Stochastic economic analyses of even-aged timber growing

New Zealand Journal of Forestry Science, Apr 2017

Background StochPV is a computer programme enabling the risks and uncertainties inherent in even-aged timber growing to be recognised through stochastic analysis. Most financial analyses of even-aged plantation or forest stands have used deterministic analyses, such that a single set of volumes, costs and prices yields a single answer for the present value. Risks and uncertainties are ignored, even though well-recognised by practitioners. StochPV provides a probability distribution, not just a single value, for the present value of an even-aged stand, allowing practitioners to better gauge their decisions regarding the impact of risks and uncertainties on silvicultural options and stand valuation. More generally, it will enable analysts to explore whether or when deterministic analyses are a reliable guide for such decisions. Methods Means and coefficients of variation, together with maximum and minimum values and correlation coefficients of prices and costs, are read in via a spreadsheet and used to estimate beta distribution parameters for each data cell. The resulting distributions can be reviewed visually and amended, if necessary. Fire frequency and fire salvage data are also read in via spreadsheet. Univariate or multivariate pseudo-random values are simulated for each variable involved, enabling the present value to be calculated for each iteration. Present value is calculated for the stochastic analogues of Faustmann perpetual rotations and a single rotation, the latter taking account of the initial land cost and revenue at the end of that rotation. The present values of the many iterations are then used to calculate mean, standard deviation and other summary statistics. Results The programme integrates all known risks relating to stand management in an analytical framework that is relatively simple and communicable. The use of beta distributions provides flexibility in representing the nature of the empirical distributions involved. Inter-relationships between kindred variables are taken into account using multivariate distributions based on copulas and the marginal distributions involved. Conclusions The programme results are suitable for evaluation of first-degree stochastic dominance and could also be applied to second-degree stochastic dominance if the decision-maker had a material aversion to risk, all necessary data being available as outputs of the programme.

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Stochastic economic analyses of even-aged timber growing

Ferguson New Zealand Journal of Forestry Science Stochastic economic analyses of even-aged timber growing Ian Ferguson 0 0 School of Ecosystem and Forest Sciences, The University of Melbourne , Grattan St, Parkville, Vic 3010 , Australia Background: StochPV is a computer programme enabling the risks and uncertainties inherent in even-aged timber growing to be recognised through stochastic analysis. Most financial analyses of even-aged plantation or forest stands have used deterministic analyses, such that a single set of volumes, costs and prices yields a single answer for the present value. Risks and uncertainties are ignored, even though well-recognised by practitioners. StochPV provides a probability distribution, not just a single value, for the present value of an even-aged stand, allowing practitioners to better gauge their decisions regarding the impact of risks and uncertainties on silvicultural options and stand valuation. More generally, it will enable analysts to explore whether or when deterministic analyses are a reliable guide for such decisions. Methods: Means and coefficients of variation, together with maximum and minimum values and correlation coefficients of prices and costs, are read in via a spreadsheet and used to estimate beta distribution parameters for each data cell. The resulting distributions can be reviewed visually and amended, if necessary. Fire frequency and fire salvage data are also read in via spreadsheet. Univariate or multivariate pseudo-random values are simulated for each variable involved, enabling the present value to be calculated for each iteration. Present value is calculated for the stochastic analogues of Faustmann perpetual rotations and a single rotation, the latter taking account of the initial land cost and revenue at the end of that rotation. The present values of the many iterations are then used to calculate mean, standard deviation and other summary statistics. Results: The programme integrates all known risks relating to stand management in an analytical framework that is relatively simple and communicable. The use of beta distributions provides flexibility in representing the nature of the empirical distributions involved. Inter-relationships between kindred variables are taken into account using multivariate distributions based on copulas and the marginal distributions involved. Conclusions: The programme results are suitable for evaluation of first-degree stochastic dominance and could also be applied to second-degree stochastic dominance if the decision-maker had a material aversion to risk, all necessary data being available as outputs of the programme. Stochastic; Monte Carlo simulation; Beta distributions; Multivariate distributions; Copulas; Present value Background Deterministic analysis of the financial outcomes of forest investment is based on a single set of prices for inputs and outputs, together with a single set of quantities of those outputs and inputs. They are used to calculate annual net revenues which, in turn, are discounted to their present value and aggregated to a single value estimating the net present value of the stand or forest or per unit area thereof. Deterministic analyses of present value currently represent the conventional wisdom of foresters in evaluating options in the financial management of radiata pine (Pinus radiata D.Don) stands and similar even-aged forests. They could be correct and useful guides if no natural disasters occur and all the probability distributions attached to the value of quantities and prices were normal distributions. But foresters know they live with the risk of natural and other disasters, together with the risk of changes in the quantities and prices of outputs and inputs due to changes in climatic conditions and changes in markets, not to mention other sources of volatility. So the question arises—how reliable are deterministic analyses? We obviously should not expect deterministic and stochastic analyses to produce identical present values for the same set of options. However, will they produce the same rank order for the same set of options? This computer programme enables such questions to be pursued. Of course, there are many partial ‘fixes’ to assess the impact of individual risks, such as using a risk-weighted value for a particular price due to a natural disaster or other exogenous change (Hildebrandt and Knoke 2011) . Wald’s (1945 ) maximin strategy can be applied to indicate the best strategy to take to avoid the worst-case outcome. Fuzzy sets (Varma et al. 2000) can be used to finesse nearobjective probabilities with more subjective possibilities. Hildebrandt and Knoke (2011) note the popularity that Ben-Haim’s (2006 ) so-called info-gap model appears to have gained in ecosystem management, despite concerns about its objectivity. All these methods and many others may have a place for protecting an owner against the worst-case scenario. But they are specific fix (...truncated)


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Ian Ferguson. Stochastic economic analyses of even-aged timber growing, New Zealand Journal of Forestry Science, 2017, pp. 9, Volume 47, Issue 1, DOI: 10.1186/s40490-017-0089-z