A restricted Leontief profit function model of the Canadian lumber and chip industry: potential impacts of US countervail and Kyoto ratification

Abstract

Estimation of output supplies and factor demands with a range of functional forms provides a basis for bounding possible supply responses to exogenous shocks. No prior study, to our knowledge, has used a generalized Leontief functional form to estimate lumber and chip supply responses in Canada. The own price lumber supply elasticities estimated from the restricted Leontief profit functional form used in this study are lower than those presented in most other studies, while the lumber supply response with respect to roundwood price change is somewhat higher than some studies. We simulate the impacts of current US countervail processes on Canadian lumber supply. The simulated responses to duties might be considered to be conservative estimates, while the lumber supply responses to roundwood price increases could be on the high end of expected responses. Estimation of profit and supply functions indicates that rather than being a distinct production decision, chip supply follows lumber supply. The supply responses of chips and lumber to the various combinations of duty, roundwood price increases, and energy price increases indicate a number of patterns. First, if Kyoto policies increase energy prices (up to 10%), these changes are not likely to have a large impact on lumber and chip production. Second, British Columbia and Quebec tend to have lumber and chip supplies that are more sensitive to duties and increased roundwood prices than Ontario. Third, Quebec is more sensitive to roundwood price increases, while British Columbia is more sensitive to the effects of duties.