The discount rate differential required for harvesting-by-dice-rolling to outperform optimal rotation planning

Although the cost of capital has enormous bearing on the financial performance of forestry investment projects, the dynamics of this factor of production are under-theorized in modern forest economic thought and its potential susceptibility to management is under-analyzed by forest managers, investors, and scholars. This study illustrates the importance of the cost of capital relative to the choice of rotation age by modeling the discount rate differential required for fully randomized harvesting strategies to yield the same expected capitalized returns as optimal rotation planning. For numerical simulations of radiata pine plantations in New Zealand and benchmark discount rates between 1% and 10%, a crude dice-rolling strategy required discount rate concessions from 0.31 to 3.35 percentage points to match the performance of optimal rotations. “Optimal” random harvesting strategies—with stochastic harvest probabilities specified to maximize expected value—required discount rate concessions lower than one percentage point across the entire range of benchmark rates. This paper concludes with an exploration of potential mechanisms through which the cost of capital could be endogenized in forest economic analysis and practical investment management.