The export of wood pellets from the southeastern United States (USA) has grown significantly in recent years, following rising demand from Europe. Increased wood pellet demand could lead to spatially variable changes in timberland management and area in the USA. This study presents an assessment of the impacts of increasing wood pellet demand (an additional 11.6 Mt by 2030) on land‐use dynamics, taking into account developments in other wood product markets as well as expected changes in other land uses. An economic model for the forest sector of the southeastern USA (SRTS) was linked to a land‐use change model (PLUC) to identify potential locations of land‐use change following scenarios of demand for pellets and other wood products. Projections show that in the absence of additional demand for wood pellets, natural timberland area is projected to decline by 450–15 000 km² by 2030, mainly through urbanization and pine plantation establishment. Under the high wood pellet demand scenario, more (2000–7500 km²) natural timberland area is retained and more (8000–20 000 km²) pine plantation is established. Shifts from natural timberland to pine plantation occur predominantly in the Atlantic coastal region. Future work will assess the impact of projected transitions in natural timberland and pine plantations on biodiversity and carbon storage. This modeling framework can be applied for multiple scenarios and land‐use projections to identify locations of timberland area changes for the whole southeastern USA, thereby informing the debate about potential impacts of wood pellet demand on land‐use dynamics and environmental services. © 2017 The Authors. Biofuels, Bioproducts and Biorefining published by Society of Chemical Industry and John Wiley & Sons, Ltd.

We extend real options analysis of timberland investments to examine a combination of financial and biophysical risk effects on optimal investment strategies in the southeastern United States. Results show that, despite a slight downward drift in price, expected returns for loblolly pine management fall between entry and exit thresholds, indicating an optimal “hold” strategy. This is explained by an offsetting upward trend in biophysical productivity associated with climate changes across a range of modeled futures. Monte Carlo analysis indicates a small positive difference between entry and exit outcomes consistent with observed rates of expansion in timberland investments in the region. (JEL D81, Q23)