Marketing Sustainable Wood Products

PROJECT BACKGROUND
Our farm consists of 120 acres in Wabasha County. My wife Toni and I derive our farm income from the sale of Christmas trees, farm windbreak and wildlife nursery stock, hardwood and conifer seedlings and fruit trees. In the 80’s we made a decision to manage our land in a manner that was compatible and friendly with the forest land and trout stream around us. Our woodland is in the proves of being certified as a sustainable woodland as described by the Forest Stewardship Council.

PROJECT DESCRIPTION AND RESULTS
Problems:
- Markets need to be established to ensure the success of this innovative, value added producer/woodland owner cooperative, Hiawatha Sustainable Woods Cooperative (HSWC) of which we are members.
- Need for awareness: 1) consumer awareness that there is a choice of purchasing certified sustainably grown and harvested wood 2) producer/woodland owner’s awareness of the opportunities currently existing to sustainably manage their woodlands and value add their wood resource through membership in Hiawatha Sustainable Woods Cooperative.

We believe there is an untapped market potential for 1) third party certified (through the Forest Stewardship Council, FSC) wood, 2) underutilized and undervalued wood such as aspen and cottonwood, and 3) specialty woods that would have been left in the woods or on the landing if left to conventional industry practices. Our objective is to develop markets for our certified, value added wood from our land. By securing markets for our value added wood products, the cooperative effort will be secured, not only for us, but for the other landowner members and other producers with whom we will share this information. The objective of the project is to also reach other producer/woodland owners to emphasize the potential available to them if they sustainably manage and are involved with a value added cooperative like HSWC.

There are two ways that something can be valuable: instrumentally and intrinsically. Instrumental (or utilitarian) means that something has value because it is useful to something else. Intrinsic means that something has value in and of itself, not because something else deems it valuable. In environmental philosophy, these two values can be ascribed from three different viewpoints: ecocentric, biocentric, or anthropocentric. In an ecocentric viewpoint, ecosystem processes have intrinsic value while non-living nature has the instrumental value. With antropocentrism, only humans have intrinsic value, while everything else has instrumental value (Meffe and Carroll 1997).

The economic approach to ecosystems is one of anthropocentric instrumentalism. Ecosystems and their services are valuable if they serve and satisfy human beings. Many environmentalists would immediately recoil at this thought, asserting that nature has intrinsic value. However, anthropocentric utilitarianism does not necessarily mean that ecosystems must be exploited and have no value in their natural states (Goulder and Kennedy 1997). There is a range of values, many of which are presented by intrinsic rights proponents (Toman 1997). It is also important to realize that the economists’ utilitarian values can, at least in theory, be measured and quantified, while intrinsic values cannot (Brown et al. 1993).

Economists divide values into two main categories: use and non-use. Use values are derived from physical involvement with some aspect of an ecosystem. One type of use value is direct, such as logging, fishing, recreation, and tourism, while another is indirect. Direct use is further divided into consumptive (logging, fishing) and non-comsumptive (recreation, tourism) values. There are also indirect use values, which arise from supporting humans or what humans directly use. Regulation and habitat functions, such as flood control, climate regulation, and waste assimilation would fall into this category (Adamowicz 1991; Brown et al. 1993; Edwards and Abivardi 1998; Goulder and Kennedy 1997).

Non use values do not involve physical interaction. This includes existence, bequest, and option values. Existence value (sometimes called passive use) is derived from the satisfaction of knowing that a certain species or ecosystem exists, even if it will never be seen or used. Bequest value is satisfaction from being able to pass on environmental benefits to future generations (Adamowicz 1991; Edwards and Abivardi 1998). Option value pertains to the possible use of a resource in the future. This has to do with uncertainty and risk aversion. An example is the preservation of tropical rainforests because we may be able to find new medicines (Adamowicz 19991; Brown et al. 1993; Edwards and Abivardi 1998; Goulder and Kennedy 1997).

Many of the values described above are abstract and subjective. These values play a big part in what people get from the natural world and hey they want it to be preserved. However, only a small portion has any sort of presence in economic markets. When land use decision and policies are being made, usually only the economic values are taken into consideration, and the other values are undervalued or ignored. For this reason, great effort has been made to somehow put a dollar amount on the values that are not represented in markets.

Economic theory is based on the premise that individuals have preferences for different market and non market goods. These preferences have a degree of substitutability, if the quantity of one good is reduced; the quantity of a different good can be increased to leave the person no worse off. The trade offs made during this substitution reveal something about the values held for each good. Measurements of these values are expressed as either willingness to pay, the maximum amount a person would be willing to pay for an increment of a good, or willingness to accept, the minimum amount of a person would require as compensation for the loss of an increment of a good (Freeman 2003).

Methods for measuring these values fall into two categories: revealed preference and stated preference. Revealed preference measurements are based on observations of actual behavior, while stated preference measurements are based on responses to hypothetical questions (Freeman 2003).

Direct market valuation is one type of revealed preference, and can be used for those few services that are traded in the market. This includes the production function category, such as food, raw materials, and some recreation values. The value of the service is the market price (de Groot et al. 2002). However, most ecosystem services have no direct presence in our economy. In that case, a price may be derived indirectly through related factors that do have a market. There are many indirect market valuation techniques. The less common ones include household production costs (costs of cleaning or repair due pollution), avoided cost (costs that would have incurred if the service were absent, such as flood control), replacement cost (the cost of replacing a service with a man made system), factor income (how much a service enhances income, such as for commercial fishermen), dose-response (how changing an environmental service affects the production costs of a product), and averting behavior (expenditures to defend against negative effects of pollution, such as sunscreen sales) (de Groot et al, 2002, Freeman 2003; Hoevenagel 1994).

Far more common are the travel cost and hedonic pricing methods. The travel cost method estimates the value of a recreational site or changes in the environmental quality of that site by using the amount of money and time people spend traveling there. It tires to find out the willingness to pay for recreational services (Adamowicz 1991; Hoevenagel 1994; Toman 1997). This method is advantageous because it relies on observed behavior and can provide a behavioral model that can be tested for accuracy. However, there are some disadvantages, as well. Behavioral assumptions must be made by the researcher, which may not accurately reflect how an individual decided to visit a site. The value and opportunity costs of the time it takes to travel are very important, even more so than the cost of travel. The time issue, however, is much more difficult to measure. Also, this method can only be applied to use values, so if it is the only method used for a site valuation the benefits may be underestimated (Adamowicz 1991; Hoevenagel 1994).

The hedonic pricing method is based on this idea that people prefer and will pay more to live in areas with good environmental quality. The value of environmental quality, then, is embedded in housing prices (Hoevenagel 1994). As with the travel cost method, the hedonic pricing method is advantageous in that it uses observed market behavior, but it, too, has problems. This method requires many assumptions that usually do not hold in reality, such as that each household is aware of the effects of pollution and is able to buy exactly what housing characteristics it wants. This method is also disadvantageous because some pollution effects may not be clear to the household, data collection and statistical analysis can be difficult, and it is limited to use values (Adamowicz 1991; Hoevenagel 1994).

Stated preference methods, again, draw values from responses to hypothetical questions. The main method for this is contingent valuation, which is widely used and widely discussed. Contingent valuation directly asks individuals about the values they place on environmental services via a survey or questionnaire. It is quite useful in that it can be used to value a wide array of services, and for some, such as existence values, it is the only method possible. However, this flexibility also leads to methodological challenges and questions of bias and reliability (Bishop and Heberlein 1990; Hoevenagel 1994b).

The survey design is very important. The first step is to define the population whose values are to be measured, such as park visitors, hunters, or community members. Then, as with all surveys, a sound sampling strategy must be designed (Bishop and Herberlein 1990). Next the questionnaire itself must be written. In order to obtain realistic values, the respondents must have a good understanding of the ecosystem service or environmental quality changes they will be asked about, of the hypothetical method of payment (i.e. taxes, licenses, fees) and of the social context of the payment. Ideally, these hypothetical situations will be realistic, but also neutral. The goal is that the values expressed by the respondents are those held for the ecosystem service, and do not reflect other issues, such as dissatisfaction with tax rates (Bishop and Heberlein 1990; Hoevenagel 1994b).

Once the respondent understands the hypothetical situation, they can be asked valuation questions. There are several options for the question format. One is the referendum format, where a person is asked if they would be willing to pay $X for a policy, program, or environmental improvement. Direct open ended questions allow respondents to come up with their own amount they would be wiling to pay, without any starting point provided by the practitioners. This format is often seen as less reliable, because it is difficult for respondents to come up with a realistic value out of the blue. Another format is the bidding game, where a respondent is asked if they would pay $X. if the answer is yes, then they are asked if they would pay a higher amount, until the highest amount they would pay is reached. If the answer is no, the amount is lowered until it reaches an amount the respondent would be willing to pay. This format helps respondents give more consideration to their answers. However, this type of question can only be used with phone surveys, an expensive and time consuming approach. The payment card method provides a card that has several dollar amounts from which respondents can choose their willingness to pay. The payment card method, however, can be used in mail surveys. Finally, with the contingent ranking methods, respondents are asked to rank alternatives of environmental quality and services without placing monetary values on them. It is still debated which of these methods is best, but the format choice usually depends on the type of service being examined and the information desired (Bishop and Heberlein 1990; Freeman 2003; Hoevenagel 1994b).

As was alluded to previously, there are some issues surrounding contingent valuation. One is the validity of responses. Would respondents actually pay the amount they said they would? Some may even give a value of zero; because they feel they should not have to pay for something they feel they have a right to (Freeman 2003). Most people are unfamiliar with ecosystem services, and even more unfamiliar with placing monetary value on them, so answers may be more of a guess than their true willingness to pay (Hoevenagel 1994). There are no market values to test the validity of contingent valuation responses, but there are some indirect methods available. These methods are still being researched and tested, but show promise (Bishop and Heberlein 1990).

The potential for biased answers is another issue. There are four main sources of bias: sampling design, incentives to misrepresent willingness to pay values, implied value cues, and scenario misspecification (Hoevenagel 1994b). Sampling design refers to issues of representative samples and no responses that are common to all surveys (Freeman 2003). There are several biases that can result from respondent’s incentives to misrepresent their willingness to pay. One is strategic bias, where respondents provide misleading answers to serve their own purposes. These purposes include the fear that fees will actually be assessed, and so will give low values, or the feeling that the values will promote a desired service or policy, and so will provide high values (Bishop and Heberlein 1990). Two other incentive biases are interviewer bias, where misleading answers are given to please the interviewer, and social desirability bias, where a respondent gives an answer they think will make them look good. Three implied value cues are starting point bias, where values are based on the starting point in a bidding game, range bias, when values are based on the range of values provided by a payment card, and relational bias, when values are based on the value of some related public good. Scenario misspecification biases result when respondents misperceive the hypothetical situations. Most of these biases can be overcome with careful survey design, question format selection, and result analysis (Hoevenagel 1994b).

Another stated preference method that has only recently been gaining attention is the group valuation or discourse based valuation. In this method, a group of stakeholders is brought together to discuss values of ecosystem services (de Groot et al. 2002, Wilson and Howarth 2002). Ecosystem services are public goods, and decisions regarding them affect many people. For this reason, many feel that the valuation of these public services should not come from individual based values, such as the previous ones, but from public discussion. The values derived would be society’s willingness to pay or accept, rather than an individual’s. This should lead to more socially equitable and politically legitimate outcomes (Wilson and Howarth 2002). Group valuation is not, however, a replacement for individual based methods. Kaplowitz (2001) and Kaplowitz and Hoehn (2001) compared results from individual and group valuation methods. Both studies found that the two approaches yield different answers and values, and are complementary rather than interchangeable. This method has challenges like all the others. Failure of groups members to share all their information and group dynamics such as peer pressure or a dominant member can lead to incomplete or biased results (Kaplowitz and Hoehn 2001; Wilson and Howarth 2002).

The valuation method used will depend on what type of service is being studied. In general, regulation function have been most often valued with avoided cost or replacement cost methods, habitat functions with direct market (such as money donated for habitat protection), production functions with direct market or factor income, and information functions through contingent valuation (cultural and spiritual information), hedonic pricing (aesthetic information), or market pricing (recreation, tourism, and science) methods. However, many different methods can work for any given service and the method of choice depends on the specific characteristics and goals of the study (de Groot et al. 2002).

Economic valuation of ecosystem services is an evolving discipline. Both the data needed and methods used have shortcomings. Also, some common economic theories and practices do not apply to ecosystem valuation as well as traditional valuations. Finally, there is a conceptual controversy about the use of ecosystem values.

Valuation of ecosystem services depends on a good understanding of those services, but it is very difficult to know what ecosystem aspects and function are required to maintain services and to predict how provision of services will change due to human activities (Bingham et al. 1995). This lack of information often causes values to be underestimated (Daily 1997b). The better our ecological knowledge and understanding, the better our valuations will be.

As was mentioned in the ecosystem services section, services interact with and depend on each other. Classifications are arbitrary and useful for discussion, but in reality these services are not independent and could not operate alone. This means that finding a total value of all services in an area is not as simple as valuing each category and adding them up (Daily 1997b). Valuation must be performed carefully to avoid double counting. Use of one service may preclude a different service, such as using wetlands for wastewater treatment limiting recreational uses, while some key services are essential to others (Turner et al 1998).

Another limitation of ecosystem service valuation is geographical and temporal specificity. The same type of ecosystem could have very different values in different locations due to differences in economic activities, cultures, and lifestyles of the local people. Values also depend on current market prices and preferences, both of which can change over time. Future generations may value a particular service differently than the current one. The geographical and temporal specificity of any service valuation limits extrapolation of current, local values beyond local or bioregional scales and for all times (Daily 1997b, Turner et al 1998).

Use of market values when possible may seem the best route, but there are problems with this method. Values that incorporate market prices may still be misleading, because many prices do not incorporate subsidies or externalities (the social cost of pesticide pollution, for example), thus underestimating the ecosystem services that support those products (Daily 1997b). Market prices only reflect the cost of using a product and do not take into account the free production of nature. Also, there are many different markets that may place different values on the same thing. Furthermore, markets do not deal with issues of distribution and equity (de Groot 1992).

There are also questions regarding the use of stated preference methods and willingness to pay measures. Willingness to pay depends on the ability to pay, so based on that measurement it will appear that those with a lower income have less value for economic services (Bakker and Matsuno 2001). Another argument against stated preference methods is that preferences do not drive behavior or imply well being. Some think it is better to base decisions on actual behavior, such as voting. However, some studies have shown that contingent valuation results are similar to those from other methods. Contingent valuation is by no means perfect, but when designed well is useful for revealing values that cannot be found through other methods (Toman 1997).
Even if these values are useful, some do not think that they provide enough information to decision makers. Aggregating individual willingness to pay values is not enough when decisions involve large scale consequences to society and future generations. These arguments are valid, and it is important to recognize both the current and future dependence on ecosystem services. Still others feel that economic methods do not adequately relay the importance of ecological conditions. They prefer energy based measurements, where they trace the direct and indirect energy requirement of ecological functions. However, this approach fails to reveal how those functions are valued and connected to human well being, which is an important part of resource decisions (Toman 1997).

One economic issue is the determination of marginal values. Marginal value is the value of an increment of something, as opposed to the total value of the entire thing, such as the value of 10 hectares of forest out a total 100 hectares. We could not live without ecosystem services, so the total value of all services would be infinite. Likewise, resource decisions do not usually pertain to destroying an entire ecosystem at once (although sometimes they may, such as draining a wetland). What is most relevant is the value of a unit of intact habitat that might be destroyed. As the habitat gets smaller, the value of the next remaining units will increase. Ideally, if we can accurately determine the value of each unit, conversion would only occur if the benefits of the economic use are greater than the cost of losing the services of that unit. However, ecosystem services are not provided by certain parts, but by the entire ecosystem. The question is how much those services would be disrupted by losing more area, which is very difficult, if not impossible, to determine (Daily 1997b).

Another economic theory issue is the use of discounted rates. Discounting is the idea that an individual, with an uncertain future and a limited life span, will choose to have something today instead of in the future. This means that the value of something that could be had now is less in the future. The rate used for environmental function is usually 5-6%, but the standard economic discount is 10% or more. Discounting is a standard practice in economic analysis to determine the present worth of future benefits, but can be problematic with environmental issues. Many feel that ecosystem services, if used sustainably, can last perpetually and should not be valued in the same way as man made products that quickly lose value. Discounting ecosystem services does not consider future generations and may jeopardize the provision of a crucial resource in the future. Also, ecosystems should not be discounted like man made products because products can be replaced, while ecosystems generally cannot (de Groot 1992, Gowdy 2001).

The final and perhaps most fundamental issue with economic valuation of ecosystem service is: should we be doing it at all? Many feel that we are “generating prices for the priceless and quantifying the unquantifiable” and that we are using money as a common standard to compare things that cannot be compared (de Groot 1992 p. 140). Many feel economic valuation puts conservation on a “slick terrain” because it “provides a rationale for valuing biodiversity but its value is always relative to the values attached to other things” (Randall 1991 p. 65). Some feel that a rationale for conservation should not include human utility, instrumental arguments, or trade offs (Randall 1991). These are emotional objections, based on ethical arguments that the environment has intrinsic value and is priceless. An alternative emotional objection is that we have a right to ecosystem services and they should be free (de Groot 1992).

There are also more practical objections. Monetary valuation is difficult, if not impossible, it apply to aesthetic or spiritual services. Therefore, many hold that there should be room in decision marking for “priceless experiences” without monetary valuation (de Groot 1992). Also, it is questionable whether economic valuation alone can provide everything needed to make decisions about ecosystems use, management, or preservation and the long term consequences of those decisions. In some cases, it may be enough, but we must realize that there are many non-monetary values and criteria that are important to consider (Bingham et al. 1995). There is also the question if policy and decision makers will even use these values. Power (2001) points out the political and personal decisions are not usually made with quantified values in mind but by “an informal and thoughtful weighing of costs and benefits” (p. 73).

The emotional objections have a point, but are not very useful when it comes to practical situations. Having a conservation rationale devoid of human utility values would require a broad, overarching societal value for biodiversity that supersedes other political concerns (Randall 1991). This is not practical or probable. It is easy to say what we need to consistently have environmentally friendly decisions (an intrinsic value basis, etc.) but we obviously are not there yet and it will take a long time for society to change. In the meantime, we must use what tools we have, one of which is economic valuation. It would be useful if decisions took into account “priceless experiences”, but what weight would those experiences have compared to other considerations? Economic valuation provides information that can be used to more clearly weigh different factors.

Conclusion:
Ecosystems provide a myriad of services that contribute to human survival and quality of life. Though many services overlap and are interdependent, it is useful to attempt to classify them, as was done by de Groot at al. (2002). These services can then be applied to local ecosystems, such as the forests, prairies, and freshwater systems of southeast Minnesota.

Humans value each ecosystem service in one or more ways, including direct use, indirect use, and non use values. The services and values in turn can be quantified using economic methods, such as direct market pricing, travel cost evaluations, or contingent valuation surveys. Each method has advantages and disadvantages, and should be carefully chosen based on the specific goals and subject of the study. Not only are there issues with individual methods, but there are issues with economic theory and the idea of economically valuing ecosystem services in general.

Despite difficulties, limitations, and issues surrounding ecosystem service valuation, there does seem to be a general consensus that the value of ecosystem services often outweighs economic use and that protecting ecosystem services is, or should be, one of the most important responsibilities of today’s politicians, resource mangers, and society in general (Balmford et al. 2002; Daily 1997b; Salzman, Thompson, and Daily 2001).

OUTREACH
Throughout the term of the grant informational meetings will be held for people (for producer as potential cooperative members and potential customers). A website will be available. At the completion of the grant an on farm field day will be sponsored to view the value added processing of wood as well as providing the documentation of increase financial gain through the value added process as determined through the two year grant. Conferences will be attended, including but not limited to: Upper Midwest Organic Farming Conference and the Tri-State Forest Stewardship Conference. Other organizations have agreed to publish articles, hold informational meetings and share mailing lists, those organizations include but are not limited to: Hiawatha Sustainable Woods Cooperative (HSWC), Bluff County Cooperative, Land Stewardship Project, Landowner Eco2 Alliance for Forestry (LEAF) area farm, soil and water agencies. We will submit a summary of the grant to publications of the above listed organizations.