What Goes Up, Must Come Down | Shepley Wood Products
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What Goes Up, Must Come Down

My wife and I were at a school dinner, the week before last, enjoying our first social event in 15 months that allowed a large group to congregate and in which no one was wearing a mask. It felt wonderful, a bit like finding an oasis in the middle of a desert trek. Across the table, an eager fellow whom I had not previously met jumped right in with the question we hear daily. “What is up with these lumber prices?” Actually he jumped in with a bit of vigilante aggressive vigor. It is not uncommon these days. Lumber has gone from a topic of conversation that very few thought about to becoming a front and center poster child for COVID era inflation.

I told him, as a consumer that I completely understand his concerns. No one likes inflation and unpredictability. Both put a lot of extra pressure not only on those who are buying, but also on those who are selling. I explained to him that the rise in lumber prices over the past year was not the result of one thing, but the sum of many things. He was still listening, so I continued.

It is not because of landowners or loggers charging a lot more for timber. Log prices in most species have been quite depressed and many loggers chose to sit out last winter because log prices at the mill were low due to an actual glut of logs. Logs have a shelf life after they are cut, just like any other plant based product. They don’t sit in a log yard well for very long before they hit their expiration date.

Overall logging in the US has declined from over 10 billion board feet harvested per year in the early 90’s to around 3 billion board feet per year today. Former Vice President Al Gore pushed through legislation back then that took 92% of federal timberlands out of timber leasing programs. If you wonder why we have more serious forest fires out west, it’s because Mother Nature is thinning out the forests where we used to…but that’s another story for another time.

I explained to the fellow across the table, that the current day lumber situation boiled down to supply vs demand. 15 months ago, producers panicked as COVID arrived. They cut production, reduced inventories, and furloughed workers in anticipation of business grinding to an abrupt halt. Housing production in this country has been in a slump since the 2008 Recession. New housing has been undersupplied by some 300,000 units per year on average since then. Another element is how flat lumber pricing has been since 2008. Other than a spike up in 2018, the past 13 years have been a relative flat pricing curve. In the spring of 2020, the lumber market was pretty close to where it was in the 1980’s on a lot of items. We were at low pricing levels and some say a lot lower than we should have been. By comparison, A Toyota SR5 pick up truck that cost $8400 in 1985, costs $26,000 in 2021, just over a three-fold increase. That increase happened steadily over time and was less noticeable because it was gradual.

COVID-19 has been a huge cost driver in lumber. Imagine running a saw mill and one positive COVID test makes you stop production, sanitize the entire mill, and then scares workers into staying home out of fear of contagion. Add in extra unemployment benefits and staffing becomes a real challenge. We all have experienced some level of this.

Transportation has been another real challenge. Government regulations have shortened the number of hours that CDL drivers can drive, license testing has been made more stringent, and physical exams and drug testing for drivers made more strict. Estimates are that these factors have equated to the removal of some 60,000 CDL drivers from the workforce. Lack of truckers definitely drove up freight costs.

Supply chain challenges have made parts for equipment and components for manufactured goods difficult to get and stretched lead times. Late or partial shipments plague all parts of industry. There have been price increases on everything from resins to structural steel.

Demand is the other side of the supply/demand market equation. A year ago, after the initial COVID shutdown, all of a sudden demand skyrocketed, accelerating from zero to a hundred in a veritable flash. It seems like it all started with toilet paper and demand mania spread to everything from plywood to semi-conductors, from shingles to subcontract labor. Demand continually has outstripped supply and pulled prices up with it.

The combination of events above has given us the longest bull lumber market of any of our careers but nothing lasts forever. Lumber futures pricing is definitely printing down and the cash market is starting to follow. There are still many bottlenecks in the supply chain, many transportation issues, and still our government is pushing to increase the duty on Canadian softwood lumber coming over the border!

Canada still has COVID challenges and it is restricting Canadian production. The good news...every price bubble bursts and we are seeing prices start to come off. It starts with “futures” and then trickles down to the cash market. Futures, the indication of buyer optimism or pessimism in the market, are off significantly and that will translate to lower prices going forward as inventories of higher priced material are replaced with lower priced goods. Lumber is coming down. Other manufactured goods such as plywood, shingles, PVC trim, pre-hung doors, and engineered wood and steel are still in short supply and ultimately will follow lumber but right now are scarce and selling at firm pricing.

After I explained some of the factors above to my new found friend at the dinner table, he actually thanked me for the explanation and said he had a better understanding that this was more of a perfect storm of a lot of contributing factors coming together and not just a few greedy lumber mills. He was also relieved to hear that the market is starting to correct itself. So are we!

Enjoy the fact the restrictions are easing up, life is feeling a bit more normal, and that as every market works in cycles, the next cycle will be in our favor. It will be great to have a tailwind behind us instead of fighting a headwind.