Why the drop in wood prices will not last


Stacks of lumber for sale at a home improvement center in Chicago, Illinois. Demand for wood will continue to increase, analysts say.

Scott Olson / Getty Images

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Lumber has been particularly volatile over the past three months, but demand and prices for the raw material are poised for a long-term rise as the market settles into its “new normal”.

Among the major commodity futures contracts, lumber was one of the biggest price winners for the month, but also one of the biggest declines for the quarter.

Consumers of do-it-yourself and over-the-counter lumber and building materials led the dramatic price moves in 2020-2021, said Kyle Little, COO of Sherwood Lumber. As white-collar workers moved to a work-from-home environment during much of the pandemic, there was “literally nothing else to do but complete the majority, if not all of the projects that had previously been idle. “.

This boosted demand for lumber, pushing forward prices to a record high of $ 1,670.50 per 1,000 board feet on May 7.

The DIY project boom, however, was a “generational event that we won’t see again for some time,” Little says. The market is retreating “from too far-reaching extremes and developing its new normal”. This new normal has not been fully determined, but its scope “appears to be better than pre-Covid,” he says.

At $ 602 on September 21, lumber is trading 64% below the record settlement. Lumber prices are up nearly 25% this month, but down 16% for the quarter. “There will definitely be an ebb and flow in the housing market over the next several years,” says Scott Reaves, director of forestry operations at Domain Timber Advisors. “We expect a sustained increase in the demand for lumber from housing during this period. “

So far, the real opportunity for investors is “further up the forest investment supply chain,” he says. The increased demand for raw materials, including lumber, packaging and solid timber, coupled with growing interest in reducing carbon emissions, suggests an ‘attractive entry point for investment in land. forest ”. At the start of this year, for example,


Weyerhaeuser

(ticker: WY) has entered into an agreement to purchase 69,200 acres of Alabama woodland from a unit of


Greif

(FEM) for $ 149 million.

Demand for home construction, meanwhile, is going to be very high over the next eight to 10 years, even without a pandemic, Little says, as the United States “needs underbuilt shelters” from 2008 to 2018. due to the 2007-09 recession.

In August, U.S. homebuilders began building homes at a seasonally adjusted annual rate of 1.62 million, up 3.9% from the revised upward pace in July, according to the US Census Bureau. “Falling commodity prices are relieving some of the cost pressure on manufacturers,” said James Knightley, chief international economist at ING. “We believe real estate activity is returning to its pre-Covid trend.”

News that Chinese real estate giant China Evergrande Group was set to default on more than $ 300 billion in debt contributed to a 6% drop in lumber futures on September 20. growth in demand, including for timber, “but for now, this is seen as a Chinese problem with no wider global effects, assuming Chinese authorities intervene to mitigate the risks, Knightley said.

Looking ahead, Steve Loebner, director of risk management at Sherwood Lumber, sees an opportunity in physical lumber, referring to on-site pricing and product delivery.

Lumber futures have been way ahead of the spot market and carry a spot premium for delivery next year, which is bullish, he says. This, coupled with robust demand and clients positioning themselves in the spot and derivative markets to avoid the risk of explosive price movements, indicates a “spot market where the risk / reward ratio is definitely skewed upward over time. time “.

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