This time Robert W. Hagler (formerly of ForestEdge, now with New Forests) – the co-author of recently published scientific article on cointegration analysis of international roundwood prices shares the main findings of his research along with Dr. Rafal Chudy, on the characteristics of global roundwood markets.
First, thank you, Mr Hagler, for participating in the interview for Forest Monitor blog. Let’s start with a question why studying price relationships between regional roundwood markets is important?
I think that studying price relationships between regional roundwood markets is important for three reasons:
First, by cointegration analysis, it is possible to explore potential future timber price fluctuations across markets. Since roundwood sales are the major revenue stream for timberland investors and owners, understanding price fluctuations is of utmost interest to them. If regional timber markets are integrated, a price change in one of the markets affects the price in the other markets and this integration may balance the price change across integrated markets. However, one should bear in mind that if there is friction between wood markets due to violations of the law of one price (e.g., transport or transaction costs), then markets may quickly become disconnected and new patterns may be observed.
Second, the knowledge of cointegration between price series may help investors find the best asset candidates for either paired trading in a stock exchange (e.g., among REITs focused on different roundwood markets), or timberland investment managers looking to arbitrage timberland values in correlated regions where asset values do not reflect such correlations, or to provide end-market diversification for their asset portfolios by investing in regions where roundwood prices have been shown to be poorly correlated with other assets in the portfolio.
Third, the degree of market integration may also inform the decision-maker on timber trade flows and suitable responses to changing market conditions. This may be important with respect to the spatial location of sawmills for example, as a local expansion of sawmill capacity and consequently roundwood price increase may occur when the relevant timber market is geographically restricted. If the market is efficiently integrated, then arbitrage opportunities will, in due course, be exhausted, and prices may differ only by transaction costs. Contrary to this, with a weak degree of market integration, only an incomplete price transmission occurs. Thus, knowledge about market integration contributes to making optimal investment decisions.
What was the primary goal of your study and how it contributes to present scientific literature?
The primary goal of our study was to further add empirical evidence to the literature by assessing the degree of market integration for roundwood markets in the following regions/countries: USA (U.S. South and Pacific Northwest), New Zealand, Brazil, South Africa, Sweden, Chile, Canada, Finland and Austria. Compared to previous analyses, our study differs primarily because it focuses on five continents, including most of the key timberland investment regions, so that the findings provide insight into the extent to which the premise of globally diversified roundwood markets is valid. In addition, we use data from Wood Resource Quarterly, a publication which has collected roundwood price data from in-country organizations since it was founded in 1988. As such, it is probably one of the most consistent quarterly roundwood price data sets currently available. Finally, our analysis considers the period of Q1 1995 – Q4 2017 representing a relatively long time horizon and investigates the cointegration of nineteen roundwood products.
What were the main results of your research?
Generally, our results show that non-coniferous and coniferous roundwood markets are not well integrated between countries, with the exception of Sweden and Finland. It seems that this result fits the existing literature as some authors could not detect the law of one price in their studies as well (see further references in our paper).
What are the main reasons behind such results?
The lack of cointegration between global roundwood markets found in this study should not be surprising because:
1) even roundwood products of the same category (conifer sawlogs for example) vary with respect to their characteristics and end-market uses. For example, fast-growing pine logs from New Zealand, Chile or Brazil do not generally have the density and strength characteristics needed to be used in the U.S. home construction industry. As a result, they are only suitable for non-structural applications such as interior finish products (mouldings, door and window frames), or in engineered wood products. Although U.S. South pine sawnwood can substitute for northern Spruce-Pine-Fir (SPF) sawnwood products in the U.S. home construction market, builders may prefer the lighter SPF products in interior and exterior wall construction and thus may use the heavier southern pine products for roof and floor trusses. Finally, certain species of conifer pulpwood are likewise preferred or discriminated against by pulp and paper manufacturers due to differences in colour, density, fibre length, or extractive content.
2) the existence of “transaction costs” or the costs to arbitrage supply from one region to another may often exceed the value of the roundwood product being arbitraged so that markets remain poorly correlated, and finally
3) legal restrictions and extra transaction costs such as tariffs are often implemented in the global roundwood trade in the name of protection of domestic markets (ban on roundwood export in Russia or Belarus) or sometimes serve as a tool in trade wars (e.g., the U.S. vs. Canada or China).
All of these are reasons that, despite widespread trade, global roundwood markets remain poorly correlated.
And finally, what is the practical implication of these results for investors interested in forestry as an asset class?
The conclusion that global roundwood markets have not yet evolved to the point of cointegration and strong correlations due to a lack of product substitutability and «transaction costs», may support timberland investment managers as they attempt to diversify market risks within a global timberland investment portfolio.
Robert Hagler leads investor relations for New Forests’ US strategies and clients. Bob has more 30 years of experience in all aspects of forestry and timberland investments. Prior to joining New Forests, Bob was Principal of ForestEdge, LLC, a Registered Investment Advisor and timberland investment consultancy serving family offices and direct timberland investors. Over the past 20 years, he has held a range of senior positions including Head of Timberland Investment Strategy and International Portfolio Manager for both US and international timberland investments. Prior to that, Bob established and led Wood Resources International, an international forestry and forest product consulting practice that conducted research and projects in more than 70 countries around the world. Bob holds a bachelor’s degree in Forest Resource Management from Virginia Polytechnic Institute and an MBA from Penn State University.
Source: Chudy, R.P., Hagler, R.W., 2020. Dynamics of global roundwood prices – Cointegration analysis. For. Policy Econ. 115, 102155.
Main photo: pexels.com
This disclaimer informs readers that Mr Hagler’s views presented in this interview are his personal views and do not necessarily reflect the view of New Forests, Inc.