Costs of harvesting, transportation and milling in the Brazilian Amazon: Estimation and policy implications

We estimate economic cost functions for timber harvesting, transportation and milling in the Brazilian Amazon using a 2003 sample of 527 firms in both new and older frontier locations. We find that labor wage, distance from the forest to the processing location, type of equipment, and the type of the frontier all factor significantly in the total and marginal cost of each activity, and that predicted processing costs are not significantly different on new frontiers implying a lack of technology adoption as industry expansion into the Amazon has occurred. We also show that capturing economies of scale in logging by increasing average annual logging volumes by 50% and reducing the number of firms to about 1400 could lead to an industry wide cost savings of approximately US$90 million per year. Similar economies of scale are also present in log transport but not in processing. Further, if improved logging techniques allow harvest for an additional 1 month per year, for example through better planning, the industry could reduce logging costs by almost US$30 million. This points towards generating forest policies and economic conditions that encourage firm size growth, as opposed to those policies encouraging massive entry of small, unregulated and inefficient firms, and the adoption of management practices that allow for additional time in the forest.