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Changyou Sun, Zhuo Ning

Land Economics, Volume 90, Number 2, May 2014, pp. 306-323 (Article)

3XEOLVKHGE\8QLYHUVLW\RI:LVFRQVLQ3UHVV
DOI: 10.1353/lde.2014.0013

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http://muse.jhu.edu/journals/lde/summary/v090/90.2.sun.html

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Timber Restrictions, Financial Crisis, and Price

Transmission in North American Softwood
Lumber Markets
Changyou Sun and Zhuo Ning
ABSTRACT. Competition among the South, the West,
and Canada as major softwood lumber production
regions has been affected by timber resource endowments, public land policies, and the general economy.
To assess spatial price linkages, a threshold vector
error correction model is applied on softwood lumber
prices from 1978 to 2011. Price transmission is found
to be nonlinear and asymmetric. The South is more
adaptive to price disequilibrium. Short-term price adjustments are more sophisticated over the period of
1991 to 1993 related to the federal timber restrictions
than over the period of 2008 to 2009 related to the
global financial crisis. (JEL C32, Q23)

I. INTRODUCTION

Softwood lumber in North America is produced mainly in three regions: the southern
United States (South), the western United
States (West), and Canada.1 Price transmis1 The United States of America can be divided into several regions. Three references with slightly different classifications are cited in this study. For forest inventory assessment, Smith et al. (2009) divided the 50 states into several
regions and subregions: the North (North Central, Northeast), South (South Central, Southeast), Rocky Mountain
(Great Plains, Intermountain), and Pacific Coast (Pacific
Northwest, Pacific Southwest). For annual statistics of forest
products (e.g., lumber), Howard (2007) used three regions:
the North, South, and West, where the West mostly corresponds to the Pacific Coast of Smith et al. (2009). For
monthly prices of forest products, Random Lengths (2012)
reported data mainly by species. These species generally
correspond to a particular region, but with a less clearly
defined geographical boundary than these for forest inventory assessment (e.g., southern yellow pine is produced
mainly in the southern United States). In this study, lumber
prices by species are used in the analyses, and the United
States is divided into three lumber production regions (i.e.,
the North, South, and West), following the classification in
Howard (2007).

Land Economics May 2014 90 (2): 306323

ISSN 0023-7639; E-ISSN 1543-8325
2014 by the Board of Regents of the
University of Wisconsin System

sion of softwood lumber products among

these supplying regions or subregions has
been an important issue for at least two reasons. First, the softwood lumber industry is a
major sector of the forest products industry
whose value of shipments was 6.1% of total
manufacturing outputs in 2010 (U.S. Census
Bureau 2012). The value of annual softwood
lumber consumption in the United States
alone has reached about $20 billion in recent
years (Howard 2007; Random Lengths 2012).
More than 70% of softwood lumber products
are linked to residential construction through
various end uses (Shook, Plesha, and Nalle
2009). Second, unlike many market goods
(e.g., computers or toys), softwood lumber
products have been greatly affected by public
policies for land use and natural resources. In
particular, protection of the spotted owl in the
West since the 1990s has resulted in severe
timber harvesting restrictions on public land.
At the same time, the South and Canada have
produced an increasing amount of softwood
lumber to meet market demand. Thus, spatial
price transmission of softwood lumber products has received widespread attention over
time because of the economic status of the
industry and the close relation between resource policies and lumber products.
A number of studies have investigated the
market integration and price linkage of softwood lumber among the major supplying
regions in North America.2 For instance,
2 A number of studies have used linear cointegration
models to analyze market integration of forest products in
other countries (e.g., Hanninen, Toppinen, and Toivonen
2007; Nyrud 2002). However, to our knowledge, no spatial
integration study on lumber markets out of North America
has been published.

The authors are, respectively, associate professor and

research assistant, Department of Forestry, Mississippi State University, Mississippi State.

90(2)

Sun and Ning: Timber Restrictions and Softwood Markets

Murray and Wear (1998) applied the EngleGranger cointegration test on monthly prices
from 1983 to 1993 to investigate the impact
of federal timber restrictions on the integration of softwood lumber markets in the West
and South. A structural break was found in
the relationship, and the restrictions led to
more integrated markets. Other similar studies
have been conducted with different coverage
of period and species (Nanang 2000; Shook,
Plesha, and Nalle 2009; Yin and Baek 2005).
Each of these studies used linear time series
econometric models, including linear cointegration analyses and vector error correction
models. However, among the competing regions of softwood lumber production, the actual price dynamics may be nonlinear and
asymmetric, as explicitly but only briefly discussed in the literature (Murray and Wear
1998; Spelter 2006). Therefore, there has been
a need to investigate the integration of regional softwood lumber markets with appropriate nonlinear time series econometrics.
In recent years, nonlinear time series models have been rapidly developed and extensively applied for price analyses. Particularly,
asymmetric price transmission has emerged as
a main research issue because price transmission may differ according to whether prices
are increasing or decreasing (Meyer and von
Cramon-Taubadel 2004). Asymmetric price
transmission can be positive or negative and
can occur along a vertical value chain or between spatially separated markets. Positive
asymmetric price transmission between two
prices arises when price movements that
squeeze their margin are transmitted more
rapidly or completely than the equivalent
movements that stretch the margin. Conversely, the transmission is negative when
price movements that stretch the margin are
transmitted more rapidly or completely than
movements that squeeze it. Furthermore, a
number of econometric models have been developed to assess the nature and magnitude of
price transmission (Frey and Manera 2007).
These include the specification of split price
terms (Kinnucan and Forker 1987), threshold
cointegration (Enders and Granger 1998), and
threshold vector error correction models
(Goodwin and Piggott 2001).

307

The objective of this study is to assess the

spatial price linkage among three regional
softwood lumber markets in the South, the
West, and Canada through a threshold vector
error correction model and generalized impulse response function. Monthly softwood
lumber prices between 1978 and 2011 for stud
grade are defined by region and used in the
analyses. This study makes several contributions to the literature of softwood lumber markets and relevant natural resource policies. To
our best knowledge, nonlinear threshold models have not been utilized to analyze softwood
lumber price linkages before. The analyses in
the present study provide new insights into the
nonlinear relation among the three major softwood lumber production regions. Furthermore, a nonlinear impulse response function
is used to analyze the impact of two selected
histories on price adjustment among the regions. The first history is related to the protection of the northern spotted owl, as mandated by the Endangered Species Act and the
sharp decline of timber supply between 1991
and 1993. The second history is related to the
global financial crisis and the resultant large
reduction of softwood lumber demand between 2008 and 2009. The results from this
study can help us understand the competition
among the major lumber supplying regions
when public policies for natural resources
change or the general economy fluctuates.
II. SOFTWOOD LUMBER MARKET IN
NORTH AMERICA
Regional Production Patterns and
Contributing Factors

The geographic supply sources of the softwood lumber market in North America can be
divided into several regions: the South, the
West, the North, and Canada (Howard 2007).
In the United States, the South and the West
have been the two major softwood lumber
production regions, and the production in the
North is generally less than 5%. Canadian imports have been a major source of supply to
the U.S. market. The West was the dominant
producing region before 1985. However, in
recent decades, the production in the West has
dropped to a level similar to the southern pro-

308

Land Economics

May 2014

FIGURE 1
Annual Quantity of Softwood Lumber Production in the South, West, and North in the United States, and
Imports from Canada between 1965 and 2010

duction and Canadian import. As a result,

softwood from each of the three major supplying regions, namely, the South, the West,
and Canada, has accounted for about onethird of the U.S. market shares since 1993
(Figure 1).
More specifically, the West supplied an average of 58% of the softwood lumber consumed in the United States between 1965 and
1975 (Howard 2007; recent unpublished data
collected from Howard through personal communication). The share from the West
dropped after 1975, recovered to 47% in
1989, and then dropped gradually and converged with that from the South and Canada
at the 33% level. This trend has been attributed to several factors. The most cited factor
is the timber harvesting restrictions on federal
lands in the West (Murray and Wear 1998).
The restrictions were driven by efforts since
the late 1980s to protect the habitat of the
northern spotted owl on federal lands, as mandated by the Endangered Species Act. The
northern spotted owl was proposed as an endangered species in June 1989, and timber
harvesting restrictions have been formally implemented since 1993. In addition, federal
legislation, such as the National Forest Management Act of 1976, requires that forest outputs other than timber be given due consid-

eration in the management of national forests

(Wear and Murray 2004). In aggregate, all
these factors are related to the distinctive forestland ownership in the West: 66% of forestlands in the West are owned by the public,
22% by industrial firms, and 11% by nonindustrial private landowners (Smith et al.
2009). Therefore, public policies have affected softwood lumber production in the region considerably. Private ownership of forests is relatively small in the West, but it has
contributed more to timber production in recent years. At present, the West as a whole
still plays a large role in the national market.
The South has been gaining softwood market share steadily, from 21% between 1965
and 1975 to more than 31% since 1993. This
region is unique in that the land ownership
pattern is dominated by private owners: about
70% by millions of small nonindustrial private landowners, 20% by industrial or institutional landowners, and 10% by the public
(Smith et al. 2009). In the South, harvests are
more frequent and increasingly derived from
agricultural forestry, with forests growing on
shorter rotations. As a result, the harvesting
decisions are distributed among many small
landowners, timber supply is more sensitive
to market information, and the overall production is less likely to be affected by dra-

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Sun and Ning: Timber Restrictions and Softwood Markets

matic changes in environmental and forest

policies. As pine plantations have steadily established in the South, this region can be expected to maintain its status as an active and
stable supplier in the national market.
Canada has a strong comparative advantage in the production of softwood lumber
(Wear and Murray 2004). It is rich in forest
resources, has a small population relative to
the size of its timber resource, and is geographically close to the large U.S. softwood
lumber market. Thus, Canada is naturally positioned as an exporter of forest products, with
80% of its lumber products exported to the
United States. As shown in Figure 1, Canada
has been gaining market share in the United
States, from 18% (19651975) to 33% (1993
2010). However, there has been a long, bitter
history between the two countries about the
softwood lumber trade (Zhang 2007). The
central issue of the trade dispute has been
whether Canadian lumber is subsidized
through provincial stumpage systems, and if
it is, whether the lumber industry in the
United States is injured. The dispute started
in October 1982 when a group of lumber producers in the United States filed a petition to
the Department of Commerce. Since then,
there have been numerous negotiations, lawsuits, and actions. Major periodic outputs
from the dispute include the 1986 Memorandum of Understanding, and the 1996 and 2006
Softwood Lumber Agreements.
A common factor that can impact all timber
production regions is the status of the general
economy. As softwood lumber consumption
is closely related to the housing market, economic declines can, ultimately, influence the
demand for softwood lumber products (Zhang
2007). For example, the economic recession
and change in macroeconomic policy in the
early 1980s resulted in a decline in softwood
consumption. The more recent global financial crisis in 2008 also created a lasting negative impact on the softwood lumber market.
Analyses of Spatial Price Linkages

Numerous studies have analyzed various

issues related to the softwood lumber market
in the United States, Canada, or both. An issue
that has attracted plentiful efforts is the price

309

linkage in these markets. In an early study, Uri

and Boyd (1990) used a causality test and annual softwood lumber prices between 1950
and 1985 to determine the market integration
in four regions of the United States. The results confirmed that there was a national market for softwood lumber. Applying the Johansen cointegration test on the same dataset,
Jung and Doroodian (1994) supported the hypothesis of the law of one price. More recently, Yin and Baek (2005) conducted an extensive investigation to assess the market
integration in the United States with the Johansen cointegration test and 36 monthly softwood lumber prices between 1991 and 1999.
Their conclusion was that the law of one price
held for the entire softwood lumber market in
the United States.
Furthermore, Shahi, Kant, and Yang (2006)
used monthly data between 1996 and 2004 to
assess market integration in 10 regional North
American markets. The regional markets of
homogeneous softwood products in the
United States and Canada were found to be
cointegrated. Shook, Plesha, and Nalle (2009)
used the Engle-Granger cointegration analysis
to examine the correlation among 11 softwood lumber products (either stud or panel)
in North America. With monthly data from
1995 to 2001, long-term cointegration existed
among the different regions, but no clear evidence was found to support perfect substitutability. Finally, Shahi and Kant (2009) used
error correction models and generalized impulse response functions to assess price dynamics by species in the North American softwood lumber market. With monthly data from
1994 to 2004, the long-run price equilibrium
and degree of market integration were found
to be different by species.
In total, this cohort of studies possesses
several common features, which can become
the basis for further studies. Most studies used
monthly data for approximately 10 years to
address a specific objective. The major methods employed were the linear Engle-Granger
or Johansen cointegration test. Possible nonlinear or asymmetric relation was briefly discussed by Murray and Wear (1998) and Spelter (2006), but no rigorous analyses were
offered. All of these motivate us to construct
a longer softwood price series and conduct a

310

Land Economics

dedicated examination of spatial price lumber

linkages, with special attention to the periods
when timber supply or lumber demand
changes dramatically. A set of nonlinear time
series techniques is adopted in the analyses,
as detailed next.
III. METHODOLOGY

Threshold vector error correction models

and the related techniques are employed to investigate the softwood lumber price dynamics
in North America. This model has an intuitive
economic explanation of spatial price relation,
as transaction costs can affect the trade between regions (Goodwin and Piggott 2001). It
is usually applied to a pair of prices because
estimation and inference methods have been
better developed for bivariate cases than for
three variables or more. In this study, monthly
time series data are collected to represent lumber prices in the South, the West, and Canada,
and then three price pairs among these regions
are formed. Major steps are to analyze time
series properties of data, evaluate the longterm cointegration relation, estimate the linear
and threshold error correction models, select
the best model through nonlinearity tests, and
finally, assess the short-term dynamics
through impulse response analyses at several
critical histories.
Linear and Threshold Vector Error
Correction Model

Consider a standard linear cointegration

relationship between a vector of prices
Wt = (yt, xt) as
y t = 0 + 1 x t + t ,

[1]

where 0 and 1 are parameters, and t represents the residual of the equilibrium relation. Cointegration between the two prices
requires the residual to be stationary, which
can be evaluated by applying the augmented
Dickey-Fuller (ADF) test on the residual with
special critical values (Engle and Granger
1987). Given that the cointegration relation
exists, the Granger representation theorem
states that a linear vector error correction
model can be developed as

May 2014
p

W t = + t 1 +

iWt i + ut,
i=1

[2]

where , , and i are parameters; t 1 is

the lagged residual from the cointegration relation (also referred to as the error correction
term); p is the number of lags; and u t is the
disturbance term.
The above linear analysis can be extended
to the case where the residual of the long-term
equilibrium relation follows a threshold autoregression (Balke and Fomby 1997). A
three-regime vector error correction representation of the threshold model can be specified
as

W t =

1 + 1 t 1 +

1i Wt 1 + u1t ,

i=1

if < t k 1
p

2 + 2 t 1 +

2i Wt 1 + u2t ,

i=1

if 1 < t k 2

[3]

3 + 3 t 1 +

3i Wt 1 + u3t ,

i=1

if 2 < t k < +

where the superscript (j = 1, 2, 3) denotes the

lower, middle, and upper regime, t k is the
threshold variable, k is the delay parameter,
and 1 and 2 are the threshold values to separate the regimes. Alternatively, the threshold
model can be compactly expressed as
W t = B1 Z t D1t + B2 Z t D2t + B3 Z t D3t + u t,
Z t = (1, t 1,W t i, . . . ,W t p),
D1t = 1( < t k 1),
D2t = 1(1 < t k 2),
D3t = 1(2 < t k < + ),

[4]

where B j is the coefficient matrix, Z t is the

covariate matrix, and D jt is the indicator variable that takes the value of 1 within regime j
and 0 outside of the regime. The delay parameter is usually assumed to be 1 in the literature
(Goodwin and Piggott 2001). The compact
form allows the model estimation to be easily
implemented by matrix manipulation (R Development Core Team 2012). Other forms of
threshold models, such as a two-regime

90(2)

Sun and Ning: Timber Restrictions and Softwood Markets

threshold model with one threshold value

only, can be similarly defined.
If the threshold values are known, equation
[4] can be estimated easily. However, the
threshold values are usually unknown and
must be estimated along with other parameters. In practice, the model is estimated with
sequential iterated regressions in several
steps. First, determine the possible range of
threshold values. For the threshold values
( 1 and 2) to be meaningful and create regimes, they must be one of the values of the
threshold variable t k (Enders 2010). In addition, to estimate the parameters, each regime needs to have a minimum number of observations. In this study, the first threshold in
the three-regime model is searched between
2.5% and 95% of the largest absolute values
of the negative lagged error correction term.
The second threshold is searched between
2.5% and 95% of the largest positive lagged
error correction term. Next, for each pair of
threshold values, estimate the threshold model
) of the reand save the covariance matrix (
siduals. Finally, select the pair of threshold
values that minimizes the log determinants of
, that is, ( 1, 2) = arg min(ln(
1, 2)).

With the selected threshold values, estimate

the model again and generate the final parameter estimates.
Tests for Nonlinearity and Model Selection

Once linear and threshold vector error correction models are estimated, tests are needed
to evaluate whether the dynamic behavior and
adjustment toward the long-run equilibrium
relationship is linear or exhibits threshold
nonlinearity. Lo and Zivot (2001) extended
the method adopted by Hansen (1999) for
testing linearity in univariate threshold autoregressive models to multivariate threshold
models. They proposed a set of sup-likelihood
ratio (LR) tests as follows:
2()),

LR1,2 = T(ln 1 ln
3( 1, 2)),
LR1,3 = T(ln 1 ln

3( 1, 2)),
ln
LR2,3 = T(ln2()

[5]

where k(k = 1, 2, 3) are the estimated residual covariance matrices of the linear, two-re-

311

gime, and three-regime vector error correction

models, respectively. The first two tests evaluate the null hypothesis of a linear model
against the alternative hypothesis of either a
two-regime or three-regime model. If the
presence of the threshold effect is confirmed,
the third test is to select a better-fitted model
between the two- and three-regime models for
the data.
The above statistics suffer from the problem of unidentified nuisance parameters under
the null hypothesis (Hansen 1999; Hansen and
Seo 2002). Thus, the algorithm of parametric
residual bootstrap is adopted to compute the
p-value for these statistics. A random sample
of u t is first generated by sampling with replacement from the residuals of the linear error correction model. Then, using the fixed
initial conditions (Wt, t = 1, . . . ,1 + p) and the
parameters from the linear error correction
model recursively generates a simulated sample W t. Apply the methods described for the
original data on the simulated sample to calculate the test statistics. After repeating the
procedure 500 times, the bootstrap p-value for
each test statistic is the percentage of simulated statistics that exceed the statistic from
the original data.
Generalized Impulse Response Analysis

The generalized impulse response function

from Potter (1995) and Koop, Pesaran, and
Potter (1996) is used to compute the impulse
response function for the nonlinear threshold
model. Mathematically, the response I for a
specific shock and history t 1 can be expressed as
I(h,,t 1) =
E [ W t + h(u t = ,u t +1 = u t +1, . . . ,u t + H = u t + H,t 1) ]
E [ W t + h(u t = u t,u t +1 = u t + 1, . . . ,u t + H = u t + H,t 1) ] ,

[6]

where h = 1, . . . , and H is the forecasting time

horizon. As both shocks and histories are realizations of random variables, the responses
are also realizations of random variables as
I(h,,t 1) =
E [ W t + h(,t 1)] E [ W t + h(t 1)].

[7]

312

Land Economics

In this study, the responses of each price in

a pair are evaluated for a horizon of two years
(i.e., H = 24). Both positive and negative
shocks are included, and their magnitudes are
two times the standard error of the residuals
of the source price from the threshold model.
Furthermore, hypothetical shocks are initiated
over two particular histories. The northern
spotted owl was listed as an endangered species in the early 1990s, resulting in a hike of
softwood lumber price at that time. Thus, related to the Endangered Species Act and federal timber restrictions, the period between
January 1991 and December 1993 is selected
as the first history. In addition, the global financial crisis in 2008 also caused a low demand of softwood lumber and a falling price.
The period between October 2008 and December 2009 is selected as the second history.
The specific estimation steps are as follows. For each time point in a history, collect
Wt(t = i 1 p, . . . ,i 1) from the series as
history t 1, where i is the location of the
time point in the price series. For a given horizon, randomly sample a matrix from the estimated residuals with the dimension of
(H + 1) 2. Use one exogenous positive shock
(two times the standard error of the residual),
the first H random shocks, the history t 1,
and the parameters from the fitted vector error
correction model to recursively calculate the
realizations of the prices. Repeat the above
calculation with (H + 1) random shocks only.
Calculate the difference from the previous two
calibrations. Repeat the procedure 1,000 times
for each selected time point in a history, and
take the average differences to form the estimates of impulse responses over the (H + 1)
horizon. When the history contains more than
one time point, averages are taken over all the
estimates. Whether an average estimate is significantly different from zero can be evaluated
by calculating the 90% confidence interval
from the 1,000 simulations, and then examine
if the interval includes zero or not. If zero is
not within the confidence interval, then the average estimate is significantly different from
zero. The whole process can be repeated by
history, different shock sign, and different
shock size, and the resulting responses can be
plotted.

May 2014

IV. DATA AND PRELIMINARY

ANALYSES

Monthly lumber prices for various forest

products by dimension, species, and region
have been reported by Random Lengths
(2012). In this study, the price of kiln-dried
lumber with stud grade and dimensions of 2
inches by 4 inches by 8 feet (precision end
trimmed) is selected because it is a typical
lumber product in North America. Three species are involved: southern yellow pine for the
South, Douglas-fir for the West, and sprucepine-fir for Canada. In the South and Canada,
several time series have been reported for
their subregions, and the one with consistent
reporting over time is selected. This results in
the selection of the Westside price series for
the South, the Coast price series for the West,
and the Eastern/Great Lakes price series for
Canada (Random Lengths 2012). The substitutability among forest products made from
different species and regions has been investigated in a number of studies (e.g., Nagubadi
et al. 2004). Given the similar dimensions of
forest products and the leading role of these
species in the corresponding regions, the selected prices are deemed appropriate for the
study purpose. This is also consistent with the
data treatment in previous lumber price studies (e.g., Shook, Plesha, and Nalle 2009). The
beginning period is January 1978, which is the
earliest date for which consistent data can be
collected across the regions. The end date of
December 2011 reflects the data availability
when the study was conducted. In total, the
three lumber price series cover the period between January 1978 and December 2011, with
408 monthly observations. The unit is dollars
per thousand board feet.
The price series are deflated by the producer price index of all commodities, published by the U.S. Bureau of Labor Statistics
(index value of 100 at 1982). All the series are
also expressed in natural logarithms. The logarithmic transformation mitigates fluctuations
of individual series and allows us to interpret
the results by percentage change. As the data
are monthly, seasonality is investigated by implementing seasonal unit root tests, following
the procedure of Hylleberg et al. (1990). Results from the seasonal unit root tests reveal

90(2)

Sun and Ning: Timber Restrictions and Softwood Markets

313

FIGURE 2
Monthly Nominal and Logarithmic Real Lumber Prices in the South, the West, and Canada between January
1978 and December 2011

that only the null of the unit root at the regular

frequency cannot be rejected, and a seasonal
component is not significant. Alternatively,
the systematic component of seasonality is
captured by a second-order Fourier approximation (Ben-Kaabia and Gil 2007), which
turns out to be small relative to the overall
magnitude of the series. Removing this systematic component from the series does not
qualitatively change the results. Therefore, the
final price series used in the nonlinear model
are real lumber prices in logarithm without
further adjustment. A comparison of the nominal and transformed prices among the three
regions is demonstrated in Figure 2.

at 306.936 (Table 1). The West has the largest

standard error at 84.333, which is related to
the relatively large price surges in the early
1990s and drops since 2008. The South-West
pair has the lowest linear correlation at 0.900,
followed by the Canada-South pair at 0.933,
and the Canada-West pair at 0.946. The log
real prices display similar trends as the nominal prices. Furthermore, two graphs for each
pair are created to further reveal the price relationship (Figure 33). Nominal prices are utilized in drawing the graphs to have a more
intuitive explanation. The first one is the relative margin, which is defined as mt = (yt xt)/
xt 100% for the price pair Wt = (yt, xt)
(t = 1, . . . ,408). The average of all relative

V. EMPRICAL RESULTS
Basic Statistics and Cointegration Results

The nominal price in the South has the lowest mean at $258.086 per thousand board feet,
followed by the West at 271.887, and Canada

3 For each price pair W = (y ,x ), the relative margin is

t
t t
defined as m t = (y t x t)/x t 100% . For the four asymmetric
response values, 1 refers to the average price change in y
when m t > 0, 2 refers to the average price change in x
when m t > 0, and 3 and 4 are similarly defined for the
subsamples when m t 0.

314

Land Economics

May 2014

TABLE 1
Basic Statistics and Properties of Softwood Lumber Prices
Nominal Price
Item
Basic
Mean
Std. error
Minimum
Maximum
Observations
Correlation
South
West
ADF test statistic
Level
Difference

Log Real Price

South

West

Canada

South

West

Canada

258.086
70.998
155
429
408

271.887
84.833
137
520
408

306.936
72.961
175
542
408

5.308
0.269
4.681
5.863
408

5.349
0.314
4.450
6.071
408

5.491
0.240
4.833
6.125
408

1.000
0.900

0.900
1.000

0.933
0.946

1.000
0.902

0.902
1.000

0.932
0.946

2.007
11.878***

1.681
11.291***

2.264
11.607***

Note: The unit of the price is dollars per thousand board feet. The augmented Dickey-Fuller (ADF) test examines the null hypothesis of
nonstationarity. The lag lengths selected are six.
*** Significance of the estimates at the 1% level.

FIGURE 3
Margin Changes in Percentage and Asymmetric Responses of Nominal Lumber Prices by Pair

margins is 5.2% for West-South, 16.0% for

Canada-West, and 20.7% for Canada-South,
and the corresponding standard error is
14.5%, 13.6%, and 11.8%. Thus, the relative

margin for the West-South pair has the smallest mean and the largest volatility.
The second graph is created to show the
degree of asymmetric price response. The

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Sun and Ning: Timber Restrictions and Softwood Markets

315

TABLE 2
Estimates of Cointegration Vectors and Results of the Engle-Granger Cointegration Test
West-South

Canada-West

Canada-South

Item

Coefficients

t-Ratio

Coefficients

t-Ratio

Coefficients

t-Ratio

Constant
x
R2
ADF test

0.242*
1.053***
0.814
5.805***

1.821
42.156

1.627***
0.722***
0.894
5.675***

24.637
58.594

1.079***
0.831***
0.869
6.335***

12.671
51.886

Note: The lag length selected for the augmented Dickey-Fuller (ADF) test is six. x is the second variable in each pair (e.g., the southern price
in the pair of West-South).
*, *** Significance of the estimates at the 10% and 1% levels, respectively.

whole sample is divided into two groups, depending on whether the relative margin in one
period over that in the previous period is increasing (mt > 0) or decreasing (mt 0).
Then, within each group, the monthly average
percentage changes in prices are calculated,
T1

for example, ( y t)/T 1 for the first price in

i=1

a group with T1 observations. This results in

a vector of four numbers for each pair (i.e.,
two average price changes by two groups),
and they are shown as bar charts in Figure 3.
For example, the four values in the WestSouth pair are 1.68%, 4.39%, 2.02%, and
3.27%; the first two are the changes in
prices when the margin increases, and the last
two are the changes in prices when the margin
decreases. Two observations can be drawn in
comparing these values. First, positive
changes in each price are slightly larger than
the negative changes in magnitude (i.e.,
4.39 > 3.27 and 2.02 > 1.68). This is an indication of asymmetric response of these prices
to the disequilibrium in the margin. Second,
changes in the relative margin are primarily
due to the changes in the second variable (i.e.,
4.39 > 1.68 and 3.27 > 2.02). Thus, the first
price is stickier than the second price. By pair,
the South is more active than the West and
Canada, and the West is more active than Canada. This observation motivates us to follow
this order in normalizing on the first variable
when later evaluating the cointegration relation.
The nonstationarity property of the price
series is assessed by the ADF test. The test
statistics are not significant for the individual
price series but are significant for the first-dif-

ferenced price series. Thus, all the price series

are nonstationary with an integration order of
one. Furthermore, the long-term relation is estimated through the Engle-Granger two-step
cointegration test (Table 2). All the coefficients are highly significant at the 1% level or
better, with the exception that the intercept for
the West-South pair is significant at the 10%
level only. The coefficient for the price variable on the right side is 1.053 for the WestSouth pair, 0.722 for the Canada-West pair,
and 0.831 for the Canada-South pair. This indicates that the first pair for domestic prices
may have a different dynamic relation than the
other two pairs with Canadian prices involved. Finally, the ADF test on the residual
from the long-run relation reveals that the residual is stationary and each pair is cointegrated.
Results of Nonlinearity Tests and Model
Selection

Three types of models are estimated for

each price pair: linear, two-regime, and threeregime vector error correction models (Table
3). Based on the Akaike information criterion,
the lag used is three for the West-South and
Canada-West pairs, and one for the CanadaSouth pair. For the sup-likelihood ratio test of
linear versus two-regime or three-regime
models, the statistic is significant at the 5%
level or better for each pair; the exception is
the insignificant LR1,2 for the Canada-West
pair. Thus, nonlinearity is present in the price
relationship. In deciding on the number of regimes, the test statistics select the three-regime model. Misspecification tests, including

316

Land Economics

May 2014

TABLE 3
Nonlinearity Diagnostic Tests and Threshold Estimates of Three-Regime Model by
Regional Pair
Item
Sup-likelihood ratio test
LR1,2
LR1,3
LR2,3
Threshold estimates
1
2
Observations (share)
Regime I (lower)
Regime II (middle)
Regime III (upper)

West-South
24.954 [0.02]
50.222 [0.00]
25.268 [0.01]

Canada-West
15.216 [0.18]
35.130 [0.02]
19.914 [0.04]

Canada-South
23.716 [0.00]
37.051 [0.00]
13.335 [0.06]

0.196
0.215

0.055
0.027

0.143
0.146

31 (7.7%)
351 (86.9%)
22 (5.4%)

78 (19.3%)
162 (40.1%)
164 (40.6%)

21 (5.2%)
363 (89.4%)
22 (5.4%)

Note: LR1,2 tests the hypothesis of linear against two-regime vector error correction models. LR1,3 tests the
hypothesis of linear against three-regime models. LR2,3 tests the hypothesis of two-regime against three-regime
models. Numbers in brackets are p-values from the parametric residual bootstrapping. Threshold estimates and
observation numbers are from the three-regime model.

ARCH Lagrange multiplier and Ljung-Box

statistics, are used to assess the properties of
the residuals from the three-regime threshold
model. The results are satisfactory with the
only exception of slight heteroskedasticity for
lags larger than 12 months. Therefore, the
three-regime threshold error correction model
is selected and estimated for all the three price
pairs.
The threshold estimates from the three-regime threshold models are reported in Table
3, and their relation to the residual values from
the long-term cointegration is presented in
Figure 4. The residual values from the Canada-West pair have less dispersion, and the
threshold estimates divide the samples into
more evenly distributed regimes. Specifically,
for the Canada-West pair, the share of the observations is 19.3% for the lower regime,
40.1% for the middle regime, and 40.6% for
the upper regime. For the West-South pair, the
three shares are 7.7%, 86.9%, and 5.4%. For
the Canada-South pair, the shares are 5.2%,
89.4%, and 5.4%. Regime switching occurs
mainly at the beginning and end periods for
the West-South and Canada-South pair. In
contrast, for the Canada-West pair, regime
switching occurs more frequently; lower regimes are mainly in the early period before
1995; and upper regimes are mainly in more
recent years after 2000.

Results from Linear and Threshold Models

To facilitate comparison, the results from

the linear vector error correction model are
reported in Table 4, and the results from the
threshold model are reported in Table 5 by
pair. In the linear model, all the error correction terms have the expected signs and are significant, with only one exception in the Canada-West pair. For example, in the West-South
pair, the response to one positive unit of disequilibrium is 0.059 by the western price
and 0.102 by the southern price. The magnitude of the response is bigger for the southern
price, which confirms the finding in Figure 3
that the southern price is more active than the
western price.
The results from the threshold models are
similar to those from the linear model, but
they also provide additional insights. For the
West-South pair, the only significant estimate
for the error correction term is the response of
the western price in the middle regime (i.e.,
0.097), which is slightly larger in magnitude than the corresponding estimate in the
linear model (i.e., 0.059). For the southern
price, the estimates in all three regimes are
significant at the 15% level only. The values
in the lower regime (0.386) and upper regime
(0.382) are especially large. Both prices have
more significant lagged variables in the sys-

90(2)

Sun and Ning: Timber Restrictions and Softwood Markets

317

FIGURE 4
Residual Values from the Long-Term Cointegration, Threshold Estimates, and Time of Regime Switching
from Three-Regime Threshold Vector Error Correction Model by Pair

TABLE 4
Results from Linear Vector Error Correction Models by Pair
y = West, x = South
Variable
t 1
Constant
yt 1
xt 1
yt 2
xt 2
yt 3
xt 3

y = Canada, x = West

y = Canada, x = South

yt

xt

yt

xt

yt

xt

0.059**
( 2.071)
0.002
( 0.555)
0.197***
(3.211)
0.079
(1.466)
0.133**
( 2.220)
0.132**
(2.432)
0.013
( 0.221)
0.044
( 0.805)

0.102***
(3.137)
0.002
( 0.544)
0.024
(0.345)
0.294***
(4.774)
0.071
( 1.042)
0.009
(0.149)
0.097
( 1.440)
0.030
( 0.477)

0.147***
( 2.944)
0.002
( 0.593)
0.277***
(3.255)
0.103
( 1.237)
0.051
( 0.602)
0.010
(0.122)
0.094
(1.136)
0.113
( 1.425)

0.024
(0.485)
0.002
( 0.570)
0.214**
(2.505)
0.080
(0.965)
0.014
(0.171)
0.049
( 0.583)
0.044
(0.528)
0.070
( 0.878)

0.133***
( 3.224)
0.002
( 0.533)
0.143**
(2.175)
0.037
(0.655)

0.143***
(3.055)
0.002
( 0.418)
0.119
(1.595)
0.214***
(3.362)

Note: The error correction term t 1 is the lagged residual from the cointegration regression.
**, *** Significance of the estimates at the 5% and 1% levels, respectively.

318

Land Economics

May 2014

TABLE 5
Results from Three-Regime Threshold Vector Error Correction Models by Pair
yt
Variable
(y, x) = (West, South)
t 1
Constant
yt 1
xt 1
yt 2
xt 2
yt 3
xt 3
(y, x) = (Canada, West)
t 1
(y, x) = (Canada, South)
t 1

II

0.214
(0.936)
0.057
(0.947)
0.314
( 1.493)
0.100
(0.506)
0.279
( 1.412)
0.285
( 1.478)
0.502**
( 2.160)
0.098
( 0.513)

0.097**
( 2.391)
0.002
( 0.584)
0.198***
(3.078)
0.088
(1.550)
0.163**
( 2.533)
0.154**
(2.737)
0.005
( 0.084)
0.045
( 0.793)

0.204
( 1.486)

0.288
(1.269)

1.502**
(2.260)

0.135**
( 2.646)

xt
III

II

III

0.237
(1.130)
0.076
( 1.281)
0.484*
(1.866)
0.144
(0.631)
0.030
(0.127)
0.004
( 0.013)
0.308
(1.144)
0.577*
(1.728)

0.386
(1.451)
0.078
(1.111)
0.059
( 0.242)
0.047
( 0.205)
0.419*
( 1.824)
0.200
( 0.896)
0.245
( 0.910)
0.043
(0.191)

0.067
(1.410)
0.003
( 0.748)
0.051
(0.690)
0.240***
(3.626)
0.052
( 0.690)
0.018
(0.269)
0.100
( 1.403)
0.039
( 0.601)

0.382
(1.568)
0.020
( 0.297)
0.601*
( 1.994)
1.306***
(4.935)
0.005
(0.019)
0.207
( 0.547)
0.282
( 0.902)
0.835**
(2.154)

0.753***
( 4.034)

0.013
( 0.092)

0.404*
(1.768)

0.391**
( 2.080)

0.152**
(2.691)

0.615
( 0.604)

1.823*
( 1.988)

3.248***
(4.402)

Note: I, II, and III are the lower, middle, and upper regimes, respectively. The error correction term t 1 is the lagged residual from the
cointegration regression. For the pairs of Canada-West and Canada-South, the results for the lagged terms are omitted to save space.
*, **, *** Significance of the estimates at the 10%, 5%, and 1% levels, respectively; significance at the 15% level.

tem. Overall, the western price is less sensitive to the regime division, whereas the southern price has the tendency to respond very
differently in the two outer regimes.
For the Canada-West pair, the Canadian
price has a large significant estimate in the
upper regime ( 0.753), while it has no significant responses in the other regimes. The
western price responds to the system disequilibrium in both the middle regime (0.404) and
upper regime ( 0.391). This explains why in
the corresponding linear model, the western
price does not respond to the error correction
term at all. Therefore, for the Canada-West
pair, both prices do not adjust actively when
the Canadian price is much lower than the
western price (i.e., in the lower regime). When
the Canadian price is much higher than the
western price (i.e., in the upper regime), both
the prices tend to drop; the reaction is bigger
for the Canadian price, so the margin can be
reduced.

For the Canada-South pair, the behavior of

the two prices in the middle regime is similar
to that in the linear model. However, where
the Canadian price is much lower than the
southern price, both prices increase and the
reaction by the southern price is much larger
(1.502 versus 3.248). When the Canadian
price is much larger than the southern price,
the drop of the Canadian price brings the relation back to normal. Thus, in the relation
between Canadian and southern prices, they
are sensitive when Canadian price is lower
than the southern price, and the southern price
usually has a larger reaction.
Results of the Generalized Impulse
Responses

For each price pair, the nonlinear impulse

responses for various combinations of histories and shocks are calculated. The results related to the history of the Endangered Species

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Sun and Ning: Timber Restrictions and Softwood Markets

319

FIGURE 5
Generalized Impulse Responses over the Period 19911993 Related to the History of the Endangered Species
Act (ESA)

Act are plotted in Figure 5,4 and those related

to the history of global financial crisis are
plotted in Figure 6.5 For all three pairs, the
responses are highly consistent with long-run
market integration. Isolated shocks in one region provoke responses in the other region
that eventually lead to a tendency for prices
to equalize. For example, a positive shock to
the western price evokes an equilibrating
positive response in the southern price that
eventually leads to price convergence. In most
4 There are four lines in each panel: y( + ) stands for the
response of series y to a positive shock, x( + ) for x to a
positive shock, y( ) for y to a negative shock, and x( )
for x to a negative shock. y and x are the first and second
price in each pair, respectively. The size of the shock is two
times the residual standard error. The shock occurs at time
zero, and the forecasting horizon is 24 months. The dots on
the lines indicate that the responses are significant at the 10%
level.
5 See the notations for Figure 5.

cases, the shocks result in permanent shifts in

the price series, reflecting the nonstationary
nature of the price data. Thus, positive shocks
often lead to permanent price increases, while
negative shocks lead to permanent price decreases. The responses suggest that after some
short-term dynamic adjustments, prices converge on one another in the long run.
By history, over the period of 1991 to 1993
related to federal timber restrictions, sophisticated and fluctuating responses are observed
during the first half year, especially when the
shock is initiated on the western price. This
may reflect that the disputes over the spotted
owl were controversial and long lasting, and
the responses are calculated as the averages
over the period of three years. A market disequilibrium or shock on the Canadian price
over the same period related to the Endangered Species Act generates smoother curves.

320

Land Economics

May 2014

FIGURE 6
Generalized Impulse Responses over the Period 20082009 Related to the History of Global Financial Crisis
(GFC)

Over the period related to the history of the

global financial crisis, the general patterns are
similar. For instance, for the Canada-South
pair, a negative shock on the Canadian price
generates large negative responses. However,
differences in the impulse responses do exist
between the two histories. The global financial crisis has affected every region to a more
similar degree than the federal timber restrictions in the West. The responses to the global
financial crisis are more balanced among the
three price pairs and shock sources.
Across the three pairs, the responses are
significant up to five months for a shock of
two times the residual standard error. The scenario that generates the most significant responses is a negative shock over the period
related to the history of the global financial
crisis on the southern price in the West-South
pair. In addition, the origin of the shock also
matters. In most cases, a shock from the y

variable causes more significant responses

than a shock from the x variable. This is most
apparent for the Canada-South pair. Finally,
asymmetric price responses can be revealed
by evaluating whether the responses of a price
to positive and negative shocks (e.g., the lines
y( + ) and y() in Figure 5) are symmetric with
regard to the horizontal axis. For example,
take the Canada-West pair at the global financial crisis in 2008 with a shock on the Canadian price. When the shock is positive and
price margin is enlarged, the reaction of the
Canadian price is to drop and restore the equilibrium. The shock is absorbed in the market
within two months. In contrast, when the
shock is negative and the margin becomes
smaller, the reaction of the Canadian price is
much slower. Therefore, the Canadian price
shows negative asymmetry in relation to the
western price. Overall, negative asymmetric
price transmission is more prevalent for the

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Sun and Ning: Timber Restrictions and Softwood Markets

Canada-West and Canada-South pairs. In contrast, the West-South pair shows some positive asymmetry.
VI. SUMMARY AND POLICY
IMPLICATIONS

After several decades evolution, the softwood lumber market in North America has
become the battlefield of lumber producers
from three major regions with similar market
shares: the southern United States, the western
United States, and Canada. The competition
among these regions has been affected by
many factors, including timber resource endowments, forestland ownership, environmental protection and public land policies,
trade disputes between the two countries, and
the status of the general economy. Following
previous market integration studies, a threshold vector error correction model is developed
in this study to investigate nonlinear price
transmission in the softwood lumber market
among these regions. The time span includes
34 years between 1978 and 2011 and is longer
than those used in previous studies. The major
conclusion is that price transmission among
lumber production regions in North America
is nonlinear and asymmetric. As the first study
that utilizes a nonlinear time series model to
analyze softwood lumber price dynamics and
the impact of resource policies, the new findings from this study have several policy and
management implications.
The lumber price in the South shows the
most flexibility and the largest magnitude in
responding to price disequilibrium with other
regions. Forestlands in both the West and
Canada are mostly publicly owned, whereas
about 90% of forestlands in the South are privately owned, including nonindustrial forest
landowners, industrial firms, and institutional
investors. The dominance of the market mechanism in the South may be largely responsible
for the active behavior of the southern lumber
price in regional competition. This finding has
important implications for forest policy design and implementation. In general, policy
makers utilize instruments of coercion and
regulations, financial aids, technical service,
and public land ownership in achieving forest
policy goals (Cubbage, OLaughlin, and Bul-

321

lock 1993). In particular, government management of public forestlands is expected to

produce more nonmarket goods and demonstrate public preferences of natural resource
management to private forest landowners.
The new finding reveals that when the share
of lumber production from privately owned
forests is sufficiently large, the interaction between public and private forestland ownership
can be modified substantially. Feedbacks from
the southern market can disclose the preferences of private landowners and other market
participants in the face of evolving environmental regulations and market competition.
These timely feedbacks provide valuable information to the general public and policy
makers for policy design, implementation,
and evaluation.
The nonlinear price transmission differs
among regions. The domestic pair between
the West and the South in the United States
has the lowest correlation, the smallest average of price margins, but the highest volatility
of price margins. Some positive asymmetric
price transmission is identified between the
western and southern prices. In contrast, the
other two pairs with the Canadian price involved have larger correlation coefficients and
are more prone to negative asymmetry. This
suggests that producers in the West and South
are slow in responding to an enlarged price
margin between the two regions, but fast in
responding to a reduced price margin. In contrast, both the western and southern prices
have reacted to any price disequilibrium relative to the Canadian price in a way that these
prices follow each other as closely as possible.
These differences among regional price pairs
may be attributed to product differentiation
and varying degrees of substitution between
imported and domestic softwood products
(Nagubadi et al. 2004). Given the difference
between the two countries (e.g., forestland
ownership), softwood lumber trade disputes
between Canada and the United States will
likely continue. Incorporating nonlinearity
and asymmetry in welfare analyses may reveal different impacts on market participants
across regions and, thus, improve the existing
assessments in this area (e.g., Zhang 2001).
From a policy perspective, the finding from
the present study highlights the need to con-

322

Land Economics

sider nonlinear price transmission among regional prices in pursuing a better trade remedy
for the softwood lumber dispute in North
America.
Different events can generate very diverse
and nonlinear price adjustments. The generalized impulse response analyses reveal that
between 1991 and 1993, related to the federal
timber restrictions, short-term price responses
are more sophisticated with varying duration
and magnitudes, especially when the price
shock is initiated on the western price. This is
consistent with the fact that the contentious
disputes over the spotted owl lasted for several years in the 1990s. The global financial
crisis that started in 2008 has been more prevalent over all the regions under consideration,
and the responses over this period are more
balanced among the three price pairs. In general, when nonlinear price transmission exists,
the effect of a shock depends on the history
of the time series when the shock occurs, the
sign of the shock, and the magnitude of the
shock. The implication of this finding is that
in adopting a specific forest policy or evaluating its effectiveness, individual assessments
should be conducted to examine the nonlinear
and asymmetric impacts that are unique to the
policy under consideration.
In recent years, the consumption of softwood lumber in the United States has experienced one of its lowest levels in history,
which is largely due to the economic recession
that began in 2008. As the economy has been
on the way toward recovery, the housing market has improved and the demand of softwood
lumber products has gradually increased, especially since 2012. Nonetheless, other uncertainties such as environmental protection
and trade disputes between the United States
and Canada can still affect the comparative
advantages of lumber producers in different
regions. Thus, the competition among the
main supplying regions will likely develop
further, and regional price dynamics can become even more sophisticated. As public policies for natural resources continue to evolve
to meet the diverse demand from the public,
further studies are needed to closely monitor
these interactions among regional softwood
lumber markets.

May 2014

Acknowledgments
The authors wish to thank Randall C. Campbell and
Ian A. Munn for valuable comments on earlier drafts.

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