Alaska Softwood Market Arbitrage
The objective of this study was to test the hypothesis that the markets for Alaskan lumber and logs are integrated with those of similar products from the Pacific Northwest (Oregon and Washington) and Canada (British Columbia). The prices from the three supply regions are tested in a common demand market (Japan).
The analysis performs pair-wise co-integration tests to compare long-run movements of paired prices (AK/PNW, AK/BC) and to determine if there are common driving fundamentals, i.e., markets are efficiently linked and that there is a single long-term equilibrium price.
The analysis supports the conclusion that Alaskan western hemlock and Sitka spruce logs share an integrated market with those from British Columbia and the U.S. Pacific Northwest in Japan. The evidence for an integrated market for lumber is strong but not unequivocal. The lack of statistical support for an integrated lumber market may be because the markets are truly not integrated or due to structural reasons or a lack of perfect substitution between the products. It should be noted that data from three independent sources were used in the study and all confirmed similar findings of one market.
Given the evidence of at least an imperfectly integrated market, Alaskan production costs matter. High production and transportation costs tend to make Alaska the last-in, first-out supplier of commodity products that have close substitutes in markets like Japan.
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