Lumber Market has Gone Emotional – Nothing Good Comes of This

Lumber prices have risen again. Last week typically-followed random lengths print levels were nearing all-time highs. It has also been said that some lumber purchases are costed above print.

This is very strange given what folks say are the actual facts on the ground. Our sincere hope is that this lumber market is not playing everyone for fools.

It looks like we missed the mark last week by doing our best to try to calm all the emotional waters we were hearing about, that were not based on a good set of facts and encouraging everyone to take a deep breath by saying not to panic. Unfortunately, lumber cost craziness is causing folks to be very concerned about the future and rightly so. 

Key summary concepts to consider based on as many conversations possible.

Number 1 – It is a really good idea to NOT get emotionally involved in lumber cost moves. When you need lumber, or see your profits eroding, this is extremely hard or near impossible to do. It is also very important to be discerning about news and only use verifiable sources (i.e. names, folks you have complete trust in, documented evidence, etc.). Fake lumber volume and cost news can seriously harm lumber buyers. Purchases based on bad information can erode cash and profits quickly.

Number 2 -- While not perfectly clear, it is probably important to consider that new lumber cost levels – the new lumber normal -- will be found during this emotional period of time. Given this, the 25% to 35% lumber cost increases that have been experienced starting about four weeks ago may need to be plugged into all of your “what if” cost models. The question is how quickly can new cost levels be passed on, or how long can CMs eat the extra cost?

Number 3 -- If the Canadian/US Dollar exchange rate was even, like it was several years ago, there would be no perceived or real crisis regarding US southern lumber mill competition from Canada. Not much anyone can do about exchange rates.

The hope for volatility-driven lumber traders is to use times like these to foster uncertainty and panic purchases, because they always win when panic purchasers lose. They love chaos because they have more knowledge of the truth on the ground and can win big via a wild and emotional ride. Feeding into that emotion likely began over the last few weeks. Reasonable people in the lumber industry did not expect the emotion to last.

Number 4 – The US South desires reduced volume from Canada to alter the supply demand equation in their favor. We have been told that the goal of the US South is to have Canadian market share be in the 20% to 26% range down from the 30 to 33% range that has traditionally existed. This would keep the baseline lumber composite costs about 25% to 35% higher.

Number 5 – As is usual in emotional markets and trade disputes like this, the unintended consequences create winners and losers as follows:

Winners:

  1. The traders always win on moving markets because they generally have more knowledge about real lumber inventories. Knowledge equals trading power. This is when you learn about the integrity of your lumber trading partners, and if they are truly a partner or not.
  2. The goal of the US lumber producers is to ensure less lumber supply overall, which generates an economics 101 change in the market that favors their businesses.
  3. Less supply means greater cost volatility, which means that anyone that trades on that volatility can be a major winner if they are holding lumber inventory at a low price when the market is moving up.
    1. They can also short the market when they know the lumber market is at a high, and sell all they can sell at a high price, and subsequently buy the lumber they need to fill those orders when the price has fallen to a lower level trigger point.
    2. In order to be skilled at these two trading concepts, superior knowledge is needed, and that knowledge allows them to win on the lumber movement and cost spread subsequently created. Unfortunately, someone also does not get as good a deal as they could if they don’t have this same knowledge.
    3. The best way to stop the craziness is for the lumber buying and selling market to dry up until the market calms down.
  4. Everyone can win, if and when lumber costs rise to a sustainably profitable level for everyone involved in lumber sales and manufactured lumber products and the cost stays at consistently profitable levels for all involved. This is not as much fun for gamblers, but much better for all business folks that desire to run a business with integrity.

Losers:

  1. All buyers of lumber, where lumber is a significant cost of the final product produced.
  2. This obviously includes all homebuilders, roof/floor truss and wall panel manufacturers building material suppliers, GCs, framers and so forth. Not having fixed costs when lumber is 50% of the cost of production becomes a losing proposition quickly when lumber costs move up by 25% and the market will not bear this 25% increase and you do not have all the lumber you need purchased at the normal cost. This can lead to a 12.5% profit reduction immediately. Not fun to say the least

Suffice it to say, the commodity nature of the lumber business, and the desires of lumber traders, can raise havoc with a lumber buyer’s manufacturing business, to the point of losing a high volume of money. This issue is very challenging when there is no cost effective and easy to implement substitutes for lumber to be used in the manufacture of floor/roof trusses and wall panels.

The above scenarios only get worse should a Canadian tariff or quota or both be put in place as this will create a two tiered lumber cost market. For more information on the foregoing and the current facts we have found on the softwood lumber dispute with Canada, please see the article -- Lumber History Repeats Itself, and It's Gotten Ugly.