One year ago in the spring of 2020 when it was just beginning to become clear that COVID-19 was not going to quickly subside, the impact of the pandemic on commodity prices was completely unknown. What no one expected was that the price of ordinary building lumber would surge as significantly as it has. Driven by consumer demand and a variety of other factors, the price of lumber has increased nearly 300%! Why is lumber so expensive? And when will things get back to normal? What does normal even mean anymore? Let’s discuss.
The Lumber Landscape
The chart below shows the CME Futures Price Per Thousand Board Feet over the past year (source: Business Insider):
The series of new peaks and the relentless rise over the last month in particular are historically unprecedented. In fact, lumber prices have only risen this sharply one other time: in 1946 during the post-WWII building surge.
To be sure, there have been a number of non-COVID related reasons why the price of lumber has increased:
A warming trend in northwest Canada has increased the prevalence of a certain type of beetle that has destroyed millions of trees over the past two decades, contracting supply and fundamentally altering the market in that part of the world.
Tariff wars between the United States and Canada including tariffs of up to 24% against Canadian lumber have directly increased prices.
Demand for new homes has steadily increased over the last decade, as homebuyers continue to recover from the Great Recession, stoking demand for all types of building materials including lumber. And many younger people are entering their home-buying years, driving demand higher.
But as with many aspects of the current economic landscape (see last week’s newsletter about home prices in Maine), COVID-19 is the driving force.
The Impact of the Pandemic
I spoke recently with Eric Kingsley , who is a logging industry expert and consultant with Innovative Natural Resource Solutions. In reviewing the last year, Eric said:
Everyone guessed wrong about the pandemic. When the pandemic hit a lot of people thought that lumber demand would go down. A lot of mills took time off and at the same time we had fires out west, so there was a little bit of supply contraction. But instead of the decrease in lumber use that people were expecting, it actually increased.
Why did demand increase? Well, a lot of people were suddenly stuck at home and realized they had home renovation projects they wanted to do. No one could travel and entertainment and eating out were limited, so many people shifted this portion of discretionary spending to investments in their homes. Plus thanks to government stimulus, PPP, and other COVID-relief programs, the country did not experience as prolonged a period of economic distress as perhaps was originally feared. Many people suddenly have had the time and money to do their long-neglected home renovation projects (including the addition of home offices!).
On the supply side of the equation, as noted by Eric Kingsley, some sawmills pulled back on production in the early days of COVID both in anticipation of weaker demand and in order to keep workers safe from the spreading virus. Though noble and sound and perhaps correct from a public health perspective, what happened was that production shrank even as demand ratcheted up, the combination of which pushed lumber prices sharply higher.
Of note, the prices that landowners are getting in stumpage fees and that tree cutters are getting for their harvests have not increased in the same way that the prices lumber sellers are charging consumers have increased. In other words, the price surge is almost all reflected in the transaction from lumber seller to consumer and not from landowners and loggers to lumber sellers, which suggests that demand from consumers is the most causal variable here rather than limited supply. The spreads between what landowners, loggers, and lumber companies get paid could be the subject of its own future newsletter, or I encourage people to follow Eric Kingsley for his expertise and perspective on the question:
What Comes Next?
The National Association of Home Builders (NAHB) estimates that the higher cost of lumber has added $24,000 to the average price of a new home. This comes even as new housing starts are as strong as they have been since 2006. Such robust demand with strong prices means that lumber companies are making money and when that is the case market forces will always respond. New sawmills are now opening particularly in the south and existing mills are ramping up production to the extent possible, although it is difficult for sawmills to quickly expand as the machinery and equipment are not really things you can buy at Home Depot or Lowe’s; sawmill equipment is specialized and expensive and it can take a year or more to prepare and install. Sawmill owners have been left wondering whether to expand capacity to take advantage of higher prices or if in doing so they will be left with surplus capacity that has significant financing attached to it at the exact moment prices drop.
Market forces on the demand side of the equation should take hold at some point too. As prices continue to rise, consumers will pull back from renovation projects and new home construction will soften. Even as demand is currently robust, there are some anecdotal examples of developers pulling back on projects and waiting for prices to stabilize and perhaps decrease. Market peaks whether they are in stocks, tulips, or lumber can reverse quite quickly with a return to normal prices, which is what some developers who have started to pull back from new projects are counting on.
Will such patience be rewarded or will prices be even higher six months to a year from now? As Eric Kingsley noted in our conversation, “If traditional economic theory holds and people start backing off of projects then demand will ease and prices will drop, although that is the type of thing that always works better in economic textbooks than in reality."
I am not an expert in the pricing of commodities, but based on history and a study of human behavior it is clear that markets respond, bubbles burst, artificially high prices reverse, and normalcy typically returns. The question, of course, is in the timing. If the price of lumber is over $1,000 per thousand board feet in April 2022 I would be surprised, however; a price around $600-$700 is more likely based on my read of demand and other market forces. At the current frenzied moment, however, it is hard to preach patience amid such roaring demand and for many homebuilders, developers, and individual consumers it is full speed ahead.
Ben Sprague lives and works in Bangor, Maine as a V.P./Commercial Lending Officer for Damariscotta-based First National Bank. He can be reached at firstname.lastname@example.org or email@example.com. Follow Ben on Twitter, Facebook, or Instagram and subscribe to his weekly newsletter by clicking below.
From the Newsletter Community…
Thank you to Eric Kinglsey for sharing your perspective and expertise for this newsletter.
Responses to Newsletter #2: “Homes in Maine are One of the Hottest Investments in the Country”
“Can confirm this. My dad is selling his house. My wife and I were thinking of buying it but the price went from 325 to 440 in the last 6 months.” - Aaron Jackson
“Remarkable times, and a great opportunity to #liveworkmaine” - Marty Grohman
Message from Ben to newsletter readers:
“Thank you and welcome to all the new subscribers. I appreciate you being here and look forward to engaging with you. If there are topics you’d like covered, please do not hesitate to reach out. “The Ben Sprague Newsletter” is only a working title at this point. Perhaps we’ll run a contest for a better name. Suggestions welcome!