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Twenty one years after the publication of the generalized Faustmann formula

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  • Chang, Sun Joseph

Abstract

In this paper, I discuss developments of the generalized Faustmann formula since its publication in 1998. They included the formula for even-aged plantation management, uneven-aged management and forest valuation. These formula were followed by those for forest property taxation and valuation under taxation, the generalized van Kooten model, and the generalized Reed model as well as the uneven-aged management formula with carbon sequestration. The dynamic, incremental solution for the generalized Faustmann formula was then discussed. Pressler's indicator rate formula turned out to be equally applicable under the generalized Faustmann formula. Further, it enables the incorporation of risk preference to deal with the down side stumpage price risk. Lastly, modern financial instruments enables forestland owners/managers to outsource both stumpage price uncertainties and stand volume risks. With a put option, they can lock in a specific stumpage price at a future harvest date for a specific volume. With a timber insurance, they are guaranteed to get paid if the timber stand is lost in a catastrophe. The cost of the former reduces the stumpage value while the annual premium of the latter acts as an increase in the discount rate. As a result, they enable forest management decisions to be made under a certainty equivalent environment.

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  • Chang, Sun Joseph, 2020. "Twenty one years after the publication of the generalized Faustmann formula," Forest Policy and Economics, Elsevier, vol. 118(C).
    • Handle: RePEc:eee:forpol:v:118:y:2020:i:c:s1389934120301118
    DOI: 10.1016/j.forpol.2020.102238
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