Boarding School: A Lumber Prices Lesson
The record lumber prices over the last year were front-page news. But by mid-July, the price for finished southern yellow pine (SYP) lumber had tumbled by more than 65 percent from a record high of US$1,202 per thousand board feet (MBF), achieved just nine weeks previously.
While the flat price performance in recent months has been less newsworthy, the coverage has prompted interest into the forest products supply chain that usually includes this question: When lumber prices hit record highs, shouldn’t log costs increase as well? The answer is not as straightforward as it might seem.
What Forces Drive Markets?
Two primary factors drive lumber prices:
- Housing starts. Historically, the main driver of lumber price has been the larger U.S. housing and remodeling markets, which require a well-oiled supply chain and steady import flows, primarily from Canada.
- Lumber inventory. Manufacturers must be able to make and stock a variety of lumber products in order to meet the demands of the huge construction market.
The drivers of log prices, at both the mill gate and in the forest, are supply and demand. The inventory of standing timber products in a supply basin must be matched to regional demand. For example, pulp and paper mills need access to deep inventories of pulpwood, and sawmills need access to sawtimber. In the Southern U.S., approximately 12 billion tons of inventory are growing in forests; roughly 291 million tons (3 percent) annually are harvested and used in the production of wood products.
Meanwhile, wood product mills demand a significant amount of raw materials, which make up as much as 70 percent of a mill’s operating costs. Each year in the South, 165 million tons of pulpwood are routed to facilities that produce pulp and paper, oriental strand board (OSB) and wood pellets, and about 126 million tons of sawtimber go into dimensional lumber and panels.
These distinctions can seem perplexing, but the markets for trees and lumber are vastly different. In the South, the inventory of standing timber (trees) has increased since 2007, which has resulted in an oversupplied market. The timber surplus and improved mill efficiencies have kept log prices suppressed, even as demand for lumber has surged and sawmill production continues to increase.
Looking Ahead to Next Year
Will wild lumber volatility and flat log prices continue into 2022? As Inside Supply Management® went to press, lumber prices were on the rise again after seemingly finding a new floor price of about $430 per MBF. Flat demand from the home construction sector and expanded mill inventories have created a market better attuned to current needs, which should limit substantial price reactions in either direction as well as provide some degree of stability.
Regarding forest resources in the South, significant stumpage price increases are unlikely in the near term. While supply is a major consideration for wood product manufacturers, it’s not the only one — labor pools/costs, competitive market dynamics, transportation costs and the like are also important factors.
The rapidly changing economy has driven some of these costs significantly higher over the last year, which could translate into more volatile delivered log costs for manufacturers in the near term.