Lumber Market Update

[Jeffreauxdawg]

I know there have been a few of you holding off on projects because of the skyrocketing prices of lumber and osb. Well, there appears to be a window in place for the next month or 2 at least to get on it. Commodity lumber futures are down 70% since May 10th. In fact, futures are actually back at the high end of the normal range and 10-15 below summer 2018 prices. Futures are a predictions of where actual prices are headed.

Wholesale prices in the Southeast for SYP are actually pretty much in line with where they were this time last year. A few items are below and a few are above. Wholesale prices of OSB have also dropped significantly in the last few months, but its still historically high as of today. With this said, its really only lumber, osb, and plywood that is pulling back. Siding, engineered wood, and millwork is still on the upswing.

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From everything I see and hear, this has nothing to do with housing weakness. This is a product of the shortages that first hit lumber, plywood, and osb now hitting other stuff like windows/siding/drywall/labor/appliances etc. This is what we call the lumber yo-yo. It will bounce back up once the other supply chains correct, but not quite as high. By all accounts, housing demand is still very strong and builder confidence is only waning because of supply chain issues. Rates are at 5 month lows as well...

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I think this is a lumber supercycle type event. Lumber prices have lived in long term (20+ year ranges) before. In fact they always do. Once some kind of event comes along that drives the price significantly through the previous ceiling, that old ceiling becomes the new floor. See the monthly chart below.

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From 1973-1993 Lumber futures stayed in a defined range that would swing about 125%. From 1993-2020 lumber futures stayed in a defined range that had swings of about 125%. I am projecting that from 2020-2040 ish a new range will be established. We have been underbuilding homes for 13 years and the chickens are coming home to roost. I don't want to hear about price gouging either... As of today, lumber futures are only up 20% or so from the 1993 highs. With the inflationary pressures going on and wage increases, it will become economically infeasible to continue to produce lumber at the same prices that we did in the 90's. There is very little innovation or automation left to cut costs.


Long story short, if you were holding off on construction projects because of high prices, I think your window is here. It may not be the very bottom, but its close on lumber. Other products probably will never come back down from where they are today. It's time to get the checkbook out if you are planning on doing anything construction related over the next few years.

 

[57stratdawg]

Lumber seems to be the shining example of transitory inflation. It’s good to see it down YTD 2021.

 

[Jeffreauxdawg]

Not transitory inflation. Just supply and demand. It will shoot back up 30% at some point in the not too distant future IMO.

Useable commodity prices (lumber, copper, oil, crops) have short term price action based on supply. Commodities affect inflation long term by establishing new ranges like it appears lumber is doing. Case and point. You will probably never see 7/16" OSB for sale at Home Depot or Lowe's for under $15-20 again. Even though at various times over the last 10 years you have been able to get it for for $7-8 a sheet and rarely was it every over $20. The old ceiling is the new floor. That's highly inflationary... Unless of course I am completely wrong.

With the lack of mill capacity and forward demand, I doubt I am though. The one big threat I see to commodity lumber/osb prices is 3D printed houses. They are kind of where electric vehicles were 20 years ago. But that one might be a game changer.

 

[Jeffreauxdawg]

But overall I do believe we are in a transitory inflation event for now. At least as defined by what and how the Fed measures inflation. We will see large CPI/PPI increases for however many months until supply chains around the world are corrected.

At the end of it though, we end up in a world where prices increases from the shutdowns are one thing, but rising wages become round 2 down the road.

 

[BoomBoom.sixpack]

But overall I do believe we are in a transitory inflation event for now. At least as defined by what and how the Fed measures inflation. We will see large CPI/PPI increases for however many months until supply chains around the world are corrected.

At the end of it though, we end up in a world where prices increases from the shutdowns are one thing, but rising wages become round 2 down the road.

This is the question. For the first time in decades, there is actual wage pressure, but American business is hell bent against paying higher wages. Who knows which way it will go? WFH for reduced pay will obviously become a thing, but will that offset the rest?

 

[GloryDawg]

This is the question. For the first time in decades, there is actual wage pressure, but American business is hell bent against paying higher wages. Who knows which way it will go? WFH for reduced pay will obviously become a thing, but will that offset the rest?

I saw a taco bell offering 500.00 sign on bonus. I think they are willing to pay. Finding people to go back to work is the problem.

 

[horshack.sixpack]

Interesting. I built in late 2003/early 2004. OSB basically doubled from around $7 to around $14 from the time I got the estimate to the time I bought the lumber. Large shipments to the middle east for Gulf War barracks created supply issues. As you noted, though, the pricing came back down and pretty much stayed in the old range until recently. Prior to reading this I just assumed it'd be at $7ish at some point in the future.

 

[Jeffreauxdawg]

We talk about fast food, etc pay like its a big needle mover (I am guilty of it too.) The real needle is in full time decent paying jobs (factories, construction, white collar.) If we have to start paying everyone more its going to be the real factor. I'm confident its coming, but the local McDonald's salaries don't really move the needle with the rest of the economy. It just makes a Big Mac cost $4 vs $3.

With that in mind. Mrs Sock's just inherited a big group of employees out in Silicon Valley a few months ago and they are flying the coop like crazy out there. Big offers coming in from big tech and startups poaching employees and she is in a scenario where HR is only able to find inexperienced candidates to work in jobs they are nowhere near qualified for... So she is looking to bump her pay scale on those jobs big time. Construction pay is getting ridiculous too. Talk about not having enough workers.. In most parts of the country, hardly anyone is willing or able to perform skilled labor jobs on construction sites unless they are here illegally.


When middle class and up jobs start getting the kinds of pay raises that fast food workers have been getting, that's when pricing pressure on everything will start to cause significant inflation.

 

[57stratdawg]

That seems to be two sides of the same coin. I think we see it in the used car market as well. We have supply chain restrictions (semiconductors) reducing the ability to produce new vehicles combined with rental car companies rebuilding their fleets. Those two factors are really reducing the supply side before we even look at demand.

I was in a auto parts manufacturer in Tenn. a few weeks ago; I was surprised they were still fully masked and social distancing. They said management had set vaccination goals for the facility to ease restrictions, but they hadn’t reached the goals yet. The supply chains right now are full of small bottlenecks and they only get larger when you expand out to a global perspective.

 

[horshack.sixpack]

You gotta think that automation investment is sky high for fast food right now. I can't imagine many of those jobs even being jobs for many more years.

 

[jethreauxdawg]

The only thing slowing that down is having enough technicians to service those automated machines

 

[Jeffreauxdawg]

I wasn't real clear with that comment. Transitory inflation would be if it was only a temporary supply side issue caused by the pandemic and once those cleared, long term prices settled back down onto a reasonable trendline that was established before the issue. But in the case of lumber, osb, and housing in general. There was a temporary or "transitory" squeeze on lumber this spring, but the overarching issue of long term demand pressures and increased cost of operating are expected to have prices settle 50% higher than the pre pandemic average on lumber over the next 2 years. There was a "transitory inflation" of lumber prices on lumber in 2018 when some Canadian tariffs expired. That lasted for all of about 6 months. This is a complete shift in long term demand. The millennial hoards have finally rushed into the housing market.

 

[Uncle Ruckus]

We held off building this past spring and are tentatively planning to start this winter. Hope these trends continue

 

[Jeffreauxdawg]

Good luck. I think lumber itself settles down to a bottom between now and mid August in the wholesale and futures markets. Unfortunately most of that bottom won't reach the consumer. Just like the top didn't reach the consumer. I knew guys in April and May buying truckloads of OSB for 30% more than we could go buy a single sheet at Lowes or Home Depot... Before anyone asks, Lowes and Home Depot had limits of 1-2 units.

It's really all about how much it bounces from the bottom. I track North American sawmill capacity utilization and inventories monthly. I will try to give you a heads up on that front in August and September. Right now buying has come to a standstill at the wholesale level as everyone is dumping high dollar inventory. How low inventories get between now and the end of August will determine how much buying comes in to raise prices back up again.

 

[mstateglfr]

You gotta think that automation investment is sky high for fast food right now. I can't imagine many of those jobs even being jobs for many more years.

A conveyer system has to be able to assemble a McD cheeseburger more consistently than a worker. Better said- the conveyer system wouldnt do a worse job.

 

[BoomBoom.sixpack]

I saw a taco bell offering 500.00 sign on bonus. I think they are willing to pay. Finding people to go back to work is the problem.

Since they are offering a small bonus rather than a permanent hourly raise, it is actually proof of the opposite. Data says plenty of people are available to work, but not at the rates offered for the work. Can't blame UI anymore either. 40 years of stagnant pay will do that.

 

[57stratdawg]

We definitely under built middle class housing in the post-Great Recession decade.

 

[BoomBoom.sixpack]

We talk about fast food, etc pay like its a big needle mover (I am guilty of it too.) The real needle is in full time decent paying jobs (factories, construction, white collar.) If we have to start paying everyone more its going to be the real factor. I'm confident its coming, but the local McDonald's salaries don't really move the needle with the rest of the economy. It just makes a Big Mac cost $4 vs $3.

With that in mind. Mrs Sock's just inherited a big group of employees out in Silicon Valley a few months ago and they are flying the coop like crazy out there. Big offers coming in from big tech and startups poaching employees and she is in a scenario where HR is only able to find inexperienced candidates to work in jobs they are nowhere near qualified for... So she is looking to bump her pay scale on those jobs big time. Construction pay is getting ridiculous too. Talk about not having enough workers.. In most parts of the country, hardly anyone is willing or able to perform skilled labor jobs on construction sites unless they are here illegally.


When middle class and up jobs start getting the kinds of pay raises that fast food workers have been getting, that's when pricing pressure on everything will start to cause significant inflation.

Common mistake, but "inflation" only happens when there's a continual cycle of higher pay causing higher costs, causing higher pay, etc. Otherwise it's just a one-off correction or whatever you want to call it. I just don't see us going back to expectations of continual 10% annual raises. I think the situation is more analogous to a stock market or housing market "correction". We'll see pay correct up, then restabilize.

 

[Jeffreauxdawg]

You shouldn't confuse inflation with hyper inflation. Your "correction" is absolutely inflation. Even if it's only one time. But the reality is it will become a self fulfilling prophecy. You steal my guy for $1.00 per hour increase. I have to steal somebody else's guy. Eventually somebody is stealing the guy from you at an additional increase from the $1.00 per hour you paid to hire him away from me. When wages start running, they don't just stop. The only driving force that will change this is an increase in willing workers or automation. I don't think automation is going to be fast enough to stop the train.

If I have to pay my employees more and raise my prices, then not only do my customers have to spend more and likely raise their prices, but my employees have more money to spend, thus putting more money into circulation for the same amount of products. The only way the scenario is not inflationary is if output increases as much as the increase of money supply in circulation. Businesses will increase the money supply in circulation by drawing more money from equity or lending markets. This is one way that cash which is parked in non circulating environment begins to circulate.

Now let's not forget the most critical part of inflation... The belief that it is happening. If enough people believe prices will increase, they will. It becomes a game of leapfrog where prices and wages try to catch up to each other. The only way to stop that when it gets going is to stymie growth. AKA take away the punch bowl.

 

[BoomBoom.sixpack]

You shouldn't confuse inflation with hyper inflation. Your "correction" is absolutely inflation. Even if it's only one time. But the reality is it will become a self fulfilling prophecy. You steal my guy for $1.00 per hour increase. I have to steal somebody else's guy. Eventually somebody is stealing the guy from you at an additional increase from the $1.00 per hour you paid to hire him away from me. When wages start running, they don't just stop. The only driving force that will change this is an increase in willing workers or automation. I don't think automation is going to be fast enough to stop the train.

If I have to pay my employees more and raise my prices, then not only do my customers have to spend more and likely raise their prices, but my employees have more money to spend, thus putting more money into circulation for the same amount of products. The only way the scenario is not inflationary is if output increases as much as the increase of money supply in circulation. Businesses will increase the money supply in circulation by drawing more money from equity or lending markets. This is one way that cash which is parked in non circulating environment begins to circulate.

Now let's not forget the most critical part of inflation... The belief that it is happening. If enough people believe prices will increase, they will. It becomes a game of leapfrog where prices and wages try to catch up to each other. The only way to stop that when it gets going is to stymie growth. AKA take away the punch bowl.

I'm not confusing them. The 70s were inflation, not hyper inflation. We may see inflation soon, but hyper inflation isn't happening. But yes, there's some confusion here because of inadequately defined terms. "Inflation" can be defined as any increase in the cost of goods or a good. But the term is also used to describe an increase in the cost of goods due to monetary phenomena only (such as money printing). In this usage, we should ignore price changes caused by factors such as supply and demand. There really should be two different words for these two different things, but alas. I believe we have been using the latter definition here. It's not "inflation" if it's a response to supply and demand and thus doesn't induce a further continuation in the cycle.

As to the first scenario, I guarantee you 9 times out of ten such a job in America today gets filled at the same pay with whoever is best qualied, even if it means a less qualified worker. Just how modern corporate America is today, and the main reason I don't see raises becoming a norm.

Of course running wages stop! As wages go up, if prices don't fully rise to fully counter them, then the pent up pressure (demand) for rising wages decreases, and thus the raises slow.

There are plenty of ways that scenario is not inflationary. For example, if higher pay is used to pay down debt, or even just decrease the accumulation of more debt.

But I think we agree on the last part: it is all about expectations. And I still just don't see people expecting annual 10% raises. We also have virtually zero COLA increases these days, unlike then. Even if people start to expect price inflation and want raises to counter thsm, they likely won't get them. Ultimately, it's about power. Corps have the power, not workers. And they'll use it to prevent paying more.

 

[Jeffreauxdawg]

One of the reasons I think the lumber business is one of the best businesses... Check out this blurb in the weekly market report from one of the biggest brokerages in the country... Pretty sure I saw the same comment from Jethreaux on SPS.

The tone of the lumber market changed on Wednesday as a trading level was found on SYP narrows and lumber futures reversed course. Canfor announced significant mill curtailments for the month of August in SPF, helping fuel the futures increase. Time will tell if the futures response holds and translates to the open market. There were deals done at steep discounts to start the week, but some of those are gone for now. Conversely, panels continue to fall faster than (just the) tip of Jeff Bezos rocket, with double and triple digit decreases the norm. Fires in the west continue to be of concern as smoke carries all the way to the East Coast.

 

[Beretta.sixpack]

you should see the automation at McDs in Europe

i visited Austria a couple of years ago and stopped in for a McD's quick bite.....it looked like a chick fil in a college town busy-like....3 employees.....rolling them out....private sector knows what is coming, and a $12 big mac aint gonna work....

 

[Cooterpoot]

All this "demand" will lead to all this foreclosure. People are paying too much. Going to be trouble down the road.