Timber prices soar as demand exceeds supply

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Prices for all grades of timber are breaking records as futures prices skyrocket with no relief in sight for buyers. Destruction of demand due to high prices is certain, but when?

The closing prices on Friday, April 16, 2021 of the Chicago Mercantile Exchange Random Length Timber Futures contracts for each delivery month in 2021 were all above $ 1,000 per board foot, the spot delivery contract or closest for May 2021 coming in at an incredible $ 1,294.70.

As a prospect, exactly one year before April 16, 2020, the same May 2021 futures contract was trading at around $ 345. Few asset classes can claim a 375% price increase in one year, and the historic rise in timber prices will surely reverberate through the construction industry and the economy in general with consequences as yet unknown.

What is certain now is that the futures curve still does not signal when wood prices could stop their relentless ascent and eventually fall. We observed in December 2020 and again in February 2021 that the wood futures curve was inverted and relatively flat, meaning that the price close to wood was higher than the price of wood further into the future. , but that the more distant prices were not enough of a discount to indicate an impending price easing as happened in September 2020, when there was a steep eight-month haircut on the futures curve of about 45%. Soon after, lumber prices fell by about half in just six weeks.

Right now, however, the price difference between May 2021 and November 2021 lumber futures is around 22%, which in the world of lumber futures is simply not. not enough to signal an impending price drop. Even the May 2022 contract, a full year off the current spot month curve, is valued at “only” a 25% discount. None of this is good news for builders or other professional buyers of almost any grade of lumber as they must have lumber to build on and the building season is in full swing as the schedule progresses. These people are paying because they have no alternative, and there is no indication that this trend will end anytime soon. Professionals who use wood will continue to buy what they need, if they can get it, even at high prices.

A few signals are starting to emerge that could herald a change in trend. There are fortuitous reports that lumber material price increases for DIY home improvement projects may cause consumers to divert their attention from wood-intensive activities to other activities, such as new appliances, improvements to landscaping or even taking more vacations. Regardless of their choice, there will likely be less wood in the retail mix compared to last summer.

More importantly, the futures price of lumber is approaching a premium of nearly $ 100 over the actual “spot price” of some lumbers of comparable physical random length, a situation that will not last long if history is a guide. Price disconnections of this type are corrected in two ways: either the physical price increases to respond to the forward price, or, more commonly, the forward price, generally leading to a premium over physical supplies through panic buying. , is corrected at the real price. of the merchandise.

There is no way to predict how the premium will be corrected, but there is a very real physical shortage of lumber, with many yards running out until May 2021 and beyond. The price of physical lumber looks set to increase a bit more because sawmills are at full capacity and unable to meet current demand. Price rationing is really the only solution, and lumber prices have clearly started the painful process of finding the highest price above which few people, whether professionals or DIY enthusiasts, will pay.

We will continue to monitor the futures curve for definitive signals that the price trend will change, but for now the amazing uptrend in wood remains intact.

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