PREDICTING THE PRESENT VALUE DISTRIBUTION OF A FOREST PLANTATION INVESTMENT

Forestry investment decisions may be based on the probability distribu tion of financial return in addition to a point estimate of mean retur n. This study describes an approach to predicting the present value di stribution of a plantation investment using actual data on timber pric e and yield. Changes in stumpage price are modeled with a lognormal di ffusion process called geometric Brownian motion (GEM), Timber yield i s modeled with a variant of GEM that includes an age-dependent growth component. Model parameters are estimated with time-series observation s of loblolly pine (Pinus taeda L.) price and yield in the southeaster n United States. Because GEM models have lognormally distributed error s, present value distributions are skewed with extremely long right-ha nd tails. The median and quartiles of the distribution provide a bette r measure of central tendency and spread than do the mean and standard deviation. A median-maximizing feedback cutting rule does not perform any better than a median-maximizing fixed rotation age suggesting tha t no economic gain can be obtained by monitoring timber price and yiel d under the assumptions of our models, The forecast error, measured by the distance between quartiles, is about twice the size of the median present value. System error is the primary cause, and error in the pr ice process contributes more to the variability in present value than does error in the yield process, Parameter uncertainty increases forec ast error 15 to 35%. The large forecast error raises the question of w hether better predictive models can be built or whether the present va lue of a plantation investment is inherently uncertain.