RECENT ACCOMPLISHMENTS IN APPLIED FOREST ECONOMICS RESEARCH FORESTRY SCIENCES Volume74 The titles published in this series are listed at the end of this volume. Recent Accomplishments in Applied Forest Economics Research edited by F. Helles The Royal Veterinary and Agricultural University, Department ofE conomics and Natural Resources, Copenhagen, Denmark N. Strange The Royal Veterinary and Agricultural University, Department ofE conomics and Natural Resources, Copenhagen, Denmark and L. Wichmann The Royal Veterinary and Agricultural University, Department ofE conomics and Natural Resources, Copenhagen, Denmark .... ' SPRINGER-SCIENCE+BUSINESS MEDIA, B.V. A c.I.P. Catalogue record for this book is available from the Library of Congress. ISBN 978-90-481-6221-5 ISBN 978-94-017-0279-9 (eBook) DOI 10.1007/978-94-017-0279-9 Printed an acid-free paper AlI Rights Reserved © 2003 Springer Science+Business Media Dordrecht Originally published by Kluwer Academic Publishers in 2003 Softcover reprint of the hardcover 1s t edition 2003 N o par! of this work may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, microfilming, recording or otherwise, without written permission from the Publisher, with the exception of any material supplied specificalIy for the purpose of being entered and executed on a computer system, for exclusive use by the purchaser of the work. Foreword The papers in this book were 'in a preliminary version' presented at an international con ference May 21-25, 2002 in Gilleleje, Denmark. It was a joint event, namely the biennial meeting of the Scandinavian Society of Forest Economics and the 3rd Berkeley-KVL Con ference. The Scandinavian Society of Forest Economics (SSFE) was established in 1958 as a forum for forest economists in the Nordic countries to meet and exchange ideas on research and education. Alternating between Denmark, Finland, Norway and Sweden, biennial ordinary meetings have taken place ever since. The number of participants has increased from 10-15 in the first decade to more than 80 in 2002. In the last two decades prominent researchers from outside Scandinavia have been invited to present papers at the biennial meetings and also to participate in ad hoc working groups. The Berkeley-KVL part of the conference is based on a research collaboration between The Royal Veterinary and Agricultural University (KVL), Copenhagen, University of Cali fornia at Berkeley, and Oregon State University. It was initiated in 1993 within the frame work of a research programme at KVL: 'Stochastic Decision Analysis in Forest Manage ment' and since 1996 extended to the programme 'Economic Optimisation of Multiple-Use Forestry and Other Natural Resources'. Participants in the conference were given the option to have their paper published in the SSFE proceedings or submit it for publication in a potential edited volume, after selection and peer reviewing. The outcome is the present book in which no paper has been previously published. The editors express their sincere appreciations to Samnordisk Skogsforskning and The Danish Agricultural and Veterinary Research Council for indispensable financial support to the conference. We also thank the authors who took on the extra work needed for such publication, and the reviewers who accepted to accomplish the task fast and efficiently. Copenhagen, October 2002 Finn Helles Niels Strange Lars Wichmann v Preface Finn Helles, Niels Strange and Lars Wichmann The papers in this book deal with applied forest economics. With regard to topics it is a heterogeneous book- even within each of its three parts: Resources, Industry, Markets, the topics differ. It demonstrates recent accomplishments within the broad discipline of modern forest economics, applied on a wide spectrum of problems using many different approaches. The book does not pretend to show the entire state-of-the-art in forest economics, but nonetheless it is claimed to illustrate many recent accomplishments. Part I: Resources starts with a paper by Colin Price who demonstrates that the world-wide trend towards 'near-nature forestry' may not be as self-evidently advantageous as is usually claimed by the public, politicians and even forestry professionals. The eco nomics of transformation from even-aged to uneven-aged (continuous cover) forestry is examined on the basis of Douglas fir in Wales. It appears that economic justifications such as improving profitability, or gaining early, well-distributed or flexible revenue are spurious, and that environmental advantages are equivocal. Suggestions are offered as to the choice of locations for continuous cover forestry in Wales - the arguments may well be applicable to other geographical locations. Guillermo A. Navarro scrutinises the theo retical problems affecting calculation of the land capital asset value in forestry, i.e. using the land expectation value (LEV) formula. Three different basic LEV formulas are iden tified in the forest economics literature, the topic having been debated for close to 200 years. The paper will hardly bring the debate to an end, but it is elucidated that much disagreement is due to different and often unclear assumptions, and criteria are presented for improving the application of the three LEV formulas. Richard J. Brazee also deals with the Faustmann formula or model, but shows that the 'Volvo Theorem' provides an alternative model of optimal timber harvesting. Instead of choosing to harvest at the age that maximises net present value, under the Volvo Theorem landowners harvest when faced with a non-forestry expense such as the purchase of a new Volvo. A simplified model is used to describe behaviour when a landowner faces differential interest rates depending on asset position. And an assessment is made of the Volvo Theorem as an alternative to the Faustmann model. Henrik Meilby, Bo J. Thorsen and Niels Strange apply Monte Carlo simulation to evaluate the consequences of an adaptive optimisation approach to spatial harvest planning under risk of windthrow. Such strategy is demonstrated to have the dou ble advantage of (i) producing realistic solutions that imitate the adaptive behaviour of the forest manager, and (ii) producing realistic solutions that circumvent the tremendous combinatorial dimensions of the topical stochastic interaction problem. Stale St¢rdal and Sjur Baardsen perform an econometric analysis of Norwegian microlevel timber harvesting data, demonstrating significant differences in stumpage values over regions with respect to both the characteristics of the timber and the valuation of the different grades. The paper provides a framework for analysing individual harvests by regions, season and size that de composes differences between regions. If the findings can be generalised, moderate rather than large-scale harvests should have minimal impact on the economy of a particular har vest - an interesting result, e.g. from the point of view that small clear-cuts are often more environmental friendly than large. Bo J. Thorsen and Nikolaj Malchow-M¢ller extend the vii field of real-options theory. Instead of considering land-use decisions under uncertainty as a problem of replacing an existing land use with one alternative use, the paper analyses the problem of decision-makers having more than one investment option available, and by exer cising any of them, they sacrifice all other options. A simple two-period model is presented, a continuous-time model outlined and results given of a numerical solution procedure for the case of afforestation. Signe Anthon applies the hedonic pricing method and data from two residential areas in Denmark to calculate willingness-to-pay (WTP) measures for two afforestation areas. Modelling the environmental attribute with the continuous variable 'distance' is likely to be the best representation of the marginal values that proximity to an afforestation area has in the two cases, and it is concluded that there is a positive WTP for afforestation projects in both cases. Niels Stmnge, Vilis Brukas, Finn Helles and Peter Tarp analyse the performance of several optimisation models, using genetic algorithms, simulated annealing, and mixed integer programming, when applied to the multi-criteria problem of delineating conservation areas in a case forest in Lithuania. The study indicates that mixed integer programming is relatively time-inefficient for complex problems that involve a large number of sites and consider spatial connectivity. Peter Bogetoft and Kurt Nielsen discuss the pros and cons of using Data Envelopment Analysis (DEA) to evaluate and enhance the efficiency of natural resource management. The DEA modelling is particu larly useful in a natural resource setting because of its ability to handle multiple inputs and outputs, to work with flexible production structure, to incorporate local variables, and to work with limited or no preference information. Moreover, the need in DEA for good data from several similar units is often possible to fulfil. The DEA approach can also be useful to cope with delegated production and incentive problems. Some basic results on DEA based incentive schemes are reviewed. These schemes can be used in motivating landowners to take desired decisions. It is indicated how a DEA based procurement procedure could be used to select farmers and forest owners for a programme, e.g. to enhance environmental qualities. The authors believe that developments along the lines of the DEA based auctions may lead to new approaches that can solve real problems using sound theory. Part II: Industry. Sjur Baardsen estimates input demand, output supply, returns to scale, and technical change in Norwegian sawmills, employing a flexible, restricted and normalised translog profit function on observations for 1974-1991. Focus is on the estima tion of the profit function, on the derived elasticities and on aggregation issues rather than on possible implications for policy. Matti Flinkman analyses the use of sawnwood within six end-use sectors and nine related producer sectors involved in the West German wood supply chain for construction. The time-series cover the period 1970-2000 and is used for econometric analysis and forecasting the wood use within the subsectors. By aggregation over the subsectors, a projection for the total consumption of sawnwood in construction is derived. Lars Lonnstedt investigates, on the basis of six cases in the Swedish forest sector, arguments for and against backward vertical integration, i.e. integration from pulp- or sawmills to timberland ownership. The results give strong support for the transaction cost theory. Backward vertical integration of the forest industry may be explained, not least for the pulp and paper industry, by transaction specific capital, i.e. high quasi rents. Part Ill: Markets. Mikael Linden and Jussi Leppanen investigate, on the basis of Finnish regional data 1983-2000, the impact of government investment assistance on forest investment and timber supply. It is argued that the private forest owner has a low incentive for self-financed forest investment due to low forest capital return and postponed consump tion. It is shown in a theoretical model that government cost sharing (loans and grants) has positive timber supply and investment effects. Peter Berek and Sandm Hofmann consider different methods and issues in estimating employment changes from preservation of forests and other natural lands in California. The conclusion is that job multipliers exist, but are surprisingly difficult to pin down. Different simulation and time series methods result in dif ferent empirical estimates for job multipliers. James Turner and Joseph Buongiorno review differences between the concepts and information used in current global forest sector mod- viii els. The need for such models is stressed; however, there are few models with sufficiently detailed coverage to answer specific questions. Adequate representation of timber supply is a particular weakness of existing global forest sector models. Anders Baudin investigates inventory and price movements of coniferous sawnwood in Europe (Sweden, the UK, Ger many). A method is shown by which an indicator of consumer inventory change can be obtained. It is also shown that dynamic models can be specified and estimated for the re lationship among price and inventory variables. Ritva Toivonen and Eric Hansen examine quality dimensions of wood products as perceived by German organisational customers, and compare wood and other construction materials with respect to those dimensions. Product quality appears to take somewhat different dimensions regarding different products. Prod uct information and perceived quality are found to be separable dimensions. Particularly with regard to wood, environmental considerations did not seem to form a separate quality dimension. Using Nepal as case country, Carsten Smith Olsen and Thorsten Treue inves tigate the commercial trade in the medicinal plant product "chirait", mainly consisting of the herb Swertia chirayita, and show that this is an important income generating product for rural households. It is emphasised, however, that before medicinal plants can be used in longer term larger scale attacks on poverty in the Himalayan region, it is important to establish harvest rates and to ensure that national policies, legislation and administration support such initiatives. ix Contents Foreword v Preface vii I Resources 1 The economics of transformation from even-aged to uneven-aged forestry Colin Price ............................ . 3 Re-examining the theories supporting the so-called Faustmann formula Guillermo A. Navarro ...................... . 19 The Volvo Theorem: From myth tobehavior model Richard J. Brazee 39 Adaptive spatial harvest planning under risk of windthrow Henrik Meilby, Bo J. Thorsen and Niels Strange ... 49 An econometric analysis of differences instumpage values using micro-levelharvesting data Stale St0rdal and Sjur Baardsen . . . . . . . . . . . . . . . . . . . . . . . . . . 63 Afforestation as a real option: Choosing among options Bo J. Thorsen and Nikolaj Malchow-M¢ller ... 73 The value of urban afforestation:A hedonic pricing case Signe Anthon . . . . . . . . . . . . . . . . . . . 81 Comparison of multi-criteria optimisation techniques for selection of conservationareas Niels Strange, Vilis Brukas, Finn Helles and Peter Tarp . . . . . . . . . . . . . . 91 DEA based yardstick competition in natural resource management Peter Bogetoft and Kurt Nielsen . . . . . . . . . . . . . . . 103 II Industry 127 A multi-output restricted profit function for Norwegian sawmilling Sjur Baardsen 129 The use of sawnwood withinthe end-use and producer sectorsin former West Germany Matti Flinkman . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141 Backward vertical integration in the Swedish forest sector -six case studies Lars Li:innstedt , . . . , . . . . . . . . . . . . . . . . . . . . . . . . 153 III Markets 165 The impact of government investmentassistance on forest investment and timber supply Mikael Linden and Jussi Leppanen . . . . . . . . . . . . . . . . . . . . . . . . . 167 Preservation and employment Peter Berek and Sandra Hoffmann 181 Issues and prospects in global forest sector modeling James Thrner and Jospeh Buongiorno .. 193 xi Inventory and price movements ofconiferous sawnwood in Europe Anders Baudin 207 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Quality dimensions of wood products -perceptions of German organisationalcustomers Ritva Toivonen and Eric Hansen 219 o o 0 o o Analysis oftradein non-timber forest products Carsten Smith Olsen and Thorsten Treue 227 List of Authors 241 xii