An Examination of the Relationships Between Hardwood Lumber and Stumpage Prices in Ohio

Understanding the relationship between hardwood lumber and stumpage prices is critical in evaluating market efficiency and in understanding the potential impact of changing technology on stump-age markets. Unfortunately, the complexity of the hardwood lumber market and lack of reliable data make it difficult to evaluate this relationship using traditional econometric systems. However, the relationship can be evaluated using economic theory, a review of market history, and statistical procedures. This paper first presents a theoretical development of the demand 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 model was developed. Analysis of short-term relationships between lumber price and stumpage price revealed that these series did not always move in the same direction, but tended to move in the same direction when there were large changes in lumber prices. However, continual declines in lumber prices did not always result in continual declines in stumpage price because of apparent price expectations of the stumpage owner. In the long run, the market margin between stumpage and lumber price has declined in a discrete manner. These declines are related to periodic increases in lumber production and price that occur at the beginning of the hardwood production and price cycle. Theory stipulates that during periods of declining prices, the less efficient sawmills will be forced out of the market. Following these periods, inventories usually are insufficient to satisfy any increase in lumber demand. Therefore, when demand increases, lumber prices increase sharply causing surviving, efficient mills to increase production and to bid up stumpage prices to new, higher levels. This bidding transfers any short-term economic gains that result from increased production or marketing efficiency to the resource owners