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The Optimal Timber Rotation: An Option Value Approach

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Abstract:

Previous analyses of the timber rotation problem under price uncertainty find that timber owners can increase the expected values of their stands by using a reservation price policy that exploits stochastic variations in prices. This result is found when the process governing prices is stationary and with nonstationary prices when there are fixed costs. This paper highlights the role of option values in influencing the optimal timing of harvests. In this context, the option value is a premium over the expected net present value of a timber stand reflecting the opportunity cost of harvesting now and foregoing the option to delay harvest until information on future stand values is revealed. With stationary prices, option values arise from two sources of forthcoming information: the level of the stumpage price relative to the long-term mean and the stand value relative to fixed costs. With nonstationary prices, option values are associated only with the latter information. This paper demonstrates analytically that reservation price policies act as a mechanism for incorporating the option value into the calculus of the optimal rotation length. Numerical simulations provide further insights into the effects of option values on rotation lengths, expected stand values, and reservation prices. For. Sci. 44(2):192-202.

Keywords: Stochastic prices; stochastic dynamic programming

Document Type: Journal Article

Affiliations: Assistant Professor, Department of Resource Economics and Policy, University of Maine, 5782 Winslow Hall, Orono, Maine 04469 (207)581-3156;, Fax: (207)581-4278

Publication date: 1998-05-01

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

    Average time from submission to first decision: 62.5 days*
    June 1, 2016 to Feb. 28, 2017

    Also published by SAF:
    Journal of Forestry
    Other SAF Publications
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