Estimating Financial Returns from Mid-Rotation Release in Coastal Plain Loblolly Pine Plantations

Financial rates of return are estimated for mid-rotation release from hardwood competition for Coastal Plain loblolly pine plantations. Economic benefits were measured against the costs required to obtain those benefits. A base-case scenario was employed to approximate the average initial stand conditions of an existing release study. Product volumes were projected for released and non-released conditions for a maximum rotation length of 30 years. Three release levels, 95%, 75% and 50%, were simulated. Annualized rates of return were calculated from age 10 for each 5-year period up to age 30. Sensitivity tests estimated how changing release age, maximum height response and timber product prices influenced results. Introduction Timberland owners recognize that intensive management of pine stands enhances biological productivity, which can increase financial returns. A management activity of growing importance is the use of silvicultural herbicides for controlling hardwood competition in mid-rotation plantations. Researchers examining the impact of mid-rotation herbicide release (“release”) report a positive and persistent impact on growth rates of treated plantations (Fortson et al. 1996, Shiver 1994). These studies also suggest release is economically justified because it results in larger trees and a more valuable timber crop at harvest. But several questions remain unanswered. First, although existing work demonstrates that while release may increase timber volumes and future sale revenues, added benefits are not weighed against costs. Neither does it estimate how different release levels influence financial returns. For example, a release treatment which eliminates 50% of competing hardwoods should be expected to show a lower return than one that removes 95% of competition, given comparable treatment costs. Existing studies show how release positively affects yields and value of a single product such as pulpwood. But increasing the biological growth rate means trees move more rapidly into more valuable product classes. Following release, larger volumes of chip-and-saw and large sawtimber are produced at younger ages. It is reasonable to anticipate higher financial returns as a result. This study estimates financial rates of return for mid-rotation release from hardwood competition in Coastal Plain loblolly pine plantations by using a combination of results from existing studies combined with informed judgment to adjust an existing growth and yield model. The analysis includes both economic benefits from increased pine growth rates and treatment costs. The impact of varying levels of release is also estimated. The effect of release on the merchantable volumes of different product classes is included in the calculation of financial return. The approach used here can be useful, and may be necessary in situations where forest managers are required to make decisions despite a lack of complete long-term response information from experimental plot data. In forestry such situations are the norm rather than the exception. However, the estimates provided by the study should not be construed as substitutes for more completely developed growth and yield equations which include the impact of release treatments. The next section describes how financial returns from mid-rotation release are calculated. This is followed by a discussion of how release influences plantation growth, and how growth was modeled for the analysis. The basecase set of parameters is described, as are sensitivity tests that were performed. Finally, study results are presented and discussed. Financial Returns from Mid-Rotation Release When projections of merchantable product volumes for non-released and released stands are available, estimating financial returns from release is straightforward. Assume a landowner is considering treating a 10-yr old stand of loblolly pine, at a cost of $C/ac, and wishes to measure annual returns from time of release to age 20. The released stand is projected to be worth $Vr/ac at age 20, versus $Vnr without release. The annualized rate of return is: Rate of Return (ROR) = { (( Vr Vnr) / C ) } 1 If a released stand is projected to be worth $1000/ac at age 20 versus $750 without treatment, and release costs $80/ac, then: ROR = { (($1000 $750 ) / $80 ) 1/10 } -1 = 0.1207 = 12.07% The calculation focuses on the return from the release operation itself and weighs the benefits of release – the incremental value gain from the treatment over a non-treated stand – against the cost required to achieve that gain. It ignores factors such as original land cost, and investments in site preparation and planting because these costs are already “sunk” and have no bearing on current decision making. The appropriate way to think of mid-rotation release is as a potential investment in the stand. If the marginal wealth generated by this investment exceeds the marginal cost, then it is worthwhile. The Influence of Mid-Rotation Release on Plantation Growth Existing studies demonstrate that pine growth is modified by release in at least two ways. First, release increases height growth of the treated stand. Second, release increases basal area over time compared to a non-released stand. Average stand diameter therefore increases, as does merchantable product volumes. Greater volumes of higher per-unit value products also become available at an earlier age. A recent study (Fortson et al. 1996) documents the impact of release on loblolly pine stands following silvicultural herbicide treatment at 33 locations in the Piedmont and upper Coastal Plain of Georgia and Alabama. Samples were taken from stands averaging 7 and 14 yr old at the time of treatment. Treated stands were remeasured at two yr intervals for an eight yr period following treatment (ages averaging 15 and 22 yr at the last assessment), and compared to non-released check plots. In treated plots, basal area increased almost 11%, or 14 ft/ac, over untreated plots. Height of treated plots increased 1.8 ft over untreated plots. Merchantable wood volume rose an average of 20% (377 ft/ac). Responses of this magnitude were achieved even though relatively small amounts of hardwood were present. The percentage of hardwood basal area to total basal area was less than 10% in 26 of 33 installations. Another result of this study was that the differences in basal area, height and merchantable volumes between treated and untreated plots continued to diverge throughout the measurement periods. The study thus demonstrates that the positive influence of hardwood release on pine growth response is long-term in nature. A slash pine release study (Oppenheimer et al. 1989) reports similar findings 10 growing seasons following release. Merchantable volume increased over 15% on treated plots. Height increased an average of 1.4 ft. The study also demonstrated that differences in merchantable volumes diverged over time. A 14-yr remeasurement of that study (Shiver 1994) showed that volume differences continued to diverge, with treated plots having about 400 ft more merchantable volume – a 30% increase – over untreated plots. Although the above results are for stands receiving complete vegetation control, one study indicated that hardwood control levels of greater than 90% were achieved by operational aerial applications of 16 oz of Arsenal herbicide applicators concentrate (Zutter et al. 1987). In the two locations included in that study, hardwood basal areas expressed as a percent of total stand basal area, were 22% and 29%. Stand age at the time of treatment was 14 yrs. Two yrs following application, treated plots had 105 ft/ac more volume than untreated plots. These results indicated that growth responses of the magnitude observed in study by Fortson et al. (1996) are achievable from operational treatments and that greater responses are likely at higher initial hardwood competition. Pienaar and Rheney’s (1995) methodology, with some modifications described below, was employed to project growth and yield relationships. The equations and modifications used are described below. Predicting Growth and Yield for Non-Released and Released Loblolly Pine Prediction equations for Coastal Plain loblolly pine stands developed by Harrison and Borders (1996), employing modifications suggested by Pienaar and Rheney (1995) and Shiver (1994), were used in the analysis. The equations are: Survival function: N2 = 100 + [ (N1 100) + 0.0003425 SI (A2 A1)] Where: N2, N1 = Trees/ac at periods 2 and 1, where N1 > 100 A2, A1 = Age in periods 2 and 1 SI = Site index in feet (base age 25) Height Growth: Non-released stands: H = SI [ 0.30323/(1e)] Where: H = Height at age i A = Stand age Released stands: H = SI [ 0.30323/(1e)] + β1YSTe Where: YST = Years since treatment β1 and β2 = Parameters defining magnitude and pattern of the response (Values used for β1 and β2 are described in the following section.) Basal Area: BA = e H + 2.5482/A N + 3.38107/A e Where: BA = Basal area at age i N = Number of surviving trees/ac PHW = Percent hardwood expressed as a whole number Total Volume Per Acre (outside bark): V = H + 8.9345/A N BA + 3.5534/A Where: V = Total volume (ft/ac) Merchantable Volume: Vd,t = Ve 3.99114 0.74826N-0.1112 (d/Dbar)5.7848 Where: Vd,t = Total merchantable volume (ft/ac) for all trees with minimum DBH > d (in.) to top diameter t Dbar = Quadratic mean stand diameter Product breakdowns were for pulpwood V5,4 V9,6, chip and saw V9,6 V11, 9, and large sawtimber V11,9 Analysis Base-Level Scenario The analysis begins with a base-level scenario which approximates the average initial stand conditions of the loblolly pine release study described by Fortson et al. (1996). A 10-yr old stand with 600 trees per acre is assumed to be released on site index 60 (base age 25) land. Product volumes are projected for released and nonreleased conditions for a maximum rotation length of 30 yr. Annualized rates of return are calculated from a