Economic Analysis of the North American Softwood Lumber Markets

Markets have an important role to play in advancing an improved understanding of international trading relationships. Two most important economic issues, which contribute to improved national welfare and ensure long-run competitive market equilibrium in international markets, are market integration and market efficiency. To provide softwood lumber markets related information to the policy makers, economic analyses relating market integration and market efficiency of the combined markets of Canada and the US have been conducted. The economic analyses include: (i) testing cointegration of prices among North American softwood lumber markets; (ii) identifying price leading markets in long-run price structure of these cointegrated markets; (iii) examining the degree of market integration among these markets; and (iv) testing the efficiency of spatial arbitrage among these markets.First, the price linkages in the North American softwood lumber markets have been explored over different trade regimes. The results indicate that market integration is affected by product aggregation of data. Further investigations of market integration are, therefore, limited to homogeneous softwood lumber product markets. Second, oligopsonistic pricing behavior of traders is identified as the possible reason for imperfect competition among Douglas Fir product markets, while imperfect competition among the markets of Spruce-Pine-Fir and Hem Fir products can not be explained by this behavior. Third, a comprehensive picture of the adherence to price parity is formulated by evaluating the magnitude and persistence of deviations from equilibrium relation of prices. It is found that large volumes of trade, product substitutability, lower prices, and certainty of trade are the factors which contribute to higher degree of market integration among North American softwood lumber product markets. Finally, the inter-temporal shifts in regime probabilities of competitive market equilibrium are assessed over different trade regimes. It is found that lower transaction costs, large volumes of trade, short distances between markets, and certainty of trade contribute to high market efficiency among softwood lumber product markets of North America.