One of the biggest commodity stories this year has been lumber, which has seen a run-up in prices to what some have called “mind-boggling” levels. Lumber futures blew past the previous record high nearly two weeks ago and haven’t looked back. They’ve more than doubled since April when the September contract was trading around $280. Cash prices for SPF (spruce, pine, fir) two-by-four boards were trading at a record level of $760 per thousand board feet the week ending 8/14, clobbering the previous high of $650 set in mid-2018, according to Kevin Mason, managing director of ERA Forest Products Research.
A combination of factors have contributed to the rapid climb, some of which stem directly from the coronavirus pandemic. Lockdowns enacted early on in March and April led to wood products companies cutting production in anticipation of declining demand. However, consumer behavior defied those expectations as demand for housing in both the U.S. and Canada rebounded dramatically and current homeowners went on a home improvement binge. Mill owners are now struggling to play catch-up amid staffing shortages and capacity limitations and don’t expect they’ll be able to boost supply by any meaningful degree.
The production shutdowns added to an existing shortage of lumber and wood fiber that has been building, particularly in British Columbia due to a mountain pine beetle infestation and recent wildfires. Between 2000 and 2015, it’s estimated the beetles alone erased a decade worth of lumber supplies. Some models project that more than half of British Columbia’s marketable pine trees will be dead by 2020, according to a recent Bloomberg report. The forest devastation has led to the closure of several mills, many in just the last year. The pine beetles have also now spread to Alberta, another key North American timber region, and British Columbia’s forests are being further threatened by a spruce beetle infestation.
For North America, analysts say the Southern U.S. still has plenty of timber supply and some Canadian firms have already shifted operations. British Columbia-based Canfor owns more than a dozen mills in the South and now sources less than half its lumber from Canada, compared to 88% just seven years ago, according to the company.
Some analysts also blame elevated prices on U.S. tariffs on Canadian lumber imports, which average more than 20% according to the National Association of Home Builders (NAHB). Earlier this month, the NAHB sent an urgent letter to President Trump expressing growing concern about soaring lumber prices and supply shortages. The NAHB urged the White House to prioritize a new softwood lumber agreement with Canada in order to end the tariffs and asked the White House to call on domestic labor producers to ramp up production.
Additionally, NAHB warned that escalating lumber prices threaten housing affordability at a time when home prices are already at all-time highs. There are indications that those increases may already be pushing up housing costs. Builders in the U.S. and Canada both have reported passing on skyrocketing lumber prices, which translate to an additional cost of +$8,000 to +$10,000 based on current estimates.
Stinson Dean, managing partner of Deacon Lumber Co., a lumber-trading firm said buyers are so desperate for lumber that they are paying much more than the futures price—in some cases hundreds of dollars more—for prompt delivery. “The marketplace is starved for supply, so much so that it will pay whatever it takes,” Mr. Dean said. “It doesn’t matter that you can buy it cheaper in two months. Everyone needs it now.” His comments mirror those I’ve seen from builders. One firm in Canada explained, “You’ve got buyers who care more about just getting product than they do about the price. Buyers don’t care. Right now, it’s an absolute panic, a scramble to get product.” (Sources: Wall Street Journal, Canadian Press, Seeking Alpha, Bloomberg)