The minutes from the U.S. Federal Reserve’s December meeting along with various payroll reports last week caused lumber prices (along with other commodities) to fall. In its December minutes, the central bank stated it will keep the Fed funds rate “higher for longer” and the ADP private payroll report showed employers added 235,000 jobs in December, above the expected level of 200,000. The payroll reports support the Fed’s stance that interest rates will not be coming down any time soon. Higher interest rates mean higher mortgage rates and a slower housing market, so less demand for lumber. In fact, the price of the commodity is now below the average cost of production.
Background
From 1990 to 2018 – with the exception of a brief drop during 2008 – the price of lumber had held in the range of US$200 to US$500 per thousand board feet, before starting to climb. During the initial days of COVID-19, lumber futures dropped more than 50 per cent to US$280. Since then we have seen it rise and fall three times by at least 50 per cent, reaching an all-time high in May of 2021 of US$1,686. Based on more active supply-side management from the producers, lumber looks to be heading into a higher “new normal” range with less price volatility.
So how is this new normal happening?
Supply Side
In contrast to continuing to run through the tough times to drive out high-cost producers, mills are taking downtime quicker to support prices. Canfor Corp., West Fraser Timber Co. Ltd., Tolko Industries Ltd. and Interfor Corp. have all announced production downtime. Most recently, Canfor announced Dec. 19 they will reduce output by 150 million board feet through December and January and Tolko announced on Jan. 2 additional downtime during this month.
These reductions in supply will help support prices and dampen price volatility.
Demand Side
US housing starts in November, 2022, fell to 1.43 million annualized units, a level last seen in June of 2020 (Canada was at 264,000 units for both October and November). With mortgage rates expected to stay firm at least until mid-2023, demand should remain subdued or even fall until then. Interestingly, even with low inventories, lumber buyers (wholesalers) were only covering immediate needs going into the holidays, implying they expected prices to fall further.
Lumber price outlook
According to Madison’s Lumber report, lumber prices should range between US$500 and US$700 per thousand board feet in the long run. The lower part of this range is the current average cost of production for West Coast sawmills. With the dynamic downtime strategy they are employing, this should become the new support price. Lumber currently trades at US$360 per thousand board feet before wholesale or retail markups.
Consumer Impact
The impact we see as consumers happens when we purchase lumber at our local hardware store or engage a contractor for a construction project. Checking prices at Home Depot in Canada we see one 10-foot 2x4 is priced at $7.66. A board that size contains 6.67 board feet (a board foot is 12 inches by 12 inches by one-inch thick) so we have 150 pieces of dimensional lumber of that size per thousand board feet. If we multiply $7.66 by 150 we get $1,149 (or US$850) per thousand board feet. Retail lumber prices should come down based on this, but if we expect a range of US$500 to US$700 per thousand board feet going forward, once wholesale and retail margins are added, we will see retail lumber prices at or above the level they are today.
Brian Donovan, CBV, is the president of StockCalc, a Canadian fintech based in Miramichi, N.B.
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