Q: What effects the demand for lumber?
Ron Wenrich: Housing starts make the highest impact on lumber demand. The number of housing permits issued can predict which way housing starts are headed. Softwood prices will be the first to be effected because of its structural use in home building.
Hardwood prices lag by another 6 months. This is due to hardwood being used in flooring, molding, trim, and furniture - the latter stages of new home completions and furnishing.
There is an industrial demand as well. Industry uses pallets. Railroads use ties, bridge timbers, and decking. Most industrial stock is produced at a price less than top stumpage value but is higher than chip and pulpwood prices.
Q: Ron, you and I know the forest products market is very cyclical; prices will be up one year and down the next. Can you explain?
Ron Wenrich: There are several factors that effect lumber prices.
Suppliers are in a constant battle to control inventory. Sufficient log inventory must be kept at a level that assures little downtime associated with log supply. This means that timber inventory must be managed to meet log demand. Trees have to be bought, to supply logs, to provide inventory, to meet the needs of lumber demand. Not an easy task.
Lumber demand cycles are largely due to economic conditions. As housing starts increase, more demand for the forest product creates a scarcity, which causes prices to rise. This will entice more production. Conversely, when demand drops, inventories at the mill level increases. Mills will reduce inventory by accepting lower prices.
Q: Supply can cause cycles. Can you give me another reason for a timber price cycle?
Ron Wenrich: Another factor that enters in is consumer demand of certain species. These can be very long cycles and may last for 30 years or more. Current furniture and cabinet demands are for oak. This is starting to change, however, to painted cabinets. A lower priced wood can be used which might shift the demand to soft maple and beech.
Log demand cycles are more seasonal. Mills try to reduce inventory in the spring because logs can spoil in the summer. Sapwood can be stained by bacteria, fungi can attack woods left lay too long, and wood boring insects can degrade logs quickly.
So, log inventories will be kept low in the summer to offset degrade. With the spring inventory reduction (sell off), excess inventory will will depress lumber prices. However, in the fall, mills will increase log inventory to prepare for poor logging conditions. This depletes timber inventory.
If the winter is mild and dry, expect lumber prices to dip in the spring as mills saw up their log inventory. If the winter is wet, expect lumber prices to rise as mills have a limited log inventory and there may be spot shortages.
More in Part II