Are Lumber Prices Really Hitting New Lows?
Friday, July 09, 2021
It has been quite a year for lumber and other wood products. Prices soared due to unexpected demand from home construction and very lean supply chains. In the early days of the pandemic, producers went into survival mode, cutting back capacity and liquidating inventory. This set the stage for record high prices early in 2021. Anyone looking to buy lumber or a sheet of plywood at Home Depot has no doubt experienced severe sticker shock. But the headlines now are highlighting an epic collapse. We think some perspective is needed.
The price of lumber, as shown below, broke through US$1,670/mbf* before falling back to US$774/mbf on July 7. Lumber typically trades in a range of US$200 to US$400/mbf. In other words, although it looks like a steep drop, the current price is still close to double the top end of the historical range.
Over time we expect lumber prices to eventually fall back to a more normal range. However, we believe the industry was already exposed to supply constraints due to the mountain pine beetle, conservation and industry consolidation. The pandemic appears to have just accelerated the pending supply crunch. While capacity will no doubt be added given the recent run up in prices, it may not be as swift as in past cycles, and the cost to add new supply is likely higher.
On the demand side, the U.S. housing market has been underbuilt for 15 years, and more houses are needed simply to keep up with new household formations and the replacement of older homes.
We are not typically interested in owning a forestry stock right after the underlying commodity has hit a record high price, but some lumber producers’ current share prices are intriguing. Given the outlook for supply and demand, we expect lumber prices to trend above the historic range and to be highly volatile for quite some time. We plan to be patient and potentially opportunistic, if the down trend in share prices continues.
*MBF is a common forestry measurement. It stands for “1,000 board feet,” where M is the Roman numeral for 1,000 and BF is board feet.