SEARCHING FOR AN OPTIMAL ROTATION AGE FOR FOREST STAND MANAGEMENT UNDER STOCHASTIC LOG PRICES

Due to rapid change in timber prices in the Japanese market most likel y affected by imported timber from countries such as the U.S., Canada, and the Nordic countries, the domestic forest managers have been faci ng a large degree of future price uncertainty. Because of this, it bec omes necessary to take the future price uncertainty into account withi n the forest management framework. In this paper, the continuous time stochastic process, i.e., the geometric Brownian motion, has been used to model the log price process. The binomial option pricing approxima tion was then applied to value the Sugi (Cryptomeria japonica) and Hin oki (Chamaecyparis obtusa) forested land under stochastic log prices i n order to search for an optimal rotation age. Our experiments with th e proposed two state stochastic dynamic programming model showed that when the current log price is high enough to cover all costs, an optim al rotation age from the stochastic price and deterministic price mode ls coincides, although the total expected present net value from manag ement activities differs. Also it was shown that as the current log pr ice decreases, an optimal rotation age derived from the stochastic pri ce model becomes longer than that from the deterministic price model. If the current log price further decreases, then forest management wil l be abandoned, and the forest stand will be converted into alternativ e uses. (C) 1998 Elsevier Science B.V.