Potential Effects of Wood Chip Mill Harvests on Economic Returns and Forest Management Practices of Nonindustrial Private Forest Landowners in North Carolina

Four approaches were used to estimate the market effects of wood chip mills for nonindustrial private forest (NIPF) landowners. First, we used economic welfare analyses to estimate potential changes in consumer and producer surplus that might be attributed to increased stumpage demand created by wood chip mills. Better markets would consistently increase economic returns for both timber buyers and sellers, up to about $5 million per year more per 1% shift outward in the demand function. Forest industry (buyers) had higher benefits in absolute terms, while NIPF owners (sellers) had higher percentage benefits. Second, changes in actual returns in the 1990s were estimated using Timber Mart-South data and timber product output (TPO) measures of changes in harvest levels. NIPF owners had decreased returns from softwood stumpage sales. However, increasing hardwood pulpwood timber production and prices would have yielded incremental returns of $553,000 per year for NIPF owners. Two-thirds of the total value accrued to owners in the Coastal Plain, but the largest percentage increase per year (6.5%) was received for NIPF hardwood pulpwood harvests in the Mountains. Third, discounted cash flow analyses of potential returns with better markets for small pulpwood material were calculated. Higher total stumpage volumes and prices, coupled with shorter rotations for softwood timber, led to sawtimber production with a chip component having the greatest returns, followed by chipping the stand entirely at a shorter rotation, and last, production of sawtimber only. These alternatives generated internal rates of return (IRRs) of about 8 to 12%. The lower timber prices and long rotations for hardwoods generally yielded much lower investment returns, ranging from about 4% to 6% IRRs depending on the management regime. Even the addition of a wood chip component did little to increase these returns. Last, analyses of potential site preparation savings for regeneration on sites with less woody debris and harvest residuals indicated that NIPF owners could save up to $800,00 per year. These economic analyses suggest that better markets will benefit NIPF landowners and timber buyers, thus prompting increased harvests for chip wood. 1 Anthony Snider and Frederick Cubbage are Graduate Research Assistant and Professor, respectively, at North Carolina State University, Box 8008, Raleigh, NC 27695-8008; [email protected] and [email protected]. Robert Moulton is Economist, USDA Forest Service, P.O. Box 12254, Research Triangle Park, NC 27709. NIPF LANDOWNER MOTIVATIONS North Carolina has the largest number of private forest owners in the South with about 705,000, or 14% of the South’s total. Of North Carolina’s forest area, 76% is owned by nonindustrial private forest (NIPF) land owners (Johnson 1991). In the South, 75% of private forest owners own fewer than 20 acres. These owners control 12% of the region’s forest land. Landowners holding over 100 acres number comprise only 5% of the total number, but control 54% of the region’s forest land (Moulton and Birch 1995). Since 1978, the number of owners in the South has increased by more than one million (28%) (Birch 1996). NIPF owners have many objectives for owning forest land. In the South, 38% stated that having the land as part of their residence was their main reason for owning forest land. Farm or domestic use was cited by 8% of the owners, while 16% cited recreation or aesthetics. Investment was cited by 12% and 4% cited timber production. On an area basis, 35% listed timber production as their major objective and 14% listed land investment (Moulton and Birch 1995). More than 60% of the acres in the South have timber production as their main or secondary objective and various commodity interests are important for over 75% of the southern land base. Emphasis on commodity production was directly related to tract size (Cubbage 1997). Three NIPF landowner practices and their associated deterrents and incentives were examined in this component of the study--harvesting, reforestation and management. The research literature indicated that deterrents to harvesting included various landowner objectives, economics, and immaturity of timber. Factors encouraging timber harvesting included maturity of timber, attractive stumpage prices, and the desire to improve the remaining trees on the site. Research has found that reforestation is deterred by planting costs and the long wait until a return is realized on the investment of planting. Significant incentives for regeneration include cost sharing, technical assistance, and, among those owners with higher incomes, stumpage prices. Deterrents to timber management included a preference for nontimber outputs, a low potential return on timber, and a lack of information on the part of NIPF owners. Strong markets, favorable tax treatments, and the availability of technical assistance provided incentives to management. ECONOMIC ANALYSES OF WOOD CHIP MARKET EFFECTS ON NIPFS Four approaches were used to estimate the market effects that better markets for timber due to wood chip mills might have on nonindustrial private forest (NIPF) landowners. These included (1) analysis of the actual increases in stumpage returns (price changes times volume changes) for North Carolina NIPFs in the 1990s; (2) welfare analyses of potential changes in consumer and producer surplus; (3) discounted cash flow analyses of potential returns to timber investments with and without wood chip markets; and (4) potential site preparation for planted regeneration savings that could be realized from “cleaner” timber harvests attributable to wood chip production. Incremental Stumpage Returns Economic analyses were performed to assess the benefits to NIPF owners that could occur due to changes in markets that might be attributable to wood chip facilities or other factors. Based on historical data for the 1990s derived from Timber Mart South and Southern Pulpwood Production Reports (Norris; Schaberg, pers. comm.), NIPF owners have actually experienced decreased returns from softwood stumpage sales in the Mountains and Piedmont of North Carolina (Timber Mart-South Region 1) due to decreased stumpage prices in the 1990s. The average annual incremental return to NIPF softwood pulpwood stumpage returns statewide was $34,527, for an annual increase of 0.2% (Table 1). Increasing hardwood pulpwood timber production and prices yielded incremental returns of $594,567 per year on average for NIPF owners, for an annual increase of 4.4%. Two-thirds of the total value accrued to owners in the Coastal Plain (Timber Mart-South Region 2), but the largest percentage increase per year (8.8%) was received for NIPF hardwood pulpwood harvests in the Mountains. The average annual total NIPF pulpwood returns for the entire state amounted to $35,804,623 and showed an average annual incremental increase of 1.7%. Consumer and Producer Surplus The potential impacts of shifts in demand in North Carolina timber markets were examined using economic welfare analysis in order to estimate benefits accrued to NIPF owners and forest industry. The price elasticities used for hardwood were 0.144 for supply (Siry et al. 1998) and –0.028 for demand (Nagubadi and Munn 1998). For softwoods, the elasticities were 0.23 for demand and –0.43 for supply (Newman 1987). Formulas for analysis were taken from Newman (1987). Increased demand for timber consistently increased economic returns for both timber buyers and sellers. Forest industry (buyers) had higher benefits in absolute dollars, while NIPF owners (sellers) had higher percentage benefits. For softwoods, total welfare Area Total Incremental % of Total Softwood 1: Pdmnt/Mtns $4,217,876 $-197,101 -4.7% 2: Coastal Plain 17,970,151 231,628 1.3% Total for Both Areas 22,188,027 34,527 0.2% Hardwood 1: Pdmnt/Mtns 2,381,868 209,240 8.8% 2: Coastal Plain 11,234,728 385,327 3.4% Total for Both Areas 13,616,589 594,567 4.4% State Total (All) $35,804,623 $629,094 1.7% Table 1. Average Annual NIPF Pulpwood Returns, 1990-1997 (1990 Dollars) benefits to both buyers and sellers increased about 1.7% for each 1% rise in demand. The increase in total welfare benefits to both buyers and sellers for hardwoods was about 2% per each 1% increase in demand. For example, for a 1% increase in demand for both softwood and hardwood pulpwood, total welfare benefits would increase by $6.4 million annually. These would amount to $5.0 million annually for consumers (forest industry; 74%) and $1.4 million for producers (NIPFs; 26%). Welfare benefits from hardwoods would generate the greatest increase, with 89% of the total increase from a 1% aggregate demand shift. Discounted Cash Flow Analyses Discounted cash flow returns to NIPF investment in timber production with and without chip components were computed using a 6% real interest rate. Returns were greater in the Coastal Plain than in the Mountains/Piedmont Timber Mart-South regions due to higher prices. Softwood timber management regimes were analyzed based on traditional sawtimber rotations of 30 years with and without a pulpwood and chipping harvest component, and a simple 18 year pulpwood/chipping rotation (Table 2). Higher timber prices and shorter rotations for softwood timber growing led to sawtimber production with a chip component having the greatest returns, followed by chipping the stand entirely at a shorter rotation, and last, production of sawtimber only. These alternatives generated internal rates of return (IRRs) of about 6% to 13%, with the latter figure corresponding to a harvest of sawtimber with a pulp component in the Coastal Plain. Hardwoods were analyzed using an 80 year rotation with no thinning for both upland slope and ridge (Table 3) and wet flat forest types (Table 4). The lower timber prices and long rotations for hardwoods generally yielded lower investment returns than softwoods, ranging from about 4% to 6% IRRs on upland ridge sites and 4% to 7% on wet flat sites. In both hardwood forest types and price regions, production of pulpwood had the lowest rates of return. For wet flat sites, all sawtimber options had IRRs greater than 6%. Addition of a wood chip component to a sawtimber harvest did little to increase hardwood returns, raising IRR by less than 1%. Nonmarket values might influence total returns for both hardwoods and softwoods, but were not examined. Management Regime NPV ($) EAI ($) SEV ($) B/C ratio Payback Period (Yr) Real IRR (%) P20ch T1 85.90 7.49 124.82 2.21 20 10.74 P80wo T1 -7.43 -0.54 -8.99 0.96 No pay 5.80 P80ch T1 167.51 12.17 202.82 3.23 18 11.54 P20ch T2 113.92 9.93 165.54 2.60 20 11.73 P80wo T2 88.29 6.41 106.90 1.50 30 7.78 P80ch T2 276.60 20.10 334.92 4.69 18 13.13 P20ch = chip all @ 20 years P80wo = thin to 80ft BA @ 18 yrs & harvest @ 30 yrs with no pulpwood component P80ch = thin to 80ft BA @ 18 yrs & harvest @ 30 yrs with a pulpwood component T1=TMS Region 1 (Mountains & Piedmont), T2=TMS Region 2 (Coastal Plain). Real Discount Rate = 6% Table 2. Softwood Discounted Cash Flow (DCF) Analysis Results Per Acre Site Preparation Savings Potential savings in site preparation prior to planting could occur if less woody debris and harvest residuals made for cleaner harvests. These potential savings on NIPFs were calculated on the assumption that more intensive wood chip harvests would eliminate site preparation costs (Table 5). The number of acres artificially regenerated each year (Johnson 1991, table 22) was multiplied by the percent of area harvested for pulpwood going to chip mills (Schaberg 2000) to estimate the maximum potential savings that might be attributed to wood chipping. More than 7,000 acres would be regenerated each year according to this assumption, at an average savings of $122 per acre (Dubois et al. 1999). The Mountain forest survey unit received the least potential benefit while both of the Coastal Plain survey units garnered more than $135,000 each year in savings. The Piedmont region received the highest benefit, with savings of $440,000. At the state level, the maximum potential annual savings in site preparation associated with cleaner harvests amounted to $808,690. If fewer (or more) acres were chipped than the 1999 wood chip data indicated, then this potential savings would be proportionately less (or greater). Management Regime NPV ($) EAI ($) SEV ($) B/C ratio Payback Period (Yr) Real IRR (%) HslPuO T1 -20.16 -1.22 -20.35 0.32 No pay 4.04 HslStO T1 -13.91 -0.84 -14.04 0.53 No pay 4.93 HslStP T1 -5.58 -0.34 -5.63 0.81 No pay 5.65 HslPuO T2 -21.55 -1.31 -21.75 0.27 No pay 3.76 HslStO T2 -11.50 -0.70 -11.61 0.61 No pay 5.17 HslStP T2 -5.82 -0.35 -5.87 0.80 No pay 5.63 HslPuO = harvest @ 80 yrs. all volume in pulpwood HslStO = harvest @ 80 yrs. all volume in sawtimber HslStP = harvest @ 80 yrs. sawtimber and residual in pulpwood T1=TMS Region 1 (Mountains & Piedmont), T2=TMS Region 2 (Coastal Plain). Real Discount Rate = 6% Table 3. Hardwood DCF Analysis Results, Upland Slope and Ridge Stands, Per Acre Management Regime NPV ($) EAI ($) SEV ($) B/C ratio Payback Period (Yr) Real IRR (%) HwfPuO T1 -15.57 -0.94 -15.72 0.47 No pay 4.74 HwfStO T1 12.55 0.76 12.67 1.42 80 6.58 HwfStP T1 21.89 1.33 22.19 1.74 80 6.90 HwfPuO T2 -17.63 -1.07 -17.80 0.40 No pay 4.46 HwfStO T2 19.02 1.15 19.20 1.64 80 6.81 HwfStP T2 25.46 1.54 25.70 1.86 80 7.01 HwfPuO = harvest @ 80 yrs. all volume in pulpwood HwfStO = harvest @ 80 yrs. all volume in sawtimber HwfStP = harvest @ 80 yrs. sawtimber and residual in pulpwood T1=TMS Region 1, T2=TMS Region 2 (Mountains & Piedmont), T2=TMS Region 2 (Coastal Plain). Real Discount Rate = 6% Table 4. Hardwood DCF Analysis Results, Wet Flat Stands, Per Acre