Input substitution and relative input price variability in timber markets

Abstract

Timbers of multiple tree species and sizes are often traded in a single market. Some previous studies have empirically examined their price interdependences, but the drivers of such relationships remain unclear. I demonstrated with a rational expectations model that when timbers of two species (or sizes) were gross substitutes in production, the steady-state ratio between their prices was dependent on their relative quality and ease of substitution in production. The relative input price variability — the variance of the deviation of the relative price from its steady-state value — was a function of shocks in tree growth and demand for the output, negatively related to the ease of substitution. A case study illustrated that the relative price between pine (Pinus L.) pulpwood and hardwood pulpwood, as well as its variance, drastically decreased during the period of 2001–2016, as compared with 1986–2000, in the United States South, whereas the relative price between pine pulpwood and pine chip-n-saw was more stable. One possible explanation was that the emergence of novel forest products may have altered the relative quality and substitutability between pine pulpwood and hardwood pulpwood in the manufacturing process.