Quantifying the effects of changing log prices on land values for forest valuations

Authors: J. Turland
Publication: New Zealand Journal of Forestry, Volume N.Z.J.For. 1990, Issue N.Z.J.For. 35(2) 1990, pp 22-26, Aug 1990
Publisher: New Zealand Institute of Forestry

---

Abstract: In forestry valuations determined using a discounted cashflow approach real costs are normally assumed to remain constant because real changes in costs are either unpredictable or not easily quantifiable. It is postulated in this report that an estimate of real forest land value change stemming from increased log price is predictable and should be incorporated in forest valuations if real log price escalations are to be used.
The methodology presented here for deriving land value changes is based on the hypothesis that since long-term real increase in log prices will result in higher land expectation values it is inevitable that the market (land owners) will perceive the change in profitability and will eventually transfer, in part, into higher land rentals. This in turn will have a negative feedback effect on the forest valuation.
It is noted that land rentals may not represent a large proportion of total forestry costs on a per hectare basis, but a slight increase in the rental compounded over the forest rotation represents a significant reduction in the profit margin. So in situations where the ownership of vast areas of forests is being separated from the land and log or timber product prices are expected to increase significantly, it is considered appropriate to account for this element in forest valuations.

---