Many institutional investors (not to mention many Americans interested in expanding a home or building a deck) are wondering why lumber prices have soared in 2021 – especially when raw timber has not. (“Lumber prices soar, but logs are still dirt cheap”¹). Indeed, lumber prices have reached record highs at levels perhaps four times what were previously thought to be “trend” prices. 

So why are lumber prices so high? And why haven’t timber prices, especially in the U.S. South, followed suit? 

This article provides insights on these questions from Gwen Busby, PhD, Head of Natural Capital Research and Strategy, Nuveen, and Clark Binkley, PhD, Managing Director for International Forestry Investment Advisors located in Vancouver, Washington.

First, why did lumber prices spike? 

Lumber prices actually started dropping in 2005 as housing starts fell from the record 2.2 million that year. They plummeted after the Global Financial Crisis (GFC) in 2008 then rose only slowly from the 2009 bottoms. A brief spike in 2018 was quickly extinguished by production bumps until COVID-19 hit. Though the forest sector was considered an “essential” industry, in Spring and Summer of 2020 sawmill operators struggled to maintain production. In April 2020, an estimated 35% of North American lumber capacity was down.²

Strategic thinking in the industry was that demand for lumber would plummet because of the prolonged closures and restricted economic activity. All of these factors led sawmills to let lumber inventories shrink. 

Then homeowners defied expectations 

Developments on the demand side were precisely the opposite of what the industry anticipated, however. Many homeowners had bank accounts padded by stimulus checks and savings from foregoing normal spending during the pandemic. The homebound found joy in “repair and remodeling”: building home offices, constructing additions, and improving outdoor spaces with decking. Suddenly lumber yards faced unprecedented demand. Exploding lumber prices resulted as dealers paid panic-induced prices to fill orders. 

This combination of strong demand and constrained supply caused lumber prices to skyrocket from near trend levels to new record levels in the South and Pacific Northwest (PNW).

While forest owners benefited from rising timber prices in the PNW, timber prices remained subdued in the South. In 3Q 2020, just as lumber prices hit their historic high, average South-wide timber prices sank to an historic low.³ 

To understand what is driving the relationship between timber and lumber prices, we must explore their historical correlation, the derived demand for timber, and, finally, the ratio of timber harvest and inventory as an indicator of supply-demand balance in timber markets. 

The historical correlations of lumber and timber prices

Unique market conditions in the South and PNW after the GFC led to different developments in lumber and timber markets. As shown in Figures 1 and 2, lumber and timber prices in both the South and PNW started to fall after the peak housing demand in 2005. 

In the South, however, the GFC reinforced the downward pressure and sawtimber prices have stayed low ever since, reaching an historic low in 3Q 2020.³ Indeed, on trend, real sawlog prices have fallen at 1.0% per year since 2000.

In the PNW, log prices for the two principal species – Douglas fir and “white woods” (primarily Western Hemlock) – have roughly followed lumber prices. The correlations between lumber prices and log prices are 0.65 for the pre-GFC recovery period, for the post-recovery period and, a bit tautologically, for the entire period since 2000. 

Clearly, circumstances in the PNW differ materially from those in the South. But what explains the differences? More importantly, what are the implications for timberland investors? 

To answer this, we must first look at the demand dynamics for lumber and timber.

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