Lumber: No Gossip, No Rumors, No Chaos, Better Profits

Originally published by the following source: SBC MagazineJanuary 3, 2020
by Kirk Grundahl collaborating with Mike Ruede. Sean Shields & Laura Soderlund contributed to this article.

   

What business do SBCA members engage in?

This appears a simple enough question, yet there is "a tradition" in this industry that persists where some believe that SBCA members are in the lumber buying business rather than the "engineered industrial framing" supply business. Why would anyone think this? Because there is the belief that there are extraordinary profits to be made when buying lumber “right” or being good at lumber gambling.

The Definition of Gambling

What does buying lumber “right” really mean? Consider the following observations commonly heard regarding the lumber market in the context of gambling:

  1. Volatility needs to be embraced as a profit opportunity.
  2. Volatility is a nice way of describing chaos, implying that “really smart” folks can profit from chaos.
  3. Volatility is the definition of chaos and the more chaos the more profit to be made.
  4. It is generally known that January through April is a period of growing demand. Remember, any disruption can cause chaos so buy all you can now to be prepared for increasing volatility and resulting profit opportunities.
  5. Any market disruption, perceived or real, is a good for making profit on the up or down swings.
  6. From a lumber salesperson – “You are the best lumber buyer I know!” leading to the belief "I buy lumber better than all my competitors do."

Lumber Demand and Labor Supply Considerations

The 2019 lumber costing cycle was NOT volatile. There has been steady demand for housing, a tight labor supply to prevent overheating and no major market chaos. Therefore, the question is, what can everyone expect in 2020.

 Presumably:

  1. Given no immigration fixes, the construction labor supply will remain constrained.
  2. Demographics (chart 1) support the continued need for single-family and multi-family units.
  3. The 58-year annual average need of 1.44 million housing units continues (see chart 2).
  4. There remains a systemic housing deficit due to the 2007 depression.
  5. Logic says that the demand for housing will remain solid, but not overheat.

What is coming next for lumber? Following the November-December pause, due to all of the “non-work” time, lumber producers will resume full production. Buyers will do their best to estimate first and second quarter demand and build inventories accordingly. Builders will resume building based on the demand that they have and the supply of labor available to meet demand.

A key indicator of constraints on demand are how many projects are getting "pushed off" anticipated completion times. This is typically due to trade labor supply issues, regulations, changing cost of money, etc., leading to start schedule modifications.

So the question becomes what major changes in housing production patterns will there be that will affect lumber buying patterns in 2020?

2019 was a year where there was little to no chaos/volatility. When the market supply-demand ratio is balanced, like was the case for all of 2019, there are four winners – lumber mills, component manufacturers (CMs), framers and builders. Why? They all know their costs. Lumber mills are getting consistent prices to cover cost and profit. CMs can rely upon a consistent 40 to 50% cost of goods sold percentage that allows consistent profitability. All construction business models work well under these conditions.

The losers, if there really are any, are the lumber gamblers who need gossip, rumors and chaos to move the market to make profit from predicting this movement accurately. Like gambling sometimes you win big and feel great, other times......

What does the Lumber Past & Lumber Futures Tell Us?

Here is what the futures data looks like from 1973 to the present. Two items to focus on:

  1. The anomaly in 2017, which was caused by shipping and market rumor chaos.
  2. The evenness of the “Average Settle Price”

Graph of future prices from 1973 to 2019 long term trend mildly higher prices

Chart 4. Click to enlarge. Data pulled from macrotrends.

Here is what current futures looks like:

Graph of futures January 2020 to January 2021

Chart 5. Click to enlarge. Data pulled from Barchart.com.

And finally, we can use historical data to provide an estimate of future trends through a simple Excel analysis. Please consider taking into account the trend chart when thinking about the lumber market. The general trend is a slowly rising cost/value trend. The gray bars indicate the type of volatility that exists in the historical data. 

Graph showing the projection of lumber futures using data from 1973 to 2019

Chart 6. Click to enlarge. Data pulled from macrotrends.

Barring a cataclysmic event, lumber futures should be trading in the range of $350 to $450, which is consistent with both the 2020 futures outlook and our forecast graph above.

Beyond this analysis, if rational business behavior prevails, it appears that another year of no chaos and low volatility are in the offing.

The good news, if this is the case, is that lumber mills, CMs, framers and builders stand to make a solid stream of profit. This bodes well for them, their employees and their customers and really for everyone in our industry that uses lumber as a key raw material.

Maybe our 2020 new year’s resolution can be “no gossip, no rumors, no chaos, better profits.”

 

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