The real reason lumber prices are so high


Tony Nye - OSU Extension



Since early 2020, the COVID-19 pandemic has wreaked havoc with all of us in so many ways. The havoc has not only included the fear of the virus, but has included just about everything we do and use in our daily lives.

Shortages of this, and high prices for that have driven many of us to the brink of craziness. At times, I wonder if and/or when things that we are accustomed to will ever get back to normal. I’m thinking that since toilet paper is in good supply other things will get back to normal eventually.

Case in point: I was reminded the other day at a local lumber vendor just how ridiculous lumber prices are right now. According to Brent Sohngen, Professor Environmental and Natural Resource Economics, based on the U.S. Bureau of Labor Statistics Lumber Price Index, lumber prices have increased 180% since April 2020.

So, why have they risen, and how high will they go?

According to Sohngen, the economic explanation is relatively straightforward: Demand rose rapidly due to pandemic related building, and supply is inelastic. Thus, demand of wood has increased dramatically, and the supply hasn’t been able to keep up.

Consider the demand side first. The construction sector, specifically building and remodeling houses, is one of the largest demanders of lumber in the U.S. and around the world. New home starts and construction spending slumped at the beginning of the pandemic, but they rebounded pretty quickly. Remodeling seems to have picked up a real head of steam.

While demand for new construction and remodeling is hot, it’s now at about the same level as before the pandemic. So, something else must be going on.

Sohngen suggests one of those something else’s is the price of steel, which has also increased dramatically in the U.S. Steel is a substitute for wood, especially in commercial construction, and rising steel prices have also driven up demand for lumber and other things that can be made out of wood or steel.

OK, so the demand side is going crazy. What about supply?

The supply side in forestry is very inelastic. That is, it’s hard to make big increases in supply in short periods of time. Sohngen explains the many reasons for this:

First, you can’t build a lumber mill overnight. And after some mills slowed down during the depths of the pandemic, and others closed, it’s not as simple as just turning the key to start the remaining ones back up. You need trained workers, the machines are pretty complicated and may need some maintenance work before re-starting production, and you need logs.

Second, getting logs is not easy, either. There is a whole complicated supply chain associated with delivering logs to mills that itself has been affected by the pandemic.

Third, the supply of logs is super-inelastic because of the way trees grow. Plantation trees, which supply around 50% of our timber in the U.S., put on a lot of value in the 5-10 years before they are harvested. Most people who own these trees don’t want to cut them too early because they’ll miss this value growth, which could be 8-12% or more per year.

When plantation trees are cut, they actually are still growing, perhaps 6% or more per year, so if prices start rising really quickly, many landowners may actually hold them longer than they would otherwise because they get some nice volume growth plus the price growth.

So, when prices rise rapidly as they are now, the supply of logs contracts a bit because landowners hold onto their trees. Seems strange, but the value growth that occurs with the rising prices gives people who own trees a real reason to put off logging for a while.

Fourth, the supply of logs from our main source of imported lumber, Canada, is super inelastic because most supply there is from public lands and is controlled by government-allowable cut constraints. These allowable cut constraints are set administratively, not economically, and thus limit their ability to increase supply in times of high demand.

There are other issues at play, including U.S. tariffs on wood, but most of this dramatic increase in prices is due to short-term market phenomena related to the rebound from the pandemic, not any long-term structural issues or limitations in supply. on in the US, indicates that an enormous area of trees has been planted in the last decade, providing a reasonably large long-term supply of wood.

Finally, Sohngen suggests supplies of plantation timber in other productive regions of the world, especially South America, but also China, New Zealand, Australia, and parts of Southeast Asia, are expanding.

The current high prices for lumber may linger for a while as demand continues to rebound from the pandemic, and due to overall inflationary pressures, but over the next 6 months to a year, prices should stabilize.

And over the longerrun, there will be plenty of wood to go around.

Tony Nye is the state coordinator for the Ohio State University Extension Small Farm Program and has been an OSU Extension Educator for agriculture and natural resources for over 30 years, currently serving Clinton County and the Miami Valley EERA.

https://www.wnewsj.com/wp-content/uploads/sites/22/2021/05/web1_Tony-Nye-2.jpg

Tony Nye

OSU Extension