What's Going on with Dimensional Lumber Prices?

Many have noticed the sharp increase in the price of dimensional lumber (e.g. 2x4s, oriented strand board, and plywood) at home improvement depots and lumber yards. This crunch is being felt by homebuilders as well, and it will likely result in an increase in the price of newly built homes. The sharp increase in price arose as a result of the confluence of several known constraints, novel issues caused by COVID-19, and multiplied by several long-running issues within the industry.

Pennsylvania Insight

One key thing to understand is that while most lumber and wood products have seen recent rises in price, this is increasingly true for softwood lumber rather than hardwood lumber. Softwood lumber, often referred to as framing lumber or SPF Lumber (spruce, pine, fur) is a major component of the building industry, most notably for homes. When homes are finished, they are furnished and decorated with hardwood lumber in the form of flooring, moldings, stairs, cabinets, and furniture. Hardwood lumber prices have seen an increase in cost but not to the same magnitude as softwood lumber. Pennsylvania has 16.62 million acres of forested land, of that roughly 90% is hardwoods. While Pennsylvania is not known for softwood lumber production, the Commonwealth does lead the nation in the volume of hardwood growing stock, production of hardwood lumber, and export of hardwood lumber and wood products. Pennsylvania hardwoods are known worldwide for their superior quality.

Constraints in the Canadian Market

About a third of dimensional lumber on the floor of lumber yards in the US comes from conifers harvested in Canada—mainly British Colombia, Saskatchewan, and Alberta. These provinces have experienced large beetle outbreaks and wildfires, which killed and threatened millions of acres of mature forest. Almost 90% of the land in Canada is Crownlands—land owned and managed by the Canadian government (provincial or federal). The Canadian government responded to these threats by conducting large salvage harvests to cut any trees left that had value and to mitigate future threats. These rates of harvesting were artificially high and unsustainable. In 2020, the Canadian government lowered the amount of timber harvested to bring harvesting back to sustainable levels. This policy change was predicted to cause an increase in timber prices.

Another constraint is the ongoing softwood trade dispute war between the United States and Canada, which dates to the 1980s. This dispute is the longest and largest running trade dispute between the US and Canada; at its core is a difference in land ownership and industry subsidization. Instead of buying stumpage (standing trees) from private landowners or owning land—like American timber companies—Canadian timber companies buy stumpage directly from the Canadian government. The United States government and timber industry believe that the Canadian government sells stumpage for a below-market rate, thereby subsidizes their timber industry. The Canadian government disputes this and has brought the dispute before the World Trade Organization (WTO) several times. To protect the American timber industry a large import duty has been placed on Canadian softwood. The duty has changed over the years. Over the course of the Trump administration, the duty was increased to up to 24% on Canadian softwood and required cash payments. This duty has been disputed by the Canadian government and is currently under review by the Biden administration.

These factors have greatly reduced the supply and availability of softwood from Canada. The impact of both constraints was known and a moderate increase in prices was predicted as a result. What no one predicted was how these constraints would combine with the effects of COVID-19.

Effects of COVID-19

Many sawmills were closed at the beginning of the pandemic out of concern for worker safety. In most states, they were declared necessary and could re-opened shortly after the initial closing. But producers were slow to reopen mills—they had to learn how to work with COVID-19 and they thought the number of housing starts (the largest consumer of dimensional wood) would slow just like in 2008. Housing starts did not slow, and producers decided to sell their inventory down rather than ramp up production. Producers made this decision because they were worried that construction would stop as a result of the pandemic and there would be no one to buy their products.

Besides a tight supply of dimensional lumber, producers and consumers are struggling with logistics. With most Americans in their homes and the threat of COVID-19, online shopping skyrocketed. Logistical assets (trucks, trains, and ships) switching from moving lumber and logs to other more profitable products like electronics, and the price of shipping has greatly increased. COVID-19 also complicated international shipping—border crossings were closed and were slow to reopen, inspector’s activity was/is restricted, and communications were lost as people transitioned from their offices to work-from-home. This brought the important, but greatly decreased supply of logs and timber from Canada almost to a halt.

Additional there was an increase in retail demand. Americans have spent over a year at home with nowhere to go and nothing to do, as well as an influx of money from government stimulus checks, so many people started doing home improvement projects. To do these projects, they needed large amounts of dimensional lumber, which tightened an already stressed market.

Systemic Multipliers

Prior to the 2007-2008 Financial Crisis, there were many small sawmills and wood producers, but many of them were either bankrupted or bought up by larger companies as a result of the crisis. This consolidation has left the forest products industry with a few large mills that are owned by a few companies. These companies are highly risk averse as a result of the lessons they learned in the Financial Crisis. They do not keep a large supply of inventory on hand, and as a result, were not able to meet increasing demand.

Market Indicators

During 2020 when the global pandemic began there was a drop in new residential construction starts and permits, but completions remained relatively steady. Midway through 2020 starts and permits rose rapidly. At this time both the softwood and hardwood industries were struggling to secure the raw materials needed to keep up with the demand for lumber. Among many reasons, this is in part due to staffing issues brought on by the pandemic and landowners choosing to hold off selling their timber due to the economic uncertainty. These increases in new construction paired with current supply issues and greater DIY demand was and is resulting in higher prices.

National Association of Home Builders (NAHB)/Wells Fargo (WF) Housing Market Index (HMI) is a gauge of builder opinion on the relative level of current and future single-family home sales. If this reading is above 50 that indicates a favorable outlook on home sales; below 50 indicates a negative outlook. In November the HMI reached a record high of 90. Also, since April 2020 US consumer confidence has been trending upwards. This indicates that Americans are growing more upbeat about the economy and the labor market. Traditionally this a sign that household spending may pick up more broadly in the coming months.

Conclusion

It is unlikely that increase prices will increase stumpage prices because there is plenty of wood in the forest, and the issues are mainly on the mill-side. This spike is a result of a constricted supply from Canada, an increase in retail demand, strong growth in new housing construction, constrained shipping, and decreased production. New mills are very large, technologically advanced, and expensive to build, so it is unlikely that any will be built to increase supply. The current price spike may cause a decline in demand, which could moderate prices, or incentivize finding solutions to the other constraints (e.g. importing timber from Canada or increasing logistical capacity).