2. Points to be considered in making Calculations concerning Forestry. The capital required in Forestry consists of the land and the growingstock of wood. Together these form the woodlands, from which returns in timber or other produce are obtained, either periodically, or else regularly year by year. A woodland may be valued according to― 1. Its Productivity or Prospective Value-that is to say, the net value of all prospective future returns, freed from cost of production or of harvesting, discounted to the present time. 2. The Cost of its Production, or actual expenditure that has been incurred, or would be necessary, in order to produce it. 3. Its Market Value-that is to say, the sum it would fetch if sold, or the amount usually obtained for similar properties. 4. The Capitalised Value of the Annual Income it produces, as expressed by formula XI., where C is the capital required to produce the annual rental, †, at the given percentage, p. Here C:r=100: p, and C= or= 100r On consideration, it will be seen that only the first method is the commonsense one to apply to woodlands (though merely when they are being managed on purely commercial principles), because it is this productivity or prospective value which, so far as commercial principles are followed, practically deter mines the market value of estates and the capitalised value of the annual income they produce. This purely commercial standard is, however, seldom, if ever, applicable, owing partly to the special amenities derivable from forests (shooting, fishing, &c.), and partly because woodlands, like landed property in general, are not capable of being increased to an indefinite extent, but must belong to the few on whom, cæteris paribus, they confer a certain amount of local prestige and social status. The cost of production of woodlands is in Britain a method of calculation liable to very considerable errors at present-and mainly on account of rabbits. Wherever ground game is preserved, or is liable to commit damage through being preserved on adjoining estates, the cost of production of plantations is increased greatly. In such cases it would be obviously incorrect to charge against timber production the extra cost incurred solely on account of ground game. Moreover, except in very young plantations, the cost of production has nothing to do with the prospective returns derivable from them, because these depend mainly on factors (local market, soil and situation, suitability of crop, distance of plants, treatment as to thinning, &c.) not necessarily in any manner determined by the amount of money spent in forming the plantations. So far as actuarial investigations connected with Forestry in Britain are concerned, the prospective value therefore forms by far the surest basis of calculation, whenever satisfactory data are available for estimating that. In all these four ways of valuing woodlands the net monetary return from the timber-crops, clear of the cost of production or regeneration and of harvesting, is, and must necessarily be, the essential factor in making the calculation. Even where the intention is to ascertain the value of the land, this can only be done through estimating its productivity by means of the net monetary returns yielded by the timber-crop it has produced, or is considered to be capable of producing. The Rate of Interest reckoned in making actuarial calculations regarding Forestry is a matter of great importance. If either a very low or a very high rate of interest be used, the results worked out are often palpably absurd and contrary to common-sense. Yet it is a very difficult matter to strike anything like a true average for general use; and even such average rate would of course be subject to fluctuation locally and from time to time. Apart from the relation between supply and demand as regards capital, the rate of interest is generally dependent on the degree of safety of the investment, and on the regularity and convenience with which the returns are obtainable. Now, in Forestry the rate of interest may be taken below the current rate, because, in addition to the social and other amenities connected with the ownership of woodlands, forests (even taking loss from windfall, and damage through fire, insects, fungous diseases, &c., into account), give better guarantee for the security of the capital than ordinary investments, and because trade statistics prove very clearly that the value of timber has been steadily increasing (besides being very likely to increase much more rapidly in the near future), whilst the exchange-value or purchasing-power of money has been gradually sinking. As an aid to fixing the rate of interest in forestry, it is natural that a comparison should be made with agriculture, although there are important essential differences between these two methods of utilising land. In comparison with agriculture, the following advantages on the side of forestry tend to raise the rate of interest : 1. Woodlands require less labour and supervision than agricultural operations involving the same amount of capital. 2. Woodlands can be managed so as to produce about equal monetary returns annually, whereas agricultural harvests often vary to a very considerable extent. 3. A favourable market can be utilised by making heavy falls of timber, while fellings can be kept short if prices are temporarily low. On the other hand, the following disadvantages tend to reduce the rate of interest to be expected 1. Plantations and other young woodlands do not begin to yield valuable returns till a long time after their formation; and the capital is meanwhile completely locked up. 2. It is more difficult to determine the average annual returns from woodlands than from field-crops. 3. Danger of damage from wind, snow, fire, insects, &c., extends over a much longer time in the case of woodland crops-though the total amount of damage throughout a long term of years is not on this account greater in forestry than in agriculture. 4: Woodlands cannot, without great risk to the owner, be let like farms; nor can loans of money be raised on them so easily. Other points of difference might also be noted. Thus, the rental value of farms depends on the demand for them, while the upward tendency in the price of timber is due to foreign and colonial supplies to Britain diminishing through the competition of Germany and the United States of America. As a matter of practical experience, however, good land yields a better rental if utilised agriculturally, while poor soil gives a better return as woodland. Taking the general rate of interest for business loans at about 4 per cent, and the agricultural rate at about 3 to 3 per cent, that of forestry may fairly be assessed at about 2 to 3 per cent in the case of hardwood timber-crops requiring long to mature and not exposed to many dangers, and about 3 to 3 per cent for coniferous crops more liable to damage from wind, snow, insects, fire, and fungous diseases. Everything being considered, 3 per cent may perhaps be taken as a fair rate of interest for general use in making actuarial calculations regarding forestry in Britain. This also corresponds with the rate of interest ordered under the Succession Duty Act, 1853, according to which the average value of the returns from timber is to be taken at 3 per cent per annum on the estimated capital value of the woodland produce, a rate which also regulates the amounts payable under the Finance Act, 1894. By the Finance Act, 1896, the land-tax is redeemable at 30 years' purchase (equal to just below 34 per cent). In calculating the value of woodlands, all marketable minor produce, shooting, and fishing must of course be taken into account as well as timber; while due allowance must be made for covering the annual cost of management, sowing and planting, maintaining boundaries and roadways, and payment of rates and any other assessments on the land. 3. The Valuation of Forest Land.-In Scots law, under the Valuation of Lands Act, 1854, sec. 6, in valuing lands that consist of woods, copse, or underwood, the yearly value shall be taken to be the rent at which they might in their natural state be reasonably expected to let from year to year as pasture or grazing lands. Under English law, the standard prescribed is practically much the same, being based on the agricultural value of land in its "natural and unimproved" state.1 Under the Finance Act, 1894, the annual value of the woodland, the actual land itself, is estimated at what it is according to its value in the natural and unimproved state, while the timber growing upon it is subject to separate valuation. While the Act declares the principal value of any 1 Rating of Plantations, Woods, &c.-By section 14 of the Rating Act, 1874 (37 & 38 Vict. c. 54), so much of the Poor Relief Act, 1601 (43 Eliz. c. 2), as related to the taxation of an occupier of saleable underwoods was repealed, and by section 3 of the Act, the statute of Elizabeth, and the Acts amending the same, were extended to land used for a plantation or a wood or for the growth of saleable underwood, and not subject to any right of common. Under this enactment it is the land, and not the timber, underwood, or other produce of the land, which is made the subject of assessment; and it would seem that if land used as a plantation or a wood, or for the growth of saleable underwood, is subject to common rights, it is exempt from the poor rate and other local rates. Mode of Valuing Woodlands.-The method of estimating the gross estimated rental and rateable value of such woodlands is prescribed by section 4 of the Act, and is as follows: "(a) If the land is used only for a plantation or a wood, the value shall be estimated as if the land instead of being a plantation or a wood were let and occupied in its natural and unimproved state. "(b) If the land is used for the growth of saleable underwood, the value shall be estimated as if the land were let for that purpose. "(c) If the land is used both for a plantation or a wood and for the growth of saleable underwood, the value shall be estimated either as if the land were used only for a plantation or a wood, or as if the land were used only for the growth of the saleable underwood growing thereon as the assessment committee" (or where there is no assess ment committee the persons making the poor rate) "may determine."(Forestry Com mittee Report, 1903, Appendix xix. p. 206.) property to be what it would sell for in the open market, yet special provision is made for estimating the principal value of agricultural property, including woodland, at an amount not exceeding twenty-five times the annual value as assessed for income-tax on lands, after making certain deductions for repairs, rates, management, &c. Except in the rather unusual case of land being bought for the express purpose of planting, it is difficult to fix its actual market value. Where land has been thrown out of arable cultivation or pasturage, its rental value may be assessed as below its previous agricultural value, and the capital value may then be estimated as Thus, pasture land thrown out of occupation at 7s. 6d. an acre might be fairly assessed at about 5s. an acre for planting, and its capital value would then be 5÷003=£8, 6s. 8d. an acre. ( This same formula can also at once be used to determine in a rough-andready practical manner the capital value of woodlands-i.e., land and growing-stock of wood-if the woods are in "normal condition" as to distribution of age-classes, and the management on the basis of a regularly sustained annual yield has been of long enough duration to enable the true average net annual income to be estimated with something like accuracy. Ordinarily, however, the value of woodlands can only be estimated by their productivity-i.e., the amount of net income obtainable from the timber, &c., they are capable of producing. This, the only sound practical standard of valuation, can be assessed by discounting to the present all the future net monetary returns which may be expected, and deducting therefrom the present discounted value of all expenses necessary to obtain these returns. This mode of valuation concerns itself with all the capital invested in Forestry that is to say, both with the land primarily, and also with the growing-stock; but this combination is unavoidable, as neither the soil nor the plants put into it can of themselves produce timber or any other marketable produce; and to ascertain the value of either one of these, the other must also be taken into careful consideration. The items here coming into calculation in order to determine the productivity of the land, are the following data regarding timber and other produce: Receipts. (1) The fall of mature timber. Expenditure. (1) Cost of formation of crop (sowing and planting, &c.). (2) General Annual charges (rates, management, protection, &c.). The Receipts are net returns, free from the cost of harvesting the crop and collecting the money. (1) The present value of all the future falls (F) of mature timber at n years of age, (2) The present value of all the future thinnings, T, at a, b, and . . . 9 years of age, if prolonged to n years of age, and treated as a perpetual rental occurring first at a years and then every n years, (Tax 10 pa) (T2 x 10 pm) 1·0p" - 1 (Ta×10 p) + (T¿ × 1·0 p2 ̄b) + 1·0 pm - 1 (Tq × 1·0 pm-7) + (T2 × 1·0 pr−4). 4 (Formula VIII.) (3) The present value of minor produce is calculable by the same formula as for thinnings, except as regards a fixed annual return like shooting, which has a present value of (Formula XI.); or as regards a return obtained regularly for some years, like 0-0 p grazings. The latter may be prolonged to the year at which it ceases, and then treated as R(1·0 pm) a perpetual recurring periodic return (Formula VIII.), the present capital 1.0 p" - 1 value of which can be added to the capitalised value of the land and the growing-stock. The Expenditure.—(1) Assuming that an outlay, c, for sowing and planting, &c., will be necessary at each time of regenerating or reproducing the crop, then the capital sum now cx 1·0 pn required to defray this is (Formula IX.). For newly formed copse and coppice, 1·0 pm - 1 where the first outlay is greater than subsequent reproductions, this formula has to be modified to ex preferable. с 1·0p" - 1' but for all practical purposes the simpler general reckoning is (2) The general charges, g, for management, protection, rates, &c., being of annual recurrence, have a present capitalised value of 9. (Formula XI.) 0.0 p Summarising these credit and debit capitalised present values to estimate the productivity, we therefore arrive at the following formula, known as Faustmann's, which has previously been referred to on p. 239 : The Productivity or Present Capital Value of Land (as estimated by the real value of the timber, &c.) is = Fn + (Ta × 1·0 p2¬a) + (T¿ × 1·0 p2 -ð) + ... +(TqX · × 1·0 p′′ ̄7) − (c × 1·0 p") g 1·0 pm - 1 Examples of the use of this formula, for determining the present value of returns from woodlands of 80 and 100 years in order to ascertain the more profitable rotation, will be found on page 241. If misused, the formula leads to apparently absurd results. Thus the land and the growing-stock could be shown as having a negative value, if the rotations for which the calculations are made are so low that the produce is unmarketable and fails to counterbalance the amount of expenditure incurred in formation and maintenance. And the same happens if the rate of interest be unduly high. Theoretically, the above method is quite correct; but in practice it has certain weak points, such as are, however, common to other methods dealing with the future as well as the actual present returns available. It is exceedingly difficult to estimate returns quantitatively far ahead, and impossible to assess their monetary value one or two generations hence. Then, again, the result varies essentially with the rate of interest, which forms one of the main bases of reckoning. Notwithstanding these drawbacks, however, Faustmann's formula is of great practical use in calculating, by means of the returns of average yield tables, what kind of timber-crop is likely to pay best on land of any given quality, and what is likely to prove the most remunerative rotation. Continental results worked out by it correspond with those of practical experience in showing that Conifers are usually the most profitable kinds of timber-crops, especially on land of only medium or inferior quality, and that the most remunerative rotation for these varies from about 65 to 80 years. The earlier and the heavier that thinnings are made, the more the present capital |