Modeling nonindustrial private forest landowner behavior in face of woody bioenergy markets
Transcript of Modeling nonindustrial private forest landowner behavior in face of woody bioenergy markets
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Modeling nonindustrial private forest landowner behaviorin face of woody bioenergy markets
Andres Susaeta a,*, Pankaj Lal b, Douglas R. Carter c, Janaki Alavalapati d
a 315 Newins Ziegler Hall, School of Forest Resources and Conservation, University of Florida, Gainesville, FL 32611, PO Box 110410, USAbMallory Hall 358 N, Earth and Environmental Studies Department, Montclair State University, Montclair, NJ 07043, USAc357 Newins Ziegler Hall, School of Forest Resources and Conservation, University of Florida, Gainesville, FL 32611, USAd313 Cheatham Hall (0324), Department of Forest Resources and Environmental Conservation, Virginia Polytechnic Institute and State
University, Blacksburg, VA 24601, USA
a r t i c l e i n f o
Article history:
Received 22 February 2012
Received in revised form
19 June 2012
Accepted 29 July 2012
Available online 6 September 2012
Keywords:
Bioenergy
Landowners
Elasticities
Profit function
Policy simulation
* Corresponding author. Tel.: þ1 352 846 087E-mail addresses: [email protected] (A
(J. Alavalapati).0961-9534/$ e see front matter ª 2012 Elsevhttp://dx.doi.org/10.1016/j.biombioe.2012.07.
a b s t r a c t
This article analyzed the impacts of emerging woody bioenergy markets on the behavior of
nonindustrial private forest (NIPF) landowners in the state of Florida, United States. A
seemingly unrelated regression (SUR) approach was used to assess the supply of
sawtimber, pulpwood, woody bioenergy and demand for labor. Data was gathered from
official statistical reports of the forestry sector in Florida spanning 1970 to 2006. The
econometric analysis suggested that consistent own price elasticities could be obtained
from the SUR approach. The results indicated that an increased price of woody bioenergy
implied an increase in the production of pulpwood and demand for labor. Results also
suggested that forest landowners might financially benefit from emerging bioenergy
markets.
ª 2012 Elsevier Ltd. All rights reserved.
1. Introduction A well-established woody biomass market can decrease the
Woody biomass for energy production has recently gained
attention in the United States (U.S.) because it contributes not
only to the economic development and growth and reduction
of the dependency on foreign energy markets, but also to the
mitigation of greenhouse gas (GHG) emissions [1e4]. It is
considered a better alternative than starch based energy
production as it has fewer risks associated with food security
and has higher net energy balance ratios and greater
greenhouse gas reduction potential [5,6]. Also, the removal
of excess biomass from forests for energy production
might decrease the risk of wildfires and pest outbreaks [7,8].
7; fax: þ1 352 846 1277.. Susaeta), [email protected]
ier Ltd. All rights reserved018
probability of converting forestlands to other uses and allow
forest landowners to invest in treatments that in turn could
lead to improved forest health [9]. Incorporating socioeco-
nomic and environmental benefits might position woody
biomass as a viable option for energy production [3].
A woody biomass based bioenergy market development
could act as additional avenue source for landowner’s
stumpage, along with pulpwood and sawtimber industries.
Nonindustrial private forest (NIPF) landowners own around
70% of the private forestlands in the U.S. South [10] and are
expected to realize higher economic returns with the inclu-
sion of woody biomass as a forest product [11,12]. The sawmill
ontclair.edu (P. Lal), [email protected] (D.R. Carter), [email protected]
.
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industry might benefit from bioenergy development due to
higher prices for secondary products such as sawdust and
chips demanded by bioenergy markets [13,14]. Potential
competition for raw material may exist between bioenergy
plants and wood processing plants in the U.S. South [15,16].
However, the empirical evidence from Europe has showed
that sawtimber markets would less likely be affected by new
bioenergy markets compared to pulpwood markets [13].
Furthermore, pulpmills might also benefit from bioenergy
market development as energy can be generated along with
the production of pulp and paper products [9].
NIPF landowners’ views and preferences about their
forests have evolved over time [17,18]. Primary management
decisions taken by NIPF landowners are influenced by non-
timber activities conducted in their lands such as aesthetics,
family legacy and privacy [10]. Factors that shape the future
choices of forest use depend on factors such as: policy and
economic environment; type of forests; and landowner
socioeconomic characteristics and attitudes [19]. Heteroge-
neity of NIPF landowners due to different forest management
objectives may affect their willingness to supply woody
biomass [20]. Although little information exists about NIPF
landowners’ attitudes towards woody biomass harvesting
behavior for bioenergy, recent literature helps in the identifi-
cation of critical factors affecting landowners’ willingness to
supply woody biomass for bioenergy. Price of biomass,
transaction costs incurred during biomass harvest and
removal, and existence of goals other than biomass manage-
ment in terms of biodiversity and recreation act as critical
motivational factors determining the availability of woody
biomass for bioenergy [21]. Joshi and Mehmood [22] reported
that landownerswithwildlifemanagement goals and younger
landowners with relatively large forestland areas are more
likely to supply biomass for bioenergy. Joshi and Mehmood
[23] segmented southern NIPF landowners into three cate-
gories (bioenergy friendly conservationists, multiple objective
landowners, and passive forest landowners) based on
management goals and willingness to supply woody biomass
for bioenergy. They found that landowners who manage their
forests not only for timber but for other benefits have the
greatest willingness to supply woody biomass.
Different approaches have been used to model NIPF land-
owners’ behavior. Previous work primarily focused on NIPF
landowners’ harvesting decisions and how these were related
to market conditions, timber characteristics and landowner
preferences. However, newer studies have incorporated non-
timber activities in the decision mix and how these in turn
can be used to predict landowners’ behavior [17,18]. Beach
et al. [24] and Pattanayak et al. [25] provide a reviewof different
microeconometric studies pertaining to NIPF management in
the U.S. In general, all these models explore the underlying
theoretical structure of landowner behavior within the profit
and/or utility maximization framework. Profit maximization
assumes than landowners maximize the discounted profits of
producing only timber over time while utility maximization
considers the value the benefits of non-market goods gener-
ated by forestlands along with the value of timber [17,24]. In
general, studies conducted in the U.S. South use the latter
approach and are mostly related to survey based studiesdre-
duced form regressions for binary choice models [24].
Two emblematic studies in the U.S. South using
a restricted profit function approach were conducted in the
nineties by Newman and Wear [26] and Wear and Newman
[27]. The former modeled the production behavior of indus-
trial and NIPF landowners using a restricted profit function
while the latter modeled regional forestry production to
assess short and long run production possibilities. However,
hardly any study has modeled landowner behavior in face of
woody bioenergy markets, under the profit maximization
framework, i.e., assessing the theoretical underlying structure
of the profit function for a stumpage market model that
includes woody bioenergy. In the Scandinavian market
context, a few studies such as Ankarhem et al. [28] and Geijer
et al. [29] havemodeled the effect of price of biomass on forest
landowners’ behavior through profit function maximization
approach.
It has been suggested that utility maximization can be an
alternative approach to model NIPF landowners’ behavior
[24,30]. While empirical evidence has shown that NIPF land-
owners recognize the tradeoffs between timber management
and non-timber amenities [26], they respond consistently to
market conditions such as prices, costs, and interest rates in
a way that is consistent with profit maximization [31]. In this
study, we considered profit maximization approach for an
illustrative forest landowner due to the following reasons:
around 60% of NIPF landowners harvest commercially trees
for their lands [10], economic benefits accruing from timber
are critical to encourage NIPF landowners to supply costly
non-timber benefits, and this economic framework is consis-
tent with long term economic outlook since majority of the
landowners are price takers and supply undifferentiated
forest products [32].
In this backdrop, we used a profitmaximizing approach for
forest landowners in three product markets comprising of
bioenergy, pulpwood, and sawtimber markets. We assumed
a short run landowner profit function, and analyzed its theo-
retical structure and investigated assumption of symmetry,
jointness in production, and separability of the landowners’
profit function. Non-inclusion of bioenergy markets in the
previous studies using profit maximization approach for
forest landowners can be largely attributed to lack of formal
woody bioenergy markets in the southern U.S. We recognized
this limitation and tried to mimic the existence of bioenergy
markets by utilizing forest and mill residues as a proxy for
woody bioenergy. Our rationale was based on the literature
suggesting that conventional forest products harvest residues
and mill residues can act as energy feedstocks [33,34].
Apart from testing the basic properties of profit maximi-
zation functions, we also simulated a policy scenario in which
we imposed a price support policy for bioenergy. Government
policy scenarios such as subsidies for woody biomass based
energy are expected to increase development of the bioenergy
industry by incentivizing the biomass supply through more
advantageous competitive prices [35]. Our policy simulation
scenario followed an implicit assumption that understanding
NIPF landowners’ behavior in light of bioenergy markets is
critical for the design of efficient policy instruments [36]. The
importance of this study is further accentuated by the fact
that policies that promote production of woody biomass for
energy use have not totally been developed [37]. Thus, this
b i om a s s a n d b i o e n e r g y 4 6 ( 2 0 1 2 ) 4 1 9e4 2 8 421
type of policy analysis will add to the research literature
focusing on nascent bioenergy markets and also assist in
effective policy design and implementation.
We used time series data for the state of Florida in our
study. The rest of the paper has been organized as follows. In
Section two we outlined the theoretical specification model
and econometric specification. In Section three we described
the data used in our study. In Section four we reported the
results of testing basic structure of profit functions for forest
landowners. In section five we reported the estimated elas-
ticities and discussed the findings of a policy simulation.
Finally, we presented the conclusions and future research
opportunities.
2. Theoretical model and econometricspecification
We developed a three sector marketmodel in Florida whereby
landowners can sell stumpage to wood fuel and power
industries along with traditional forest product industries
such as those engaged in sawtimber and pulpwood produc-
tion.We assumed a restricted generalized Leontief profit (GLP)
function to model the production behavior of NIPF landowner
which provides a second order approximation to an arbitrary
twice differentiable true profit function [38]. The Leontief
profit function has been widely adopted for econometric
analysis of supply and demand in forest sector [26,39]. We
chose this flexible functional form due to theoretical and
empirical criteria: it does not require having restrictions in the
parameter when linear homogeneity is imposed; and input
substitutability and supply and demand functions are easier
to determine compared to translog profit function [40e42].
The dual profit function p ( p, w, v)dwhere p and w are
respectively, the vectors of output and input prices, and v is the
fixed vector of inputs and outputsdsatisfies the following
properties [43]: non-negativity, non-increasing in w, non-
decreasing in p, convex and continuous function in ( p,w),
homogenousofdegree 1 in ( p,w) (constant returns toscale inall
factors), and differentiable in p and w. The dual specification
implies that thestructureofacost functioncanbe inferredfrom
profit function and vice versa [43]. In addition, the restricted
GLPF must be linear in parameters and have a functional form
that satisfies the appropriate regularity conditions over a range
of values for the independent variables, given a simple set of
inequalities restrictions on the unknown parameters [38].
We posited that a landowner requires labor and capital
inputs to produce three outputs: sawtimber, pulpwood and
woody bioenergy. Chip-and-saw was not included in our
analysis due to lack of historical data for this forest product.
The estimated short run profit function p(ws, wp, wb, wl, K )
thus became:
p ¼Xi
Xj
aijw1=2i w1=2
j þXj
akjwjKþ εp; i; j ¼ s;p;b; fl (1)
Wherews, wp, wb represented the output prices of sawtimber,
pulpwood and woody bioenergy, wl was the labor wage in
forestry, K was quasi-fixed capital in forestry, εp represented
the disturbance term for the profit function, and aij and akj
were the coefficients of the profit function to be estimated. As
it is difficult for forest landowners to adjust the timber
production in a short period of time, capital is typically
assumed as quasi-fixed input in the forest sector [44,45]d
price of capital ¼ 0. Operating cost of capital was also ruled
out. Although it was beyond the scope of our paper, some
studies have acknowledged the adjustment of capital over
time once a threshold is reached [27,46,47].
It was also assumed that NIPF landownersmaximized their
profits under perfect competition, an assumption that has
been empirically proved in context of the forestry sector
[48e50]. Symmetry was imposed, i.e., aij ¼ aji for all i and j.
Applying Hotelling’s lemma on the profit func-
tionsddifferentiating the profit function with respect to the
input and output pricesdwe obtained the supply and demand
function gradients, i.e., the short run supply of sawtimber ( ys),
pulpwood ( yp), and woody bioenergy ( yb), and the demand for
labor (eyl):
ys ¼Xi
asi
�wi
ws
�1=2
þaskKþ εsn i ¼ s;p;b; l (2)
yp ¼Xi
api
�wi
wp
�1=2
þapkKþ εpn i ¼ s;p; b; l (3)
yb ¼Xi
abi
�wi
wb
�1=2
þabkKþ εbn i ¼ s;p; b; l (4)
�yl ¼Xi
ali
�wi
wl
�1=2
þalkKþ εln i ¼ s;p; b; l (5)
Where εsn, εpn, εbn, and εln represented the disturbance terms
for the sawtimber, pulpwood, woody bioenergy and labor
equations, respectively. The subscript n of each disturbance
terms represented the number of time series observations per
equation. Disturbance terms were assumed to be additive and
normally iid, with E(εin) ¼ 0, Eðε0iεjÞ ¼ sij and E(ε0ε) ¼ U. All right
hand side variables were assumed to be exogenous. Following
Chambers [43], the supply functions are increasing in output
prices, the demand function is non-decreasing in input pri-
ces, supply and demand function are homogenous of degree
zero in input and output prices, and cross price effects are
equal.
The disturbances terms can be correlated as input and
output prices for supply and demand equations were taken
from the same dataset. Thus, Zellner’s seemingly unrelated
regression (SUR) approach was used to determine the supply
and demand equations because it yields asymptotically more
efficient estimators than traditional single equation least
squares estimators when disturbances are mutually corre-
lated [51]. By solving the system of equations, we obtained the
coefficients of the restricted profit function. Short run own
and cross price Marshallian elasticitiesd eii and eij, respec-
tively d was also determined from the system of equations
(Eqs. (2)e(5)). These elasticities were as follows:
eii ¼ �12
Piaij
�wj
wi
�1=2
Yii; j ¼ s; p; b; l; isj (6)
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aij
�wj
�1=2
eij ¼ 12
wi
Yii; j ¼ s; p;b; l; isj (7)
3. Data construction
The data used for the study were primarily compiled from
official statistical reports of the forestry sector in Florida
spanning from 1970 to 2006. Table 1 shows the input and
output variables used in the study and their respective sour-
ces. As historical time series information regarding woody
bioenergy prices was not available, forest residues (wood
chips and low value wood produced in the forests), and wood
residues (mill chips and other industrial products) were
utilized as a proxy since these products have been tradition-
ally used to generate electricity [58e62]. This is also reflected
by two largest facilities wood pellet production facilities in the
worlddCottondale, Florida and Selma, Alabamadwhich use
wood chips as main inputs [63]. Mill chips are a by-product of
other wood products such as lumber, thus the supply of
woody bioenergy would be somewhat a function of the supply
of lumber. We acknowledge this limitation and the implica-
tions for the results, however, the level of aggregation of the
historical data does not allow for gauging the proportion of co-
products in the woody bioenergy product.
The yearly hours of employment in the logging industry
was used as a proxy for the quantity of labor [54]. Pine pulp
chip prices were used as a proxy for woody bioenergy prices.
All prices were deflated to 1997 dollars. Table 2 shows the
descriptive statistics of the data.
4. Testing basic structure of profit function
Table 3 presents the coefficients, bootstrapped standard
errors (SE) and statistical significance of the system of equa-
tions. Bootstrapping (100 replications) was employed to obtain
the heteroskedasticity and autocorrelation consistent covari-
ance matrix. Although it has been suggested that bootstrap
standard errors and asymptotic standard errors may provide
similar results [64], we chose the former technique since these
estimates tend to perform better in small and moderate
Table 1 e Sources of information for input, outputs andprices.
Variables Variable/proxy description Source
Sawtimber ( ys) Sawlog production [52]
Pulpwood ( yp) Pulpwood production [53]
Wood fuels ( yb) Wood residues
(wood chips and mill residues)
[52,53]
Labor ( yl) Hours of employment in logging [54]
Sawtimber price (ws) Stumpage price for sawtimber [55]
Pulpwood price (wp) Stumpage price for pulpwood [55]
Wood fuel price (wb) Pine pulp chip prices [56]
Wage labor in
forestry (wl)
Earnings for logging camps
and contractors
[55]
Forestry capital (K ) Standing inventory [57]
samples than conventional asymptotic standard errors
[65e68]. Furthermore, bootstrap confidence intervals tend to
reflect the true nature of the sample distribution [69].
Regardless of the approach, it is not the scope of our research
to establish a comparison between both types of standard
errors. Only 45% of the coefficients were statistically
significant.
An R square proposed by McElroy [70] was used to test
overall model goodness of fit:
R2 ¼ 1�ε0�P�1 4I
�s
y0�P�1 4At
�y
(8)
Where y is the matrix of dependent variables, ε is disturbance
term matrix, S�1 is the residuals covariance matrix, I is the
identity matrix and At is a matrix that has transformed the
dependent variables into deviation from their means. The R
square can also describe an F statistic for the overall model
significance:
F ¼ R2
1� R2
nq�PikiP
iki � q(9)
Here n is number of observations, q the number of equations
andP
iki the total number of coefficients in the system of
equations. The estimated R2 and F values were 0.610 and 12.5
respectively. The F statistic was significant at p ¼ 0.01. The
independence of the disturbance terms was tested through
Breusch Pagan test, where null hypothesis of independence
was rejected at p ¼ 0.01, confirming the adequacy of the SUR
approach. The symmetry condition was tested by the unre-
stricted model i.e., aijsaji for all i and j, where Chi square
statistic at p < 0.001 indicated rejection of the null joint
hypothesis that unrestricted coefficients are equal in magni-
tude. Thus, the assumption of symmetry was justified in the
analysis. As expected, the profit function gradients were
positive in terms of prices of sawtimber, pulpwood, and
woody bioenergy and negative for labor at all sample points.
Likewise, own price elasticities were positive for outputs and
negative for inputs at all sample points.
Another crucial assumption of profit maximization is
convexity of the profit function. The convexity of the profit
function assumption was analyzed by examining whether
the Hessian matrix of the profit function evaluated at the
variable mean values is positive definite. The convexity
property was not satisfied as one of the four eigenvalues of
the Hessian matrix had non-positive values. Failure in
achieving convexityda frequent problem in the context of
profit function studies [71,72]dmight imply not having
strictly positive and negative gradients for supply of outputs
and demand for inputs, respectively [73]. Inconsistent profit
maximizing behavior [74], increasing returns to scale,
complementarity of input factors, low quality data and
model misspecifications [39] can also be attributed for failure
of convexity assumption. Furthermore, the underlying true
function properties might not be inherited by the approxi-
mating function [75]. In our particular analysis K is a quasi-
fixed input which means that complementarity of input
factors (the relationship between labor and capital in the
short run) cannot be investigated.
Table 2 e Descriptive statistics.a
Variable Unit Mean Standard deviation Minimum Maximum
ys Cubic decameter (dam3) 3520 1180 1240 5100
yp 6640 954 4790 8530
yb 1700 533 869 2900
yl Hours per year (h y�1) 2080 62.7 1950 2220
ws Dollar per cubic meter ($ m�3) 58.6 17.9 31.6 92.2
wp 8.21 0.593 6.84 9.98
wb 3.75 0.717 2.61 5.56
wl Dollars per hour ($ h�1) 58.6 17.9 31.6 92.2
K Cubic decameter (dam3) 198,000 11,900 164,000 209,000
a All values (and hereafter) are reported with three significant digits.
b i om a s s a n d b i o e n e r g y 4 6 ( 2 0 1 2 ) 4 1 9e4 2 8 423
A weaker form of convexity curvature is quasi-convexity
which implies that the profit function has convex level sets
[76]. A necessary and sufficient condition for quasi-convexity
in a profit function is that the number ( g) of non-negative
eigenvalues must be equal or greater than g�1 [75]. As only
one of the four eigenvalues was negative thus quasi-convexity
was achieved in our analysis. Additionally, the diagonal of
principal minors of the Hessian matrix were positive in 100%
of the sample points, suggesting that output supply and input
demand equations showed their expected own price elasticity
signs at all sample points. Based on these findings and
evidence from previous studies [39,74], we relaxed the
convexity condition imposed on the profit function. This
relaxation means that one should be cautious when inter-
preting our results. However, this relaxation is in sync with
studies such as Lau [77], who suggested that relaxation of this
assumption might be needed to incorporate effects of factors
such as increasing returns of scale on technology. Imposing
convexity in a Leontief profit function tends to be more
restrictive than other flexible functional forms such as the
normalized quadratic function because the second derivatives
of the profit functions depends on the estimated coefficients
Table 3 e Coefficients and standard errors (SE) of restricted pro
Sawtimber
Coefficient Estimate Bootstrapped SE
asp �465 434
asb �319b 169
asl 94.8 94.3
ask 0.0814a 0.00596
ass �12400a 1180
Woody bioenergy
Coefficient Estimate Bootstrapped SE
abs �319b 169
abp 337 845
abl 218 348
abk 0.0355a 0.00879
abb �4910a 1480
a Significantly different from zero at 1% level.
b Significantly different from zero at 10% level.
and variables [39]. Furthermore, it rules out the complemen-
tarity between pairs of inputs [72].
We also tested non-jointness in production which implies
that supply of a good depends on its own price change and not
by other goods’ prices [78,79]. Following Lau [79], a necessary
and sufficient condition for a production function to be non-
joint in inputs is vp2/vpipj ¼ 0 where pi and pj represent the
output prices. This implies testing whether asp, asb, apv are
significantly different from zero or testing if production of
sawtimber, pulpwood and woody bioenergy are independent
of each other. The Chi square ( p < 0.001) rejected non-
jointness in production for sawtimber, pulpwood and woody
bioenergy. Jointness in production might be attributed to
reasons such as increased cost complementarities among
outputs suggesting that separate production is less costly than
producing them together, generating diseconomies of scope
and causing potential inefficiency in the quality or quantity of
the output [80]. Similar to the agricultural sector, jointness in
production is a regular event in forestry due its multifunc-
tional nature, technological interdependence, allocatable
fixed factors such as land and non-allocatable inputs such as
labor [78,81e84].
fit function.
Pulpwood
Coefficient Estimate Bootstrapped SE
aps �465 434
apb 337 845
apl �607 669
apk 0.058a 0.0125
app �3180b 1950
Labor
Coefficient Estimate Bootstrapped SE
als 94.8 94.3
alp �607 669
alb 218 348
alk �0.0027 0.00601
all 2820b 1530
b i om a s s an d b i o e n e r g y 4 6 ( 2 0 1 2 ) 4 1 9e4 2 8424
We also tested for weak separability of input output tech-
nology, i.e., whether sawtimber, pulpwood and woody bio-
energy can be aggregated into an output index. Dual
properties of the profit function imply that the marginal rates
of substitution between outputs (inputs) are independent of
the level of inputs (outputs), suggesting that the effect of input
and output price variation can be reflected on the aggregated
input and output, respectively [43,85]. Following Newman and
Wear [26] and Shumway [86], the econometric restrictions of
no interaction between inputs and outputs and homotheticity
in output pricesdthe cost of producing any outputs are
independent of factor pricesdcan be given by asl¼ apl¼ abl¼ 0.
The Chi square statistic ( p ¼ 0.432) failed to reject the null
hypothesis of weak separability. These results indicated that
sawtimber, pulpwood andwoody bioenergy can be aggregated
as consistent wood product index that can be used to facilitate
decentralized landowners’ decision making regarding levels
of production.
5. Estimated elasticities and policysimulation
The estimated Marshallian elasticities and SE are shown in
Table 4. The elasticities were evaluated at the mean values
between 1997 and 2006. Our rationale to choose this time
period was that bioenergy markets are still immature,
particularly from the demand side [87]. Although power used
at wood processing plants has been historically generated by
small scale biomass based energy plants in the U.S. [88], it has
not been commonly distributed to the interconnected elec-
tricity network [60].
Consistent with economic theory, the own price elasticities
were positive for the three outputs and negative for the input
factor. All own price and cross price elasticities of the supply
and demand were inelastic. The own price elasticity of
sawtimber and pulpwood were significantly different from
zero, while forwoody bioenergywas not significantly different
from zero. The own price pulpwood elasticity value was
higher than the own price sawtimber elasticity value. This
might be explained by the fact that pulpwood can be obtained
from both large and small trees while sawtimber can be ob-
tained solely from larger diameter trees [27]. Larger trees are
required by sawmills for lumber while pulpmills are less
restrictive in terms of tree diameter as lower size trees can be
used to convert pulpwood into paper. The estimated
Table 4 e Marshallian elasticities (Elst) and standard errors (SEbioenergy and demand for labor, evaluated at the mean value
Elst wrt to Sawtimber SE Pulpwood SE
ws 0.0192a 0.000521 �0.110a 0.011
wp �0.0165a 0.000424 0.155a 0.019
wb �0.00691a 0.000313 0.0162a 0.002
wl 0.00426a 0.000335 �0.0609b 0.010
a Significantly different from zero at 1% level.
b Significantly different from zero at 5% level.
c Significantly different from zero at 10% level.
magnitude of own price supply of sawtimber elasticity was
lower than the values reported in previous studies such as
Newman andWear [26],Wear andNewman [27], andNewman
[89]. This difference could be attributed to reasons such as
differences in approaches employed (for example instru-
mental variable methods), data sources used and regional
variation (aggregated and cross sectional regional data).
The estimated elasticities values can be used to extrapolate
landowners’ response to product price changes. An increase
in the price of pulpwood and woody bioenergy results in
a decrease in the production of sawtimber. This implies that
sawtimber and pulpwood act as substitutes (negative cross
price elasticity). Substitutability is also observed between
sawtimber and woody bioenergy. In the short run, substitut-
ability between sawtimber and pulpwood has been commonly
found since it is easier for landowners, in physical terms, to
switch from producing sawtimber to pulpwood in response to
price changes [27]. This means that the forest landowners
might be inclined to transfer part of the sawtimber production
into pulpwood markets. Higher prices of pulpwood makes
forest thinningsda pre-harvest intervention in which some
smaller size trees are removeddmore financially attractive to
landowners instead of an undertaking a final harvest. This in
turn reduces and increases, respectively, the supply of
sawtimber and pulpwood [90]. In the long run sawtimber and
pulpwood generally act as complements [27]. Landowners are
encouraged to increase the production of outputs modifying
harvest decisions to be in line with higher values for both
products [27].
The positive sign of the cross price elasticity between
pulpwood and woody bioenergy indicates that both products
act as complements. This unexpected result suggests that
there may exist a joint production between pulpwood and
woody bioenergy, thus an increase in the price of pulpwood
results in an increase in the supply of wood residues (a source
for woody bioenergy) which is a by-product of the wood
supply [28]. The cross price elasticities of labor with outputs
are significantly different from zero. Price of labor has ex-
pected sign only for pulpwood production. Although the price
of labor has a positive effect on the sawtimber production, it is
almost negligible in magnitude (z0.0043).
One of the primary factors that determine use of woody
biomass for energy production is government policies [91].
Federal and state policies aimed towards increasing woody
biomass production are critical for the development of bio-
energy markets [92]. For example, the Energy Independence
) for the supply of sawtimber, pulpwood and woodys 1970e2006.
Woody bioenergy SE Labor SE
8 �0.469c 0.118 �0.0528a 0.00575
4 0.163c 0.037 �0.112a 0.00981
17 0.173 0.062 0.024a 0.00145
5 0.133a 0.023 �0.034b 0.00495
b i om a s s a n d b i o e n e r g y 4 6 ( 2 0 1 2 ) 4 1 9e4 2 8 425
Policy Act of 2007 (EISA) [93] established a renewable fuel
standard (RFS) of 136.3 hm3 by 2022, of which 79.5 hm3 must
be cellulosic biofuels. The American Clean Energy Security
(ACES) draft of 2009 [94] required retail electricity suppliers to
meet a percentage of their electricity generation from
renewable resources, up to 20% by 2020. The government
incentives till date have focused on production and
commercialization of bioenergy products. Only few incentives
exist for forest landowners [24,92]. It has been suggested that
forest landowners would prefer tax based policies than
subsidy support [92]. It was beyond the scope of this study to
determine the optimal financial incentives for NIPF land-
owners. However, the literature indicates that new woody
bioenergymarkets would likely result in higher product prices
[95].
In order to reflect such a price increase, we simulated two
price support policy scenarios by increasing price of woody
bioenergy by 50% and 75% with respect to the baseline price
levels, respectively. We chose these percentage increases to
factor in the potential competition for wood biomass between
wood based energy and pulpwood markets [96]. We used the
estimated equations to develop a baseline for prices and
quantities of sawtimber, pulpwood, woody bioenergy, and
labor using average data for production and input levels, pri-
ces and wages between 1997 and 2006. Next, the price of
woody bioenergy was increased by the respective percentages
in accordancewith policy scenarios. For the two scenarios, the
output supply and input demand equations resulted in new
equilibrium quantities for inputs and outputs of sawtimber,
pulpwood, woody bioenergy and labor. The new equilibrium
values, in turn were compared to the baseline values to gauge
the effect of policy interventions.
Table 5 shows the baseline and the policy scenario results.
Higher increases of price of woody bioenergy resulted in
a higher supply of pulpwood and woody bioenergy, as well as
increase in labor requirements (average increase of 0.90%,
18.9% and 1.18%, respectively). It also caused a small decreased
supply of sawtimber on an average of 0.37%. In both the policy
scenarios, an increase in the price of woody bioenergy stimu-
lated forest landowners, in turn enhancing the supply of
woody biomass for energy production. The positive cross price
elasticity sign between pulpwood and woody bioenergy sug-
gested a rightward shift of the supply of pulpwood. However,
the low magnitude of the cross price elasticity of pulpwood
with respect to woody bioenergy (z0.016) implied a small
Table 5 e Summary of policy simulation scenarios andtotal profits (p) in million dollars (MM$).
Variables Baselinec D50a,c Percentage
change (%)D75
b,c Percentagechange (%)
ys 4030 4020 �0.248 4010 �0.496
yp 6660 6710 0.751 6730 1.05
yb 1750 2030 16.0 2130 21.7
yl 2120 2140 0.943 2150 1.42
p 409 412 0.733 413 0.978
a New equilibrium quantities after an increase in wb by 50%.
b New equilibrium quantities after an increase in wb by 75%.
c Equilibrium quantities ys, yp, yb in dam3, and yl in h y�1.
increase in pulpwood production. Positive own price effects of
pulpwood and woody bioenergy, and negative cross price
elasticity of sawtimber with respect to the price of pulpwood
and woody bioenergy, resulted in a leftward shift of the supply
of sawtimber. An increase in the price of woody bioenergy
implied an upward shift of the demand for labor since both
products act as complements (positive sign of the cross price
elasticity between labor and price of woody bioenergy).
The profit function derived by econometric analysis was
used to estimate the landowners’ profits as well. Increased
price of woody biomass for energy resulted in a small increase
in landowners’ profits levels. On average, profitability
increased by z 1%. This result is in agreement with the
literature which suggests higher returns for landowners in
case where forest biomass diverted to traditional forest
products industries along with woody bioenergy conversion
plants [97,98]. Ankarhem [99] and Susaeta et al. [12] found that
economic revenues for landowners could increase by 64% and
10%, respectively, when landowners start diverting their
woody biomass for energy production along with sawtimber
and pulpwood. Our analysis did not consider demand forces
from sawmills, pulpmills and woody bioenergy industry.
Empirical studies have shown that adding the demand side
forces could result in higher profitability for forest landowners
[28], which suggests that our analysis might be conservative
as it could have a downward profitability bias.
6. Conclusions
We modeled forest landowner behavior in the face of bio-
energy markets in Florida using a restricted general Leontief
profit function. A test of non-joint production between
sawtimber, pulpwood and woody bioenergy resulted in rejec-
tion of non-jointness assumption, thus suggesting the exis-
tence of economies of scope. A test of separability between the
three forest product markets indicated that sawtimber, pulp-
woodandwoodybioenergy canbe aggregated into a consistent
product output index. The convexity property of the land-
owner profit function was not satisfied suggesting that incon-
sistent estimates of supply and demand functions are not
implausible. However, consistent economic information was
obtained from the supply and demand functions in terms of
their own price elasticities. As expected, the supply of outputs
in terms of price of outputs and own price elasticities had
positive signs while demand for inputs in terms of price of
inputs and own price elasticities had negative signs.
In general, all elasticities values were inelastic suggesting
that forest landowners are not much influenced by price
variations. This is in accordance with the literature, which
suggests that the forest products are inelastic in the short run
[25]. Cross price elasticities results indicated substitutability
between sawtimber and pulpwood and sawtimber and woody
bioenergymarkets. Woody bioenergy and pulpwood came out
as complements.
We simulated a price control policy instrument intended to
encourage the production of woody bioenergy. Results indi-
cated an increase in the production of wood energy and
pulpwood for both policy scenarios. Demand for labor showed
an increase as well. These findings are in sync with the fact
b i om a s s an d b i o e n e r g y 4 6 ( 2 0 1 2 ) 4 1 9e4 2 8426
that bioenergy markets might benefit rural economies by
stimulating employment [100]. Results also suggested that
forest landowners’ revenues would increase in face of woody
for energy markets. Although the increase in NIPF land-
owners’ profit may be considered small, greater economic
revenuesmay be expected with the development of bioenergy
markets [101]. New conversion technologies, construction of
bioenergy plants with larger capacities and adequate policy
instruments can be considered as feasible alternatives to
stimulate the production of woody bioenergy.
A potential shortcoming of our analysis was not to include
the non-timber benefits in the profit function. Thus, a more
complete assessment of this type of behavioral models would
be to incorporate endogenous factors such as non-timber
amenities. For example, non-timber benefits may be
modeled as a function of growing stock timber [26], empha-
sizing on the connection between age structure of the forest
capital and ownership [25]. Integrating our study findings into
spatial equilibrium models and assuming imperfect compe-
tition between timbermarkets remains an interesting area for
future research as well.
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