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2002
By Kevin Zobrist
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Print a PDF copy of Fact Sheet #11
Washington's Forests and Fish
Rules include significant new requirements for forest roads.
Forest landowners, regardless of size, are required to prepare
a Road Maintenance and Abandonment Plan (RMAP) that outlines
how their forest roads will be brought into compliance with
the new regulations. Landowners must submit an RMAP before harvesting
timber, and all landowners must submit an RMAP by 2005. Any
road upgrades prescribed by the RMAP must be completed by 2015.
Road upgrade cost estimates from the Small Business Economic
Impact Statement (summarized in Fact Sheet #4) indicate that
compliance with the new requirements could be expensive. This
fact sheet demonstrates the potential economic hardship of road
upgrade costs for individual small forest landowners in Western
Washington. |
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Road upgrade costs can cause economic hardship in two ways. The road
upgrade costs may significantly reduce a landowner's return on his
or her forestry investment. This is reflected by a reduced net present
value (NPV) for the rotation impacted by the upgrade costs. The road
upgrade requirements also pose a cash flow problem. Forestry is a
unique enterprise because of periodic and long-term nature of the
income it yields. Because of this, landowners may not have adequate
cash available at the time of the road upgrades. This may force some
landowners to harvest their forests sooner than they otherwise would.
Other landowners may have to harvest more than they otherwise would.
Landowners without sufficient timber liquidity to raise the cash necessary
for the road upgrades may have to borrow money and pay back the costs
of the upgrades plus interest out of future timber revenues.
The extent of economic hardship depends on several factors, such
as the size of the property, the cost of the road upgrades, and
when in the rotation these costs are incurred. Several examples
are presented below of how these factors influence the economic
impacts of road upgrade requirements on small landowners. Economic
impacts are illustrated both as a percentage loss in future timber
revenue from the compounded cost of the road upgrades and as a percentage
reduction in the NPV of the impacted rotation.
The examples are for a theoretical western Washington landowner
on site 120. The analysis was done using a real interest rate of
5%. Other assumptions include a $239/acre planting cost at the beginning
of the rotation, a $75/acre pre-commercial thin cost at year 15,
$1000/acre of net commercial thin revenue at year 35, $14,000/acre
of net revenue from final harvest at year 50, and $12/acre/year
of annual administrative costs. All figures are pre-tax and assume
no land rent costs.
Note that the Forestry Riparian Easement Program attempts to mitigate
riparian buffer costs greater than the 11% industry average but
did not consider road upgrade costs. The charts below suggest many
situations will greatly exceed this threshold.
Figure 1: Impact of compounded road upgrade costs on net timber
harvest revenue. This shows the percentage of net future timber
revenues that would be lost to pay off money borrowed for road upgrades.
Because of high carrying costs, road upgrades done earlier in the
rotation will have a greater impact. Losses greater than 100% reflect
a scenario in which the road upgrades cost more than the timber
on the property is worth.
Figure 2: Impact of road upgrade costs on NPV of timber investment.
This shows the percentage loss in NPV for the timber rotation in
which the road upgrade costs are incurred. This reflects the decrease
in performance of the landowner's investment in forestry. Because
of high carrying costs, road upgrades done earlier in the rotation
will have a greater impact. Depending on the cost of the impact,
though, even upgrades done at the very end of the rotation can have
a high impact on NPV. Losses over 100% reflect a scenario in which
the landowner's forestry investment no longer achieves a 5% rate
of return.
Figure 3: The combined impacts on NPV of road upgrade costs
and a 20% harvest revenue reduction due to riparian buffers.
A 20% harvest reduction from riparian buffers (roughly the average
impact on small landowners on the Westside) would reduce NPV by
an additional 30%. A high buffer impact combined with high road
upgrade costs could be economically devastating to a small landowner.
Discussion:
The impact of road upgrade costs depends heavily on how much the
upgrade cost is per forested acre. The Small Business Economic Impact
Statement estimates the cost of a single crossing over a fish-bearing
stream to be $40,000 (Perez-Garcia, et al., 2000). Thus, one crossing
alone on a 20-acre property would represent an upgrade cost of $2,000/acre.
For a very small landowner with several significant upgrades, the
total cost per acre could be very high. Larger landowners will tend
to have more road miles and stream crossings, and thus they will
have higher upgrade costs. However, larger landowners can average
these costs over a larger acreage base. Some small landowners can
be expected to have much higher per-acre costs resulting in disproportionate
impacts across all owners.
The economic impacts also depend on the timing of the road upgrades.
Because of carrying costs, if road upgrades have to be done early
in the rotation, the NPV of that rotation will be significantly
diminished. If a landowner has to borrow money to upgrade roads
early in the rotation, the compounded cost may significantly diminish
future revenues. If upgrade costs are high, the compounded costs
will likely exceed future timber revenues, indicating that some
landowners will face upgrade costs that are greater than the value
of their timber assets.
The worst-case scenario is a landowner who has high upgrade costs,
small acreage, and has to do the upgrades early in the rotation.
In the above example, a $5,000/acre upgrade in year 10 of the rotation
would cause a 338% reduction in the NPV of that rotation, making
forestry a poor investment for that landowner. The costs of that
upgrade carried to the end of the rotation would be almost four
times greater than the total net timber revenue produced. In contrast,
a low per-acre upgrade cost incurred late in the rotation would
have much smaller economic impacts. There will likely be a broad
disparity of impacts across different landowners.
It is important to note that the above examples represent a Westside
landowner managing even-aged timber on a relatively high site. A
companion fact sheet (FS#12) examines the potential economic impacts
of RMAPs and associated road upgrade costs on Eastside landowners.
Also note that the economic impacts of road upgrade requirements
are compounded by riparian buffers. As shown in Figure 3, buffer
impacts combined with road upgrade costs can be a serious economic
blow to a small landowner. RTI has two fact sheets (FS#2 and FS#3)
available from www.ruraltech.org that discuss riparian buffer impacts
in more detail for both Western and Eastern Washington.
Depending on the cost of road upgrades, the timing of road upgrades,
and other combined impacts from the Forests and Fish Rules, it may
be difficult for many small forest landowners to remain economically
viable. In some cases, road upgrade costs may exceed the combined
value of both land and timber. If non-timber values exist, landowners
may find it more attractive to liquidate their timber and convert
the land to other uses to minimize their losses. This is significant
given current concerns about the rate of non-industrial private
forestland conversion in Washington, which the Department of Natural
Resources estimates to be 100 acres/day (Our Changing Nature, 1999).
Information in this fact sheet is provided by
the Rural Technology Initiative. For more information, please visit
the RTI website at www.ruraltech.org or contact:
Kevin Zobrist
University of Washington
Box 352100
Seattle, WA 98195-2100
(206) 543-0827
kzobr u.washington.edu
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