Question

Economics of forestry - what is the basic question that needs to be answered? What is the answer to that question? How is the harvesting of forests affected by various factors that enter the Faustmann formula

Answer 1

Forest economics courses per se concentrate on the evaluation of the forest resource, on BUSINESS MANAGEMENT principles as applied to forest regeneration and stewardship, and forest products industries, and on the relation of the forest resource and its exploitation to national economic and social policies. Thus courses address factors affecting the financial viability of a given operation, the industry in general, and the objectives of society as a whole.
Fiscal factors that affect the success of a particular operation include the revenues and costs involved in licensing of public timberland; TAXATION; industrial legislation and regulation; costs of inputs and prices of commodities; geographic distribution of customers (as it affects transportation costs); marketing constraints; LABOUR MARKETS; and various federal and provincial policies. The forest economist must also be familiar with technical aspects of forest management and industrial production, and should have at least some knowledge of forest ecology, the processing of timber products, technological innovation and WILDLIFE MANAGEMENT.
FORESTRY resembles agriculture in that both deal with CROPS, but the differences between them point out some of the constraints that forest economists must consider. For example, agricultural land is usually cropped annually; forests must be managed over several years (the shortest crop cycle, that of hybrid POPLAR for pulpwood, is approximately 10 years). Failure to do so threatens the long-term viability of an operation also has a negative effect on the ECOSYSTEM. On the other hand this extended perspective has some advantages: it enables the industry to make management decisions, marketing arrangements and other plans for the longer term.
Another difference between forestry and agriculture is that while farmers own their land or rent it from private owners, most forestland is publicly owned (the provinces own 71%, the federal government 23%). This may create a conflict between short- and long-run objectives for public forests. There are also several economic and social activities, such as grazing, HUNTING, recreation or watershed protection, that may conflict with timber harvesting in some locations.
Finally, the scale of operation is also an important factor for forest economists. Farms occupy a few square kilometres, but at least 30 million ha are cropped annually. In contrast, forest areas under management are often much larger, but only 1 million ha, or less than one-quarter of 1%, are harvested in a given year.
Analytical Framework
While forest economists apply general economic ideas such as supply and demand, and other market factors like financial rates of return, capital investment, development, conservation, etc, they must take great care when choosing the analytical framework they work with. For example, the relative costs and benefits of forest management differ depending on the length of time under consideration; on whether the calculation involves indirect as well as direct effects; on whether it is done from the perspective of an individual company, a province or a national economy. An experienced analyst can ensure the recognition of economic, social, environmental and political linkages.
One of the most important issues today is the apparent conflict among forestry investment criteria. The traditional approach in professional forestry was to emphasize biological growth. A forest was said to be mature and ready for harvesting when timber of sawlog size was available, or when a timber stand ceased to add volume because annual growth was exceeded by disease, decay and mortality. In recent decades, support has grown for the concept of financial rotation, whereby the ideal harvest date is set by its calculated maximum value to the owner. A financial rotation age is based on economic efficiency as measured by market prices, costs and profitability. It assumes free competition and the absence of external costs to the ENVIRONMENT, wildlife, etc. This method tends to favour exploitation for timber over other values.
Since timber supply problems began to emerge worldwide in the 1970s, the fairness of liquidating forest capital was questioned. This change in attitude resulted in the increasing use of CONSERVATION criteria that seek to keep the resource base essentially intact over time. This is a goal with particular appeal to managers of public land who do not operate by the profit motive and are not expected to apply corporate financial criteria. Conservation tends to emphasize stewardship of ecosystems rather than timber.
This approach does not mean a complete break from financial rates of return. Provincial land managers must still use financial methods to allocate funds budgeted for REFORESTATION, and they must choose among sites and silvicultural treatments to achieve the best growth and yield possible with limited funds. Economics aside, the only politically and socially acceptable policy, for public and private forest managers alike, is to replant promptly after harvest. But how much should be spent on intensive silvicultural activities, such as thinning and fertilizing? For provincial foresters the answer is largely political, though it is based on expected long-term economic and social benefits. Private industry and small woodlot owners apply a variety of measures to determine the level of forest management, usually with a shorter time in mind than their public counterparts and with taxes playing a key role.Deforestation is one of the major effects posed by the smallholder tobacco farming as the farmers heavily depend on firewood sourced from natural forest for curing tobacco. The research aims at assessing the factors that influence the harvesting of natural forest in the production of tobacco. Data is collected through the structured questionnaire from 60 randomly selected farmers. Binary logistic regression model is used to explain the significance of factors influencing natural forest harvesting. Results show that farmer experience, tobacco selling price, and agricultural training level negatively affect the harvesting of natural forests (to obtain firewood) for curing tobacco significantly (). However, gender, size of the household, tobacco yield, and level of education are insignificant () in influencing natural forest harvesting. Though farmers are exploiting the environment and at the same time increasing foreign currency earning through tobacco production, there is therefore a need to put in place policies that encourage sustainable forest product utilization such as gum plantations, subsidizing price of coal, and introducing fees, as well as penalties or taxes to the offenders.

Faustmann's formula, or theFaustmann Model, gives the present value of the income stream for forest rotation. It was derived by the German forester Martin Faustmann in 1849. ... The optimal time to cut is when the time rate of change of its value is equal to the interest rate modified by land rent.

ƒ(T) is the stock of timber at time T
p the price of timber and is constant
which implies that the value of the forest at time T is pf(T)
r is the discount rate and is also constant.

The Faustmann formula is as follows: