Sept. 4, 2001, 9:00-9:30. Income from Timber. The Economics of Mountain Forestry in Central Europe

Income from Timber:

The Economics of Mountain Forestry in Central Europe

by Walter SEKOT (Austria)

1. Wood production in mountain forests – an economic perspective

The significance of mountain forests is defined by the various benefits which are derived from them. Ultimately, sustainable mountain forestry can be associated with a constant flow of such benefits. It has to rely on a sound understanding of these benefits, their dependencies and interrelationships. Income is the main monetary benefit to be derived from mountain forestry and is directly linked to standard measures of regional and national economy. It can be applied as a measure of efficiency regarding the utilisation of the resource and also for addressing questions of equity in terms of allocation of the income among different stakeholders. Therefore, assessing the actual, potential and sustainable levels of income is a key issue of sustainable mountain forestry. Income from timber production is a major element to be investigated in this context, its significance depending on the respective market or use values of the various forest products and services.

A mountainous landscape is just one feature out of a broad range of characteristics classifying forests and forest enterprises. Mountain forestry therefore comprises a great diversity of settings and one must not expect generally applicable economic implications of mountain forestry apart from e.g.:

• the accessibility of the forest being impeded
• the choice of technologies for hauling the timber being restricted
• watershed management and erosion control requiring prudent management

Because of these, competitive disadvantages of mountain forestry in contrast to timber production in non-mountainous regions, are to be expected. On a regional scale, mountain forestry may be characterised more closely, the setting being determined by:

• the natural conditions of climate and geology
• the socio-economic circumstances

From a Central European point of view, mountain forestry can be associated with economic hypotheses, such as the following:

• higher surface area per forest enterprise
• higher percentage of coniferous species
• higher costs of making forests accessible
• higher costs of logging
• lower levels of value added per hectare
• lower levels of profitability

2. Measuring income from timber production

2.1. Items to be considered in terms of regional economy

Where forestry is organised in terms of the enterprises owning and managing the forest, most of the direct income constitutes the value added associated with the enterprises' activities. Value added comprises the income of the hired personnel, the profit of the company and the taxes paid by the enterprise. When applying a broader definition of forestry, as is the case with national accounts e.g., the value-added production of contractors and concessionaires also contributes to forestry income. Furthermore, an income in kind is created by the harvest and consumption of wood outside the market, be it by the forest owner himself or by the local population. Consequently, the following groups of beneficiaries have to be taken into account:

• forest owners
• hired personnel
• contractors
• concessionaires
• people using the timber for free

In terms of regional economy, multiplier effects should also be considered in order to account for induced income.

A basic approach for assessing the income derived from timber production within a certain mountainous area would be to measure or estimate the volume and the value of the timber harvested. This gross output reduced by any advance payments is a first measure of the income directly provided by forestry.

2.2. Monitoring value-added production by means of forest accountancy networks

At least in several European countries, there are networks of forest enterprises which enable the economic conditions of forestry to be monitored (see Hyttinen et al., 1997; Hyttinen and Kallio, 1998 a,b). Based on the accountancy data provided by the individual enterprises, it is possible to assess the value added of wood production and its respective components thoroughly and in a more or less representative manner.

Most networks are designed in order to provide average figures for regional groupings. If these regions can be classified as having a mountainous or a non-mountainous character, the peculiarities of mountain forestry can be addressed directly by comparing the results for the different regions. An alternative approach would be to classify the individual test enterprises according to characteristics of their terrain.

2.3. Assessing the sustainability of forestry income

Actual income may differ significantly from the level of sustainability. The notion of sustainability of forest management implies that natural growth and removals balance out each other in the long run. If extractions systematically exceed the rate of increment, there is clear evidence that the resource is being depleted. Consequently, actual income has to be corrected for overfellings in order to assess the sustainable income. The comparison of increment and felling volumes may be performed by means of monitoring concepts such as national forest inventories. At the enterprise level, one might refer to the allowable cut as a measure of sustainable yield.

However, a sustainable flow of volume does not necessarily imply a sustained income. Depending from the changing values of the products, as well as the values of the productive agents, value added may increase or decrease even when the quantity of output remains constant. Thus, falling product prices may necessitate an increase in productivity in order to sustain total output as well as income.

One possibility for addressing the sustainability issue in terms of income is to adopt a scheme of natural resource accounting such as the one proposed by the System of Integrated Economic and Environmental Accounting (SEEA). However, monitoring the value of the resource by means of net present-value calculations is still in an experimental stage (see European Commission, 1999).

3. Empirical evidence

Several accountancy networks that are operated in Austria, Germany and Switzerland allow to some extent for a characterisation of mountain forestry as compared to non-mountainous categories.

3.1. Network of farm forest enterprises in Austria

The national Farm Accountancy Data Network (FADN) recognises a few forestry items and does provide some basic data on forestry revenues. On average, 31% of all farmland is forest, proceeds from forestry contributing some 5.5% to the overall farm revenue. Respective data for the eight agricultural production regions clearly point to a higher significance of forestry in alpine and mountainous regions. In 1998, the alpine regions showed a share of forestry revenues of between 10% and 14% as compared to some 0.5% to 8% in the other regions.

The individual farms are classified as mountainous according to the degree of site irregularity. Increasing levels of site irregularity are associated with an increase of forest area in absolute and relative terms as well as with an increase in the share of forestry revenues. In total, mountain farms are characterised by a share of forest land of 42%, the forestry revenues contributing some 10% to the total farm returns. The respective figures for those farms classified as not being mountain farms are 16% as to the share of forest area and some 2% in terms of revenues.

A small sub-sample of the FADN provides additional data on forestry costs and revenues. Those test farms adhering to alpine production regions may be associated with mountain forestry. Respective averages can thus be compared to the results obtained from the other farm forests as exemplified in Table 1. The results indicate substantial differences between the two groupings. Productivity in terms of allowable cut and actual fellings is considerably less in the Alps, resulting in lower revenue and farm income per hectare. Further differences pertain to the input of family labour and the productivity of logging operations.

Table 1: Average figures for alpine farms as compared to a non-mountainous production region (1998 data, 1 Euro = 13.7603 ATS)

3.2. Network of large private forest enterprises in Austria

Private forest enterprises exceeding a forest area of 500 ha are monitored by a specific accountancy network (see Sekot and Rothleitner, 1999). Three of the six forestry production regions can be classified as mountainous. Apart from such a regional classification, it is also possible to group the test enterprises according to the terrain for hauling. For the following comparison, those enterprises with more than 40% of their forest area being inaccessible for skidding, thus necessitating cable logging systems, are regarded as mountainous. Table 2 provides ratios between mountainous and non-mountainous groupings according to the two alternative methods of classification. The calculation of the ratios is based on data from 1997. A comparison of various ratios is given in Table 3.

Table 2: Characteristics of mountainous enterprises given in percent of the values of non-mountainous enterprises according to two alternative classification schemes

Table 3: Comparison between mountainous (mount.) and non-mountainous (non-mount.) categories of forest enterprises according to two alternative classification schemes (values in %)

The results confirm that there are significant differences between mountainous and non-mountainous forest enterprises. The regional classification seems to be a good proxy for the alternative categorisation based on terrain classification as shown by the direct comparison exemplified in Table 2.

Value added comprising all income incurred by the enterprise's activities is a most relevant measure when assessing total income at enterprise level. The empirical example indicates that income per m3 and, particularly, income per ha is considerably less in mountain forestry than in non-mountainous groupings.

3.3. Network of farm forest enterprises in Baden-Württemberg

Small-scale forestry on farms in the German province of Baden-Württemberg has already been monitored by means of an accountancy network for 20 years (see Brandl et al., 1999). The results refer to regional groupings of the test farms. One of the regions, namely the 'Schwarzwald' has a distinctive mountainous character, whereas the others can be classified as non-mountainous. Table 4 provides a comparative analysis of the data pertaining to the accounting period 1997/1998.

In this case it is not the individual feature but the pattern of items which characterises mountain forestry. In essence, it is the significance of forestry in terms of area which clearly distinguishes the mountainous region from the others. Many other features, however, differ to such an extent in the other three regions, that the mountainous region is not characterised by extreme values.

Table 4: Characteristics of farm forestry in a mountainous region (1) as compared to the non-mountainous regions (2, 3 and 4) in Baden-Württemberg (1998) (1 € = 1.95583 DM)

3.4. Network of public forest enterprises in Switzerland

In Switzerland, forest ownership is dominated by provincial, municipal and community forests. A considerable number of these enterprises rely on the services of a central agency for their cost accounting, thereby contributing to a data base which allows for the computation of regional averages. The region 'Alpen' typically comprises mountainous geographical units, whereas 'Mittelland' is characterised by a lowland landscape. The third region, 'Jura', is of an intermediate character: It is a mountainous region where, on the one hand, the mountainsides have steep slopes, and on the other hand, there is a great plateau of a comparatively low altitude.

Table 5 comprises a set of features characterising these three regions based upon 1998 data. The alpine region shows remarkable differences to the other two regarding practically all of the features considered, thereby emphasising several of the assumptions associated with mountain forestry. Income is restricted by the low productivity of alpine forests and relies to a considerable extent on subsidies.

Table 5: Characteristics of public forest enterprises in the mountainous region (1, 'Alpen') as compared to the lowland region (2, 'Mittelland') and the intermediary region (3, 'Jura') in Switzerland (1998)

4. Future research needs

For dealing profoundly with the question of sustainable income from mountain forestry, considerable gaps still have to be bridged. To date, mountain forestry has hardly established itself as a unit for economic reporting on forestry. Existing accountancy networks should be upgraded in order to allow for a better differentiation. A regional breakdown of national accounts for forestry could also enhance the availability of respective data. Common definitions for the delimitation of mountainous and non-mountainous forestry, as well as agreed protocols for data collection, are a prerequisite particularly for international comparisons.

In principle, measuring the actual income from mountain forestry is a more or less straightforward exercise from a methodological point of view. However, there is still a considerable lack of empirical background, e.g. in regard to the interdependencies of levels and structures of income or appropriate multipliers for different settings. Furthermore, the measurement of income is no end in itself but has to be linked to questions like the viability of mountainous farm forest enterprises or communities in mountain regions. Finally, assessing the level of sustainable income for different settings and under various circumstances requires considerable research efforts.

References:

Brandl, H. ; Hercher, W.; Löbell, E.; Nain, W.; Olischläger, T. and Wicht-Lückge, G. (1999) 20 Jahre Testbetriebsnetz Kleinprivatwald in Baden-Württemberg. Forstwissenschaftliche Fakultät der Universität Freiburg und Forstliche Versuchs- und Forschungsanstalt Baden-Württemberg, Freiburg, 122 pp.

European Commission (ed.) (1999) The European Framework for Integrated Environmental and Economic Accounting for Forests: Results of pilot applications. European Commission, Luxembourg, 57 pp.

Hyttinen, P.; Kallio, T.; Olischläger, T.; Sekot, W. and Winterbourne, J. (1997) Monitoring Forestry Costs and Revenues in Selected European Countries. European Forest Institute, Joensuu, 83 pp.

Hyttinen, P. and Kallio, T. (eds.) (1998 a) Cost Accountancy in European Farm Forest Enterprises. European Forest Institute, Joensuu, 146 pp.

Hyttinen, P. and Kallio, T. (eds.) (1998 b) Sampling Schemes for Monitoring the Socio-Economics of Farm Forestry. European Forest Institute, Joensuu, 219 pp.

Sekot, W. and Rothleitner, G. (1999) Betriebsabrechnung für forstliche Testbetriebe. Institut für Sozioökonomik der Forst- und Holzwirtschaft, Wien, 128 pp + append.

Suggested Further Readings:

Sekot, W. (2000): Income from Timber: The Economics of Mountain Forestry in Central Europe. In: Price, M.F.; Butt, N. (eds.): Forests in Sustainable Mountain Development: A State of Knowledge Report for 2000. IUFRO Research Series No. 5. CABI. Oxon. S. 239–247.

Mantau, U.; Merlo, M.; Sekot, W.; Welcker, B. (eds.) (forthcoming/in print): Recreational and Environmental Markets for Forest Enterprises. CABI. Oxon and New York