- Assume a 500,000 acre predominately old-growth forest that currently has 6 billion board feet of timber inventory. Under current management practices, its maximum sustained yield level is 100 million board feet per year. (With Faustmann's economic harvest ages, it would only be 80 million board feet per year so this has not been seriously considered.) The annual allowable cut under even-flow sustained yield is 100 million board feet per year. Wood on the stump, or stumpage, is worth $200/MBF. Gross annual receipts are therefore $20 million. All management costs are $2 million, so the net revenue is $18 million. The present value of this net revenue stream in perpetuity when discounted with a 10% interest rate is $180 million.
Now let's look at a more intensive forest management program that can increase the sustained yield level to 150 million board feet per year by prompt planting of cutover acres with improved trees, controlling competitive vegetation and spacing the young stands by precommercial thinning. The cost of this new program is $1.5 million per year. Does this program make economical sense?
Annual receipts go up $10 million for a $1.5 million increase in annual costs. Net revenue increases from $18 million to $26.5 million. Net present value increases proportionately. The apparent rate of return on investment is infinite if the cash flow from increased harvests proceeds or starts at the same time as the increased cost stream. Even if the increased cost stream starts one year earlier than the revenue stream, the apparent annual rate of return is an astounding 500%. Waiting a full decade before taking a harvest credit for the increased level of investment reduces the apparent rate of return to a more believable 32.9%. Waiting two decades to take a harvest credit reduces the apparent rate of return to 18.6%. The rate of return can be made whatever the user wants by specifying when to take the harvest credit. None of these rates of return mean anything. They only obfuscate the fact that economics was ignored in making the underlying forest management plans.
- Now let's look at the same forest and a proposed land withdrawal for a wilderness, a park or some other purpose. Let's assume this withdrawal would take 100,000 out of the 500,000 acres and one billion out of the six billion board feet inventory. The acreage to be withdrawn is proportionately larger than the timber inventory to indicate lower than average productivity on the withdrawn lands. Let's further assume that the sustained yield level is reduced proportionately with the inventory from 100 million to 83.3 million board feet per year. The net annual income (assuming no change in costs) is reduced to $14.7 million per year and the 10% net present value becomes $147 million. The apparent cost of the wilderness is $33 million.
- In the interest of placating the loggers and the hikers (and not incidentally also increasing the agency budget), the forest manager might propose a "preferred alternative" that offsets the proposed withdrawal with more intensive management. The allowable cut could stay at 100 million board feet per year, the hikers would get their wilderness, the agency would increase its budget by $1 million per year and the net revenue from the forest would drop from $18 million to $17 million. Net present value would drop from $180 million to $170 million indicating the wilderness costs only $10 million instead of $33 million.
In somewhat oversimplified form, this example illustrates what is going on today all over the United States on 197 national forests that are in the process of producing new forest plans under the National Forest Management Act passed by Congress in 1976. The allowable cut is no longer identified as such but has been replaced with terms like potential yield and programmed yield which explicitly tie harvest levels to the forest's budget.
A sharp analyst might point out that this forest is so overstocked in terms of current inventory that a forest fire could consume 1 billion board feet without reducing the allowable cut or the ability to harvest 100 million board feet per year in perpetuity. This analyst might also show that the intensified management program really wouldn't have to be implemented for two or three more decades for the forest to still produce 150 million board feet per year, again in perpetuity. And the most telling point this analyst might make is that the market value of this forest if it were privately owned would be close to $1 billion dollars, rather than the $150 million of the current management plan. A private owner, however, would have to adopt a totally different management plan in order to justify and generate this market value.
Incompatibility of Sustained Yield and Economic Theory
As I mentioned earlier, the sustained yield model of forest management and its trappings are incompatible with economic theory and the functioning of prices to allocate resources in competitive markets. Gross anomalies are created when anyone attempts to merge sustained yield forestry and economics and perform analyses in the spirit of compromise. Public forest management leads to resource allocations that are far inside the production possibilities frontier defined by economists as the combination of resource inputs and product outputs that are efficient for all possible sets of relative prices.
The real economic benefits of intensive management practices are totally obscured by the allowable cut effect. Many forest management practices are economically good investments if confined to particular situations, including harvest ages based on financial rather than biologic maturity and maximum physical production. The longer biologic harvest ages render most forestry practices uneconomic.
Uneconomic traditional forest management concepts have resulted in the widespread belief by the forestry profession that forestry must be left to the state. As I mentioned earlier, this belief and the rejection of market mechanisms directly led to the establishment of the forestry profession in the United States and the creation of the National Forest System. Until the magic of the allowable cut effect was used to justify forestry investments, foresters generally believed that compound interest was so inimical to tree growing that private timberland owners would never practice good forestry. Socialism and other forms of statism, rather than capitalism, are still the much preferred alternatives among the profession for producing timber. In the western United States, including Alaska, public agencies own and manage over 68% of the total commercial forest area. This excludes parks and wilderness areas where timber production is not allowed. There are very few voices raised against forest practice regulations for private land in the three West Coast states.
The idea that competitive markets will establish prices, including interest rates and rent gradients, that will optimize the spatial and temporal production of timber has simply not penetrated the profession very far. How can we be very critical of the general public's perception and attitudes when we as a profession have done so much to reinforce them. Initiative 138 is a good example.
The migratory nature of the timber industry during the 1800's was and still is mistakenly viewed as evidence of market failure. The fact that the industry was making a rational and socially desirable inventory adjustment because timber was so plentiful its price was close to zero, was and still is poorly understood. The so-called "wasteful" logging practices were also a function of the near zero price. "New Forestry" I might point out is a lot like returning to these "wasteful" practices. The widespread abandonment of cutover timberland until the 1940's reinforced the idea that industry would always cut and run. Land abandonment was actually caused primarily by confiscatory property tax systems.
Once the timber inventory adjustment proceeded to the point that timber prices became positive, and could be expected to rise at market rates of interest, private enterprise began to invest in successive crops of timber without benefit of allowable cut effect calculations. The fact that private owners harvest trees at much younger ages and carry much lower levels of timber inventories is still a major source of concern to public timber agencies and much of the forestry profession that measure results against the sustained yield model rather than the economic efficiency model.
The thinking behind the Forests Forever initiative is a clear case of mingling the green ideology I discussed earlier with a traditional sustained yield model based on uneven-aged management. If this initiative passes and gets the most votes next month, the future prospects of Simpson and other forestland owners, not just in California, but in all three West Coast states, will be considerably dimmer. We'll need a lot more lawyers and lot fewer foresters.
I try to stay optimistic and tell myself that the radical emotion-charged response to environmental issues will, like the earlier witch hunts, run its course. I only hope it also doesn't take another three hundred years. I'd like to still be around when this storm has past.
Introducing: John L. Walker
John L. Walker was born in upstate New York and received his Bachelor's degree in forestry for the State University of New York, College of Forestry at Syracuse University (1962). He has had field forestry experience on the Mendocino National Forest in California, the Snoqualmie National Forest in Washington and Forstamt Garmish in Bavaria, West Germany. From 1962-1963, he was a Fulbright Grantee at the Forest Research Institute and Colleges at Debra Dun, India, studying tropical silviculture and forest management.
From 1965 until 1968, John Walker was a forest economist for the U.S. Forest Service at the Forest Products Marketing Laboratory in Princeton, West Virginia. In 1968, he received a M.A. degree in economics from the University of Washington and became manager of forest economics for the Timberlands Division of Weyerhaeuser Company. He held this position for five years, earning his Ph.D. in forest economics in 1971 at the University of Washington. His doctoral dissertation was on "An Economic Model for Optimizing the Rate of Timber Harvesting."
In 1973, Dr. Walker became Director of Resource Services for Simpson Timber Company in Seattle, Washington. He also became an affiliate faculty member of the University of Washington College of Forest Resources where he has taught courses in forest economics. From 1978-1980, he was a member of Class I Foundation's Leadership Program. He is currently on the Board of Trustees of this foundation.
In 1981, John was transferred to the Redwood Region where he was Simpson's California Resources Manager and a member of the California Forest Protective Association Board of Directors and Board of Managers. In 1983 John returned to Seattle to become Simpson's Vice President - Land and Timber, which is his current position. During his career, John has been involved in forestry projects throughout the United States, Canada, Europe, Asia and Latin America. He is active on a number of National Forest Products Association committees dealing with both public and private forestry issues. He is also a member of the American Economics Association, Western Economics Association, the Society of American Foresters, and Rotary International.