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Valuation of Certain Long-Term Timber Cutting Contracts

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Abstract:

In an effort to assure a stable raw material supply for their plants, many forest industry firms in the South have negotiated various types of long-term contracts with private timberland owners. In many cases, these contracts represent a significant corporate asset. Determining the value of long-term timber contracts is often difficult and may not be legally required--thus many firms have not attempted it. Under certain circumstances, however, valuation of such contracts may be necessary. "Replacement value" may often provide the best method of valuation to use on many contracts. However, for a certain type of widely used long-term cutting contract in which the firm has the right, but not the obligation, to purchase stumpage at a periodically fixed price, a methodology based on option-pricing is recommended. A valuation model is presented and tested by normative application to two actual contracts provided by forest industry firms, and the net present value of the contract to the firm is determined for each of these. Forest Sci. 30:774-787.

Keywords: Option-pricing; forest industry; wood procurement

Document Type: Journal Article

Affiliations: Assistant Professor of Industrial Forestry Operations and Extension Specialist, Virginia Polytechnic Institute and State University, Blacksburg, VA 24061

Publication date: September 1, 1984

More about this publication?
  • Forest Science is a peer-reviewed journal publishing fundamental and applied research that explores all aspects of natural and social sciences as they apply to the function and management of the forested ecosystems of the world. Topics include silviculture, forest management, biometrics, economics, entomology & pathology, fire & fuels management, forest ecology, genetics & tree improvement, geospatial technologies, harvesting & utilization, landscape ecology, operations research, forest policy, physiology, recreation, social sciences, soils & hydrology, and wildlife management.
    Forest Science is published bimonthly in February, April, June, August, October, and December.

    2015 Impact Factor: 1.702
    Ranking: 16 of 66 in forestry

    Also published by SAF:
    Journal of Forestry
    Other SAF Publications
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