FNR 407 Forest Economics

1. FNR 407 Forest Economics William L. (Bill) Hoover Professor of Forestry 494-3580 743-4120 billh@fnr.purdue.edu

2. Economics • Allocation of scarce resources to unlimited wants • Market • Other, e.g.? Supply (S) Price (P) Demand (D) Quantity (Q)

3. Demand Curve • Schedule of amounts consumers are willing and able to buy at various prices • Why is curve negatively sloped • Declining marginal utility • Substitution effect • Not same as consumption P P1 P2 Q1 Q2 Q

4. Marginality • Given the function Y = f(X), • Marginal change is change in Y per unit change in X • ∆Y/ ∆X, or • dY/dX (first derivative of Y with respect to X • Example • Y ≡ yield, X ≡ year • dY/dX = current annual increment • Y/X = mean annual increment

5. Supply Curve • Schedule of amounts producers are willing and able to supply at various price levels • Marginal cost curve above average total cost P Q

6. Supply Curve • Marginal cost (MC) curve above average total cost (ATC) • Can’t cover all costs in long-run with price below ATC Price (P) MC ATC P1 P2 Q2 Q1

7. Forest Economics • For forests decision making complicated by • Joint production • Externalities • Non-marketed outputs • Wide variety of “types” of owners

8. Joint Production • Forest provides multiple “outputs” • Wood • Water • Wildlife habitat • Recreation, etc. • How does a manager simultaneously determine appropriate level of output of each?

9. Externalities • Positive - decision to do one thing results in unintended but positive result • e.g., attract new species of bird Purple Gallinule

10. Externalities • Negative - decision to do one thing results in unintended but negative result • displace indigenous species of bird Indigo Bunting

11. Types or Owners • Issue is mix of types of owners in an ecosystem • Public • Federal • State • County • Local • Private • Industrial • Non-industrial • Investor • Farmer • NGO (non-governmental organization), e.g. land trust

12. Context In Which Decisions Are Made Matters! • What is affect of type of owner? • Public agency • Industrial firm • Private non-industrial (NIPF)

13. Public Agencies • Management objectives set by large number and variety of interest groups • Conflicts among interest groups difficult to resolve • Political pressures may dictate budget and land use decisions

14. Industrial Firms • Profit motivated • Forest practices constrained by AF&PA Sustainable Forestry Program, public pressure, and regulations • Most productive forest land • Forest land is security for conversion facilities

15. NIPF • Largest class of forest owner • Highly variable motives for owning land • Management of any type may be low priority • Aesthetics and wildlife frequently a high priority

16. Perspective Matters • Should managers base decisions on ? • each individual tree in a stand, • the stand as a whole, or • the whole forest (multiple stands) • the ecosystem

17. Perspective Matters • Decisions based on a single tree • Diameter limit • Crop tree selection • Financial maturity of crop trees

18. Perspective Matters • Decisions based on a stand • Even-aged • Optimal rotation length • Uneven-aged • Single tree selection Two-age shelterwood

19. Perspective Matters • Decisions based on multiple stands • Unregulated • Irregular harvest • Regulated • Regular harvest Even-aged Hardwood Stands on Daniel Boone National Forest

20. Perspective Matters • Decisions based on ecosystems • Multiple objectives • Must manage across pro-perty lines Forested ridges in Central PA are important watersheds

21. Economic Characteristics of Forests and Timber • Immobility of trees • Location utility • Inventory vs. economic supply • Long production period • Dual nature of trees • Capital (factory & machinery) • Product

22. Immobility of Trees • Location Utility • Forests have value in part based on their location • Trees have in-place value as part of a forest • Conversion value requires harvesting and transportation of cut products

23. Inventory vs. Economic Supply • Inventory is total physical volume present • US Forest Service Forest Survey • Estimate of total volume

24. Inventory vs. Economic Supply • Economic supply is amount of timber owners are willing to sell at some price over a specified time period • Can’t measure directly • Deduced from observed market equilibrium points

25. Long Production Period • High ratio of inventory to output • Inventory of 3 to 6 MBF per acre for 100 - 500 bd.ft. per acre per year • 3% ratio

26. Economic Characteristics of Forests and Timber • Production function is a biological growth process • Highest cost input is time, an opportunity cost • Opportunity to sell now instead of later

27. Production Function • Relationship between inputs (age) and outputs (volume) Output (volume) Input (age) Inflection point Biological maturity

28. Production Function

29. Dual nature of trees • Level of capital investment - • size of factory, and • number and capacity of machines • Acres of forest • stand density

30. Dual nature of trees • Rate at which machines are operated • Speed and hours per week • Rotation length • Increasing length increases capital investment in “machinery”