Supply remains tight with some builders still playing catch-up on their lumber requirements for projects underway. As renewed buying begins for the 2021 building season, prices will likely remain elevated.
Just about this same time last year, near the end of February 2020, lumber prices went into a five week price slump. In case anyone needs a reminder, that was basically pre-COVID time, a still relatively ordinary period before the flight-to-the-suburbs phenomenon created increased demand for single family houses, and before the stay-at-home lifestyle motivated countless families to expand or remodel their existing abodes. Lumber demand rocketed along with prices; the price of a thousand board feet on the futures exchange actually hit $1000 on September 14, 2020, but prices pulled back sharply, albeit briefly, shortly thereafter.
This year is different. Any pullback in prices from this week’s record high prices (spot lumber prices have closed above $1000 three days in a row) is certain to be met with buying as purchasers scramble to fulfill existing and new buying requirements. This will limit any downside price movement in the lumber markets, at least initially.
There is always a chance that builders who have waited to buy, those hoping to capitalize on a repeat of last year’s price pullback, may get lucky, but traders know that “hope” generally results in a bad trade, lost opportunity, and lost money.
Right now the lumber futures curve is flat, that is to say the prices for lumber contracts in the future are only discounted by about 20 percent from the current spot price. Relative to the steep differentials seen in lumber markets over the past year or so, 20 percent actually isn’t much of a differential at all. In futures markets a flat curve means there is little expectation for the supply/demand picture to change, which generally means prices won’t move much either.
Spot lumber prices can certainly go higher for a little while from here because the supply of lumber simply isn’t matching demand. High prices are the cure for high prices, and that will certainly be the case in lumber markets eventually. But it may take most of 2021 for things to find more balance; the pent-up demand for lumber is huge.
Even though mills are motivated by high prices to produce as much lumber as possible in order to meet the surge of demand, they still can’t keep up and prices won’t budge. More mills will have to be built or reopened in order for supply to catch up, but that takes time. Builders need to build, and as winter loosens its grip, they will have no choice but to pay the prevailing price for the lumber they need.
Larger forces will eventually take effect and change the supply/demand equilibrium; capital flows that allow for the opening of more mills, and perhaps demand destruction from the ultra-high current prices, will combine to lower lumber prices over time. We’ll keep watching the futures curve for a sign that things will change, but right now it appears that those needing lumber as the 2021 building season commences are going to face the highest input costs in history.