Alaska Softwood Market Price Arbitrage

In order to be effective, policies promoting industrial utilization of the forests of southeast Alaska require information on potential markets for products and, specifically, the degree to which Alaska products may be able to retain market share while commanding higher prices. Higher prices relative to competitors are needed by Alaska producers in order to compensate for higher operation costs that, among other factors, result from more difficult operation conditions (such as steep slopes and island geography), and diseconomies of small scale. Although the assumption that Alaska timber is uniquely valuable has been a long-standing premise of timber policies, this argument took on greater importance with the closure of the region’s two pulp mills (in the midto late-1990s) and as competition in commodity-oriented markets increased. This study examines the degree to which Alaska logs and lumber have close substitutes— and therefore face greater competition—in key markets. Our analysis supports the conclusion that western hemlock (Tsuga heterophylla (Raf.) Sarg. ) and Sitka spruce (Picea sitchensis (Bong.) Carr. ) logs from Alaska share an integrated market (Japan) with logs produced in British Columbia and the U.S. Pacific Northwest. The evidence for an integrated market for lumber is strong but not unequivocal. Given the evidence of markets that are at least imperfectly integrated, Alaska production costs matter and are sensitive to international market conditions. High-cost producers, such as Alaska, are typically the last-in, first-out suppliers of commodity products that have close substitutes. These results do not challenge the idea that Alaska does produce some unique (and high-value) products from old-growth Sitka spruce and Alaska yellow-cedar (Chamaecyparis nootkatensis). For both logs and lumber, however, this accounts for a very small portion of total production. In the commodity markets that make up the bulk of the end uses for Alaska’s timber resources, these results lend support to the conclusion that Alaska is competing in integrated and competitive world markets. Summary Stevens, James A. ; Brooks, David J. 2003. Alaska softwood market price arbitrage. Res. Pap. PNW-RP-556. Portland, OR: U.S. Department of Agriculture, Forest Service, Pacific Northwest Research Station. 12 p. This study formally tests the hypothesis that markets for Alaska lumber and logs are integrated with those of similar products from the U.S. Pacific Northwest and Canada. The prices from these three supply regions are tested in a common demand market (Japan). Cointegration tests are run on paired log and lumber data. Our results support the conclusion that western hemlock (Tsuga heterophylla (Raf.) Sarg. ) and Sitka spruce (Picea sitchensis (Bong.) Carr. ) logs from Alaska share an integrated market with logs produced in the other two regions. Results are less clear for lumber. Given this evidence that markets are at least imperfectly integrated, Alaska production and exports of forest products will continue to be sensitive to international market conditions, including competition from other North American producing regions.