Integration of Pulpwood Stumpage Markets in the South Central U.S. 1 by Venkatarao Nagubadi and Ian A. Munn 2

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1 Integrtion of Pulpwood Stumpge Mrkets in the South Centrl U.S. 1 by Venktro Ngubdi nd In A. Munn 2 Abstrct In this pper, mrket integrtion of pulpwood stumpge mrkets in six sttes of South Centrl United Sttes ws investigted. Unit root tests on qurterly stte verge prices from Timber Mrt-South for the period , indicted tht, with the exception of Texs, the pulpwood price series were non-sttionry. Cointegrtion tests suggest tht the lw of one price holds for the hrdwood pulpwood mrket in five sttes of the region: Albm, Arknss, Louisin, Mississippi, nd Tennessee. These sttes cn be considered single mrket. However, the evidence for cointegrtion is wek for the pine pulpwood mrket nd these sttes cnnot be considered single mrket. Despite incresing substitution of hrdwood for pine in pulp production, there is no evidence of cointegrtion between the pine nd hrdwood pulpwood stumpge mrkets. INTRODUCTION Most timber supply nlyses ssume tht timber mrkets re integrted t some level. For exmple, the Timber Assessment Mrket Model (TAMM) developed by Adms nd Hynes (1980) ssumes timber mrkets re integrted ntionlly. The Globl Trde Model (GTM) developed by Dykstr nd Kllio (1987) ssumes tht timber mrkets re integrted globlly. Pst econometric nlyses of forest products (McKillop 1967), softwood lumber nd stumpge mrkets (Robinson 1974), nd hrdwood lumber (Luppold 1984) treted the entire U.S. s single mrket. The southern U.S. ws treted s one mrket in n econometric nlysis of softwood stumpge (Newmn 1987). The implicit ssumption is tht if the mrkets re integrted t ntionl or regionl level, price chnges re trnsmitted throughout the mrket segments, nd tht the lw of one price (LOP) holds t the ssumed level of nlysis. Severl reserchers hve tested the LOP with respect to forest products with vrying results. See, for exmple, Buongiorno nd Uusivuori (1992), Jung nd Doroodin (1994), or Hänninen (1998). The evidence for the LOP in other industries is lso mixed. See, for exmple, Goodwin nd Schroeder (1991), Isrd (1977), Ardeni (1989), Plsks nd Hrriss (1993), Alexnder nd Wyeth (1994), nd Dercon (1995). However, little ttention hs been pid to testing the LOP nd integrtion of stumpge mrkets. If the LOP does not hold, stumpge mrket nlyses must be reexmined to provide more relistic picture nd improved understnding of timber mrkets. The objective of this study is to investigte sptil integrtion of hrdwood nd pine pulpwood stumpge mrkets in the six sttes in South Centrl United Sttes - Albm, Arknss, Louisin, Mississippi, Tennessee, nd Texs. Product integrtion between hrdwood nd pine pulpwood stumpge mrkets is lso exmined. THE FRAMEWORK Typiclly, price integrtion hs been tested using simple sttic bivrite correltions. This pproch hs been strongly criticized (Hrriss 1979; Rvllion 1986). Consequently, Rvllion (1986) proposed dynmic model of sptil price differentils to test lterntive hypotheses of mrket integrtion. However, Rvllion s model did not tke into considertion of the non-sttionry nture of time series price dt. Grnger nd Newbold (1974) demonstrted tht in the presence of utocorrelted disturbnces in the regression nlysis of nonsttionry vribles, the usul significnce tests of coefficients re invlid. Further, mrket integrtion requires long-run reltionship between prices in different mrkets. The lw of one price, which is the key requirement for mrket integrtion, will hold only when the mrkets re cointegrted (Engle nd Grnger 1987). 1 Approved for publiction s Journl Article No. FO of the Forest nd Wildlife Reserch Center, Mississippi Stte University. 2 Grdute Reserch Assistnt nd Assistnt Professor, Forestry Deprtment, Mississippi Stte University, Box 9681, Mississippi Stte, MS

2 Cointegrtion holds when the mens nd vrinces of two or more vribles move together (Enders 1995). When two price series re cointegrted, the mrkets re integrted in the long run nd these price series cnnot diverge by more thn smll mount in the long run. The residuls obtined from the liner combintion of the price series should be sttionry. Thus, if there re two mrkets, the cointegrting reltionship tkes the form: P t lterntively, ' 1 % 2 R t % e t e t ' (P t & 1 & 2 R t ) (1) (2) where P nd R re two mrket prices, 1 nd 2 re the coefficients, nd e t is the error term. In this eqution cointegrtion implies 1 = 0, 2 = 1, nd e t is sttionry. Engle nd Grnger s (1987) test for cointegrtion regresses one non-sttionry vrible on the other non-sttionry vrible, both vribles being integrted of the sme order 3, nd testing the error series for sttionrity. If the error term is sttionry white noise process, then the two vribles re cointegrted nd hve long run equilibrium reltionship. Johnsen s (1988) cointegrtion test identifies cointegrting reltionships in multivrite setting. Cointegrtion requires tht the individul series of interest re non-sttionry. If the men or vrince of time series vries over time, the series is non-sttionry. Sttionrity of time series dt cn be determined by using the Augmented Dickey-Fuller (ADF) test, which is given below (Enders 1995): )Y t ' " 0 % " 1 T % *Y t&1 % j k i'1 $ i )Y t&i % u t (3) where Y t is the time series vrible, T is time trend, " 0, " 1, *, nd $ i re the coefficients, k is the number of lgs, nd u t is the error term. If the null hypothesis of *'0is ccepted, the dt is nonsttionry. Lgged vlues of the first differences ()Y t ' Y t & Y t&1 ) re included to ensure the errors re uncorrelted. The pproprite lg length ws selected using the Akike Informtion Criteri (AIC). For most series, one lg ws sufficient to remove ny 3 A vrible is sid to be integrted of order d, i.e., I(d), if it hs to be differenced d times to mke the vrible sttionry. utocorrelted disturbnces from the price series. When two or more vribles re cointegrted, the error correction form is the correct wy of representing the reltionship between those vribles (Engle nd Grnger 1987). Even though there is long run equilibrium reltionship between the cointegrted vribles, there cn be devitions from the long run equilibrium in the short run. The error correction form combines both the long-run effects nd the short-run effects. The dynmic reduced form eqution with n error correction mechnism, between mrkets P nd R (with one lg) tkes the form: )P t ' P )P t&1 %b P )R t&1 &( P (P t&1 & 1 & 2 R t&1 )%, P )R t ' R )P t&1 %b R )R t&1 &( R (P t&1 & 1 & 2 R t&1 )%, R (4) where P, b P, ( P, R, b R, nd ( R, re the coefficients for the respective vribles,, P, nd, R re error terms, )P t is defined s P t & P t&1, nd the other terms re defined similrly. The term (P t&1 & 1 & 2 R t&1 ) is the lgged error term from the cointegrting reltionship. Thus, testing for mrket integrtion involves two steps: 1) testing for the order of integrtion of the price series; nd 2) scertining whether the lw of one price holds mong the mrkets in terms of cointegrtion. This leds to development of dynmic reduced form equtions which combine both long-run nd short-run equilibrium reltionships between mrkets. Dt: Qurterly verge stumpge price dt for six sttes in the south centrl region of the U.S. (Albm, Arknss, Louisin, Mississippi, Tennessee, nd Texs) re used in the nlysis. The dt re from Timber Mrt-South for period 1977 to 1996 (TMS ). Product ctegories exmined re hrdwood pulpwood, nd pine pulpwood. Since the prices re reported for 3 regions in ech stte prior to 1992 nd for 2 regions since 1992, stte verge prices re used in the nlysis. Price dt re in nominl terms. RESULTS AND DISCUSSION The frmework detiled bove is pplied to the pulpwood stumpge mrket in the South Centrl region of United Sttes. The results of Augmented Dickey-Fuller test of the six stte price series, for both hrdwood pulpwood nd pine pulpwood, re provided

3 in Tble 1. Unit roots re rejected for Texs bsed on the ADF for non-differenced dt. The price series for ll other sttes re non-sttionry. Therefore, Texs cnnot be cointegrted with ny other sttes in the study. Texs ws excluded from further nlysis. The ADF test for the first differenced dt reveled tht ll the price series were sttionry fter first differencing. The Durbin-Wtson (DW) sttistic is pproximtely two for Tble 1 ADF tests for unit roots for qurterly pulpwood stumpge prices, Stte Hrdwood AL AR LA MS TN TX Pine AL AR LA MS TN TX Level Dt *** ** DW 2.2 First Differenced -6.91*** -8.28*** -8.32*** -9.37*** -7.88*** -7.13*** -7.00*** -9.07*** -8.11*** -8.96*** -5.84*** -8.70*** DW Notes: In ll the ADF tests constnt nd time trend re included. Durbin-Wtson sttistic. McKinnon (1991) criticl vlues (n= 78): (1%), nd (5%); (n=77): (1%), nd (5%). *** nd ** denote rejection of null hypothesis t 1%, nd 5 % significnce level. ll price series, indicting no evidence of utocorrelted disturbnces. The multivrite cointegrtion test using Johnsen s mximum likelihood procedure for hrdwood pulpwood for ll the sttes, Albm, Arknss, Louisin, Mississippi, nd Tennessee indicted four cointegrting equtions t the 5% level of probbility (Tble 2). The eigenvlue trce test ws used to find the rnk, r, of the cointegrting mtrix (Enders 1995). If the rnk is zero or equl to the number of the vribles, the reltionship between vribles is sttionry nd cn be represented s stble vector uto-regression (VAR) process. If the rnk is 0 < r < n (n = number of vribles), the reltionship is sid to be cointegrted of rnk r. Thus, the hrdwood pulpwood stumpge mrket is cointegrted of rnk, r = 4. The criticl vlues for the likelihood rtio test re obtined from Osterwld- Lenum (1992). The pir-wise tests of cointegrtion between the stte hrdwood pulpwood price series lso indicte tht ll the price series re cointegrted t the 5% level of significnce (Tble 3). The LOP holds in the hrdwood pulpwood stumpge mrket cross the five sttes of the South Centrl region bsed on these cointegrtion tests. The results of cointegrtion tests for pine pulpwood stumpge mrkets re shown in Tble 4. The Tble 2 Results of cointegrtion tests for hrdwood pulpwood in South Centrl US. H o : r = 0 H o : r 1 H o : r 2 H o : r 3 H o : r 4 Null Hypothesis Eigenvlue Likelihood rtio 136.0*** 81.5*** 37.2*** 16.7** C.V. (5%) C.V. (1%) Criticl vlues of trce test. *** nd ** denote rejection of null hypothesis t 1%, nd 5% significnce level. Tble 3 Pirwise cointegrtion tests, hrdwood pulpwood: Likelihood Rtios (trce test). Stte AL AR LA MS AR 20.3*** LA 27.0*** 50.0*** MS 28.5*** 1878** 17.8** TN 39.7*** 29.3*** 29.0*** 23.0*** Criticl vlues for Likelihood Rtio test re: (1%), nd (5%). *** nd ** indicte significnce levels t 1%, nd 5%. Tble 4 Results of cointegrtion tests for pine pulpwood in South Centrl US. H o : r = 0 H o : r 1 H o : r 2 H o : r 3 H o : r *** Null Hypothesis Eigenvlue Likelihood rtio C.V. (5%) C.V. (1%) Criticl vlues of trce test. *** denotes rejection of

4 null hypothesis t 1% significnce level. likelihood rtio test indictes one cointegrting rnk. The pirwise cointegrtion tests indicte pine pulpwood prices re cointegrted in only two pirs of sttes, viz., Louisin nd Arknss nd Louisin nd Albm (Tble 5). As evident by weker cointegrtion, the LOP does not pper to hold for the pine pulpwood stumpge mrket in the South Centrl region. The results of the dynmic reduced form equtions with n error correction mechnism re indicted in Tbles 7 nd 8. Since the cointegrting rnk Tble 5 Pirwise cointegrtion tests, pine pulpwood: Likelihood Rtios (trce test). Stte AL AR LA MS AR 11.5 LA 17.0** 22.2*** MS TN Criticl vlues for Likelihood Rtio test re: 20.0 (1%), nd 15.4 (5%). *** nd ** indicte significnce levels t 1%, nd 5%. for the hrdwood pulpwood mrket is four, four cointegrting error terms re included in the finl representtion of the reltionship between different mrkets tht combines both long-run nd short-run equilibrium reltionships. These cointegrting reltionships for both products in normlized form re shown in Tble 6. In the Albm hrdwood pulpwood mrket, three cointegrting equtions hve significnt coefficients (Tble 7). Arknss, Louisin, nd Tennessee hrdwood pulpwood stumpge mrkets hve two significnt cointegrting equtions, while Mississippi hs one significnt cointegrting eqution. In ddition to the three significnt cointegrting equtions, Albm price chnges re significntly influenced by price chnges lgged one period in Albm nd Louisin. In Arknss mrket, price chnges re significntly influenced by lgged price chnges in Albm. In Louisin, prt from the cointegrting equtions, the influence of other sttes is bsent. For Mississippi, in ddition to one cointegrting eqution, one period lgged price chnges for Louisin, Mississippi, nd Tennessee re significnt. Overll, lgged price chnges in the Albm mrket influence the price chnges in most other sttes. Tble 6 Normlized cointegrting equtions. Hrdwood pulpwood: Coint. Eq. 1 ALHP t-1 = TNHP t-1 Coint. Eq. 2 ARHP t-1 = TNHP t-1 Coint. Eq. 3 LAHP t-1 = TNHP t-1 Coint. Eq. 4 MSHP t-1 = TNHP t-1 Pine pulpwood: Coint. Eq. ALPP t-1 = ARPP t LAPP t MSPP t TNPP t-1 First two letters in ALHP indicte stte nd next two letters, HP= hrdwood pulpwood, nd PP= pine pulpwood. Tble 7 Error correction model for hrdwood pulpwood. Vrible ª AL ª AR ª LA ª MS ªTN Const. C.E.2 C.E.3 C.E.4 ª AL t-1 ª AR t-1 ª LA t-1 ª MS t-1 ª TN t (0.9) (-4.6) 0.66 () (-1.3) 0.59 (2.3) 0.33 (2.3) (-1.1) 0.57 () 0.14 (0.6) (-1.1) (-0.3) (-3.2) 0.30 b (1.7) () - (-0.1) 0.10 (0.7) (-1.4) (1.3) 0.52 (2.6) (-4.7) (-0.8) 0.07 (0.7) (-1.0) (1.0) (-1.5) 0.21 b (1.8) (-0.4) 0.16 (0.8) 0.09 (0.4) b (-1.7) 0.04 (0.5) (-0.9) 0.30 b (1.8) (-) (-2.2) b () (-1.2) 0.28 (2.2) 0.07 (0.8) b (-) (-1.4) 0.16 (1.5) (3.3) R Cointegrting equtions. nd b denote rejection of null hypothesis t 1%, nd 5% significnce level. t- vlues re in prentheses. In pine pulpwood stumpge mrket, only two sttes, Arknss nd Louisin re significntly influenced by the long-run cointegrting reltionship (Tble 8). The Albm pine pulpwood mrket is not

5 influenced by the long-run reltionship, but is significntly influenced by one period lgged price chnges for ll sttes except Arknss. However, the price chnges in Arknss re significntly influenced by one period lgged price chnges in Albm mrket. The long-run reltionship is not significnt in the Mississippi nd Tennessee pine pulpwood stumpge mrkets. Also, no other stte influenced these two sttes. For Louisin, only the long-run reltionship ws significnt. Pirwise cointegrtion tests between pine nd hrdwood pulpwood mrkets in ech of the five sttes were exmined, but no long-run reltionship ws found. The results re not provided here. Tble 8 Error correction model for pine pulpwood. Vrible ª AL ª AR ª LA ª MS ª TN Const. ª AL t-1 ª AR t-1 ª LA t-1 ª MS t-1 ª TN t () 0.00 (0.0) (-2.3) 0.06 (0.5) (-5.1) 0.35 (3.0) (-) 0.05 (4.3) 0.20 b () (-1.8) (1.3) - (-2.2) 0.06 (0.6) (-0.4) 0.12 (1.0) (0.1) 0.32 (1.5) 0.01 (0.6) (0.3) (0.1) (-0.8) (-1.0) ) 0.33 b () 0.00 (0.4) 0.00 (0.0) (-0.5) (-1.0) R Cointegrting eqution. nd b denote rejection of null hypothesis t 1%, nd 5% significnce level. t- vlues re in prentheses. CONCLUSION Mrket integrtion in pulpwood stumpge mrkets in the six sttes of South Centrl region of United Sttes ws investigted. Tests for non-sttionrity reveled Texs prices were sttionry while the price series of the remining five sttes were not. This indictes the Texs pulpwood stumpge mrket is independent of the other sttes in the region. The hrdwood pulpwood stumpge mrket is essentilly cointegrted s indicted by pirwise cointegrtion tests nd region-wide cointegrtion tests between the five sttes. The lw of one price holds for the hrdwood pulpwood mrket in Albm, Arknss, Louisin, Mississippi, nd Tennessee. These five sttes cn be considered single mrket with respect to hrdwood pulpwood stumpge nlyses. In the pine pulpwood stumpge mrket, evidence for cointegrtion is wek. Thus the pine pulpwood stumpge mrket in these five sttes cnnot be considered s one mrket. Despite the incresing mount of substitution of hrdwood pulpwood for pine in pulp production, there is no evidence of cointegrtion between pine nd hrdwood pulpwood stumpge mrkets. Further work is needed to segment the mrkets in meningful wy. Literture Cited Adms, D.M. nd R.W. Hynes The 1980 softwood timber ssessment mrket model: Structure, projections nd policy simultions. For. Sci. Monogrph No. 22, Alexnder, C. nd J. Wyeth Cointegrtion nd mrket integrtion: An ppliction to the Indonesin Rice mrket. The J. of Dev. Studies. 30(2): Ardeni, P.G Does the lw of one price relly hold commodity prices. Am. J. Agric. Econ. 71: Buongiorno, J. nd J. Uusivuori The lw of one price in the trde of forest products: Cointegrtion tests for U.S. Exports of pulp nd pper. For. Sci. 38(3): Dercon, S On mrket integrtion nd liberliztion: Method nd ppliction to Ethiopi. The J. of Dev. Studies, 32(1): Dykstr, D.P. nd M. Kllio Introduction to the IIASA forest sector model. P in Kllio, M., D.P. Dykstr, nd C.S. Binkley (eds.) The Globl Forest Sector: An nlyticl perspective. NY: Wiley nd Sons. Enders, W Applied Econometric Time Series. John Wiley: New York, 433p. Engle, R. nd C.L.W. Grnger Cointegrtion nd error correction, representtion, estimtion nd testing. Econometric. 50(4):

6 Goodwin, B.K. nd T.C. Schroeder Cointegrtion tests nd sptil price linkges in regionl cttle mrkets. Am. J. Agric. Econ. 73(2): Grnger, C.L.W. nd P. Newbold Spurious regressions in econometrics. J. of Econometrics, 2(1): Hänninen, R The lw of one price in United Kingdom soft swnwood imports- A cointegrtion pproch. For. Sci. 44(1): Rvllion, M Testing mrket integrtion. Am. J. Agric. Econ. 68(1): Robinson, V.L An econometric model of softwood lumber nd stumpge mrkets, For. Sci. 29: TMS Timber Mrt-South Qurterly Report. Dniel B. Wrnell School of Forest Resources, The University of Georgi, Athens, GA. Hrriss, B There is method in my mdness: Or is it vice vers? Mesuring griculturl mrket performnce. Food Res. Insti. Studies, XVII(2): Isrd, P How fr cn we push the Lw of One Price? Am. Econ. Rev. 67: Johnsen, S Sttisticl nlysis of cointegrting vectors. J. of Econ. Dynmics nd Control, 12: Jung, C. nd K. Doroodin The lw of one price for U.S. softwood lumber: A multivrite cointegrtion test. For. Sci. 40(4): Luppold, W.G An econometric study of the U.S. hrdwood lumber mrket. For. Sci. 30(4): McKinnon, J.G Criticl vlues for cointegrtion tests. Chpter 13 in Engle, R.F., nd C.W.J. Grnger (eds.) Long-Run Economic Reltionships: Redings in Cointegrtion, Oxford University Press. McKillop, W.L.M Supply nd demnd for forest products- An econometric study. Hilgrdi, 38(1): Newmn, D.H An econometric nlysis of southern softwood stumpge mrket: For. Sci. 33(4): Osterwld-Lenum, M A note with quntiles of the symptotic distribution of mximum likelihood cointegrtion rnk test sttistics. Oxford Bul. of Econ. nd Stt., 54: Plsks, T.B. nd Hrriss, B Testing mrket integrtion: New pproches with cse mteril from the West Bengl food economy. The J. of Dev. Studies. 30(1):1-57.