The lumber market has been particularly volatile in the past three months, but demand and prices for the commodity are likely to see a long-term climb as a \u201cnew normal\u201d emerges, analysts say.<\/p>\n\n\n\n
Among major commodity futures, lumber is one of the largest price gainers for the month, but also one the biggest decliners for the quarter.<\/p>\n\n\n\n
The do-it-yourself and over-the-counter consumers of lumber and building materials led the dramatic price moves in 2020-21, says Kyle Little, Sherwood Lumber\u2019s chief operating officer. As the white collar workforce moved to a work-at-home environment for much of the pandemic, there was \u201cliterally nothing else to do than complete the majority, if not every, project that had been sitting idle prior.\u201d<\/p>\n\n\n\n
That boosted demand for lumber, lifting futures prices LBX21, +0.97% LB00, +0.97% to a record-high settlement of $1,670.50 per 1,000 board feet on May 7.<\/p>\n\n\n\n
The do-it-yourself project boom, however, was a \u201cgenerational event that we will not see again for some time,\u201d says Little. The marketplace is moving \u201cback from the overextended extremes and is developing its new normal.\u201d That new normal hasn\u2019t been fully determined, but its range \u201clooks to be better than pre-Covid\u201d times, he says.<\/p>\n\n\n\n
At $602 on Sept. 21, lumber trades 64% below the record settlement price. Lumber prices are up nearly 25% this month, but down 16% for the quarter. \u201cThere will certainly be an ebb and flow to the housing market over the next few years,\u201d says Scott Reaves, director of forest operations at Domain Timber Advisors. \u201cWe expect to see sustained increases in lumber demand from housing during that time.\u201d<\/p>\n\n\n\n
For now, the real opportunity for investors is \u201cfurther up the supply chain in forestland investment,\u201d he says. Increased demand for raw materials, including lumber, packaging, and mass timber, coupled with growing interest in reducing carbon emissions, suggest an \u201cattractive entry point for forestland investment.\u201d Early this year, for example, Weyerhaeuser Co. WY, -0.19% reached a deal to buy 69,200 acres of Alabama timberlands from a unit of Greif Inc. GEF, -0.67% for $149 million.<\/p>\n\n\n\n
Home-construction demand, meanwhile, is going to be very high for the next eight to 10 years, even without a pandemic, Little says, as the U.S. \u201cunderbuilt shelter needs\u201d from 2008 to 2018 as a result of the 2007-09 recession.<\/p>\n\n\n\n
In August, U.S. home builders started construction on homes at a seasonally adjusted annual rate of 1.62 million, up 3.9% from July\u2019s upwardly revised pace, according to the U.S. Census Bureau. \u201cLower commodity prices are relieving some of the cost pressure on builders,\u201d says James Knightley, chief international economist at ING. \u201cWe believe that housing activity is returning to its pre-Covid trend.\u201d<\/p>\n\n\n\n
\u201cThis shifts the balance of risks to slower growth in China and slower commodity demand growth, including for lumber,\u201d but for now, this is seen as a China issue without broader global effects, assuming that Chinese authorities step in to mitigate the risks, says Knightley.<\/p>\n\n\n\n
Looking ahead, Steve Loebner, Sherwood Lumber\u2019s director of risk management, sees an opportunity in physical cash lumber, referring to on-the-spot pricing and product delivery.<\/p>\n\n\n\n
Lumber futures have been well ahead of the cash market and carry a premium to cash for delivery into next year, which is bullish, he says. That, coupled with robust demand and customers positioning themselves in the cash and derivative markets to avoid the risk of explosive price moves, point to a \u201ccash market where the risk\/reward is definitely skewed to the upside over time.\u201d<\/p>\n\n\n\n