IS ENHANCED FORESTRY WORTH THE INVESTMENT?
Western Silvicultural Contractors’ Association
Vancouver, British Columbia
February 2, 2000
FLC Les Reed
Forest Policy Consultant
White Rock, BC
The Western Canada Silvicultural Contractors’ Association has chosen a theme which is most timely, given the neglect of intensive silviculture in British Columbia. It is my task to lead off this panel of five in a discussion of the question: Is Enhanced Forestry Worth the Investment?
The merits of intensive silviculture ought to be crystal clear in British Columbia. Unfortunately, this is not the case. The topic is mired in confusion, more often than not. There is an important reason, in my view, why the topic tends to be not only confused but also controversial. It is because those who teach, speak and write on the subject do not generally spend enough effort on specifying the analytical method and underlying assumptions before opening the discussion.
Rather than try to anticipate what my colleagues on the panel may say,
I have chosen instead to set the stage for the audience with some straightforward descriptive material. More importantly, I will describe the philosophical framework within which silviculture investment analysis is properly located.
But first a word about the context within which enhanced silviculture must be addressed. May I underline the fact that the BC forest sector suffers from three pervasive problems concerning the wood supply:
1. Excessive costs
2. Declining volume available to the mills
3. Erosion of log quality
These problems constitute the central issues facing those engaged in re-shaping forest policy in this province. Silviculture policy is at the heart of this exercise. It is my personal view that this panel is a waste of time unless it makes a positive contribution to the policy debate on enhanced silviculture.
It is imperative that we get the conceptual framework correct at the very beginning, by contrasting the two fundamentally different points of view involved in testing the merits of silviculture spending. The first and more traditional stance is based on economic efficiency criteria. By this term we mean the application of corporate financial analysis as practiced in the discounted cash flow or DCF method. It is often advanced as the primary or even single approach relevant to determining the wisdom or folly of investing in forest enhancement. Under this method, timber volume takes precedence over costs of logging and processing, log quality and non-timber considerations.
The second stance is based on conservation criteria. According to conservation thinking, our goal should be at minimum to maintain the resource in as good a state as it was given to us by Mother Nature, and hopefully to pass it along to the next generation in an enhanced condition. The main treatments to maintain and enhance the forest are pre-commercial thinning, commercial thinning and fertilizing. Non-timber values are considered explicitly under this philosophical construction.
To elaborate briefly, economic efficiency, by its very nature is short term. Nothing beyond 10 years is of any consequence while interest rates are falling in the range of 6-8 per cent, and when corporations normally expect to get their money back in a decade or less. The assumption is that silviculture budgets are treated as “investments” and must capitalized for write-off over the life of the forest. This is a primary application of the micro-economics of the firm.
Conservation criteria are essentially long term in nature, because the beneficiaries are spread out over two or more generations. This is called inter-generational equity, in contrast to intra-generational efficiency. The choice becomes one of practicing self-denial now for the sake of those who come after us. John Ruskin put it this way some 135 years ago. Providence, he said:
“…… has lent us the earth for our life; it is a great entail.
It belongs as much to those who are to come after us…….as
to us; and we have no right, by anything that we do or neglect,
to involve them in unnecessary penalties, or deprive them
of benefits which it was in our power to bequeath.”
This reflects the land use ethic my father taught me as a child on a subsistence farm in Alberta. To waste or mine his arable land and pasture would have branded him as a bad father, grandfather, neighbor and citizen. It would have resulted in the scorn of his community. I did not learn that in forestry school or in many years as a student of economics. Nonetheless, it is imbedded in my personal philosophy of stewardship and has shaped my entire thinking on land use priorities. I do not expect this to be shared enthusiastically by everyone else. Each person has a right to choose the ditch they want to die in. But without this declaration you may easily misinterpret the approach taken in this paper. To the extent that you disagree with me, I suggest that you blame my position on an early background in agriculture and in my observations elsewhere across the globe.
It is equally important to distinguish at the beginning the difference between single stand management and management of a large forest as a whole. A great deal of mischief has been done in benefit-cost analysis of silviculture by assuming that we must always start with a piece of bare ground, plant it, and then continue to protect and tend the new stand until it matures many decades hence. That is essentially what the German forester Martin Faustmann did in 1849, beginning with a small piece of land which had just been harvested. He asked this question: Does it pay to spend money on planting and tending, given the burden of compound interest, even at his assumed 4 per cent and a rotation age of 65 years?
Because of its deceptive simplicity, this famous model is still in widespread use in the classroom, and unfortunately in the field. However, it has virtually nothing to offer concerning the management of large blocks of Crown forest at the TSA or TFL level. This province does not start with a piece of bare ground but with a vast forest already in place. The only legitimate question is whether to intervene in under mature forests with some combination of timber stand improvement, in order to choose a different and hopefully better future.
Having said that the simplistic Faustmann case is not relevant in the public forests of BC, neither does the solution lay in a terribly complicated alternative. This will soon become obvious as we look at three sets of criteria which delineate the practical boundaries for most of the cases encountered in this province. The following questions will serve to focus our attention over the next few pages.
1. Who are the different land owners or investors?
2. What forest types and conditions do they encounter?
3. What are the relevant benefit and cost parameters?
These questions will be dealt with in turn in the next few minutes. The purpose is not to smother anyone in unnecessary detail but to ensure that orderly analysis is likely to take place.
Five different types of land owners or investors are listed in Table 1. The dominant class in this province is the large public forest managed as a TSA or TFL. Together these comprise about 95 per cent of our 64 million ha of forested area. Next in order of importance is the large privately owned forest, approximately 1.5 million ha, which can be further sub-divided into those with and without manufacturing plants. The last two categories are community forests and non-industrial farm woodlots, also about 1.5 million ha in total.
Community forests like the one at Mission will try to maximize net revenue, but will also design their silviculture and logging activities to optimize watershed, wildlife and recreation opportunities.
The last type is the small woodlot owner. Discounted cash flow or DCF numbers will probably be done on some of the larger woodlots, but this does not make much sense on smaller areas when the majority of the investment is “sweat equity,” and where a principal benefit is the psychic, non taxable income realized from improving the visual quality, habitat function, and recreation attributes.
This is not an exhaustive picture of the motivations held by different land owner classes, but it does serve to illustrate the diversity of situations which exist. To take the beginner’s small bare bare land case as the template, such as a recently harvested woodlot, is simply ridiculous outside the classroom.
Each of these land classes is managed according to different sets of objectives, depending on motivations of the owners, the area involved and other conditions. For example, large public forests are managed with a view to their impact on the province’s overall economic performance, including targets for employment targets and net revenue, as well as to the broader social, environmental, ecological and other values involved. Not all of these are easily captured in dollar terms, if at all.
In contrast, large private forests are managed primarily according to corporate financial criteria, where discounted cash flow customarily
Dominates, but does not necessarily exclude other objectives such as community stability, visual quality of the forest landscape and the approval of society in more general terms.
Where private forests are part of a larger corporate enterprise, the DCF analysis will usually embrace the contribution which the forest makes to the manufacturing and other activities. Other firms may choose to do a separate analysis for the forestry and logging components, in effect treating woodlands as a separate profit centre. This is the approach taken by TimberWest, which is now very close to a “pure timber play” with some 300,000 ha of private forest on Vancouver Island. As such it will most often act to maximize value to the stockholder while keeping a sharp eye out for non-timber considerations.
There are also four main types of forest with respect to their age and condition, each of which will require a distinctly different approach to silviculture. These are itemized in Table 2. Bare ground should not be a priority for silviculture treatment because it takes a very long time relative to other options to yield positive returns.
This is also true of forests which have reached free-to-grow (FTG) status. As far as Crown forest is concerned, planting and achieving FTG on harvested land is not an option for investing discretionary funds, but is a mandatory legal requirement. On the other hand, forest which has burned or been depleted by other natural causes may very well have been ignored after regeneration, in which case it could be a candidate for brushing, weeding and early juvenile spacing, as well as subsequent intensive silviculture.
No. 2 on the list is the under mature forest that has regenerated naturally and is say 15 to 50 years of age. What we call intensive or enhanced silviculture will take the form of one or two pre-commercial thinnings, one or two commercial thinnings, fertilizing, and occasionally pruning. Some choose to include within the enhanced forestry regime the planting of cutover land with genetically improved stock . I would tend to disagree and simply ask the question: Why would you, as a land owner or investor, plant with anything other than improved stock?
The third type of forest condition or artificially regenerated forest is a sub-set of No. 2. It is added here to emphasize that stands which regenerate artificially are more likely to be progressing well than those which come back naturally. They will probably be better spaced and have a more attractive species mix than natural forests.
Finally, over mature forests will have few if any opportunities for treatment, because there are likely to be only a few isolated stands within an age-window of opportunity. The vast majority of areas in this forest condition will long since have passed through any window of opportunity for treatment.
Already we have identified 20 separate combinations which need to be assessed by different investment criteria: combinations of five land owner classes and four forest conditions. This can be viewed as a two-dimensional grid. But there are more combinations to come.
Finally, it is necessary to consider at least seven benefit and cost criteria, as shown in Table 3. In order of concreteness or measureabilty , they range from corporate financial criteria referred to earlier as DCF, fiscal impact, socio-economic aspects, environmental values, recreational requirements, and visual quality. The net fiscal impact needs to be measured in some way for federal, provincial and municipal levels of government. Related to these is the taxpayer burden, usually forgotten in such analyses. Governments tend to forget that they do not have any money, they just have yours and mine.
Social and economic measures include employment and income, community stability, the costs of welfare, health, relocation and retraining, standards of living and so on. What was embraced by the term “environmental” has now been expanded to take in ecological and biodiversity concepts as well as the fuzzier idea of sustainability.
Frankly, we do not as yet have “the metrics” to deal quantitatively with much of this. In other words, there are no widely accepted definitions of sustainability, let alone the capability of measuring it. We are usually reduced to crude ranking of benefits, or to a limited statement like “more or less” acceptable. This may be no real handicap and is mentioned here only to warn the modeler to beware. It is somewhat easier to measure the results of management alternatives on wildlife habitat or recreation potential, whereas visual quality objectives are among the most subjective of all criteria. As we used to say, “One man’s meat is another’s poison,” which is to say that one man’s benefit is another man’s cost.
This is not to deny that progress is being made. In Alberta, for example, they have just completed the description of a Desired Future Forest Condition as you will hear today from Gordon Weetman. While desired conditions have been identified in objective terms, the full adaptation to benefit-cost analysis is yet to be realized.
Having added this third dimension, with at least seven criteria, means that we multiply the possible combinations to something in excess of 100 cases. However, all is not lost in some impenetrable jungle of complexity, in a spider’s web spun by some mad forest economist. In fact, the situation in BC forestry can be reduced very quickly to five principal cases, each of which falls neatly into an uncomplicated analytical framework.
Before describing these, it is essential to return briefly to the triple threat to competitiveness of the BC forest sector: (1) declining volumes of available wood, (2) relatively high costs of delivered wood, and (3) steady erosion of log quality. This trio can rightly be treated as another set of parameters for benefit-cost analysis. In short, we have already seen that snail pace forestry has cost the people of BC a great deal. To move aggressively into an enhanced forestry program will result in tremendous benefits in terms of volumes, costs, and log quality. It is a matter of rigorously keeping your eye on the ball.
By far the most important case for this audience, and the citizens of the province as a whole, is the vast area of Crown forest. It is already broken up into management units with a range of age classes, and these are of sufficient size to warrant separate annual allowable cut calculations. So let us ask some vital questions.
First, how many hectares of forest over 15 years of age are in a window of opportunity where spacing and perhaps fertilizing can be expected to yield positive results in terms of growth and quality? The quick answer is, probably as many as 6-10 million ha.
Second, which of these forests will yield the earliest response in terms of incremental timber volume or increased AAC, and lower cost? Timing is vitally important. That is why treating NSR should be at the bottom of the priority list, while commercial thinning and fertilizing should be at the top. One goal is to fill in age class gaps and to generally augment the volumes moving forward for harvest and delivery. Another is to move thrifty under mature stands forward in the harvesting queue to achieve an early reduction in delivered costs.
In order to better visualize what you are trying to accomplish, think of this process as similar to a giant conveyor, or to logging train running through the forest. The objective is to throw on extra loads of incremental wood, to improve the mix of species and grades, to achieve a larger and more uniform tree size, and to speed up the train so that it arrives at the mill fully loaded and in a much shorter time. Remember as well that second growth stands are as a rule on flatter ground and closer to the mills, which means that lower road, harvesting and transport costs can be realized.
Third question: Which of these TSA’s and TFL’s are threatened most seriously with reductions in available volume, excessive delivered cost and declining quality? The answer will indicate which forests might be given higher priority in scheduling silviculture treatment of a specific mix, in order to forestall the foreseeable collapse of communities and the inevitable assumption of associated social costs.
This is not high science. Mostly it is just common sense. Then, for further refinement of the selection process, those who wish can turn to compound interest tables to locate the forests which will give the best bang for the buck of silviculture investment. For example, will commercial thinning alone do the trick? Or will some judicious combination of spacing and fertilizing be more advantageous. Assuming as we must that silviculture budgets will never be overly generous, then some rationing of expenditures will always be necessary.
The analysis can also be framed in another way. Given the volume of additional wood needed in threatened communities, the target for reduced costs, and the deplorable state of provincial finances, what silviculture budgets will be needed to correct pervasive problems? This is admittedly difficult in a province where targets of any kind are scarce as hen’s teeth. I do not advocate some kind of Soviet-style “Gosplan” but just some sensible indicative plan suggesting where we as a province would like to be in a decade or two. Surely it is not too much to ask for a definition of the future role of the forest sector in the overall economy of BC.
Going back to basics for a moment, what is the rate of return on silviculture investment which yields an immediate gain in forest harvest of say 10-20 per cent? Let us assume that we have a genuinely dedicated fund of $300 million annually, and that the calculated improvement in incremental wood is a modest 10 per cent. The resulting gain of 6 million m3 of harvest from Crown forests in BC will bring with it a combination of stumpage and other tax revenue, and a substantial reduction in social costs. The positive impact on the provincial treasury alone will be well in excess of the silviculture budget. Downstream benefits of a direct and indirect kind can also be estimated with relative ease. That seems to me to be a rate of return in excess of 100 per cent. In other words, the silviculture cost is paid back in the same year in which it occurs.
Alberta’s FRIP or Forest Resource Improvement Fund , as it was known initially, is highly recommended for introduction in BC.
A silviculture surcharge is placed in a trusteed account beyond the reach of politicians These funds are dedicated to intensive silviculture and other agreed tasks. It appears to be working smoothly and without the kind of controversy which constantly surrounds Forest Renewal BC.
We could make a very positive impact on the forestry community in BC if the treatments were located properly in relation to real needs. FRBC is already collecting these funds. Since 1994 they have squandered as much as $1 billion of this money on putting roads to bed and on questionable cleanup of stream banks. Neither of these carried the high priority demanded for such massive outlays of taxpayer funds. Such utter waste should be halted immediately. Incidentally, where is the record of benefit-cost analysis for those programs? There is no such record as we know too well. I do not recall hearing forest economists crying out for benefit cost studies for those adventures.
It is vitally important to recognize that the timber harvest can be raised immediately upon committing the funds. To argue that we have to do more research before boosting silviculture spending is just plain nonsense. Yes, research will refine our knowledge. But we already have ample evidence of the benefits to move ahead vigorously.
The large parcels of private land are next in area and importance. I have no specific advice to give to them on priorizing silviculture investments, except to insist that they use the forest-in-place model described herein. They owe it to their shareholders to manage their land well, and by extension they have an obligation to society to demonstrate exemplary stewardship.
There are, however, grounds for wondering why most industry foresters in BC have remained virtually silent in the face of lackluster forestry on Crown land. A few outstanding exceptions to the contrary, they have preferred cloistered careers. Even on their own private lands they have tended to hang back in silence, well behind their counterparts in other jurisdictions, and to disregard mountains of evidence demonstrating that intensive silviculture does indeed pay.
There are many instances right here in BC where the proof is overwhelmingly in favor of aggressive forestry. The same is true of every province in Canada. I have personally seen outstanding examples of successful field trials and operational scale forest enhancement across the country. You don’t have to go to Sweden, Chile, or New Zealand to find evidence of the benefits of intensive forestry.
Little needs to be said at this juncture concerning investment strategies on small scale forests. The economic benefits tend to be supplemental rather than primary consideration. A farmer or hobby forester may get some financial return from the woodlot, but the bulk of his income will still come from other sources. As noted earlier, the pleasure of owning a thriving woodlot may be considerable. Likewise, the modest community forest has its principal justification in non-timber values rather than in the sale of timber products.
Another confusing issue must be dealt with before bringing this to a close. I refer to an argument made constantly by economists and foresters who make the bold assertion that forest spacing will not result in a larger volume in the final felling. My prompt answer to that is: Who cares? Even if it is a fact, which I take to be far from uniformly true, there is a pile of incremental wood to be realized from commercial thinning. Whether this added volume from CT is well in excess of 20 per cent as in Scandinavia, or a more modest potential of 10-15 per cent in BC, effectively disputes part one of the red herring argument. That increment is a truly significant gain in a forest economy where the volume of available timber is falling like a stone.
But the news gets even better. Consider also that the final felling can be pushed ahead in time by as much as 30-40 years earlier than nature would accomplish without our intervention. This means that in much of BC you can get three or even four crops in the time it would otherwise take to get just two. This makes possible what we call the allowable cut effect. Accordingly, it is no longer necessary to hoard the existing stock of mature forest and to spin it out for such a long time, since the next crop is scheduled to arrive on a faster train. This means that you can harvest annually, in the final felling, another 15-20 per cent at least, using relatively conservative assumptions.
A restatement of the main elements of my analysis, as set out above, is organized in two separate schedules. These are taken from a Reed-Baskerville paper and modified slightly to correspond with the theme for this panel. Table 4 identifies Forest Level Benefits from Intensive Management, beginning with the positive impact on forest volume, the potential for reducing costs, and the promise of higher quality raw material. Risk reduction is listed separately, although it is also a source of cost relief. The last three items identify significant non-timber benefits.
You will search in vain in our forestry textbooks for such a straightforward presentation of the benefits of enhanced forestry. The reason is that those authors bring an entirely different philosophical mindset to forestry issues. I merely recommend that you study the pragmatic approach in this contemporary view along side the more academic one, and then make your own thoughtful choices.
In order to facilitate those choices , I have included Table 5, titled
A Comparison of Assumptions Underlying the Faustmann Single Stand Model and Large Forests. This one begins with the starting point of forest condition, bare ground or a forest in place, and then proceeds through size of the area being studied, the treatment of costs, the waiting period for benefits, and so on. The whole point behind this Table 5 is that I will not willingly accept the conclusions of any model which fails to make the underlying assumptions explicit. Transparency in this respect is an absolute requirement. No black boxes, please.
There you have it in a nutshell: conservation and efficiency criteria. Both have validity, in appropriate circumstances. Back in 1977, Resources for the Future published a timely book titled Conservation and Economic Efficiency-- An Approach to Materials Policy. In author Talbot Page’s words:
“ One cannot use one criterion to bludgeon another. They
are on the same logical level. The most one can say at this
point is that the two criteria conflict; they imply different states
of the world.
“One can judge a criterion, however, by its implications and by
the conditions under which it leads to desirable consequences.”
Page is saying that the key to sound analysis rests in finding the right application, and in actual fact the better part of wisdom will often be in a synthesis of the two approaches.
For a more lengthy and systematic treatment of today’s topic, I refer you to a Policy Forum article published in1990 in the UBC Journal of Business Administration under the title, A Contemporary Perspective on Silviculture Investments. I co-authored this piece with Gordon Baskerville who was then Dean of Forestry at the University of New Brunswick.
Finally, the decade of the 1990’s should have stimulated a golden age of forestry in British Columbia. The crisis was upon us and we had every reason to re-think our assumptions. Instead, our leaders in the public and private sectors, together with their associated forest land managers, adopted a bunker mentality. The results were entirely predictable. This province entered a period of forest policy formulation and practice which has taken us into a stagnant backwater of broken promises, lost opportunities and broken dreams. The forest industry has experienced its most serious loss of competitiveness in the post-World War II era.
It is not too late to initiate a major reversal of this unfortunate and unnecessary prospect. In my view, intensive silviculture must be recognized as a major part of the solution, in both the short and the long term.
Land Ownership Classes
1. Large Public
-- TSA’s, TFL’s
2. Large Private
3. Large Private
-- not integrated
4. Community Forests
5. Smaller Private Woodlots
1. Bare Forest Land
2. Under Mature Forest
-- naturally regenerated
3. Under Mature Forest
-- artificially regenerated
4. Mature and Over Mature
Benefit and Cost Criteria
1. Corporate Financial Criteria
2. Fiscal Impact
3. Social and Economic Impact
4. Environmental, Ecological, etc.
-- Sustainability (?)
5. Recreational Values
6. Visual Quality Objectives
7. Competitiveness Factors
-- available timber volume
-- delivered wood cost
-- log quality, grade, species mix
Forest Level Benefits from Intensive Management
1. Harvest volume increase, from forest as a whole
-- incremental, commercial thinning
-- allowable cut effect
2. Shorter time to stand operability
3. Cost reductions
a. shorter hauling distance
-- by treating forests nearer the mill
b. produce larger, more uniform logs
-- logging cost savings
-- lower processing costs
4. Value added gains
a. species mix more attractive
b. lumber recovery factor raised
c. grade and dimension mix improved
d. residual chip values increased
e. higher sawlog ratio
5. Risk reduction
a. insect, fire losses curtailed
b. less reliance on the open market
-- for logs
-- for chips
c. less threat of curtailment from timber shortage
6. Release of forest land for other uses
-- less controversy
7. Improve the recreation vale of forest land
8. Net improvement in wildlife habitat
Single Stand Model and Large Forest Model
Faustmann Large Forest
1. Starting point Bare ground Forest in place
2. Size of area ¼ ha Over 10,000 ha
3. Costing Capitalize, 4% Write off against current revenue
4. Benefits begin End R.A., 65 yrs Now: CT and A.C.E
5. Relationship Single stand Whole forest, larger enterprise
6. Measurement of Logs only, at Volume, cost, value,
benefits stumpage value risk reduction
7. Non-timber Not counted Included, can be the
benefits overriding concern