"Real options in harvesting decision on publicly owned forest lands"

This paper extends the literature on optimal tree harvesting assuming stochastic prices. With volatile prices, the value of a stand of trees is increased when harvesting dates are flexible, depending on wood volume and product prices of the day. Flexibility adds value because a forest owner can delay harvesting when prices are depressed, or can harvest earlier than planned if there is a uptick in prices. The stand owner thus has a natural hedge against price volatility. Regulatory policy in some jurisdictions has reduced the flexibility of firms harvesting on public lands by imposing allowable cut restrictions. This paper develops a two factor real options model of the harvesting decision over infinite rotations with mean reverting stochastic prices. The model is used to examine a proposed investment in intensive forest management in Ontario's boreal forests. The value of a representative stand in the Romeo Malette forest is estimated assuming complete harvesting flexibility. This value is then compared to the value when regulations dictate a window of time during which harvesting must occur.optimal harvesting, real options, allowable cut restrictions, intensive forest management, Markov decision process, linear complementarity problem