Recent data shows that the US home prices are dropping at a historic level, and the country is preparing for its 10th consecutive interest rate hike to combat inflation. Despite wages being up and unemployment at a near record low, many businesses are struggling to fill open positions. Meanwhile, lumber prices have been relatively stable for the past few months, but that may be changing. The laws of supply and demand dictate lumber prices, and when the supply of lumber is low, prices will be higher. On the flip side, when the demand for lumber is high, prices will also be higher.
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To understand what will happen next with lumber prices, it’s essential to comprehend the factors that impact both supply and demand. The supply of lumber is influenced by various factors, including wildfires, insects like the mountain pine beetle, and mismanagement or overlogging, which can create a lack of supply. However, the good news is that forests are generally managed well, and there is little risk of overlogging or running out of the supply of raw timbers anytime soon. Additionally, the 2023 Fire season in the US has been mild, which was due to a very wet winter and a mild spring and summer in most of the western states that are prone to wildfires.
Home Economy Changes
The U.S. home prices have dropped at a historic level, and the country is bracing for a 10th consecutive interest rate hike to fight off inflation. With wages up and unemployment at a near record low, many businesses are struggling to fill open positions. Lumber prices have been relatively stable for the past few months, but that may be changing.
Lumber prices are based on the laws of supply and demand. When the supply of lumber is low, as it was during the pandemic, prices will be higher. When the demand for lumber is high, prices will also be higher. In order to understand what will happen next, we need to understand the factors that impact both supply and demand.
The supply of lumber is influenced by a number of factors, including wildfires, insect damage, and mismanagement or overlogging. However, the forests are generally managed well, and there is little risk of overlocking or running out of the supply of raw timbers anytime soon. Additionally, the 2023 Fire season in the U.S has been extremely mild due to a very wet winter and a mild spring and summer in most of the western states that are prone to wildfires.
Canadian wildfires have had some impact on supply, as will insect-damaged forests, but for the most part, it is not expected to have a significant impact on the lumber supply in the near term. Transportation is a huge factor in transporting logs to the mill and in transporting lumber to the retailer at the end of the supply chain. A shortage of truck drivers in the U.S could lead to constricted supply and higher prices.
Lumber companies have been spending a lot of money at their mills to become more efficient, which has the potential to increase their output without necessarily increasing their costs. However, if prices fall too low, some lumber mills may not be able to afford to operate and may have to shut down or implement curtailments to reduce their output to save on costs.
Overall, barring more significant wildfires or a protracted rail strike or significant mill closures, the supply of lumber is expected to remain fairly consistent over the next year or more.
Lumber Prices History
Lumber prices have been relatively stable for the past few months, but that may be changing. According to a graph of lumber futures since before the pandemic in 2020, there were wild swings up and down as the industry struggled through mill shutdowns, huge demand spikes, and shipping and logistical challenges, as well as labor shortages. However, over the past few months, things have evened out a bit.
Lumber prices, like any other commodity, are based upon the laws of supply and demand. When the supply of lumber is low, as it was during the pandemic, prices will be higher. Similarly, when the demand for lumber is high, prices will also be higher. In order to understand what will happen next, it is necessary to understand the factors that impact both supply and demand, and what is happening with each.
The supply of lumber is influenced by a number of factors, and the easiest way to visualize it is by thinking about the lumber supply chain. The first step is cutting timbers, then the logs are transported to the mill for milling. From there, they are loaded into kilns and dried, and then transported to the local lumber yard where they can be purchased.
Factors that can impact the supply of lumber include wildfires, insects like the mountain pine beetle, and mismanagement or overlogging. However, forests are generally managed well, and there is little risk of overlogging or running out of the supply of raw timbers anytime soon. The 2023 fire season in the U.S has been extremely mild due to a very wet winter and a mild spring and summer in most of the western states that are prone to wildfires. In contrast, Canada has had a very hot and dry spring and summer, which combined with the dead trees from beetle damage, has left forests very vulnerable. Canadian wildfires have had some impact on supply, but for the most part, it is not expected to have a significant impact on the lumber supply in the near term.
Transportation is a huge factor in transporting logs to the mill and in transporting lumber to the retailer at the end of the supply chain. During the pandemic, some lumber mills and rail yards had stacks and stacks of lumber just sitting there because they were unable to get it to the end consumer. Most of the supply chain kinks from the pandemic have worked their way through the system, but if something similar does happen again, it will constrain supply and lead to higher prices once again.
The shortage of truck drivers in the U.S, which is about 78,000 strong, is another problem in the current economy. If there aren’t enough drivers to get goods from point A to point B, supply will be constricted, which could lead to prices going up to attract more workers. Salaries will also have to go up, which won’t necessarily constrict supply but will certainly impact costs on the supply side. When long distances are a factor, lumber is most often transported by rail, and there are some labor disputes and increasing costs there as well.
The lumber mills themselves are becoming more efficient, which has the potential to increase their output without necessarily increasing their costs. However, if prices fall too low, some lumber mills may not be able to afford to operate and may have to shut down or implement curtailments to reduce their output to save on costs. That will certainly decrease supply and increase prices.
In summary, there are some challenges on the supply side, but barring more significant wildfires or a protracted rail strike or significant mill closures, the supply of lumber is expected to remain fairly consistent over the next year or more.
Supply and Demand Principles
The laws of supply and demand govern the price of lumber, just like any other commodity. When the supply of lumber is low, prices will be higher, and when the demand for lumber is high, prices will also be higher. In order to understand what will happen next, it is important to understand the factors that impact both supply and demand.
The supply of lumber is influenced by several factors, including the supply chain. The first step is cutting timbers, which are then transported to the mill for milling. From there, the logs are loaded into kilns and dried, before being transported to local lumber yards for purchase. Wildfires, insect infestations, and mismanagement or overlogging can all create a lack of supply.
However, forests in the US are generally well-managed, and there is little risk of overlogging or running out of the supply of raw timbers anytime soon. Additionally, the 2023 Fire season in the US has been extremely mild, due to a very wet winter and a mild spring and summer in most of the western states that are prone to wildfires. This is in sharp contrast to what is happening in Canada, where a very hot and dry spring and summer, combined with the dead trees from beetle damage, has left forests very vulnerable.
Transportation is a huge factor in the lumber supply chain, both in transporting logs to the mill and in transporting lumber to the retailer at the end of the supply chain. During the pandemic, some lumber mills and rail yards had stacks of lumber just sitting there because they were unable to get it to the end consumer. The shortage of truck drivers in the US, currently estimated at around 78,000, means that if there aren’t enough drivers to get goods from point A to point B, supply will be constricted, which could lead to prices going up to attract more workers. Salaries will also have to go up, which won’t necessarily constrict supply, but will certainly impact costs on the supply side.
When long distances are a factor, lumber is most often transported by rail, and we’re seeing some of the same issues there with labor disputes and increasing costs. The labor disputes from earlier this year seem to have settled for now, but a rail strike in the US could have a significant impact on lumber supply and prices. The price of gas is also a significant factor, and if gas prices rise again, we could see an impact on costs and prices overall.
Lumber companies have been spending a lot of money at their mills to become more efficient, which has the potential to increase their output without necessarily increasing their costs. However, if prices fall too low, some lumber mills may not be able to afford to operate and may have to shut down or implement curtailments to reduce their output and save on costs. That will certainly decrease supply and increase prices.
In summary, there are some challenges on the supply side, but barring more significant wildfires or a protracted rail strike or significant mill closures, the supply of lumber is expected to remain fairly consistent over the next year or more.
Lumber Supply Factors
Forestry Conditions
The supply of lumber is influenced by various factors, including forestry conditions. Wildfires, insect infestations, and overlogging can all contribute to a lack of supply. However, forests in the US are generally well-managed, and there is little risk of overlogging or running out of the supply of raw timbers anytime soon. Additionally, the 2023 Fire season in the US has been mild due to a wet winter and a mild spring and summer in most of the western states that are prone to wildfires. On the other hand, Canada has had a very hot and dry spring and summer, which combined with dead trees from beetle damage, has left forests vulnerable. Although there are over 700 wildfires burning in Canada right now, the impact on lumber production is not expected to be significant.
Transportation Challenges
Transportation is a significant factor in the lumber supply chain, both in transporting logs to the mill and in transporting lumber to the retailer at the end of the supply chain. During the pandemic, some lumber mills and rail yards had stacks of lumber just sitting there because they were unable to get it to the end consumer. Although most of the supply chain kinks from the pandemic have worked their way through the system, a shortage of truck drivers in the US could constrain supply and lead to higher prices. When long distances are a factor, lumber is most often transported by rail, and labor disputes and increasing costs could have a significant impact on lumber supply and prices.
Lumber Mill Efficiency
Lumber companies have been spending a lot of money at their mills to become more efficient, which has the potential to increase their output without necessarily increasing their costs. However, if prices fall too low, some lumber mills may not be able to afford to operate and may have to shut down or reduce their output to save on costs. This would decrease supply and increase prices. Although it is not easy to get mills back up and running once they shut down, most of the large lumber companies can afford to operate at a loss for a short time if they think the demand will pick up soon. Overall, the challenges at the mills are manageable, and the supply of lumber is expected to remain consistent over the next year or more, barring significant wildfires, a protracted rail strike, or significant mill closures.
Demand Factors
Housing Market Conditions
The demand for lumber is heavily influenced by the housing market conditions. When the housing market is strong, the demand for lumber increases as more homes are built. Conversely, when the housing market is weak, the demand for lumber decreases. Currently, the housing market is experiencing a shortage of homes for sale and a high demand for new homes. This is due to a combination of factors, including low mortgage rates, a growing population, and a lack of new construction. As a result, the demand for lumber is expected to remain high in the near future.
Interest Rates Impact
Interest rates also have a significant impact on the demand for lumber. When interest rates are low, more people can afford to take out mortgages to buy homes, which increases the demand for lumber. Conversely, when interest rates are high, fewer people can afford to take out mortgages, which decreases the demand for lumber. Currently, the US is bracing for a 10th consecutive interest rate hike as the country tries to fight off inflation. This could potentially lead to a decrease in the demand for lumber as fewer people can afford to buy homes. However, with wages up and unemployment at a near record low, many businesses are struggling to fill open positions, which could offset the impact of higher interest rates on the demand for lumber.
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