U.S. wood prices are racing higher amid a vigorous economic recovery from the pandemic, blasting through previous records as sawmills struggle to keep pace with demand in the run-up to peak homebuilding season. Lumber futures have soared by more than 50% in 2021 to more than US$1,327 per 1,000 board feet length as housebuilders and DIY stores scramble for increasingly scarce supplies. That has taken gains since the depths of the COVID-19 crisis to 400%, significantly above the contract’s previous high of US$650 set in 2018.

The physical market is also red hot, with the price of the preferred product for wooden framing — 2×4 lengths of Western Spruce-pine-fir — rising 30% since the turn of the year to US$1,205, according to lumber pricing company Fastmarkets Random Lengths. That is almost US$900 above the average price since 2005.

Market veterans are stunned by the scale of the rally and say it underlines the inflationary challenge facing the U.S. economy as it springs back from pandemic lockdowns that have crushed inventories and production. “I’ve followed these markets for 37 years and I have never seen it go more gangbusters,” said Mark Wilde, analyst at BMO Capital Markets.

Supply constraints have already sparked alarm; the National Association of Home Builders recently called on U.S. Secretary of Commerce Gina Raimondo to launch an investigation and “seek immediate remedies that will increase production.” One suggestion is for the Biden administration to reduce tariffs on imports from Canada, the top lumber exporter to the U.S.

The National Association of Homebuilders estimates the increase in lumber prices since last spring has added more than US$24,000 to the cost of building an average new single family home, which now stands between US$300,000 and US$330,000. “We are simply not producing enough structural lumber in the U.S.,” said Robert Dietz, NAHB’s chief economist. 

At the same time, the volume of imports, particularly from Canada, which supplies almost a third of U.S. lumber supply, is lower now than it was in 2016 owing to tariffs and a mountain pine beetle that has devastated forests in British Columbia. “It’s the perfect storm of very strong demand and a very slow supply response because of a decade of underbuilding and COVID-19,” said Paul Jannke of Forest Economic Advisors.

The NAHB expected a 4% gain in single family home construction in 2020. Instead, it rose by 12%, bringing the total to a million for the first time since the financial crisis. Activity has remained strong this year, with overall housing starts up 19.4% to a seasonally adjusted annual rate of 1.74 million units in March — the fastest pace of growth since June 2006.

Caught on the hop, sawmills and dealers were not able to replenish their inventories. Stocks remain at critically low levels heading into the peak of the house building season. “The sawmill capacity doesn’t exist to produce enough lumber for what is being produced today but that probably doesn’t warrant prices at US$1,200,” said Jannke. “Had the inventory been in the system we would probably have seen prices peaking out at around US$700 or US$800.”

On the supply side, the downturn in the housing market that followed the financial crisis led to a large number of sawmills closing. In 2005, production capacity in North America stood at 80.7 billion board feet. Today it is 72 billion, according Forest Economic Advisors. Labour shortages caused by COVID added to supply disruptions.

As they ease and new capacity comes on line, supply could rise 5% to 6% this year, reckons Wilde, helping to address the inventory issue. In the meantime, the run-up in lumber prices is proving to be hugely profitable for big forestry companies such as West Fraser Timber Company. The Canadian company and several of its peers including Canfor Corp. have been buying mills across the main timber growing regions of the U.S. south where prices for logs have slumped because so many trees were plants back in the 1990s.

“The guy in the middle who is turning the log into lumber is just absolutely crushing it,” said Wilde at BMO. “I think this is the greatest market in my career, which goes back into the 80s, and probably the greatest in the last 100 years for lumber producers. For a southern sawmill operator this is the golden age.”

Source: Financial Post