The Economics of Private Forest Management

The majority of forest land in the U.S. is owned by individuals and institutions that are not directly involved in the forest products industry. Much of this land is thought to be managed inefficiently, but the reasons for this are unclear. This article focusses on three possible factors: information and transactions costs; nonfinancial forest values; and liquidity constraints. Models for the reforestation and harvesting decisions are presented that incorporate these factors. These models use the Faustmann model to define the financial value of forest land, and borrow from previously developed models of nonindustrial private forest management to incorporate the other factors into the forest management decision. A wealth of data exists on nonindustrial private forest management, and discussion focusses in particular on models that are suitable for the study of existing data. The vast majority of commercial forest land in the United States is privately owned. This land is commonly considered as falling into two separate classes, defined by a particular characteristic of the landowner: whether the owner is involved in the forest products industry (industrial, private forest land), or not (nonindustrial private forest land). Landowners in the former class can be taken as principally profit-oriented, and so management can be analyzed via the Faustmann model. Landowners in the latter class, though, have diverse management objectives, and so are more difficult to characterize. In essence, the nonindustrial private forests are a residual class (as the name suggests), despite the fact that they hold up to 80% of all private forest land. The management of these nonindustrial private forests (NIPF's) has "long been considered a problem by many resource managers and policy makers." (Kurtz, 1989, p. 342). In periodic inventories of the nation's forest resources, the Forest Service has repeatedly identified opportunities for increased timber production on NIPF land. Presumably accompanying this productive potential must be profits for the landowners who exploit it, but for reasons that are largely unknown, landowners have ignored these potential profits. Numerous studies have been conducted, but "what motivates landowner behavior remains incompletely understood." (Martin and Bliss, 1990, p. 248). A variety of approaches have been taken to modelling NIPF management. (See Binkley, 1981; Boyd, 1984; Hyberg and Holthausen, 1989; Kuuluvainen, 1989) The following presents a synthesis of these models and the standard, Faustmann model. As will be shown below, the forest management rules generated by the Faustmann model can be easily modified to account for the different objectives and characteristics of NIPF landowners. The modified decision rules are consistent with the Faustmann model in the sense that, if the additional factors are unimportant, the rules reduce to the Faustmann forms. So under this synthesis, profit-maximizing forest management appears as a special type of NIPF management. This will make it possible to empirically identify and interpret the factors (if any) that distinguish industrial and nonindustrial forest management. The discussion focusses in particular on models that are suitable for application with existing data. By calling upon recently developed methods of nonparametric regression, these models need not sacrifice their essential economic content for the sake of empirical applicability. It's worth noting here that these models are not excessively difficult to apply or interpret for anyone with reasonable knowledge and experience in econometrics. Most of the variables required by the models are typically available in data collected by the Forest Service or by state forestry departments. The models also point to other variables that may improve the information set maintained by these agencies. The discussion begins, in section I, with the standard economic model of private forest management, the Faustmann (or profit-maximization) model. This model establishes the pure financial value of a forest asset, and is the foundation on which the rest of the models are built. It is maintained here that NIPF management may be distinguished from industrial forest management by information and transactions costs; by the nonfinancial values that some landowners derive from their forests; and by the long term to maturity "Commercial forest land", or "timberland", is defined by the Forest Service as "forest land that is producing or is capable of producing crops of industrial wood and is not withdrawn from timber utilization by statute or administrative regulation." (U.S.D.A., Forest Service, 1990, p. 254) For the sake of readability, commercial forest land will hereafter be referred to simply as "forest land." Nonindustrial, private forest land is sometimes classified into 'farmer' and 'other' classes.