February 2013 – Don’t Worry, Be Happy!

Just when we finally see signs of relief after the longest and deepest recession of our careers, just when we should be breathing a little easier because of the positive indicators, what do we do? We start on a whole new worry path!

An improving market has people speculating that lumber price increases are sure to follow. We’ve taken a number of calls from customers inquiring about the best ways to hedge against this conjectured inflation. As reported in Paul Roger’s Lumber Update (in this issue of Shepformation) prices are up from where they’ve been. But, to put today’s prices in perspective, the Recession drove levels down to those we used to see in the 1980’s and kept them depressed for a long time. Occasionally a customer will bring us in an old hand written invoice from our earliest days. They are quaint mementos of our past, sometimes from the days before our first computer system. They also carry pricing that is not a whole lot different than what we’ve been selling many items for, over the past few years. Yes, lumber prices are up, but only up to where they were 6 years ago. Recently, pricing was at levels we saw 20 years ago. Lumber mills have been having a devilish time surviving, because of so often having to sell below their cost. As efficient as mills have been forced to become, the low market levels have taken their toll. More than half the mills have shut down, and some of the best names in dimension lumber, like Winton, are off the market. But as demand is less than half of what it was when things were booming, there hasn’t been enough demand or shortage of supply to really drive prices up to where they should be in terms of normal inflation.

It is every lumber broker’s job to stir the pot and keep everyone on the edge of their seats wondering when the market will explode. They make money on market activity. Mills and brokers would love to find a way to drive up prices. They’ve been down so long, the only direction they can think of is up.

Earlier this month Bloomberg.com reported their opinion that lumber prices could actually come off a little in 2013, after their recovery in 2012. Between increased production in the U.S. at mills not running at full capacity, and increased lumber imports from Canada, plus decreased exports to China, they expect enough of a supply to satisfy the still relatively low demand. That will keep lumber steadier than we might have thought. Yes, there will be certain lines that defy this. Drywall, insulation, and steel seem much better able to get higher prices to stick. Lumber tends to give back a lot of what it takes in market gains.

When asked how to hedge against price increases, we can answer with the old industry adage, “One man’s hedge, is another man’s gamble”. Taking a position, commits you to that position, regardless of what the market does. No one can cover all their risk, without taking on the cost of that risk.

Here are our recommendations for 2013:

  • Don’t try to outsmart the market. It will have its ups and downs.
  • Demand and pricing work with seasons. Whatever projects you can schedule for off peak months will favor your ability to buy better.
  • Use time as your ally in getting your homeowners to commit and get projects started. Put a time limit on how long you can hold your price.
  • Tie your contract pricing to an independent indicator like the Random lengths Composite Average (our Dow Jones indicator of lumber market pricing) so that you have some protection against market spikes, natural disasters, and the fact that lumber still is historically underpriced.
  • Don’t drive yourself crazy! It’s our job to worry about timing the market and protecting you against price spikes. There is always a bit of ebb and flow, but we can really smooth out the cycles.

Talk with your Shepley sales team. An important part of quoting is forecasting. We’re here to help!

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