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 likely affected by imported timber from countries such as the U.S., Canada, and the Nordic countries, the domestic forest managers have been facing a large degree of future price uncertainty. Because of this, it becomes necessary to take the future price uncertainty into account within 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 approximation was then applied to value the Sugi (Cryptomeria japonica) and Hinoki (Chamaecyparis obtusa) forested land under stochastic log prices in order to search for an optimal rotation age. Our experiments with the proposed two state stochastic dynamic programming model showed that when the current log price is high enough to cover all costs, an optimal rotation age from the stochastic price and deterministic price models coincides, although the total expected present net value from management activities differs. Also it was shown that as the current log price decreases, an optimal rotation age derived from the stochastic price model becomes longer than that from the deterministic price model. If the current log price further decreases, then forest management will be adandoned, and the forest stand will be converted into alternative uses.