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Addressing forest fire risk in forest valuations

Authors: Jonathon Dash, Hamish Marshall, Cori Ham
Publication: New Zealand Journal of Forestry, Volume N.Z.J.For. 2023, Issue N.Z.J.For. 68(1) 2023, pp 10-16, May 2023
Publisher: New Zealand Institute of Forestry

Abstract: An extensive forest fire dataset covering plantations in a fire-prone region of South Africa across two decades was used to examine the impact of forest fires on estate value. Catastrophic forest fires are rare events and so conventional statistical methods are not viable for describing their occurrence. We applied methods from an alternative branch of statistics that has been specially developed for modelling rare and extreme events. We used a Monte Carlo style approach for integrating the model outputs into the estate’s woodflows. During each simulation stands were selected at random to be burned to replicate the expected fire regime. Once a stand was burned its yield projections were adjusted, resulting in changes to the estate’s woodflow and subsequently forest value. The woodflows incorporating the effect of the simulated fire regime were used in a discounted cash flow (DCF) model using costs and values provided by the forest manager. As no single fire regime could be predicted directly, 100 simulations of the estate value were used to study the impact of fire regime on estate value. The mean estate value reduction caused by the fire regime based on the historical fire database was 5.3%. The maximum simulated loss of value was 11.1% and the minimum was 2.4%. The simulation year within which the catastrophic burn occurred impacted the percentage of value lost. When a catastrophic fire event occurred early in the simulation value loss was greatest, whereas fire events in the distant future caused relatively little impact on value. Several scenarios were formulated to explore the impact of modifying the fire regime on estate value. The scenarios illustrated the effect of either reducing fire frequency through investment in fire preparation or reducing fire magnitude through investment in firefighting (Figure 1). This exercise displayed how the modelling framework developed can be used to examine different management options once a base case was established using the observed historical fire regime.