A Long-Term Analysis of Hardwood Lumber Prices by ... - sofew

A Long-Term Analysis of Hardwood Lumber Prices
by
William G. Luppold
Jeffrey P. Prestemon
and
John E. Baumgras 1
ABSTRACT
This study examined the interrelationship in prices of eight hardwood species using descriptive analysis and the
Johansen method for testing cointegration. The descriptive analysis found that the lumber prices of the various
hardwood species seem to follow independent trends largely due to changing domestic and international markets.
Still, there might be a substitution mechanism that keeps prices of various species close to one another over the long
run which may be revealed using cointegration. The cointegration analysis revealed that prices for various species
of hardwood lumber are not cointegrated. However, there were several situations in which cointegration was
found. Prices of high-grade lumber of all eight species examined were cointegrated with the price of black walnut.
Prices of open-grained species were found to be cointegrated with one another. The price of yellow-poplar prices
also were found to be cointegrated with several open- and closed-grained species.
INTRODUCTION
Hardwood lumber and timber has traditionally been
treated as a commodity without respect to species
(Haynes 1990). Although this assumption may be
useful for policy analysis, it may be less relevant for
forest management decisions. Hardwoods are a
broad collection of species with variations in color,
density, and other physical properties. Because
hardwood lumber demand is influenced by style,
different species are dominant at different times
(Frye 1996). As a result the relative price of
different hardwood species has varied over time
(Table 1).
The variation in hardwood lumber and subsequent
timber prices makes timber management difficult. It
takes 60 to 80 years for hardwood stands to achieve
the minimal diameter and quality attributes desired
by sawmills. This lengthy production cycle makes it
difficult for forest planners to decide on what species
to favor during the regeneration period following a
partial cut or clearcut. If we can determine that
hardwood lumber prices are independent or
interrelated, this information may be useful to forest
managers when projecting future market conditions.
In this paper we examine if hardwood prices move
independently of one another or are interrelated.
Prices of hardwood lumber will first be examined
using a descriptive approach that integrates changes
in lumber prices with changes in fashion and
international demand. This analysis is followed by a
cointegration analysis of hardwood lumber prices.
The concluding section of the paper will summarize
important findings.
HISTORIC ANALYSIS OF HARDWOOD
MARKETS AND PRICES
In the 1950’s and 1960’s walnut was the most
valuable species and other closed-grained species
(cherry, hard maple, and soft maple) were priced
higher than open-grained species (oak and ash).
During this period, walnut was the most commonly
shown wood at the furniture markets followed by
maple (hard and soft) and black cherry (Table 2).
Yellow-poplar was valued more than the oaks (red
and white) and maple because this species was used
in combination with walnut, cherry, and mahogany
veneers. Although furniture made from white oak
was exhibited at furniture markets in the late 1940’s
and early 1950’s (Table 2), oak furniture did not sell
well.
In 1973, walnut was still the most expensive
hardwood species while the oaks, the maples (hard
and soft), and yellow-poplar traded at similar prices.
The high price of walnut may have resulted from a
low supply caused by previous over cutting rather
than from strong demand because it was being used
less by furniture manufacturers. The early 1970’s
also was a period of turmoil for both the general
1 The authors are, respectively, Project Leader, USDA Forest Service, Northeastern Research Station, 241 Mercer
Springs Road, Princeton, WV 24740; Research Forester, USDA Forest Service, Southern Research Station, P.O.
Box 12254, Research Triangle Park, NC 27709; and Project Leader, USDA Forest Service, Northeastern Research
Station, 241 Mercer Springs Road, Princeton, WV 24740

economy and the hardwood lumber market. Wage
and price controls imposed by the Nixon
Administration caused shortages of nearly every
species, resulting in sharp increases in prices after the
controls were lifted. In addition the adoption of
floating exchange rates during this time caused an
increase in exports of oak and other species. The
most significant change during this period was the
increase in red oak furniture showings.
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_
Table 1. - Nominal prices for Number 1 Common hardwood lumber for select hardwood species 1953 - 1999
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_
Year Ash Beech Birch Black Hard Soft Red White Yellow- Black
cherry maple maple oak oak poplar walnut
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_
1953 115 130 150 150 135 115 120 125 138 180
1959 140 115 155 180 160 143 115 115 130 220
1963 117 120 163 180 157 160 105 110 135 240
1969 219 142 180 205 172 195 170 163 167 330
1973 251 190 200 260 245 235 250 245 250 450
1979 504 245 290 600 350 335 410 410 275 835
1986 445 235 235 570 342 320 510 405 260 865
1989 700 255 300 770 385 350 535 445 285 855
1993 528 335 385 1040 760 600 800 540 430 855
1999 560 415 535 1135 845 580 775 530 380 775
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_
Source: Data base maintained at the Northeastern Research Station’s Forestry Sciences Laboratory at Princeton,
WV, under the agreement with the Hardwood Market Report, Memphis, TN.
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_
Table 2. - Percentage of predominant species on exposed surfaces in bedroom and dinning room furniture show at
major US furniture shows, 1946 to 1999 (Source: Frye 1996, 1999).
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_
Year Walnut Mahogany Maple Cherry Oak Other
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_
1946 22 34 9 1 9 25
1952 15 28 13 11 12 21
1958 27 21 13 19 4 16
1964 28 5 17 29 3 18
1970 16 3 12 10 14 45
1976 8 3 7 6 18 58
1982 3 5 6 11 26 49
1988 2 8 4 12 24 50
1994 1 7 7 17 28 40
1999 1 6 9 18 19 47
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_
a/ Shown at Grand Rapids, Michigan
b/ Shown at Chicago, Illinois 1948 to 1959
c/ Shown at High Point, North Carolina 1960 to present

As the 1970’s progressed, red oak became a major
species used in domestic markets while white oak
was being exported to Europe in increasing amounts.
The maples became less important as furniture
species while cherry maintained a continual presence
at the furniture market (Table 2). In the 1980’s,
demand for oak continued to increase while
showings of maple and walnut furniture continued to
drop.
In the 1980’s, prices of red and white oak continued
to increase in value while the maples sold at
relatively low prices. Red oak continued to be used
by domestic manufacturers while white oak was
exported. The export of white oak caused the price
of high-quality white oak to increase but the price of
The ebb and flow of lumber prices for individual
hardwood species over the last 50 years can be
attributed to style. But what if style is partially
dependent on price resulting in a long-term species
substitution mechanism that eventually bring together
the prices of different hardwood lumber species? Or,
do hardwood lumber prices truly move
independently? Given these questions, how do we
test if hardwood lumber prices are interrelated or
independent?
Another way to examine the strength of the
relationship between two wood products is to test
whether their prices, expressed in linear combination,
form a stable statistical relationship in the long run,
that is, whether they are cointegrated. Consider the
following expression of the linear combination of
two time series of product prices, {p 1t } and {p 2t },
that are both nonstationary, integrated of order 1:
[1] p 1,t = a + Bp 2,t + e t
If there exists a linear combination of p 1 and p 2 , a
unique pair of values for a and B such that the
resulting residual series, {e t }, is I(0) (i.e., it is
stationary), the two I(1) prices can be considered
cointegrated with parameters a and B. This means
that the price pair has a stable, long-term relationship
that endures even following substantial changes in
levels of the series.
Equation [1] introduces a concept attributed to Engle
and Granger (1987) that should allow tests of long
run relationships between two nonstationary series
posited to possess a common trend. Although, there
has been little analysis of the interrelationship of
hardwood lumber prices in this manner or in others,
there has been numerous studies of regional
mid-quality white oak did not increase as fast as that
of red oak (Table 1). Yellow-poplar prices remained
low during this period due to relatively low demand
and increasing sawtimber inventories.
In the early 1990’s, showings of maple and cherry at
the High Point, North Carolina furniture market
began to increase. In addition, white hard maple
was being used with cherry veneer. Oak showings
hit nearly 30 percent in the early 1990’s resulting in a
noticeable spike in the price of red oak lumber. By
the end of the decade, black cherry was the highest
value species followed by hard maple, mid-grade
walnut traded at the same price as red oak while
white oak traded at price levels comparable to those
of soft maple.
softwood lumber prices and price relationships of
softwood lumber imports. These studies can provide
insight on the current analysis since softwood species
also differ in physical attributes.
COINTEGRATION ANALYSIS OF SOFTWOOD
MARKETS
Uri and Boyd (1990) surmised that the market for
softwood lumber is national and that price
movements in one region matched price movements
in other regions. Using multivariate cointegration
tests to examine regional softwood lumber price,
Jung and Doroodian (1994) concluded that the law of
one price 2 held in the U.S. softwood lumber market.
Hseu and Buongiorno (1992) examined the
interrelationships between different species of
softwood lumber by studying elasticities of demand
of imports from Canada. They concluded that each
of the six species studied (one of which was an
aggregate) behaved like a distinct economic good. In
general, price elasticity of substitution between
species was statistically significant though small in
magnitude. Hänninen (1998) examined whether the
law of one price behavior could be isolated in soft
sawnwood (softwood lumber) imports into the
United Kingdom. Hänninen’s cointegration analysis
using the Johansen (1991) method did not support the
law but revealed differences over the long run
between the softwood lumber supplied by different
countries.
2 The law of one price states that prices of
homogenous commodities are equal throughout the
world (or the United States in the case of Jung and
Doroodian 1994) when adjusted for exchange rates
and transportation costs.

The literature suggests that aggregate regional prices
may be interrelated but prices of specific species may
not. The literature also suggests that cointegration
analysis may be a useful method to test the
interrelationship between the hardwood lumber
prices. Cointegration is especially relevant because
there are no reliable estimates of hardwood lumber
production and demand by species. Our approach is
to test this cointegration conjecture across many
species grades for higher quality hardwood lumber
(grade First and Seconds or FAS and grade Number
1 Common or 1C) based on the relationships
described in equation [1]. Prices of grades FAS and
1C were selected for this analysis because they seem
to be more indicative of the value of timber than
prices of lower quality lumber.
DATA
The price series used in this analysis are Appalachian
lumber prices from 1953 to 1998 as reported by the
Hardwood Market Report 3 for ash, black cherry, hard
maple, soft maple, red oak, white oak, yellow-poplar,
and black walnut. For cointegration testing, nominal
prices are transformed by natural logarithm.
Nominal, rather than deflated (“real”) prices were
used because a deflation can impose a filtering
process that can result in spurious patterns and
spuriously significant relationships among variables
(Schnute 1987).
The logarithmic transformation is justified such that
if prices of two products are initially very different
but are equally affected by inflation, then they have a
constant ratio over time but not a constant difference.
This transformation also is appropriate for economic
time series that are assumed to be logarithmically
normally distributed (e.g., Engle and Granger 1987).
ARE HARDWOOD LUMBER PRICES
COINTEGRATED?
Equation [1] was estimated using maximum
likelihood techniques outlined by Johansen (1991).
Results of the between-species tests of cointegration
for grade FAS and 1C are shown in Tables 3 and 4,
respectively. While most combinations of species
were found not to be cointegrated, there were
exceptions that could be explained. Red oak was
found to be cointegrated with white oak and hard
3 A historic series of hardwood lumber prices (1953
to present) are maintained at the Northeastern
Research Station’s Forestry Sciences Laboratory at
Princeton WV, under an agreement with the
Hardwood Market Report, Memphis, TN.
maple and soft maple were found to be cointegrated.
These results were expected because red and white
oak are similar in appearance as are hard and soft
maple. Yellow-poplar was found to be cointegrated
with ash, black cherry, red oak, white oak, and black
walnut, supporting the notion that yellow-poplar is
used with other species. Black walnut was found to
be cointegrated with all species examined. This
species historically has been the premier hardwood,
particularly in high-end applications. These results
suggest that the FAS prices of all other hardwood
lumber might have somehow been set as a function
of the price of black walnut.
Many of the significant between-species
cointegration statistics of 1C in Table 4 also can be
explained. Red and white oaks were found to be
cointegrated but hard and soft maple were not.
Yellow-poplar was found to be cointegrated with five
species and had a high log ratio statistic (but more
than 1 cointegration equation) with soft maple. Black
walnut was found to be cointegrated with all the
open-grained species and yellow-poplar. Ash was
found to be cointegrated with red oak, white oak,
walnut, and yellow-poplar.
IMPLICATIONS AND CONCLUSIONS
The analysis of lumber prices for various grades of
eight Appalachian hardwood species found that the
many species were not cointegrated with one another
and that independent markets exist for these species.
However, there were some notable exceptions.
Grade FAS black walnut was found to be
cointegrated with FAS lumber of most other species.
Mid-grade walnut was found to be cointegrated with
the oaks, ash, and yellow-poplar.
After black walnut, yellow-poplar had the greatest
number of cointegrated relationships between
species. This finding weakly supports a previous
finding by Luppold (1983) that yellow-poplar is a
complementary species in the production of furniture.
Grade FAS yellow-poplar was cointegrated with
black walnut, black cherry, and open-grained species.
Grade 1C yellow-poplar was cointegrated with all
species except black cherry and soft maple.
In general, the oaks and other open-grained species
tended to be cointegrated with one another, while
closed-grained species tended to be cointegrated with
little other than FAS walnut and, in several cases,
yellow-poplar. The lone exception was that FAS
hard and soft maples were found to be statistically
related.

Only half of the relationships examined showed no
interrelationships between species. What this means
in terms of forest management is ambiguous.
However, if relative hardwood lumber prices are
erratic over the next 50 years, as they were over the
past 50 years, then the selection of the best species
for regeneration appears to be more of an act of faith
than a predictable outcome. Still, the initial
management premise we attempted to establish -- that
forest managers should not concentrate on
regenerating and managing for specific species but
expend resources on maintaining stand quality for
species most suited for a specific site -- might be
valid. First, prices of FAS lumber are cointegrated
with the species that historically has been the most
valuable (black walnut). Second, previous research
has shown that high-quality timber has increased in
value faster than timber prices in general (Luppold
and Baumgras 1995).
Literature Cited
Engle, R. F., and C. W. J. Granger. 1987. Cointegration
and error correction: representation,
estimation, and testing. Econometrica 55(2):251-
276.
Frye, L. 1996. The most popular furniture woods:
the historic perspective. Wood and Wood Prod.
100(14):304-307
Frye, L. ed. 1999. Wood unlimited news. April.
Haynes, R. 1990. An analysis of the timber situation
in the United States: 1989-2040. USDA For. Serv.
Gen. Tech. Rep. RM-199.
Hseu, S., and J. Buongiorno. 1992. Price elasticities
of substitution between species in the demand of U.S.
softwood lumber imports from Canada. Can J. For.
Res. 23:591-597
Johansen, S. 1991. Estimation and hypothesis testing
of cointegration vectors in Gaussian vector
autoregressive models. Econometrica 59(6):1551-
1580.
Jung, C., and K. Doroodian 1994. The law of one
price for U.S. softwood lumber: a multivariate
cointegration test. For. Sci. 40(4):595-599.
Luppold, W. G. 1983. The effect of changes in
lumber and furniture prices on wood furniture
manufacturers’ lumber use. USDA For. Serv. Res.
Pap. NE-514.
Luppold, W.G., and J.E. Baumgras. 1995. Price
trends and relationships for red oak and yellowpoplar
stumpage, sawlogs, and lumber in Ohio:
1975-1993. Nort. J. Appl. For.P 12(4):168-173.
Schnute, J. 1987. Data uncertainty, model
ambiguity, and model identification. Nat. Res. Mod.
2(2):159-212.
Hänninen, R. A. 1998. The law of one price in
United Kingdom soft sawnwood imports-- a
cointegration approach. For. Sci. 44(1):17-23
Uri, N. D., and R. Boyd. 1990. Considerations on
modeling the market for softwood lumber in the
United States. For. Sci. 36(3):680-692.
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Table 3 - Results of cointegration analysis for grade First and Seconds Appalachian hardwood lumber
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Specie Black Yellow- White Red Soft Hard Black
walnut poplar oak oak maple maple cherry
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----------------------------------------Log ratio rank--------------------------------------------
Ash 35.61 c/ 20.63 b/ 14.24 16.10 12.64 10.42 15.02
Black cherry 22.39 b/ 20.20 b/ 11.53 11.10 14.57 8.87
Hard maple 19.70 a/ 13.50 9.62 11.20 23.56 b/
Soft maple 19.58 a/ 16.12 12.74 12.24
Red oak 24.96 c/ 21.76 b/ 23.70 b/
White oak 21.95 b/ 20.66 b/
Yellow-poplar 23.43 b/
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_
a/ Significant at the 10-percent level
b/ Significant at the 5-percent level
c/ Significant at the 1-percent level

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Table 4 - Results of cointegration analysis for grade Number 1 Common Appalachian hardwood lumber
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Species Black Yellow- White Red Soft Hard Black
walnut poplar oak oak maple maple cherry
__________________________________________________________________________________________
----------------------------------------Log ratio rank--------------------------------------------
Ash 22.89 b/ 28.19 c/ 20.07 b/ 21.83 b/ 17.11 12.05 14.45
Black cherry 14.11 13.23 22.29 b/ 17.29 12.07 8.51
Hard maple 10.52 13.91 9.57 7.60 16.21
Soft maple 12.57 24.56 c/ 18.33 a/ 16.21
Red oak 23.54 b/ 25.90 c/ 22.90 b/
White oak 22.63 b/ 29.94 c/
Yellow-poplar 29.94 c/
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_____
a/ Significant at the 10-percent level
b/ Significant at the 5-percent level
c/ Significant at the 1-percent level