Forest Economics

Economics is the study of how best to allocate scarce resources in order to derive the highest mix of benefits for the investor. Econometrics, on the other hand, is a field of economics that is focused on measuring and understanding how to respond to changing economic variables. In this portion of the My-Forest.com domain we will explore which economic variables are most important to us in the forest industry, and how to understand changes in these variables.

Our Economy

The stock market is up today and down tomorrow. The Federal Reserve Board raises long term interest rates one quarter, and lowers it another quarter. Employment is up, employment is down. All of these events are reactions to economic indicators by a variety of people. Investors rely on the underlying value of a company and its ability to produce income to determine what they are willing to pay for shares of a stock. Much is the same in the forestry industry where forest product firms have both an underlying value of the resource being held and an income producing potential for the future. These combined help to determine the value of forest product company stocks.

For the private forestland owner it is rare that one landowner or even a small group of landowners could influence the economy sufficiently to change national or even regional economic factors. For the most part, we are forced to respond to the economic variables that change around us. That does not mean we are helpless, but it does mean that we have to be vigilant in our pursuit of timing our activities to take advantage of selling when markets are high, and spending when costs are low. To quote the infamous forest Economist, Dr. Charley Mcketta (University of Idaho - Retired, Moscow), "When the price is high, let 'em fly, when the price is low, let 'em grow!".

While this may sound great, the challenge is to know what the markets are REALLY doing. In this section of the My-Forest.com web domain we will focus on a few items.

• First, we explore the indicators of the economy in the US market, specifically the Consumer Price Index, Producer Price Index, and Price Indexes specific to the forest products industry. With this information we can determine such indicators of current trends, inflation in the economy and in specific industries, and we can adjust current prices to be on an equal "footing" with past prices so that we can make meaningful comparisons.
• Next, we will explore price changes in the forest products industry, we do this through an examination of elasticity in supply and demand. The important concept of this is to understand how national factors influence the forest products markets.
• Finally, we will examine how we might use this information to apply it to our forestland investments. We can correctly manipulate the data to answer the question, "How much did I really profit from this investment, when I take inflation out of the numbers?" We did this in the chart at the top of this page. By adjusting 50 years worth of stumpage prices observed by the Idaho Department of Lands we were able to present the stumpage prices in "real" dollars adjusted for inflation.

© 2007 Kamiak Econometrics, a Division of Kamiak Ridge, LLC
All Rights Reserved