Lumber prices spike as wildfires cause producers to cut output, citing ‘significant’ supply chain challenges

Bootleg Fire burns through vegetation in Oregon, tree on fire
The Bootleg Fire burns through vegetation near Paisley, Oregon, U.S., July 20, 2021

  • Lumber futures have jumped in recent days on concerns over the impact of wildfires on supply.
  • One of North America’s largest lumber producers said it would cut output at sawmills due to the fires.
  • One lumber expert told Insider the production cut was the catalyst that confirmed to traders prices had hit a bottom.
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Lumber futures have jumped in recent days as concerns mount that wildfires in Canada and the Western US will snarl production and supply chain routes.

On Tuesday, Canfor Corporation, one of North America’s largest lumber producers, said it was curtailing approximately 115 million board feet of production capacity at its Canadian sawmills. The company cited “significant supply chain challenges” amid a “transportation backlog in Western Canada as a result of the extreme wildfire conditions.”

Lumber futures jumped 10.8% Thursday, and are trading nearly 15% higher than Tuesday’s prices. Lumber is still more than 62% below the record-high reached in May. Prices skyrocketed earlier in the year as the pandemic-fueled housing boom pushed up demand, though recently supply and demand levels have begun to even out.

“The market overcorrected, it was waiting for a catalyst,” said Michael Goodman, director of speciality products at Sherwood Lumber, referring to recent moves higher after weeks of lumber prices falling.

He added that curtailment of operations at sawmills was not the sole reason for lumber’s recent price movement, but instead the catalyst that showed people prices had hit a bottom.

Goodman now sees prices moving higher as customers start buying again, though he also expects the market to be highly volatile for some time.

While prices are rising and production cuts are creating new supply constraints, Goodman said lumber will be volatile for the next year.

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Dow plummets 726 points for worst day of 2021 as virus variants threaten global recovery

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US stocks cratered on Monday as investors eyed a spike in global COVID-19 cases led by the Delta variant, throwing up a roadblock to a full recovery of the economy.

The Dow Jones industrial average fell 726 points, or about 2.1%, for its worst day since October 2020, while the benchmark S&P 500 and tech-heavy Nasdaq Composite also tumbled.

The yield on the 10-year Treasury note declined as much as 12.2 basis points to 1.177%, its lowest level since February as investors flocked to safe-haven assets.

Here’s where US indexes stood at the 4:00 p.m. ET close on Monday:

Read more: ‘More weakening beneath the surface’: A Wall Street strategist who warned investors before last year’s 35% crash lays out the latest signs that another slump into a bear market is looming

“COVID has returned to the front burner of investor concerns right now,” David Donabedian, CIO of CIBC Private Wealth, said in a note. “Last week we had high inflation readings. Now we have concerns that the rise in COVID cases is dimming the economic outlook. While the second-quarter earnings reports have so far beat expectations, this is old news now.”

Shares of airlines, cruise operators, and other travel companies slumped on concerns that the Delta variant would derail the recovery.

American Airlines and airplane maker Boeing all slipped roughly 5% each. Expedia Group and hotel chain Marriott both declined by roughly 3% each. Meanwhile, Carnival, Norwegian Cruise Line Holdings, and Royal Caribbean Cruises all fell as well.

Energy stocks tumbled, including Texas-based oil equipment maker NOV and Diamondback Energy.

Some argue the plunge on Monday is nothing to fear. The sell-off in stocks is a “healthy pullback” that will likely be short-lived and could present a buying opportunity, said technical analyst Katie Stockton of Fairlead Strategies.

In cryptocurrencies, bitcoin continued its recent slide, falling as much as 3.4% to $30,646.90. All other major cryptocurrencies – ether, cardano, ripple, dogecoin, polkadot, and solana – traded lower on Monday.

Despite the downturn, mining bitcoin has been a lot easier. The asset’s “network difficulty,” which measures how much computing power is needed to mint a new bitcoin, has plummeted.

Oil fell on news over the weekend that OPEC+ reached a deal on supply, overcoming the deadlock between Saudi Arabia and the UAE.

West Texas Intermediate crude fell as much as 8.06%, to $66.02 per barrel. Brent crude, oil’s international benchmark, dropped 7.39%, to $68.15 per barrel, at intraday lows.

Gold fell as much as 0.45%, to $1,807.56 per ounce.

Lumber gained modestly, rising 4.83% to $561.90 as supply catches up with demand. Prices are set to stay elevated despite recent declines, according to an economist,

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Lumber prices will fall back to pre-pandemic levels within a year amid considerable volatility, investment chief says

Worker loading lumber
  • The price of lumber futures has fallen to its lowest level since November 2020, erasing this year’s dizzying gains.
  • An investment chief says the price of the commodity could reach its pre-pandemic level in the next 12 months.
  • He added, however, that the price trends will vary by geography.
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Prices for lumber futures have descended to levels not seen since November 2020, erasing this year’s dizzying gains amid a cooling demand for the red-hot commodity.

Lumber prices fell for the 10th consecutive week to trade at $536 per thousand board feet – 67% lower from their May 7 peak of $1,670 per thousand board feet. Around a year ago, the commodity was hovering just above $400.

Despite weeks of decline, there is likely room to fall further, said Stuart Katz, CIO at wealth management firm Robert Stephens. He said the price of the commodity could reach its pre-pandemic level in the next 12 months, but whether prices remain at that level is the real question.

“This is a dynamic economy,” he said. He added that in order to predict the price of lumber, one must make a number of assumptions about the Federal Reserve’s monetary policy and the ability of home builders to pass along price increases or take margin compressions.

“You can’t lean on history when you turn off and then reopen the largest economy on the face of the earth,” Katz said. “No one has the crystal ball, so you need to look at the key fundamentals which provide push and pull pressures on, ultimately, the equilibrium of the price.”

One thing he is certain of is that the price trends will vary by geography.

“There may be regional aspects of this,” Katz said. “There’s an aggregate lumber price but because of some of the secular trends in home building and multifamily units … I could see there being local geographic tensions and price that would maybe make it more elevated than if you went to broad headline price.”

Katz said the Sunbelt states could continue to see heightened lumber prices as people move to the region from other parts of the US and drive up demand for housing.

Lumber prices at the start of the year surged, triggered by factors including concerns about an overheating housing market and millennials reaching home-buying age. But the main culprit behind its astronomical rally was the pandemic.

“I think it’s difficult to imagine a set of facts to support lumber prices going in excess of $1,600 per thousand for feet in the absence of the circumstances of the COVID crisis,” he said.

For some experts, the lumber phenomenon was a long time coming, especially given the chronic shortage of affordable homes for sale in the US.

Still, lumber wasn’t the only commodity that rallied this year despite the heightened interest. Many others from oil to copper also gained due in large part to distorted supply chains.

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US stocks trade mixed as Powell reiterates in testimony that inflation will pass

Stock Market Bubble
A trader blows bubble gum during the opening bell at the New York Stock Exchange (NYSE) on August 1, 2019, in New York City.

US stocks rallied on Wednesday after Federal Reserve Chairman Jerome Powell reiterated that inflation will pass.

The benchmark S&P 500 index scaled close to all-time highs, while the Dow Jones Industrial Average also inched up. The Nasdaq composite fell slightly.

The yield on the US 10-year Treasury slipped 6.1 basis points to 1.353%.

The Fed chief said the US economic recovery still has further to go before the central bank considers tapering its asset purchases, according to prepared remarks ahead of his House Financial Services Committee testimony.

Powell said the US job market “is still a ways off” from the progress the Fed hopes to achieve, suggesting it would stick to its highly accommodative monetary policy even in the face of data showing inflation is on the rise.

Powell on Wednesday presented the central bank’s semiannual monetary policy report to Congress and took questions from lawmakers.

Here’s where US indexes stood at the 4 p.m. close on Wednesday:

Stocks have scaled to record highs in the past weeks as economic data continuously point to a strong recovery on top of robust corporate earnings.

Bank earnings continued Wednesday with Bank of America reporting revenue that fell short of Wall Street’s forecasts but blew past net income predictions.

Citigroup meanwhile posted earnings that came in above analyst estimates as the banking giant’s stock trading offset a miss in fixed income.

Big movers include Oatly, which fell 6.1% to an all-time low of $19.40 after short seller Spruce Point Capital Management accused the oat milk company of misleading investors on multiple fronts and overstating its revenue.

Peloton shares also dipped by 5.4% to $113.33 following a rating downgrade to neutral at Wedbush.

In cryptocurrencies, bitcoin, dogecoin, and cardano’s ada token hit their lowest price in three weeks before recovering slightly. Ether touched a two-week low.

Powell in his testimony challenged the need for cryptocurrencies if the central bank were to issue its own digital currency.

“You wouldn’t need stablecoins, you wouldn’t need cryptocurrencies, if you had a digital US currency,” the Fed chief said.

Oil prices slid after Saudi Arabia and the United Arab Emirates reached a compromise allowing the latter to boost its output, Reuters reported.

West Texas Intermediate crude slipped 3.20%, to $72.84 oil per barrel. Brent crude, oil’s international benchmark, fell 2.56%, to $74.53 barrel.

Gold edged higher for the second straight session, rising 1.08% to $1,825.56 per ounce.

Lumber continued its five-day slide to at $642 per thousand board feet.

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Lumber prices continue to fall, and are headed to as low as $350 by August, an analyst says

Lumber prices sawmill US logs wood
Lumber prices plummeted in June.

Lumber futures are sliding after brief pop last week, falling 21% in the last five days as the hot commodity comes down from dizzying highs.

The price of lumber is trading at $642 per thousand board feet, roughly 62% lower from its May 7 peak of $1,670 per thousand board feet.

But the downtrend after scaling to unprecedented highs should be expected, said Troy Merkel, partner and senior real estate analyst at Chicago-based consulting firm RSM. He said he expects the price of the commodity to moderate, especially as supply chains normalize and recover after the last year of the pandemic.

By the end of August and into early September, he told Insider the price of lumber may settle between $350-$450 per thousand board feet due to a confluence of factors, including sawmills slowly reopening and vaccination rates rising.

And while Merkel still sees headwinds for the industry, especially when it comes to labor, he said he is optimistic the market will normalize by the end of the year.

Experts, including Merkel, have long sounded the alarm of a chronic shortage of affordable and available homes in the US.

“People took for granted the prices of lumber,” Merkel told Insider.

The spike in the price of lumber on its own has added $36,000 to the average price of a new home, according to the National Association of Home Builders.

A June 2021 report by the Rosen Consulting Group, a real estate economics consulting firm, found that more than two million housing units need to be built per year in the next decade in order to fill an underbuilding gap of at least 5.5 million housing units.

Homebuilding would need to accelerate to a pace that is well above the current trend, the study said.

But for some, like David Russell, VP of market intelligence at TradeStation Group, an online broker-dealer, the whole market “distortion” of lumber was an aberration caused by the pandemic.

“I think in some ways lumber is really just toilet paper, 2.0. It’s just a symptom of a totally weird situation that has almost never happened in history,” he told Insider. “This recession was caused by something totally external.”

Russell said prices will normalize by the end of the year, though he does not think they will return to pre-pandemic level.

“The likelihood of this happening again is very low,” he said. “This happened exactly because no one thought it was going to happen.”

A number of commodities have surged in part because of distorted supply chains during the pandemic, but lumber in particular has captured people’s attention. When asked why people have been focused on lumber over other commodities, Merkel said: “At the end of the day, people need a place to live. Housing has a personal feel, whether you’re an analyst or a prospective homebuyer.”

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Lumber prices just dropped for an 8th straight week – and they’re down more than 50% from highs as record-setting demand slows

Lumber
  • Lumber prices on Friday marked eight consecutive weeks of losses.
  • Prices for the key building material have slumped 56% from their peak set in early May.
  • Lumber prices have pulled back on signs of easing inventory shortages and some demand softening.
  • See more stories on Insider’s business page.

Lumber prices extended a string of losses last week, leaving prices for the key building material slashed by more than half from their peak on a mix of factors including easing shortages.

Lumber prices fell for an eighth straight week as they lost roughly 5%. The weekly decline was spared from a deeper contraction, however, as prices on Friday picked up about 1% to trade at $741 per thousand board feet.

But the weekly performance highlighted persistent weakness that’s been stalking prices since they began descending from their peak of $1,670 per thousand board feet on May 7. Wednesday marked the end of trading in June and prices closed the period with a fall of 45%, the worst monthly drop since 1978.

Prices as of Friday from the May peak have tumbled about 56%.

Lumber prices soared earlier this year, building on gains from mid-2020 as demand for the material kicked higher as people stuck at home by the COVID-19 pandemic embarked on home improvement projects. Meanwhile, demand for new homes was strong in an environment of low inventory of existing homes.

But the direction of lumber prices reversed course and moved lower, in part as sawmills have picked up the pace of output after the coronavirus crisis forced work stoppages. About 3,000 sawmills in the country have ramped up production, according to The New York Times, with a large focus on Southern yellow pine found in East Texas to the Carolinas.

Prices also softened on signs of slowing demand with homebuilders delaying projects partly to keep hold of their inventory of building materials.

Bank of America on Friday noted it’s seeing signs of inventory shortages for lumber and other home improvement categories such as appliances and cabinets beginning to ease.

“For retailers like Home Depot and Lowe’s, lumber/building materials and appliances are two of the largest categories as a percentage of sales,” wrote Elizabeth Suzuki, a research analyst at BofA, in a note published Friday.

“While improving supply is likely a positive for the retailers’ transaction counts (as in-stocks are particularly critical to professional customers who purchase frequently), it may be met with an offsetting decline in average ticket as pricing normalizes,” she wrote.

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Tumbling lumber prices are a sign that strong inflation will be temporary, Bank of England boss says

Lumber prices sawmill US logs wood
Lumber prices plummeted in June.

  • The plunge in lumber prices is a sign strong inflation should fade, the Bank of England’s governor said.
  • Andrew Bailey is among the central bankers to argue that inflationary pressures should be temporary.
  • Lumber prices soared but then tumbled 45% in June as sawmills upped production and demand slipped.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

The dramatic fall in lumber prices in the last month is a sign that strong inflation will be temporary, the governor of the Bank of England said on Thursday.

Lumber futures soared in the first few months of the year before dropping more than 40% in June. Prices peaked at more than $1,670 per thousand board feet of lumber in early May, but have since plummeted to around $760.

The drop is a sign that pandemic-driven booms in certain sectors will wear off as economies rebalance and supply catches up with demand, Bank of England Governor Andrew Bailey said in a speech on Thursday.

“We are seeing rebounds and normalisation of some commodity prices,” Bailey said. “In the US, lumber prices having risen sharply, are now retracting a sizeable part of that rise.”

“There are plenty of stories of supply chain constraints on commodities and transport bottlenecks, much of which ought to be temporary.”

Read more: An ex-Goldman trader breaks down why he is ‘salivating’ to buy the dip in grain stocks – and shares 5 stocks and an ETF to play the commodity supercycle

In the UK, year-on-year inflation jumped to a two-year high of 2.1% in May. In the US, year-on-year inflation hit a 13-year high of 5% in the same month.

But both Bank of England – the UK’s central bank – and the Federal Reserve argue that sharp price rises are a result of strong growth and bottlenecks in certain sectors. They say inflation will cool as growth slows, businesses adapt and people’s eagerness to spend wanes.

In the lumber market, analysts say prices are tumbling because people are spending less on home improvements as restrictions are lifted. Meanwhile, lumber producers have increased their supply.

However, not all analysts agree that falling prices in some sectors mean inflation will be temporary.

Hugh Gimber, global market strategist at JPMorgan Asset Management, said rising wages across economies as firms rehire workers could cause prices to rise more than expected.

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Lumber prices are on pace to plunge 45% in June after a record-breaking rally driven by homebuilding demand

A lumber yard

The price of lumber futures is on pace to plunge 45% in June for one of the largest monthly drops ever, as the hot commodity comes off a record-breaking rally.

Lumber prices have been on a rapid decline since their May 7 peak of $1,670 per thousand board feet.

As of June 30, the price of lumber has slipped around 45% to $721 per thousand board feet- and is now on track to have its worst month since 1978. Exactly a year ago, lumber futures closed at $435.

“I would not be surprised at all if we see the price continue to trail lower than $600 or below toward the year-end,” Mace McCain, president and managing director at Frost Investment Advisors, told Insider. “We will continue to see supply come on board but we will not see demand continue to grow.”

McCain added that this level will be more sustainable for the wood industry and will make housing more affordable.

While it is difficult to point to one specific reason why the price of lumber futures has pulled back, some experts attribute it to the economic reopening, which has caused more people to spend less time at home.

To begin with, the price skyrocketed at the start of the pandemic when restrictions forced Americans to shelter at home, prompting many to either build new houses or renovate existing ones.

Read more: ‘If lumber crashes, stocks might be next’: An award-winning portfolio manager who’s tracked lumber prices for years breaks down why futures hitting a record high of $1,600 is an ominous sign – and shares what investors can do ahead of the eventual crash

Chip Setzer, director of trading and growth for Mickey Group, a commodity trading platform, agreed that this range is what he would consider a fair valuation as well.

He has told Insider in the past that the sweet spot would be $600-$900 as this range gives sawmill operators, truck drivers, and other players in the industry more cushion for capital upgrades and operational improvements.

Setzer did express concern that while the prices are much more reasonable now due in part to a more functional supply chain, the industry simply cannot afford another disruption.

“I have strong concerns that we will have interruptions, which will have adverse effects on supply,” he told Insider.

Setzer mentioned the recent wildfires in British Columbia, where the US gets part of its lumber supply, as well as the upcoming hurricanes in Texas and Virginia.

“If the forest is on fire we can’t get logs,” he said. “That will change the tables.”

Apart from supply chain issues, Brad McMillan, CIO at Commonwealth Financial Network, said the wild price fluctuations could also be due to market distortions, where a “real lumber shortage” turned into “something much worse.”

He said this, then, resulted in higher prices, which caused more panic buying, until some sort of limit was “reached.” At this point, which seems to be now, the price will head down, he said.

Earlier in 2021, lumber prices surged, triggered by a confluence of factors – a pandemic, concerns of an overheating housing market, and millennials reaching home-buying age. On top of this, there was already a shortage of lumber supply before the pandemic even began.

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Lumber prices have bottomed out, but are likely to stay double the historical average for at least the next 5 years, trader says

A lumber yard
  • Lumber has probably found a bottom at current levels, but prices will remain over double the average for the next few years, Stinson Dean told Insider.
  • The Deacon Trading founder expects lumber to trade above $1,000 for potentially the next three to five years.
  • He added that the current state of the lumber futures curve confirms that lumber prices have bottomed.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

Lumber price have probably found a bottom at current levels, but will remain higher than average for the next few years, a lumber trader told Insider.

Stinson Dean, CEO and founder of Deacon Trading, expects lumber to trade above $1000 for potentially the next three to five years. The historical average is around $400, he said.

“My argument is the new normal is going to be significantly higher than the old normal while others think we’re going to go back to pre-COVID price ranges,” Dean said.

After an intense run-up in the beginning of the year, Lumber has fallen nearly 50% from May’s record high of over $1,700 per thousand board feet.

“Business has slowed dramatically. There’s ample supply. So there’s just not pressure on buyers to cover those needs…they’ve bought enough to cover whatever needs they do have,” Dean said.

He added that the current state of the lumber futures curve confirms his take that lumber prices have bottomed out. The curve can give an indication of the health of the underlying supply and demand market, he said.

Lumber futures recently began trading in contango – a situation in commodities wherein the future price is higher than the spot price. For the past year, the futures curve was inverted and in backwardation, where the future price is cheaper.

The backwardation and subsequent premium on front-month futures occurred because everyone needed lumber as soon as possible, and they were willing to pay whatever price for it, said Dean.

“People didn’t care about two months down the road, they only cared about right now because they were in the middle of a short squeeze. They had to get covered,” he added.

Now, that dynamic has changed and supply is ample. Dean explained that the futures curve in contango isn’t bearish for lumber, but it’s not necessarily bullish. It means that supply and demand are normalizing, and an equilibrium is being found.

He expects lumber prices to average around $900, but remain volatile.

Over the next five years, he sees lumber trading around $1000.

“For the rest of 2021, the phrase I would use is grind higher,” Dean added. “I think we’ll start trading around above $1000 this fall and stay there.”

Before this fall, he sees prices staying muted until homebuilders begin to expand production and deliver more homes in the next quarter. What partly caused the prices to fall from the peak was that homebuilders began to slow down and lumberyards grew hesitant to lock in future business. Now that homebuilders’ near-term needs have been covered, there’s less of a scramble for wood.

Read more: ‘If lumber crashes, stocks might be next’: An award-winning portfolio manager who’s tracked lumber prices for years breaks down why futures hitting record highs is an ominous sign – and shares what investors can do ahead of the eventual crash

Read the original article on Business Insider

Lumber prices have bottomed out, but are likely to stay double the historical average for at least the next 5 years, a lumber trader says

A lumber yard
  • Lumber has probably found a bottom at current levels, but prices will remain over double the average for the next few years, Stinson Dean told Insider.
  • The Deacon Trading founder expects lumber to trade above $1,000 for potentially the next three to five years.
  • He added that the current state of the lumber futures curve confirms that lumber prices have bottomed.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

Lumber price have probably found a bottom at current levels, but will remain higher than average for the next few years, a lumber trader told Insider.

Stinson Dean, CEO and founder of Deacon Trading, expects lumber to trade above $1000 for potentially the next three to five years. The historical average is around $400, he said.

“My argument is the new normal is going to be significantly higher than the old normal while others think we’re going to go back to pre-COVID price ranges,” Dean said.

After an intense run-up in the beginning of the year, Lumber has fallen nearly 50% from May’s record high of over $1,700 per thousand board feet.

“Business has slowed dramatically. There’s ample supply. So there’s just not pressure on buyers to cover those needs…they’ve bought enough to cover whatever needs they do have,” Dean said.

He added that the current state of the lumber futures curve confirms his take that lumber prices have bottomed out. The curve can give an indication of the health of the underlying supply and demand market, he said.

Lumber futures recently began trading in contango – a situation in commodities wherein the future price is higher than the spot price. For the past year, the futures curve was inverted and in backwardation, where the future price is cheaper.

The backwardation and subsequent premium on front-month futures occurred because everyone needed lumber as soon as possible, and they were willing to pay whatever price for it, said Dean.

“People didn’t care about two months down the road, they only cared about right now because they were in the middle of a short squeeze. They had to get covered,” he added.

Now, that dynamic has changed and supply is ample. Dean explained that the futures curve in contango isn’t bearish for lumber, but it’s not necessarily bullish. It means that supply and demand are normalizing, and an equilibrium is being found.

He expects lumber prices to average around $900, but remain volatile.

Over the next five years, he sees lumber trading around $1000.

“For the rest of 2021, the phrase I would use is grind higher,” Dean added. “I think we’ll start trading around above $1000 this fall and stay there.”

Before this fall, he sees prices staying muted until homebuilders begin to expand production and deliver more homes in the next quarter. What partly caused the prices to fall from the peak was that homebuilders began to slow down and lumberyards grew hesitant to lock in future business. Now that homebuilders’ near-term needs have been covered, there’s less of a scramble for wood.

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