Lumber Prices and their Pivotal Role in the Supply Chain

Lumber & The Supply Chain

From May 2020 to May 2021, the price of lumber increased a staggering 400%.  Thereafter, lumber prices plunged and are now below 2018 levels.  The wild ride for lumber illustrates the importance of supply chains and the lingering concerns about inflation.  

From May 2020 to May 2021, the price of lumber increased a staggering 400%.  Thereafter, lumber prices plunged and are now below 2018 levels.  The wild ride for lumber illustrates the importance of supply chains and the lingering concerns about inflation.  

The price swings can be explained by an unusual combination of supply and demand characteristics.

Supply – diminished production capacity   

1.      After the housing market collapse in 2008 – a 50-year low record of 554,000 housing starts in 2009 - wood prices and wood production fell drastically.  Thirty U.S. sawmills closed permanently.  

2.     Then, after 12 recessionary years, in 2019 the lumber industry suffered an epic downturn.  Anticipating another tough year in 2020, wholesalers sold off inventory and cut back operations.     

3.     When the pandemic struck, industry analysts assumed the demand for housing would dry up for a long time.  Mills cut back output once again, some even closed during initial lockdowns, and most dealt with labor problems due to reduced hours and health and safety protocols.  Mill employment fell by over 2,000 jobs between May 2019 to May 2020.     

Demand – pandemic driven mania for lumber     

1.     Stuck at home due to covid lockdowns, millions of do-it-yourselfers drove an insatiable home-improvement boom.  In the first year of the pandemic, over three-quarters of homeowners surveyed reported carrying out at least one home-improvement project.  

2.     Others felt a need to change residence and thousands fled big cities for more affordable areas of the country.  Instead of a housing slowdown, a housing boom occurred.  New housing starts shot up to historical levels and the median price for existing homes broke records.   

3.     Several rounds of government stimulus checks and increased savings due to covid travel restrictions added fuel to the frenzy.      

In May 2020, lumber prices increased to more than $1600 per thousand board feet (see graph below).  This added an average of $36,000 to a new home price.  

Lumber Prices per thousand board-feet (1996-2021)

Lumber supply chain

Once a tree is cut down, it takes trucks and railcars to move it.  Workers staff the sawmills that turn timber into lumber, truck drivers then carry loads to wholesalers, and lumber yard employees manage the retail side.  The pandemic impacted virtually every link in that supply chain, restricting access to trees, constraining sawmill capacity, and slowing deliveries.    

It took time for the supply chain to recalibrate and cope with the new high-demand reality.  The industry had suffered for years, and now the mills needed workers and needed to train those workers.  They needed more raw materials and they needed to ramp up production - and they needed to do it all quickly.    

Lumber prices gave the mills time.  High prices slowed new home construction and flattened sales to do-it-yourselfers.  The absence of stimulus checks and lockdowns cooled demand as well.  Meanwhile, the supply chain kicked into high gear.  Presently, 3,000 U.S. sawmills are running at full capacity.  With the help of a resilient and inventive lumber supply chain, prices fell back to reasonable levels.           

Implications

It is tempting to generalize from the lumber example: Painful price spikes in everything from used cars, airline tickets, to online apparel will abate and return to normal.  In fact, the rollercoaster in the lumber market seems to justify the Federal Reserve’s belief that inflation is only temporary.  Fed chair, Jerome H. Powell in fact evoked the lumber example to illustrate expectations for inflation: 

“Our expectation is that these high inflation readings that we’re seeing now will start to abate.  That’s what we think.  And it’ll be like the lumber experience.”   

However, lumber could also be a harbinger of a new normal.  Congress passed several covid relief packages that released millions of dollars in the form of stimulus checks, enhanced unemployment benefits, assistance to businesses, and grants to local and state government agencies.  The Federal Reserve also created trillions of new dollars and kept interest rates near zero.  All this easy money may not produce the runaway inflation of the late 1970s, but it may keep prices elevated.

Though lumber prices have dropped radically in the past 2 months, they are still high compared to pre-pandemic levels.  If they stabilize around $500, as analysts expect, that would be well above the 2019 average of $372 and the January 2020 figure of approximately $400. 

The lumber market is now in fact oversupplied, and mills are curtailing production.  A July survey of lumber brokers and manufacturers reported that 49% face “excess” inventory, 32% reported “normal conditions” while only 19% reported “slightly low” inventory.           

While the lumber supply chain ramped up quickly, there is no guarantee that other supply chains can do the same.  Witness the ongoing dilemmas caused by the chip shortage in the new car market.  Finally, the extraordinary price increases across a variety of markets can impact consumer psychology.  They leave an impression.  And that impression influences people’s expectations about future prices.  Michigan’s inflation expectation index reached a 13 year high in July.  

Perhaps it’s time to drop debates about the durability of prices.  Rather, the lumber example demonstrates the pivotal role of supply chains in determining prices.  What’s needed then is more focused efforts on educating the public and policymakers about our nation’s supply chains.