Timber harvesting as a part of the portfolio management: A multiperiod stochastic optimisation approach

A multiperiod stochastic optimization model is formulated for a land owner who can speculate between investing harvesting income in financial assets and postponing harvesting. This paper demonstrates the benefits from using a multiperiod model, the effects of cointegration on optimal portfolio, and the differences between the timber harvesting model and the standard financial portfolio optimisation model. The demonstrations are made partly by using a real Finnish forest and price data, and partly by using artificial data. In the real data example, the system is demonstrated using a case where it is assumed that the land owner has several mature forest stands, which can be harvested at any time during the next 3 years. Investment alternatives are stocks, government bonds, and bank deposits. The forestry returns were defined as a sum of exponential physical growth and stumpage price return. The chosen definition of forestry returns makes the model very useful, for example, when speculating on what speed of physical growth is needed to make forestry a competitive investment alternative when both returns and risks are considered.