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Lumber saw a whirlwind of action last year, with a rally to an all-time high in prices followed by a slump to one-year lows, and a recovery that led to the commodity’s strongest quarterly performance on record.
Lumber’s price action in 2021 was “nothing short of astonishing,” says Steve Loebner, director of risk management at Sherwood Lumber. While many accurately predicted the move to all-time highs in the first half of last year, “no one foresaw the price extremes we experienced both up and down, and particularly the velocity and violence of these moves.”
““No one foresaw the [lumber] price extremes we experienced both up and down, and particularly the velocity and violence of these moves” in 2021.”
Lumber futures
LBH22,
LB00,
more than doubled in 2020, climbed to a record settlement of $1,670.50 per 1,000 board feet on May 7, 2021, then hit an intraday bottom that year at $448 on Aug. 20, the lowest since July 2020.
“Enough demand got put on hold” to cause prices to “avalanche” by about 75% in less than a three-month period, says Loebner, who refers to 2021 as a “wild ride” that felt more like trading cryptocurrencies.
At $1,219 on Jan. 6, prices trade around 27% below the record high, but scored a gain of 83% in the fourth quarter of 2021—the best quarterly performance for most-active lumber futures based on records dating back to 1984.
Despite the extreme ups and downs for prices, lumber ended last year with a gain of nearly 32%. “Significant demand and supply-chain constraints” lifted prices, says Scott Reaves, director of forest operations at Domain Timber Advisors.
In response, the industry is “investing in sawmills and other production facilities to meet increased lumber needs, while adding substantial demand for raw solid wood material,” such as standing sawtimber, to the market. That should benefit forest landowners, Reaves says. Sawtimber is defined as trees suitable for sawing into lumber.
Among the biggest private owners of timberlands, Weyerhaeuser Co.
WY,
saw its stock price climb by nearly 23% last year.
Loebner, however, points out that shifts in lumber-industry dynamics helped magnify the price volatility.
“Many end-buyers haven’t adjusted their procurement strategies to match the change in the market dynamics” seen over the past two years, he says. End-use buyers are traditionally trend followers, waiting for prices to begin to move up before placing their bulk purchases, he says. But there’s so much variability around these numbers that by the time pricing indicators start to tick up, it’s “too late and prices are already significantly higher,” creating a wave of demand that chases production higher and higher until demand is “finally exhausted and prices top out,” says Loebner.
The market has also seen “enormous” producer and customer consolidation, so there’s a “tremendous concentration of buying and selling power in fewer and fewer hands,” he says. Big players “swing a big bat” and coordinate their purchasing, he adds, either “buying everything they can get their hands on, all at the same time, or they are hiding out, waiting for lower prices—and when that occurs, there is a huge liquidity hole and prices plummet.” These dynamics contributed to the “boom-and-bust hypervolatility price cycles,” that have become more pervasive, he says.
Looking ahead, Reaves says Domain Timber Advisors expects continued lumber demand to have a positive impact on sawtimber supply/demand dynamics, especially in the U.S. South, bringing the timber market closer to an “equilibrium point, moving away from the oversupplied state of the past several years.”
Lumber will likely move toward more “stabilized” prices as supply-chain challenges are overcome, but also remain at historically high levels, he says.
