Identifying the inter-market relationships of forest products in the Pacific Northwest with cointegration and causality tests

Abstract

We identify various inter-market relationships of forest products using cointegration and causality tests together. Of the six Douglas fir domestic sawlog, export sawlog, and lumber markets in the Pacific Northwest, we find that the two log markets and the two lumber markets are integrated, respectively. However, the two export log markets are not, nor is any cross-grade combination. In conjunction with cointegration restrictions, our causality tests demonstrate that export and lumber prices lead the movement of domestic sawlog prices; and similarly, the movements of domestic lumber prices follow the movements of export log prices. A close examination further reveals that export log prices for Region 1 lead the price formation process in all the lumber markets and log markets. We believe that these results have significant implications for understanding and thus dealing with forest products market behavior and price forecasting.