Thinnings Number of Economic Analyses Site Index