Evaluating timberland investment opportunities in the United States: A real options analysis

Abstract

In recent years, timberland prices in the United States have been chased to an unprecedentedly high-level owing to the restructure of the forest industry, whereas stumpage prices have been flat or declining over the same time period, primarily due to the economic downturn. This seems to make timberland investments more expensive and less rewarding. In this study, the real options approach is applied to analyze the timberland market. Results from the numerical example of a hypothetical loblolly pine plantation in the state of Georgia show that it is not optimal to make new investments with current timberland and stumpage prices. For existing landowners, however, stumpage prices fall close to the mothballing threshold. This implies less timber harvesting activities. These results can help investors make better capital budgeting decisions in the timberland industry