Price linkages in the North American softwood lumber market

Abstract

This paper examines structural changes and the dynamics of price relationships in the United States (US), British Columbia, Quebec, and Ontario lumber markets. With monthly price series from 1981 to 2002, I used Perron's method to identify structural shifts and the Johansen cointegration analysis and vector-error correction model to determine both short- and long-run price relationships. I found that because of restrictions on federal timber harvests in the Pacific Northwest, price instability experienced in 1992 has caused structural shifts for the US and Canadian lumber prices. I also found that the North American lumber market is indeed integrated, with the US price significantly affecting Canadian prices in both the short and long run. This further indicates that the US market plays a dominant role in price setting in the North American lumber market, as Canadian prices respond to the US price change, but the reverse situation does not occur.