THESIS LIBRARY Michigan State University lllI/llllllfl/I lllllflllI/IIHIII/N/l/lll Ill/IIIIIIIINIIII 3 1293 10432 5612 This is to certify that the thesis entitled FINANCIAL COMPARISON OF ACCELERATED-OPTIMAL-GROWTH TO BARE ROOT SEEDLINGS IN SIMULATED RED AND JACK PINE PULPWOOD PLANTATIONS IN MICHIGAN presented by Ronald E. Gockowski has been accepted towards fulfillment of the requirements for Master of Science degreein Forestry 5% Major professor Date May 22, 1981 07639 OVERDUE F INE§: . ‘ “J 25¢ pordupervita- j ‘ ‘2 gm}. .5 RETURN us umnv mm as: ~54 Kim”? “ ‘1 Place in book mturn to mow 1y ““1” '. charge from circulation records FINANCIAL COMPARISON OF ACCELERATED-OPTIMAL-GRONTH TO BARE ROOT SEEDLINGS IN SIMULATED RED AND JACK PINE PULPWOOD PLANTATIONS IN MICHIGAN By Ronald E. Gockowski A THESIS Submitted to Michigan State University in partial fulfillment of the requirements for the degree of MASTER OF SCIENCE Department of Forestry 1981 ABSTRACT FINANCIAL COMPARISON OF ACCELERATED-OPTIMAL-GRONTH TO BARE ROOT SEEDLINGS IN SIMULATED RED AND JACK PINE PULPNOOD PLANTATIONS IN MICHIGAN By Ronald E. Gockowski A comparison of the profitability of Accelerated-Optimal- Growth red and jack pine seedlings to bare root seedlings was con- ducted over 1440 simulated red pine and 288 simulated jack pine plantations. Accelerated-Optimal-Growth seedlings have the potential for increased growth and improved survival. The increase in growth required to warrant the use of Accelerated-Optimal-Growth seedlings as an alternative to bare root seedlings in 40 year pulpwood plantations was determined over a range of site indices, planting densities, survival improvements, real interest rates, planting stock costs, and stumpage prices using a form of the cash flow discounting model. Accelerated-Optimal-Growth seedlings will most likely be the preferred alternative at lower interest rates, higher site indices, and lower planting densities. The jack pine results are less confi- dent but the author believes they are equally as promising as red pine. Recommendations were made for future studies. ACKNOWLEDGMENTS I wish to express my sincere appreciation to Dr. John E. Gunter, my major professor, for his support and guidance on both this thesis and my academic program. I would also like to thank Drs. L. M. James and J. u. Hanover for all the assistance they have given me while at Michigan State. I wish to dedicate this thesis to my mother, Marlene, for her love and confidence throughout my college career. ii TABLE OF CONTENTS Page LIST OF TABLES ............................................... iv LIST OF FIGURES .............................................. v INTRODUCTION ................................................. 1 STUDY METHODS ................................................ 3 Analytical Model and Technique ......................... 3 Data Collection ........................................ 7 Data Analysis .......................................... 11 RESULTS AND DISCUSSION ....................................... 19 Red Pine ............................................... 19 Jack Pine .............................................. 30 IMPLICATIONS FOR FUTURE STUDY ................................ 33 BIBLIOGRAPHY ................................................. 35 APPENDICES ................................................... 37 APPENDIX A: DERIVATION OF NEIGHTED AVERAGE STUMPAGE PRICES, IN 1979 DOLLARS ................... 38 APPENDIX B: COMPLETE RESULTS OF RED AND JACK PINE ANALYSIS .................................. 43 Table 4a. 4b. LIST OF TABLES Yield for 40 year old bare root red pine plantations, in cords per acre ....................................... Yield for 40 year old bare root jack pine plantations, in cords per acre ....................................... Projection of weighted average 1979 red and jack pine stumpage prices to rotation age 40, in dollars per cord . Incremental investment costs for AOG red pine planting stock over a range of planting densities and AOG stock costs, in dollars per acre .............................. Incremental investment costs for AOG jack pine planting stock over a range of planting densities and AOG stock costs,in dollars per acre ............................... Relationship of current and real interest rates for a range of annual inflation rates, in percent ............. Required yield increases for a sample analysis .......... Cross-section of red pine results showing percent increase in growth required to warrant the use of AOG seedlings ........................................... Cross-section of jack pine results showing percent increase in growth required to warrant the use of AOG seedlings ........................................... iv Page 10 12 12 14 18 20 31 LIST OF FIGURES Figure 1. Required percent growth increase to warrant the use of AOG red pine seedlings across a range of site indices and expected survival improvements, given 400 trees planted per acre, a 4 percent real rate of interest, AOG stock costs of $142.50 per thousand, and Upper Peninsula stumpage prices .............................. Required percent growth increase to warrant the use of AOG red pine seedlings across a range of planting densities and AOG stock costs, given a site index of 65, a 4 percent real rate of interest, 20 percent survival improvement, and Upper Peninsula stumpage prices ................................................. Required percent growth increase to warrant the use of AOG red pine seedlings across a range of real interest rates and stumpage prices, given a site index of 65, 400 trees planted per acre, 20 percent survival improvement, and an AOG stock cost of $142.50 per thousand ............................................... Page 21 23 26 INTRODUCTION Accelerated-Optimal-Growth or Accel-O-Gro (AOG) is a rela- tively new concept in seedling production. In contrast to conven- tional outdoor nurseries, the system involves producing seedlings within protective cultures (greenhouses) and manipulating important growth variables to optimize growth. Light or photoperiod is the most important growth variable. By controlling light duration, quality, and intensity, dormancy can be inhibited and continuous seedling growth achieved. Temperature, moisture, carbon dioxide, and nutrients are also controlled to provide an optimum growing environment for a particular species. The result is the production of large, healthy, and vigorous seedlings in months rather than years (Hanover, 1976). In reaction to a possible softwood fiber scarcity (USDA, 1980), many forest managers are intensifying softwood plantation management and are considering the use of AOG seedlings as part of this management scheme.1 The purpose of this study was to assess the economic feasibility of using AOG seedlings for outplanting in red and jack pine pulpwood plantations. AOG seedlings have many advan- tages in comparison to conventional outdoor nursery seedlings (bare root seedlings), the more important being the potential for increased growth and increased survival. 1Personal communication with forest industry representatives. 1 A seven year study by Hanover (1977) compared growth and survival of blue spruce planted with AOG techniques to those planted with conventional nursery practices. The results showed that survival in the AOG plantation was 95.4 percent versus 84.5 percent for the non-AOG plantation; Better survival in AOG plantations can be attributed to larger and more vigorous seedlings. Hanover also found that an 81 percent increase in height growth resulted after seven years when AOG methods were used to. produce these seedlings. Although there is this biological evidence that the use of AOG seedlings will improve survival and growth, the magnitude of these improvements and the exact economic benefit of them for 40 year red and jack pine plantations, if any, still remains unanswered. It is the purpose of this thesis to begin to address some of these questions. Studies on the costs and returns of tree improvement programs for loblolly pine in the south and white spruce in Canada have found that an increase in yield (growth volume) of 2 percent to 5 percent is required to justify an investment in improved seed, while pub- lished expectations of yield increases range from 5 percent to 15 per- cent (Davis, 1969; Carlisle and Teich, 1970). In order to determine whether the benefits of AOG seedlings can offset their increased cost, similar relationships are analyzed herein. Also included are implica- tions and recommendations for future study. STUDY METHODS Analytical Model and Technique The most popular decision model to use in evaluating invest- ment alternatives is the cash flow discounting model (Van Horne, 1980). In using this model, the analyst estimates all cash flows (costs and returns) during the project time horizon and adjusts these cash flows to a common point in time, usually the present. A measure of project worth in this model is net present value (NPV), which is defined as the sum of the discounted revenues less the sum of the discounted costs. The decision rule is to accept the project or investment if the NPV is positive, otherwise reject it. A positive NPV means that the discounted revenues exceed the discounted costs, and the project rate of return is greater than the guiding rate of return used in discounting. The decision whether to use AOG planting stock, rather than bare root stock grown in conventional outdoor nurseries, assumes that the above analysis has been completed for a particular bare root plantation, and the profitability of that plantation confirmed. Now, the decision is whether the plantation can be made more profitable by using AOG seedlings. This will be the case only if the additional cost of the AOG seedlings is more than offset by additional revenue. This type of analysis is called an incremental or marginal analysis: 3 only additional costs and additional revenues are considered; costs and revenues equal between both alternatives are ignored. An incremental analysis can be incorporated into the cash flow discounting model. When this is done, the only cash flows considered are the additional costs of AOG seedlings, over those of conventional bare root seedlings, and the resulting additional revenues, if any. Thus, if the NPV of this incremental analysis is positive (the time- adjusted additional revenues exceed the time-adjusted additional costs) the overall profitability of the plantation can be increased by using AOG planting stock. If the NPV of the incremental analysis is negative, i.e., if the increased cost of AOG seedlings is not off- set by a sufficient increase in revenues to improve the overall profitability of the plantation, then conventional bare root planting stock should be used. This analysis assumed that the only relevant incremental cost is the cost differential between AOG and bare root planting stock. All the investment costs of protective culture are embodied in this differential. Other costs such as site preparation, planting, weed control, annual maintenance, and taxes are all assumed to be the same no matter if AOG or bare root seedlings are planted.2 Thus, they can be eliminated from the analysis. To warrant an investment in AOG planting stock, additional revenues must be generated. It is assumed that they will come from higher yields than those expected with bare root stock. Knowing that 2Personal communication with forest industry representatives. revenue contains both a price and a quantity component, the required increase in revenue can be expressed algebraically as: P*i-P ( 0 (1) where, P = the price per unit of pulpwood (AOG and conventional) in year n. 0* = the quantity (yield) of pulpwood harvested in year n, AOG. Q = the quantity (yield) of pulpwood harvested in year n, conventional. C. = the incremental investment cost of AOG seedlings in 1 year 0. the rotation age. 3 II the rate of interest, as a decimal. do ll Assuming the same stumpage price (P) and the same rotation age (n) for both AOG and bare root plantations, it can be seen that the additional revenue required to warrant the incremental investment cost (Ci) of AOG seedlings must come solely from increased yield.3 Since the magnitude of yield increases from using AOG seedlings is not yet known, the problem is one of identifying the gain in yield necessary to offset this additional investment cost. This can be expressed algebraically by solving equation (1) above for (0* - Q): 3It is assumed there are no quality differences in the wood fiber produced by AOG and bare root stock that would affect price. c.(1 + i)" (o*-o)= ‘ P (2) This equation computes the minimum additional yield required to break even on an AOG investment; it identifies the yield increase which sets the NPV of the AOG investment just equal to zero. Note that the incremental investment cost is compounded to year n, the rotation age. Thus, all cash flows are adjusted to a common point in time, as is required. The compounded incremental investment cost is then divided by the stumpage price in year n to give the increase in yield necessary to break even on the AOG investment. Any yield increases above this minimum would make AOG seedlings the preferred alternative. If expected yield increases are below this minimum, bare root seedlings would be preferred. To summarize, the compounded incremental investment cost must be offset by incremental revenues at rotation age to warrant the use of AOG seedlings. Since incremental revenues contain a price and quantity component, dividing by the stumpage price will give the quantity (yield) increase required. To standardize and facilitate comparison of the required yield increases across the variables studied, they can be expressed as a percentage of the expected bare root yield. Equation (2) can be rewritten to reflect this step in the analysis. Dividing equation (2) by the projected bare root yield and multiplying by 100 gives the percentage yield increase required to warrant the use of AOG seedlings. The following equation results: * c. . jg75121000) = ‘(lpa‘)n(100) (3) This analysis was conducted for red pine over a range of site indices, planting densities, survival differentials, real interest rates, stumpage prices, and incremental investment costs. For jack pine the analysis was more limited in that the effect of differential survival was not considered. Data Collection Cost and return data were collected from various forest industries in Michigan, Wisconsin, and Minnesota, and from the U.S. Forest Service and Michigan Department of Natural Resources. The relevant data included the parameters of equation (3): namely, 0, growth and yield data for bare root plantations; P, stumpage price projections to rotation age; and Ci, incremental investment costs which have earlier been defined as the difference in cost between AOG planting stock and bare root planting stock. The rotation age, n, used in the analysis was 40 years. Real interest rates, i, of 2, 4, 6, and 8 percent were considered. Red pine growth and yield were projected over a range of site indices, planting densities, and survival rates using the formulas developed by Buckman (1962). The study considered site indices 45, 55, 65, and 75; planting densities of 400, 800, and 1200 trees per acre; and bare root planting survival of 60, 70, 80, 90, and 100 per- cent. In total, red pine growth and yield were projected for 60 combinations of these three variables (Table 1). TABLE 1.--Yield for 40 year old bare root red pine plantations, in cords per acre.a Planting Density Percent Planting Survival Site Index Trees/Acre 60 7O 80 90 100 45 400 14.5 15.6 16.9 17.8 18.9 800 20.6 21.9 23.0 24.0 24.8 1200 24.0 25.2 26.0 26.8 27.4 55 400 21.6 23.4 25.1 26.6 27.8 800 30.2 32.1 33.7 35.0 36.2 1200 35.0 36.7 37.7 38.9 39.7 65 400 30.6 33.2 35.4 37.6 39.3 800 42.4 45.0 46.8 48.6 50.2 1200 48.6 50.7 52.2 53.5 54.4 75 400 40.7 44.0 46.8 49.1 51.3 800 55.3 58.4 61.0 63.0 64.8 1200 63.0 65.5 67.3 68.7 69.7 aFrom Buckman (1962): BA growth = 1.6889 + 0.041066(BA) - 0.00016303(BA)2 - 0.076958(AGE) + 0.00022741(AGE)2 + 0.06441(SITE INDEX) Cords = 0.003958(BA x HEIGHT) For jack pine, growth and yield were projected over four site indices (40, 50, 60, and 70), and three planting densities (500, 1000, and 1500 trees per acre), using the tables developed by Laidly (1976), and the formulas developed by Buckman (1962). Due to limited information on plantation growth and yield, the jack pine analysis did not consider less than perfect survival (Table 2). TABLE 2.--Yield for 40 year old bare root jack pine plantations, in cords per acre.a Planting Density (trees per acre) Site Index 500 1000 1500 40 6.8 8.9 10.0 50 11.6 14.8 17.3 60 18.2 24.0 26.8 70 26.3 33.1 36.2 aBasal area growth from table by Laidly (1976). Cords = 0.003958 (BA x HEIGHT), from Buckman (1962). Stumpage price and volume cut data were collected for the Hiawatha and Ottawa national forests of the Upper Peninsula and the Huron and Manistee national forests of the Lower Peninsula from red and jack pine pulpwood cut and sold reports for fiscal years 1975 through 1979. This data was also collected from the eight districts of the Michigan Department of Natural Resources for the years 1978 10 and 1979. From this, weighted average red and jack pine stumpage prices were computed (in 1979 dollars) for both the Upper Peninsula and for all of Michigan (Appendix A). Future stumpage prices were projected from 1980, the assumed year of establishment, to rotation age 40 years hence (Table 3). These projections assumed an average 2 percent real annual softwood stumpage price increase (USDA, 1980). These prices are in real or constant dollars, net of inflation. The 2 percent real price increase reflects a projected softwood fiber scarcity in that such price increases will be necessary to bring pulpwood demand and supply into equilibrium.4 TABLE 3.--Pr0jection of weighted average 1979 red and jack pine stumpage prices to rotation age 40, in dollars per cord. Red Pine Jack Pine Upper Upper Year Michigan Peninsula Michigan Peninsula 1979a 6.62 11.24 8.92 13.76 1980b 6.75 11.46 9.10 14.04 2020 14.91 25.31 20.09 30.99 aDerivation in Appendix A. bYear of assumed plantation establishment. 1Note that these are not what the actual prices will be in current dollars since the annual rate of inflation will surely be above 0 percent. However, these prices are valid for the analysis so long as the other cash flows are also in a real context (net of inflation), as will be the case. 11 The bare root planting stock costs used in the analysis were $40 per thousand for red pine and $20 per thousand for jack pine.5 Three AOG planting stock costs ($135.00, $142.50, and $150.00 per thousand) were assumed to account for variations in the cost of planting stock production that may occur.6 These AOG planting stock costs were used for both the red pine and jack pine analyses. The incremental investment costs (Ci) resulting from these cost estimates are presented in Tables 4a and 4b. Data Analysis Recall that growth and yield (0) were projected for bare root red pine plantations over four site indices, three planting densities, and five survival rates resulting in yield projections for 60 hypo- thetical red pine plantations (Table 1). Similarly, yield was pro- jected for 12 bare root jack pine plantations across four site indices, and three plant densities (Table 2). Also recall that the analysis considered four real interest rates (i), three incremental investment costs (Ci)’ and two stumpage prices (P) for each of these plantations. Thus, the percentage yield increase required to warrant an AOG investment was computed, using equation (3) across the range of vari- ables, for a total of 1440 red pine plantations and 288 jack pine plantations. 5Michigan Department of Natural Resources 1980 nursery price list. 6Chippewa Farms Horticultural Enterprises, Minnesota, and Michigan Cooperative Tree Improvement Program quotations. 12 TABLE 4a.--Incremental investment costs for AOG red pine planting stock over a range of planting densities and AOG stock costs, in dollars per acre. Cost per 1000 Seedlings ' Incremental Investment Cost per Acrea Bare Root AOG Trees per Acre Dollars Dollars 400 300 1200 40.00 135.00 38.00 76.00 114.00 142.50 41.00 82.00 123.00 150.00 44.00 88.00 132.00 aIncremental investment cost = (AOG cost per 1000 seedlings - BR cost per 1000 seedlings) x (planting density per acre/1000) TABLE 4b.--Incremental investment costs for AOG jack pine planting stock over a range of planting densities and AOG stock costs, in dollars per acre. Cost per 1000 Seedlings Incremental Investment Cost per Acrea Bare Root AOG Trees per Acre Dollars Dollars 500 1000 1500 20.00 135.00 57.50 115.00 172.50 142.50 61.25 122.50 183.75 150.00 65.00 130.00 195.00 13 The method of analysis can best be explained by considering a particular plantation. Assume a forest manager is considering the use of AOG seedlings for a site index 65 red pine plantation planted at 400 trees per acre. Further assume that the cost for AOG planting stock is $142.50 per thousand and the relevant real rate of interest is 4 percent. Finally, assume that the plantation is located in the Upper Peninsula and the projected stumpage price is $25.31 per cord. The first step in the analysis is to compound the incremental investment cost to rotation age, 40 years hence, at 4 percent per year. Note that the interest rates used in the analysis are in real terms, net of inflation. Market rates of interest, on the other hand, are normally expressed in current terms, which includes components for the time value of money, risk, and inflation. To avoid estimating an uncertain rate of inflation it is often easier to conduct a financial analysis in real terms, as was done here. Recall that stumpage prices (and thus revenues) were projected using an estimated real annual price increase. The incremental investment costs will also be com- pounded using the investor's real interest rate or guiding rate of return.7 Since most decision makers are more familiar with using current interest rates (e.g., cost of borrowing from a bank), Table 5 shows some equivalent current rates for the four real rates used in this analysis. For example, if the prime lending rate (which is expressed in current terms) is 20 percent and the annual rate of 7It is essential that all cash flows be expressed in real terms or all expressed in current terms and not to compare real cash flows with current interest rates (Gregersen, 1975). 14 TABLE 5.--Relationship of current and real interest rates for a range of annual inflation rates, in percent. Current Rate Real a Rate of Interest of Inflation Rate of Interest 20.0 17.6 2.0 15.0 12.7 2.0 10.0 7.8 2.0 20.0 15.4 4.0 15.0 10.6 4.0 10.0 5.8 4.0 20.0 A 13.2 6.0 15.0 10.6 6.0 10.0 3.8 6.0 20.0 11.1 8.0 15.0 6.5 8.0 10.0 1.9 8.0 a .10 II 1 + k w-JIOO Where, i = real interest rate j = annual rate of inflation k = current interest rate 15 inflation is 15.4 percent, the equivalent real interest rate is 4 percent. Returning to the example, the incremental investment cost (Ci) for AOG seedlings is $41 per acre (Table 4a). By compounding this value at 4 percent per year for 40 years, a compounded incre- mental investment cost of $197 per acre is accrued. Thus, in order for AOG seedlings to be a financially feasible alternative to bare root planting stock, incremental revenues of at least $197 per acre must be generated at rotation age. With a projected stumpage price of $25.31 per cord, this corresponds to a required yield increase of 7.8 cords per acre, or 20 percent.8 Recall that two important benefits of using AOG seedlings are the potential for increased growth and improved survival. Thus there are two potential sources from which this required yield increase may possibly accrue: increased yield from better survival and increased yield from better growth.9 If the forest manager can estimate the improvement in survival that may result from using AOG seedlings, then the resulting increase in yield can easily be obtained from growth and yield data, such as that in Table 1. If this yield increase is greater than or equal to the minimum yield increase required to warrant the use of AOG seedlings, then AOG seedlings 8 From equation (3) and Table 1: -9;f9(100)=4§%4%(100) = 20% 9The yield increase due to better survival assumes more growing trees per acre will produce more yield per acre at rotation age. It is also assumed that in a 40 year rotation mortality losses due to crowding will be minimal. 16 would be financially feasible even if no growth increase occurred. More commonly, however, the increase in yield from better survival will not fully offset the total required, and some yield increase from better growth will also be necessary. Also, if no improvement in survival is expected, the entire required yield increase must come solely from increased growth. This analysis assumed a 100 percent survival rate for AOG seedlings. Consequently, if bare root survival is expected to be 100 percent, there would be 0 percent improvement in survival; if bare root survival is expected to be 60 percent, there would be a 40 per- cent survival improvement by using AOG seedlings; and so on. Since the required yield increase may be a function of increased growth and/or increased survival, the results are expressed as the percent increase in growth required given a certain expected improvement in survival. That is, the yield increase required from improved growth is the total yield increase required less the yield increase expected from improved survival. Continuing with the example, if no improvement in survival is expected, the required 7.8 cords per acre of increased yield must come entirely from increased growth. This translates to a 20 percent increase in growth requirement given that no improvement in survival is expected. If, on the other hand, a 10 percent improvement in survival is anticipated, only 6.1 cords per acre of additional yield from better growth need be generated. The remaining 1.7 cords per 17 10 So with a acre of increased yield will come from better survival. 10 percent improvement in survival, only a 16 percent increase in growth is required to warrant the use of AOG seedlings in this particular plantation.11 In the case of an expected 40 percent improvement in survival, no increase in growth would be required: 8.7 cords per acre of addi- tional yield results from better survival, and only 7.8 cords per acre in total are required. 0r put another way, improved survival increases yield at rotation by 22 percent (8.7/39.3). Since a total yield increase of only 20 percent is required, no yield increase need come from improved growth. A summary of the results for this particular plantation across a range of expected improvements in survival is presented in Table 6. Notice that as the improvement in survival due to the use of AOG seedlings increases, less yield increase is required from better growth. The total yield increase required will always be at least 7.8 cords per acre (or 20 percent) to warrant using AOG seedlings for this plantation. However, this can come from better survival, better growth, or a combination of the two. 10From red pine yield data in Table 1. With a 10 percent improvement in survival there are 39.3 cords per acre at rotation rather than 37.6, a 1.7 cord increase. 11Percent growth increase required = total percent yield increase required - percent yield increase expected from improved survival. 33%(100) - f—guom = 20 - 4 = 16 18 TABLE 6.--Required yield increases for a sample analysis. Resulting Required Yield Increase from: Expected Yield Increase Survival from Better Improvement Survival All Sources Better Growth Percent Cords/Acre Cords/Acre Cords/Acrea Percentb 40 8.7 7.8 0.0 0 30 6.1 7.8 1.7 4 20 3.9 7.8 3.9 10 10 1.7 7.8 6.1 16 0 0.0 7.8 7.8 20 aTotal yield increase required - Yield increase expected from improved survival. bRequired yield increase from better growth 6 Bare root yield expected with 100 percent survival. The above example explains the method of analysis for all red pine plantations. The final result for each plantation is the required increase in growth necessary to warrant the use of AOG seed- lings, given an expected improvement in survival. The jack pine analysis differed only in that the possible benefit from improved survival was not included due to lack of data. Consequently, the jack pine results are very conservative. RESULTS AND DISCUSSION A total of 1440 red pine plantations and 288 jack pine planta- tions were analyzed. A full disclosure of the results appears in Appendix B, with a cross-section of the results for each species pre- sented below. These cross-sections show the relationships between the variables studied. They are useful in drawing conclusions on the use of AOG seedlings in 40 year old red and jack pine pulpwood planta- tions. Red Pine The percent increase in growth required to warrant the use of AOG seedlings in selected red pine plantations is presented in Table 7. Important relationships between the variables studied are also presented in Figures 1, 2, and 3. Figure 1 shows the effect expected survival improvement and site index have in the percent growth increase required, ceteris 12 It can be seen that as survival improves due to the use paribus. of AOG seedlings, less growth increase is required. Also, the better the site, the less the percent growth increase required. In Figure 2 the effects of planting density and AOG planting stock costs on the requirement for an increase in growth are 12 constant. Ceteris paribus - given that all other variables remain 19 20 TABLE 7.--Cross-section of red pine results showing percent increase in growth required to warrant the use of AOG seedlings.a Expected Required Growth Increase Planting Survival . Density Improvement Real Rate of Interest (in percent) Igdgx Trees/Acre Percent 2 4 6 8 55 400 40 0* 4* 38 104 30 0* 12* 44 111 20 3* 18* 50 117 10 9* 24* 56 122 0 13* 28* 60 127 65 400 40 0* 0* 20* 67 30 0* 4* 27* 74 20 0* 10* 32 80 10 '5* ' 16* 38 85 0 9* 20* 42 90 65 800 40 0* 15* 51 125 30 4* 21* 59 130 20 7* 24* 60 133 10 11* 28* 63 137 0 14* 31 66 140 65 1200 40 9* 32 81 183 30 13* 36 85 187 20 16* 39 88 190 10 18* 41 90 192 0 20* 43 92 194 aUsing AOG stock cost of $142.50 per thousand, and Upper Peninsula stumpage price of $25.31 per cord. *Financially feasible AOG plantation. 21 Figure 1.--Required percent growth increase to warrant the use of AOG red pine seedlings across a range of site indices and expected survival improvements, given 400 trees planted per acre, a 4 percent real rate of interest, AOG stock costs of $142.50 per thousand, and Upper Peninsula stumpage prices. PERCENT INCREASE IN GROWTH REQUIRED 60 22 SI 45 SI 55 SI 75 0 10 20 30 40 PE RCENT SURVIVAL IMPROVEMENT FIGURE 1 23 Figure 2.--Required percent growth increase to warrant the use of AOG red pine seedlings across a range of planting densities and AOG stock costs, given a site index of 65, a 4 percent real rate of interest, 20 percent survival improvement, and Upper Peninsula stumpage prices. 24 so - ------------ s150.00/K 3 142.50/ K ----- 3 135.00/ K 0 :5 0| 0 O 0 I0 0 PERCENT INCREASE IN GROWTH REQUIRED d O O 400 800 1200 PLANTING DENSITY ITREES PER ACRE] FIGURE 2 25 demonstrated, ceteris paribus. It is evident that as planting density increases and as AOG planting stock costs rise relative to bare root stock costs, the required percent increase in growth also increases. An increase in either of these two variables increases the incremental investment cost (Ci) of AOG seedlings (see Table 4). With an incremental increase in costs comes the requirement for an incremental increase in revenues and, thus, an incremental increase in yield. Finally, Figure 3 shows the relationship between interest rates and stumpage prices to the percent increase in growth required, again ceteris paribus. At high interest rates, the compounded incre- mental investment cost is greater than at low rates. Therefore, more incremental revenue (and thus more incremental yield) is required at rotation age. Also evident from Figure 3 is that with higher stumpage prices, less growth increase is required to warrant the use of AOG seedlings. Recall that two weighted average stumpage prices were considered in the analysis: one for all of Michigan, and one for the Upper Peninsula only. Since the Upper Peninsula stumpage prices are consistently higher than the state average, less growth increase is required if Upper Peninsula stumpage prices are relevant. Given any required incremental revenue (to offset any given compounded incremental investment cost), as the stumpage price increases, the associated incremental yield requirement decreases. From these relationships it is quite evident that an AOG investment will be more profitable when: 26 Figure 3.--Required percent growth increase to warrant the use of AOG red pine seedlings across a range of real interest rates and stumpage prices, given a site index of 65, 400 trees planted per acre, 20 percent survival improvement, and an AOG stock cost of $142.50 per thousand. IN GROWTH REQUIRED INCREASE PERCENT 120 100 80 BO 40 20 REAL 27 Michigan Upper Peninsula 4 6 INTEREST RATE 1%! FIGURE 3 31 4.91 /c d Stumpage Price at Rotatlon Ago I real dollars I $25.31/ed 28 - Planting density is at a minimum. - The AOG planting stock cost is lowest relative to the cost of bare root planting stock. - Interest rates are at a minimum. - Projected rotation age stumpage prices are at a maximum. - The site index is high. - Anticipated improvements in survival are at a maximum. This is not to say that all of the above conditions need be present for AOG seedlings to be preferred over bare root seedlings, but it is evident from Table 7 and Figures 1 through 3 that at least one or two need to be. For example, assume that it has been determined that AOG seedlings will increase growth and yield of any red pine planta- tion by 30 percent. If the guiding rate of return for plantation investments is relatively low, say 2 or 4 percent, then AOG seedlings will be preferable to bare root seedlings over most site indices, planting densities, and possible improvements in survival (see plantations with asterisks in Table 7). Thus, even though all the variables are very important in estimating the relative profitability of A06 seedlings to bare root seedlings, not all of them need to be entirely favorable. Note from the above example that the decision whether to use AOG seedlings necessitates a judgment as to what the potential growth increase will be. As of now the expected increase in growth from switching to AOG planting stock is unknown. Nevertheless, the results of this analysis can identify those cases where the use of AOG 29 seedlings will surely ggt_be financially preferable to bare root seedlings. The results also allow us to make judgments as to where and when AOG seedlings may be feasible. If an optimistic estimate is made that the threshold for any possible growth increase from the use of AOG seedlings is 30 percent, then many situations can be identified where it will be more profit- able to continue using bare root planting stock in pulpwood planta- tions. Of those plantations presented in Table 7 it is evident that bare root seedlings would be preferred in most cases when real interest rates are 6 or 8 percent, or when the desired planting density is 1200 trees per acre. This is consistent with the overall red pine results which showed that in most cases bare root seedlings should be used when real interest rates are 6 to 8 percent, when higher planting densities of 800 to 1200 trees per acre are desired, and when planta- tions are located on moderate to lower sites of 45 to 55. However, the results also show that AOG seedlings are pre- ferred in most cases when real interest rates are 2 or 4 percent, when planting densities of 400 (and in some cases 800) trees per acre 13 Since most inten- are desired, and with site indices of 65 and 75. sive forest management practices are more likely to be located on better sites and planted at lower planting densities, AOG seedlings (appear practical in many situations. As mentioned earlier, many forest managers consider the establishment and management of red pine plantations to be a hedge 13Assuming a 30 percent expected increase in growth. 30 against possible future softwood fiber scarcities. This practice reflects a willingness to forgo current consumption or more profit- able short term investments for future security. Such an objective also reflects a relatively low time value of money or real rate of interest. The real interest rates of 2 and 4 percent used in this analysis appear appropriate for these managers.14 Recall that at these interest rates, the outlook for AOG seedlings looks very promising. In conclusion, the use of AOG seedlings for red pine pulpwood plantations is contingent on the potential improvement in survival and increase in growth that may result. Since research into the exact survival and growth of AOG seedlings is yet to be completed, judgment must be used by forest managers as to when AOG seedlings should be planted. This study identifies the economic yield increase that is required to warrant the use of AOG seedlings, but the actual use of AOG seedlings is dependent on whether these yields can be attained biologically. The answer to this question is beyond the scope of this study. Jack Pine At first glance the jack pine results, presented in Table 8, may not seem as promising as the red pine results. However, recall that these results do not include the potential benefit of improved survival. Although there are no data to confirm this, it could be 14Remember that these interest rates are real rates. With an annual inflation rate of 13 percent, they correspond to current interest rates of approximately 15 and 17 percent, respectively. 31 TABLE 8.--Cross-section of jack pine results showing percent increase in growth required to warrant the use of AOG seedlings.a Required Growth Increase Planting Density Real Rate of Interest (in Percent) Index Trees/Acre 2 4 6 8 40 500 64 140 299 632 1000 98 213 457 965 1500 131 285 610 1288 50 500 38 82 175 370 1000 59 128 275 580 1500 76 165 353 745 60 500 24* 52 112 236 1000 36 79 169 358 1500 49 106 228 242 70 500 17* 36 77 163 l000 26* 57 123 259 1500 36 79 168 356 aUsing AOG stock cost of $142.50 per thousand, Upper Peninsula stumpage price of $30.99 per cord, and excluding potential benefits from improved survival. *Financially feasible if 30 percent growth increase is expected. 32 inferred from the red pine results that these yield increase require- ments would decrease sufficiently to make a number of the plantations feasible if improved survival benefits could be included. The jack pine results exhibit the same relationships to site index, planting density, interest rates, stumpage price, and incre- mental investment cost as red pine. Therefore, it can be concluded that the jack pine results also show that AOG seedlings will probably be feasible only at lower planting densities, and interest rates, and higher site indices. Again, however, feasibility requires a judgment by the forest manager as to expected survival improvement and percent growth increase. IMPLICATIONS FOR FUTURE STUDY Although they are not as easily incorporated into a financial analysis as are improved growth and survival, it is important to recognize that there are other benefits from using AOG seedlings that have definite financial implications. Two of the more important benefits are improved availability and flexibility of planting stock, and more efficient use of available labor and equipment (Hanover, et al., 1976). Since AOG seedlings are grown in months rather than years, production planning is simplified where AOG methods are employed, planting stock is more readily available, and adjustments can be easily made to sudden changes in demand for planting stock. A major limitation of bare root stock is that outplanting can only be done during a short period of the year when soil conditions are optimal. With container grown AOG seedlings, soil conditions can be less than optimal and the planting season can be extended. This allows for better utilization of available labor and equipment. Quantifying the above benefits opens up a broad area for further economic research. Another area of possible future research would be to analyze the potential benefits of a reduction in rotation lengths from using AOG seedlings in pulpwood plantations. This could also include identifying the optimal financial rotation age for AOG plantations. 33 34 A final area of possible future research for AOG seedlings is that of wood fiber quality. Is the wood fiber produced in AOG plantations of better quality? Should there be a price premium for such quality? Or do faster growth rates reduce wood quality? These are both biological and economic questions. BIBLIOGRAPHY 35 BIBLIOGRAPHY Averill, R. 0., J. E. Gunter, C. K. Lister, and D. H. Sonnen. 1977. Guidelines for Estimating Economic Benefits of Mountain Pine Beetle Control Projects. U.S.D.A. Forest Service, Tech. Rep. R2-11. 30 p. Buckman, R. E. 1962. Growth and Yield of Red Pine in Minnesota. U.S.D.A. Forest Service, Tech. Bull. No. 1271. 50 p. Carlisle, A. and A. H. Teich. 1970. The Costs and Benefits of Tree Improvement Programs. Can. For. Serv. Infor. Rep. PS-X-20. Davis, L. S. 1969. Cost-Return Relationships of Tree Improvement Programs. Proc. 9th So. For. Tree Improv. 7 p. Gregersen, H. M. 1975. Effect of Inflation on Evaluation of Forestry Investments. J. For. Vol. 73, No. 9. 3 p. Hanover, J. W., E. Young, W. A. Lemmien, and M. Van Slooten. 1976. Accelerated-Optimal-Growth: A New Concept in Tree Production. U.S.D.A. Ag. Exp. Sta. Res. Rpt. 317, 16 p. Hanover, J. W. 1977. Accelerated-Optimal-Growth: Applications in Tree Improvement. Proc. 25th Northeastern Tree Improvement Conference, p. 4. Laidly, Paul. 1976. Unpublished analysis of jack pine growth studies at the Northern Conifers Laboratory, Grand Rapids, Minnesota. United States Department of Agriculture, Forest Service. 1980. An Analysis of the Timber Situation in the United States, pp. 420-422. Van Horne, J. C. 1980. Financial Management and Policy. 5th ed. 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