Lumber futures are contracts that allow you to buy and sell a specific amount of wood that has been cut into beams and planks in the future. A futures contract is a legally binding agreement between two parties to trade a commodity for a fixed price at a future date.
Companies in the forestry business utilize lumber futures to speculate on the cash price of lumber. The price of timber can fluctuate at each stage of the lumber distribution chain forestry, milling, processing, wholesale, retail, and construction due to the delay between purchase and final sale. Companies can lock in a price and reduce their risk exposure by employing futures.
This risk is essentially passed on to speculators or investors hoping to profit from price fluctuations.
Lumber has been used in construction for thousands of years, but it wasn’t a market commodity until the industrial revolution.
- Hardwood lumber, such as oak and maple, is employed in commercial enterprises and is commonly found in the form of wood pallets, furniture, and flooring.
- Softwood timber, such as pine and fir, is structural lumber that is used mostly for construction. Western Spruce-Pine-Fir species are the most common species traded in lumber futures.
Why are lumber futures so expensive?
Lumber prices have risen to their highest level in six months as a result of strong building demand and increased supply issues. Lumber futures on the Chicago Mercantile Exchange rose 4.4 percent to a six-month high of $1,069.30 per 1,000 board feet Friday.
What are the prospects for lumber pricing in the future?
When COVID-19 first hit in early 2020, most timber suppliers cut production, assuming that the broader economic environment caused by widespread lockdowns and uncertainty would delay building activity and, as a result, diminish demand for housesand, as a result, wood.
Instead, home purchases and remodeling increased as a result of the development of remote work, which coincided with the entry of millennials into their peak home-buying years, creating a perfect storm that the lumber sector had not anticipated. Construction didn’t slow down though, since the industry was immediately designated “vital” by regulators.
In 2020, prices for the critical home-building commodity skyrocketed as a result of this. However, by mid-2021, the price of lumber had plummeted as the industry’s output had stabilized.
The recent timber price increase, according to David Logan, senior economist at the National Association of Home Builders (NAHB), is due to many factors:
- Ongoing supply chain constraints for framing kits that are prompting more contractors to put their projects on hold
- In November 2021, severe flooding took away some infrastructure in southern British Columbia and Washington (two major lumber production areas).
High lumber tariffs, together with growing home demand, are also causing the spike in timber prices, according to Zach Fritz, an economist with Associated Builders and Contractors.
The US Department of Commerce said in November 2021 that tariffs on softwood timber imported from Canada would rise from roughly 9% to 17.9% in 2022. Fritz pointed out that this is a little reduction from the previous administration’s 20 percent lumber tariffs, which were reduced to 9% in December 2020 in the face of historically high lumber prices.
Demand for new housing
Housing starts also hit their highest level since September 2006 in November 2021. “Several factors, including the influx of millennials into the housing market, retirees downsizing, Americans migrating in large numbers from the Northeast to the South and Southwest, and pandemic-induced shifts from urban to suburban living, have boosted demand for new housing to levels not seen since the mid-2000s,” Fritz said. “Because lumber is a key component of residential building, accounting for roughly one-sixth of the total cost of a home, demand has skyrocketed.”
The trends that are driving up lumber prices aren’t going away anytime soon. The lumber tariff issue between the US and Canada stretches back to the early 1980s. Permits for new residential building have remained near their highest level since 2006, despite historically low housing inventories.
“With tariffs in place and home demand expected to outstrip supply for some time,” Fritz added, “expect lumber prices to remain high for the foreseeable future.”
The United States uses lumber to construct more than 90% of its single-family homes, a much larger percentage than the rest of the globe. In the United Kingdom, for example, only approximately 20% of single-family homes are constructed with lumber. This trend will not reverse very soon, according to Fritz, because the two main substitutessteel and concretehave also suffered rapid price hikes in recent months.
Board feet prices 254% higher than pre-COVID price levels
Logan noted at the time of writing, “Futures markets anticipate that lumber will remain above $1,000 per thousand board feet until September 2022.” Logan and other industry observers can only point to futures pricing because NAHB does not publicly forecast commodities prices.
The huge increase in the cost of building materials has resulted in project delays and cancellations across the country. According to Logan, the data shows that the number of single-family units sanctioned but not started is at its highest level since April 2007. Furthermore, single-family starts have climbed by 31% since January 2018, while the number of units permitted but not started has increased by 70%.
Logan went on to say that interest rates, which have already begun to climb this year, are anticipated to rise further through 2022, creating a headwind for the construction industry, which has benefited from supportive monetary policy since the outbreak began.
Is it likely that lumber prices will fall in 2021?
Lumber prices have risen again in the United States over the previous month. Since the start of the COVID-19 pandemic, the price of lumber has been volatile, sharply plunging and unexpectedly soaring during the last two years.
Despite a brief drop in pricing in the new year, lumber prices have risen steadily throughout February, reaching $1,272 per thousand board feet, the highest level since summer 2021.
According to the Labor Department’s most recent producer price index report, softwood lumber prices increased by a stunning 25.4 percent in the month of January alone.
How are lumber futures prices calculated?
Humans have been using lumber for construction for thousands of years, but due to the heaviness of timber and manual harvesting methods, large-scale logging did not begin until the Industrial Revolution. Hardwood and softwood are both used to make lumber. Hardwood lumber is made from broad-leaved deciduous trees. The most common hardwood lumber is oak, gum, maple, and ash, which is utilized for a variety of industrial uses, principally wood pallets. Black walnut, black cherry, and red oak are examples of hardwood species with attractive hues and patterns that are utilized for high-end products such as furniture, flooring, paneling, and cabinets. Softwood refers to wood from cone-bearing trees, regardless of its hardness. The majority of lumber produced in the United States is softwood. Southern yellow pine, Douglas fir, ponderosa pine, and true firs are mostly utilized for structural lumber like 2x4s and 2x6s, poles, paper, and cardboard.
Plywood consists of multiple thin layers of veneer joined together using adhesives.
Plywood is extremely strong for its weight because the veneer sheets are layered so that the grain of one sheet is perpendicular to that of the next.
Most plywood has from three to nine layers of wood.
Hardwoods and softwoods are both used in the production of plywood, while hardwoods are mostly used for appearance and are not as robust as softwoods.
Plywood is largely utilized in building, with flooring, roofs, walls, and doors being the most common uses.
Two-thirds of all lumber consumed in the United States is used for home construction and remodeling.
The strength of the U.S. home-building market is highly correlated with the price of lumber and plywood.
Weyerhaeuser Company (ticker symbol WY) dominates the forest and wood products business, with annual revenues of almost $20 billion.
Weyerhaeuser is a forest products company that does not only cultivate and harvest timber, but also manufactures and distributes forest products, develops real estate, and builds single-family houses.
Wood products, pulp and paper, and containerboard are all examples of forest products.
In North America, the forestry section maintains 7.2 million acres of company-owned land and 800,000 acres of leased commercial forestlands.
The company’s Canadian business holds long-term, renewable licenses on over 35 million acres of forestland across five provinces in Canada.
In order to maximize its long-term yield from its acreage, Weyerhaeuser invests in a range of forest management activities such as extensive planting, suppression of non-merchantable species, thinning, fertilizing, and operational pruning.
Lumber futures and options are traded at the CME Group.
The lumber futures contract offered by the CME Group calls for the delivery of 111,000 board feet (one 73-foot rail car) of random length 8 to 12-foot 2 x 4s, which are commonly used in construction.
The deal is valued per thousand board feet in USD.
Supply – The United States led the world in industrial round wood production in 2018, increasing by +3.7 percent year over year to 368.189 million cubic meters, followed by Russia, which increased by +11.1 percent to 219.569 million cubic meters, and Canada, which decreased by -2.9 percent to 150.714 cubic meters.
The U.S. also dominated the globe in the production of plywood in 2018 with 11,490 million cubic meters of output (-0.90 percent yr/yr), followed by Russia with 4.013 million cubic meters (+7.6 percent yr/yr), and then Japan with 3.298 million cubic meters (up +0.3 percent yr/yr).
In 2018, global plywood shipments increased by 1.4 percent year over year to 30.781 million cubic meters. Russia is the world’s top plywood exporter, accounting for 8.8% of global plywood exports in 2018, followed by Finland at 3.3 percent, Canada at 2.3 percent, and the Baltic States at 1.5 percent. Exports from the United States declined by -34.3 percent year over year to 615.000 million cubic meters in 2018.
In 2018, global industrial roundwood shipments increased by 5.1% year on year to 135.463 million cubic meters.
Russia was the world’s largest exporter of roundwood in 2018, accounting for 14.2 percent of global exports, followed by the United States (9.5 percent), the Czech Republic (6.1 percent), and Canada (4.6 percent).
In 2017, Russian industrial roundwood shipments declined 1.2 percent year on year to 19.197 million cubic meters.
U.S. exports of industrial roundwood in 2018 climbed by +5.0 percent yr/yr to 12.814 million cubic meters.
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Will the price of lumber fall in 2022?
The United States is the primary driver of softwood lumber demand in North America. Softwood lumber consumption in the United States increased to 50.93 BBF in 2020, and we expect it to rise to 52.76 BBF in 2021, the highest level since 2006, and 53.87 BBF in 2022. Residential-improvement sectors, which will benefit from years of robust home sales, drove growth in Canadian lumber consumption. However, as the Canadian currency strengthens, the manufacturing sector will be harmed, thus we predict consumption to decline year over year from the fourth quarter of 2021 to the second quarter of 2022, before rebounding throughout the balance of the forecast period.
North American offshore exports fell by about 24% year over year between the second quarter of 2019 and the second quarter of 2021. As the global economy strengthened last year, we expect offshore lumber exports from North America to fall slightly less in 2021, perhaps 9.8% less than in 2020. (compared with a 25.7 per cent decline the previous year). Because of robust domestic demand, high prices, and competition from Europe, we estimate export growth to continue poor, decreasing another 1.6 percent in 2022.
The supply of lumber is made up of domestic capacity as well as imports. Early in 2020Q2, lumber demand and prices plummeted. Mills cut capex as a result of this, as well as the uncertainty surrounding the COVID-19-induced slump. As a result, capacity fell marginally in 2020. Pricing rose unexpectedly, and mills began investing to take advantage of the higher prices. This will result in a 1% increase in capacity in 2021-22. Over the next two years, significant additional capacity and expansions at existing facilities have been announced. Due to constraints on machinery manufacturers and mill labor, this capacity will ramp up slowly.
Offshore imports into the United States climbed nearly 40% in 2020, and with demand and prices soaring in early 2021, offshore imports are predicted to rise another 13% in 2021. In 2022, we anticipate a 9% increase in growth.
The predicted surge in imports is due to multiple factors, including strong North American consumption and high pricing; capacity constraints in Canada; ample, low-cost fiber supplies in central Europe; and the strong US currency. For a thorough description of the fiber supply problem in central Europe, see the FEA research Central European Beetle and Windstorm Timber Disaster.
Due to a combination of declining residential-improvement markets and the regular seasonal reduction in end-use market activity, demand for U.S. mills (consumption plus exports minus imports) has fallen off its seasonal peak, and we estimate demand for U.S. mills to continue weak through February. Putting it all together, we predict total demand at North American mills to rebound by 3.3 percent last year after being unchanged the previous year, and to grow by another 1.1 percent this year.
In the first half of 2020, capital expenditures came to a halt. Capacity growth has stalled until 2021 as a result of this. Meanwhile, demand was strong in the first half of 2021, and it expanded rapidly. Operating rates rose to 87 percent for the year as a result of this. In 2022, demand will continue to rise, but capacity expansions following the price spike of 2020-21 will start to come online. As a result, the demand/capacity ratio will stay unchanged in 2022, at 87 percent.
We may now turn our attention to lumber prices after putting all of this together. Prices rose at the conclusion of the year. Part of this was due to severe supply delays caused by British Columbia’s unusually wet weather. However, part of the rise in costs was due to strong demand as warm weather across the country extended the building season, and dealers rushed to replace inventory, fearful of another price spike similar to the spring of 2021. The weather’s impacts will be transient. However, we expect prices to remain high through February for a variety of reasons.
Inventories are still low across the supply chain, and dealers will want to start replenishing them before the construction season begins in March-April across much of North America. Mills took a break over the holidays as well. Finally, the all-too-fresh memories of $1,000-plus pricing will keep purchasers in the market while output is hampered by log- and labor-supply shortages.
Supply restrictions in the United States’ South will boost lumber prices in early 2022. Mill closures in British Columbia were primarily compensated for by capacity expansions in the United States South. Wet weather and labor shortages, on the other hand, have hampered log availability and mill output. We anticipate a reduction in soil moisture content over the winter, with a La Nia year in 2021-22. This will make getting into the woods a little easier. Labor shortages are expected to last longer this year, since many people who left the industry at the start of the COVID-19 pandemic have yet to return, and we expect labor concerns to continue to stymie production.
While we expect prices to stay high into early 2022, we do not expect them to return to the levels seen in 2021. Capacity additions in the United States’ South, somewhat higher inventory levels heading into the year, and weaker residential-improvement activity will likely preclude a run like the one we experienced in 2021. Furthermore, we estimate prices to fall in the second quarter as dealers work through their stockpiles built in late 2021 and early 2022. We foresee another round of buying in the third quarter as residential-construction markets remain strong seasonally and cyclically; however, as more low-cost southern pine production comes online, prices in the second half of 2022 will average lower than in the first half of the year. In 2022, we predict the RLFLCI will average 645 for the year.
In the end, we predict lumber prices to remain erratic in 2022. There are several causes for this, the most important of which is COVID-19’s residual effects. Following the first outbreak of COVID-19 in the United States, a lack of buying and production drove dealer stocks to new lows. As demand climbed, there was insufficient inventory in the system to meet the growing demand. As a result, prices skyrocketed to new highs. Dealers stopped buying lumber at such high prices, causing their stocks to fall again. Low stockpiles will almost certainly force dealers to buy wood at higher prices than they wish, and those higher costs will encourage dealers to cease buying as soon as their immediate needs are met, causing prices to fall significantly. Over the next year, this cycle will repeat itself, resulting in extremely volatile prices.
Forest Economic Advisors (FEA) LLC, the main source for North American wood products analysis and information, has Paul Jannke as a principal. North American lumber markets are Paul’s main area of expertise. Paul is the industry’s top economic analyst, having spent nearly 30 years analyzing lumber markets and providing reliable, insightful forecasts. He wrote the FEA publications Lumber Advisor and Lumber Quarterly Forecasting Service.
Why is the cost of lumber increasing?
Lumber prices are increasing once again, upsetting the housing industry and threatening house affordability, after a few months of moderated costs last spring and summer.
According to NAHB standard estimates of timber used to build the average home, lumber costs have nearly quadrupled in the last four months, leading the price of an average new single-family home to rise by more than $18,600. This increase in lumber prices has increased the market value of the average new multifamily housing by roughly $7,300, resulting in households paying $67 more per month to rent a new apartment.
According to Random Lengths, the price of framing timber has surpassed $1,000 per thousand board feet as of Dec. 29, a 167 percent rise since late August.
The softwood lumber that goes into the average new home, as collected in the Builder Practices Survey performed by Home Innovation Research Labs, was used by NAHB to compute these average home price increases. Any softwood used in structural framing (beams, joists, headers, rafters, and trusses), sheathing, flooring, and underlayment, interior wall and ceiling finishing, cabinets, doors, windows, roofing, siding, soffit and fascia, and exterior features such as garages, porches, decks, railing, fences, and landscape walls are all included.
Why Lumber Prices Have Surged
The unprecedented price volatility in the lumber market began in April 2020, when the COVID-19 pandemic spread and sawmills slowed production in expectation of lower demand. Lumber mills did not scale up output in response to the fact that housing weathered the storm considerably better than expected and demand remained robust in the months that followed.
Lumber prices peaked at a record-breaking $1,500 per thousand board feet in May 2021, before gradually declining until late August, due to sawmills’ sluggish response and a significant increase in demand from do-it-yourselfers and big box stores during the pandemic.
- Increased price volatility due to a doubling of duties on Canadian lumber imports into the US market.
- Summer wildfire season in the western United States and British Columbia has been exceptionally active.
NAHB Actions
While lumber prices remain stubbornly high, NAHB continues to work tirelessly with the White House, Congress, and lumber producers to alleviate supply chain interruptions, increase lumber production, and lower material prices. This is the association’s top priority. NAHB has made the following steps in the last few weeks:
- 84 members of Congress wrote to Commerce Secretary Gina Raimondo in late December at NAHB’s request, expressing grave concern about the Commerce Department’s recent decision to double tariffs on softwood lumber goods from Canada. The letter also urges the US to resume negotiations with Canada on a new softwood lumber trade agreement.
- The NAHB met with top Canadian officials at the Canadian embassy in Washington in early December to discuss major softwood lumber concerns, including the urgent need to initiate negotiations on a new softwood lumber deal that would eliminate tariffs.
- On Dec. 3, NAHB issued a letter to President Biden, urging him to work with Canada on a new softwood lumber accord and increase American lumber production to battle high lumber costs.
- Over the holiday season, NAHB engaged its grassroots by having members call or write their members of Congress, urging them to tell President Biden to negotiate an updated softwood lumber agreement with Canada and increase U.S. lumber production by harvesting more timber from U.S. forest lands through BuilderLink.
- Sens. Jeanne Shaheen (D-NH) and Jerry Moran (R-Kan.) wrote to Commerce Secretary Gina Raimondo in late November to express their opposition to the Commerce Department’s decision to double tariffs on Canadian lumber imports into the United States, citing NAHB’s assertion that historically high lumber and building material prices continue to be a headwind for the housing sector in the United States.
- On October 20, NAHB Chairman Chuck Fowke spoke before Congress, urging lawmakers to address supply chain constraints that are compounding the housing affordability crisis.
- On Oct. 6, NAHB wrote to Biden, urging him to address lumber and building material supply chain bottlenecks that are driving up construction prices and threatening housing affordability.
Government Affairs, Communications, Economics, and Legal the NAHB advocacy team continues to work relentlessly on all fronts to develop solutions that will secure a long-term and consistent supply of timber and other construction supplies for the home building industry at a reasonable price.
Will the price of lumber drop?
The likelihood of a cooling housing market, accompanied by increasing mortgage rates and persistent supply-chain difficulties, has sent lumber prices plummeting from last month’s heady heights.
See: Housing Builder Confidence Drops Due to Supply Issues Will Home Prices Rise Due to Inventory Shortage?
According to Business Insider, lumber prices have dropped 30% in the last two weeks, reaching a low of $934 per thousand board feet on Tuesday. This was down from $1,338 on January 14th. According to Bloomberg, the lumber business has been in a slump since July.
The impact on home sales has already been felt. According to the National Association of Realtors, pending home sales in the United States fell 3.8 percent in December from the previous month and 6.9 percent from a year ago.
When do you think lumber prices will drop?
- By 2022 or 2023, lumber prices are likely to return to their previous levels. This does not, however, imply that the lower prices are simply transitory.
- Once lumber prices stabilize, the price reduction will pave the path for new technologies and construction techniques. This could result in a number of positive developments for American households.
- Even if timber costs rise again in the future, homebuilders should expect to see a considerable increase in the affordability of housing and other construction projects for years after 2021.
- Outside of the property sector, the price decline has created new business prospects. Lumber prices have decreased to the point that they are now cheaper for industrial usage than some forms of paper and plastic. This means that switching from old methods will save firms a large amount of money on raw materials.
- Many experts across the country have dubbed 2021 “The Year of Timber,” predicting that the lumber trade will be the most critical element in determining the housing market’s future.
- Lumber prices are projected to climb once more, but only slightly. This indicates that if homebuilders and real estate developers take advantage of their cheap rates now, 2021 might be a terrific year for them.
- This decrease in lumber costs is good news for the housing market, and it does not portend negative news for the rest of 2021.
- Lumber prices are likely to recover to former levels by 2022 at the earliest, giving homebuilders and real estate developers plenty of time to take advantage of the current low pricing before they skyrocket.
Why is OSB so costly?
This method is repeated until enough layers have been added to achieve the required thickness.
After that, the makers cut the board to the suppliers’ specifications.
The engineering process for OSB can be costly because it requires a lot of resources and time.
Because the engineering process requires a lot of time and effort, the product is more expensive to produce.
Thickness
Interior walls use the thinner OSB planks, whereas exterior walls, floors, and even roofing use the thicker planks.
Some builders would use 15/32″ thickness for improved endurance in areas where there is a lot of snowfall or storms.
If you require a large number of thicker OSB planks, the cost of your project may rise dramatically.
Labor Shortages
Labor shortages in a variety of industries are undoubtedly adding to the price of OSB.
There are various reasons for labor shortages, including the COVID-19 pandemic and a desire to find better work.
In the lumber sector, some people chop wood and send it to a mill to be processed.
There were fewer individuals available to cut down trees and distribute them due to a labor shortage.
Another area where labor shortages have influenced the pricing of OSB is the factory itself.
Workers must process the lumber’s wood chips and begin the production process after it arrives at the mill.
Many of these factories were also shut down by COVID-19 because they were deemed non-essential.
Those that were able to keep their doors open had to do it with fewer personnel.
There were fewer boards processed each day since there were fewer staff in the factory.
Many industrial workers chose to leave their positions for a variety of reasons, including better salary, better benefits, or just to alter their career path.
Any time there is a labor shortage, it means less things are produced, from lumber workers to delivery drivers.
Because of diverse labor shortages across the country and around the world, OSB is pricey.
High Demand
Because of its widespread application in construction, OSB has always had a high demand.
With more people working from home, they were able to focus on long-overdue household projects.
Others wanted to finally fix things around their house that they hadn’t had time to fix before.
Because OSB is used for both structural support and framework, it was necessary to employ it.
More people were buying OSB as more DIYers attempted to renovate and repair their homes.
Suppliers are still battling to fill the hole that bulk shopping created, despite the fact that demand for it has dwindled as workers return to in-office employment.
Builders are always in need of OSB, therefore suppliers don’t have the time to fill the void created by everyone else buying OSB at the same time.
The price of OSB will remain high until they can create more and meet demand.
Because of the high demand for OSB during the pandemic, it is costly.
Wildfires
As if the pandemic wasn’t bad enough, wildfires have been on the rise in recent years.
Trees used for lumber are burning in California, Canada, and the Amazon, among other places.
When there is less rain in a given location, the wood and debris become exceedingly dry.
Thousands of trees that would have been utilised in the lumber sector are destroyed by the wildfire.
Lumber firms can only chop trees on a certain amount of land, therefore if that land becomes unavailable for a period of time, they are unable to cut trees anywhere else.
Instead, they have to wait until firefighters can solve the situation or wait for the fire to die out on its own.
Meanwhile, they are unable to cut any more trees or bring in any factory supplies.
Because timber firms are unable to process wood during that time, there is a scarcity.
OSB is pricey because of the recent wildfires causing delays and lowering the number of usable trees to cut.
Seasonal Shopping
The most expensive times of the year to acquire OSB are in the spring and summer.
Everyone is outside and using OSB, whether it’s DIYers, government workers, or private builders.
Because demand for OSB rises in the warmer months, the price of the boards rises as well.
Because snow and cold temperatures are common in many parts of the country, construction projects are either halted or completed before the season begins.
The price of OSB drops slightly in the winter since there is less demand for it.
OSB is more expensive in the spring and summer due to increased demand.
Home Building Increased
One of the effects of the epidemic was a temporary drop in mortgage rates.
The government ordered banks to lower their rates and halt evictions in an effort to keep people in their homes.
For people who had always wanted to buy a home but were put off by the high mortgage rates, a chance presented.
More families were able to relocate outside of the city as a result of the change to working from home.
They were looking for houses with a good yard and a fair distance from their neighbors.
As a result of the lower rates, more families are looking to buy new homes, which has increased demand for OSB.
The price of OSB soared as suppliers were unable to supply the growing demand.
Slow Mill Expansion
The time it takes to build a mill and get it up and running is estimated to be two years.
They don’t want to take the chance of building a new mill and hiring additional employees only to have to close it down because they can no longer afford it.
Because OSB is so tightly related to the housing market, it’s difficult to predict what demand will be at that time.
Because it takes a long time to expand lumber mills and boost supply output, OSB is expensive.
Why is plywood so costly at the moment?
Because homebuilding can go up and down far faster than sawmill capacity, wood product prices often fluctuate more than most goods. Other applications of wood goods, such as non-residential construction, crates, and pallets, are more stable, although new housing is the most common, followed by home repairs and renovation, all of which are highly cyclical.
In North America, particularly in the southern forests, wood is plentiful. Modern mills are extremely efficient at converting logs into 2x4s and plywood sheets. Because of the short-run dynamics of demand and supply, lumber and plywood prices are at an all-time high.