Mixed forests and a flexible harvest policy: a problem for conventional risk analysis?

The famous “Faustmann” equation, which allows for identifying the most profitable tree species on a given unstocked piece of land, assumes constant timber prices. In reality, timber prices may fluctuate dramatically. Several authors have proven for monocultures that waiting for an acceptable timber price (reservation price) before harvesting (flexible harvest policy) increases the net present value of forest management. The first part of this paper investigates how efficient a flexible harvest strategy may be applied in mixed forests and whether the optimal species mixture is changed under such harvest policy. Mixtures of the conifer Norway spruce [Picea abies (L.) Karst] and the broadleaf European beech (Fagus sylvatica L.) were investigated. In order to evaluate mixed forests, the risks and the correlation of risks between tree species as well as the attitude towards risk of the decision-maker (risk-aversion is assumed) were considered according to the classical theory of optimal portfolio selection. In the second part we took up a recent critique on modern financial theory by Mandelbrot. Whether or not the assumption of normally distributed financial flows, which are supposed to occur under risk, would be appropriate to evaluate the risk of forest management was investigated. Market and hazard risks as well as their correlation were integrated in the evaluation of mixed forests by means of Monte-Carlo simulations (MCS). The risk of the timber price fluctuation was combined with the natural hazard risk, caused mainly by insects, snow and wind. Applying the μ-σ-rule, the mean net present value (NPV) from 1,000 simulations and their standard deviation were used for the optimisation. Given a low-return, risk-free interest rate to assess potential species mixtures of the Norway spruce and European beech, optimal proportions of European beech increased according to the theory of optimum portfolio selection with growing risk aversion from 0 (ignorance of risk) to 60% (great risk-aversion). In relation to a fixed harvest policy, the net present value of both, Norway spruce and European beech, could be increased significantly. Since the hazard risks of European beech were substantially lower compared with the Norway spruce (relation of susceptibility 1:4) beech benefited more from the flexible harvest policy. A comparison of simulated frequency distributions of the NPV with the expected density functions under the assumption of a normal distribution revealed significant differences. Only in the case of European beech was the general shape of the simulated frequency distribution similar to a normal distribution (bell-shaped curve). However, the density of NPV close to the mean was much greater than expected under the assumption of a normal distribution. Consequently, the frequency of a negative NPV for a European beech forest was greatly overestimated when applying the normal distribution. Though the shape of the simulated frequency distribution was rather different from a normal distribution for Norway spruce the simulated part of negative NPV was quite well approximated by the normal distribution. Therefore the simulated and expected frequencies of negative NPV were similar in case of Norway spruce; only a slight underestimation was seen in the assumption of a normal distribution. It can be concluded that actually simulated frequencies of negative NPV seem to be better measures for risk than computed probabilities of negative NPV, which assume normal distribution. As the risk for European beech was greatly overestimated by the conventional assumption of a normal distribution, the optimal proportions of European beech were surely rather underestimated according to the theory of portfolio. MCS on optimum mixtures derived by the classical portfolio theory seems necessary to test the robustness of such mixtures.

Sustainable development and sustainable forestry: analogies,differences, and the role of flexibility

Various approaches have been developed to achieve sustainability in forestry, under changing social needs and, consequently, changing definitions of sustainability. This has led to the confusing situation in which various groups have different understandings of the meaning of ‘sustainability’. Likewise, the concepts utilized to achieve sustainability, often with a poorly defined objective, are sometimes not clear and/or inconsistent as a systematic overview regarding definitions and concepts is lacking. Based on a literature review, this paper discusses related terms such as sustainability, sustained yield management, sustainable forestry, sustainable forest management and sustainable development: their history, concepts and relationships, from a European perspective. Finally, flexibility is proposed as a solution to overcome the identified shortcomings at all scales, while focussing on the enterprise level. The origin of the sustainability concept in forestry was first driven by forest experts, while participatory elements have been considered since the more recent idea of sustainable development. Since then, much effort has been made to achieve intragenerational fairness by creating an improved participatory process. Concurrently, the original idea of sustainable forestry as long-term and future-oriented management, considering future generations’ needs fell behind. An increasing standing timber volume in Europe and the discussion on climate change brought new interest in how to cope with risks in the context of pervasive future uncertainties within the scope of promoting sustainable development. Although the consideration of risk has been concentrated on as a topic in forest science in recent years, studies have mainly focused on the enhancement of forest resistance against disturbances. However, precaution and risk avoidance alone are probably insufficient to achieve an improved sustainable development that focuses on intergenerational fairness, as these more defensive approaches may disregard important management opportunities involved with an uncertain future. A perhaps more promising approach, the idea of future options and the ability to respond to changing social and biophysical circumstances (i.e. flexibility) as criteria for sustainable development have only shown a shadowy existence up to now. To further develop the consistency of sustainability concepts, a shift of sustainability approaches from continuity towards flexibility options is proposed.     

Can native tree species plantations in Panama compete with Teak plantations? An economic estimation

Panama has the highest rate of change in the area of primary forests within Central America. However, to meet growing timber demands, it became popular over the last decades to establish plantations made up of foreign species such as Tectona grandis or Pinus spp. In the majority of the cases the species used are well known; their characteristics such as growth performance have been reviewed intensively and can be accessed in numerous publications. Characteristics of Panama’s native tree species of commercial relevance such as Hieronyma alchorneoides, Swietenia macrophylla and Terminalia amazonia are largely unknown and have been investigated within the study at hand. Using valuation methods of financial mathematics, the competitive position of these three indigenous species was assessed, the results compared to those of T. grandis stands in the same area. Land costs and taxes were not considered, as they would be the same for all species. Financial estimates for indigenous species will enlarge their acceptance for use in reforestation and plantation projects. Using the NPV method and applying the standard scenario, the profitability of T. grandis is lower than that of T. amazonia and S. macrophylla and lies only slightly above the profitability calculated for H. alchorneoides. This result clearly indicates that the investigated native tree species are comparable with T. grandis regarding their economic profitability. Besides its ecological impact, growing native tree species is now also economically legitimate. By calculating land expectation values for all tree species, ideal rotation lengths could be determined. For these species, considerable flexibility exists regarding the optimal rotation length.