Producing softwood of different quality: does this provide risk compensation?

This study analysed whether the production of high-quality assortments, saw timber and pulpwood in Norway spruce (Picea abies) and Scots pine (Pinus sylvestris) stands leads to effects of risk compensation. Mixtures of conventionally treated pruned and non-pruned stands, as well as mixtures of stands which had been optimized concerning the occurrence of assortments and financial criteria were considered. The price simulation was done by bootstrapping to avoid the assumption of a certain distribution of timber prices, and to preserve the correlations of the timber prices from different assortments. The financial valuation was carried out with annuities within a Monte Carlo simulation with 10,000 repetitions. To quantify the effect of natural hazards, the calculations were repeated with and without this factor. Minimum risk portfolios were determined and optimization performed using both a utility function as well as the value-at-risk approach. The mixtures with minimum risk were dominated by pine stands, as they are less affected by natural hazards and prices for pine timber have a lower volatility, although pine timber prices are generally lower compared to that of spruce timber. These pine dominated portfolios showed risk reductions up to 92% compared to the riskiest single stand, but the annuities were reduced even more. In contrast to this, the portfolios optimized with the utility function and the value-at-risk approach consisted of spruce stands. These spruce portfolios showed an efficient risk reduction of up to 60%. Additionally, higher annuities and larger diversification effects occurred in the portfolios containing the optimized stands. Integrating the risk of natural hazards, the annuities decreased, as did the correlation of the annuities of the different stands, while risk increased. Altogether these effects led to higher relative risk reductions when forming optimal portfolios. These results indicate that producing different assortments of spruce and pine leads to risk compensation, especially when considering portfolios consisting of optimized stands.