AN EXAMINATION OF THE RELATIONSHIPS BETWEEN HARDWOOD LUMBER AND STUMPAGE PRICES IN OHIO

Understanding the relationship between hardwood lumber and stumpage pr ices is critical in evaluating market efficiency and in understanding the potential impact of changing technology on stumpage markets. Unfor tunately, the complexity of the hardwood lumber market and lack of rel iable data make it difficult to evaluate this relationship using tradi tional econometric systems. However, the relationship can be evaluated using economic theory, a review of market history, and statistical pr ocedures. This paper first presents a theoretical development of the d emand and supply of hardwood stumpage and then examines the history of the white oak, red oak, yellow-poplar, and hard maple markets between 1970 and 1995. Using this information, a multi-period market margin m odel was developed. Analysis of short-term relationships between lumbe r price and stumpage price revealed that these series did not always m ove in the same direction, but tended to move in the same direction wh en there were large changes in lumber prices. However, continual decli nes in lumber prices did not always result in continual declines in st umpage price because of apparent price expectations of the stumpage ow ner. In the long run, the market margin between stumpage and lumber pr ice has declined in a discrete manner. These declines are related to p eriodic increases in lumber production and price that occur at the beg inning of the hardwood production and price cycle. Theory stipulates t hat during periods of declining prices, the less efficient sawmills wi ll be forced out of the market. Following these periods, inventories u sually are insufficient to satisfy any increase in lumber demand. Ther efore, when demand increases, lumber prices increase sharply causing s urviving, efficient mills to increase production and to bid up stumpag e prices to new, higher levels. This bidding transfers any short-term economic gains that result from increased production or marketing effi ciency to the resource owners.