The real reason lumber prices are so high
Since the start of 2020, the COVID-19 pandemic has wreaked havoc with us all in many ways. The havoc has not only included fear of the virus, but has included just about everything we do and use in our daily lives.
Shortages of this product and the high prices for it have driven many of us to the brink of insanity. Sometimes I wonder if and / or when the things we are used to will ever return to normal. I think that since the toilet paper is in good supply, other things will eventually return to normal.
Case in point: the other day a local lumber seller reminded me of how ridiculous lumber prices are right now. According to Brent Sohngen, professor of environmental and natural resource economics, according to the United States Bureau of Labor Statistics wood price index, wood prices have increased 180% since April 2020.
So why have they increased and how far will they go?
According to Sohngen, the economic explanation is relatively simple: demand has increased rapidly due to construction linked to the pandemic, and supply is inelastic. Thus, the demand for wood increased considerably and the supply could not keep up.
Consider the demand side first. The construction industry, especially home construction and remodeling, is one of the largest demanders of lumber in the United States and around the world. New home starts and construction spending fell at the start of the pandemic, but they rebounded fairly quickly. The remodeling seems to have taken a real head of steam.
While the demand for new construction and renovations is hot, it is now at about the same level as before the pandemic. So something else has to happen.
Sohngen suggests that one of those other things is the price of steel, which has also increased dramatically in the United States. Steel is a substitute for wood, especially in commercial construction, and the rise in steel prices has also increased the demand for lumber and other things that can be. in wood or steel.
OK, so the demand is going crazy. What about the offer?
The forestry supply is very inelastic. In other words, it is difficult to significantly increase the supply in a short time. Sohngen explains the many reasons for this:
First, you can’t build a sawmill overnight. And after some factories have slowed down deep in the pandemic and others shut down, it’s not as easy as turning the key to restart others. You need skilled workers, the machines are quite complicated and may need maintenance before restarting production, and you need logs.
Second, getting newspapers is not easy either. There is a whole complicated supply chain associated with delivering logs to factories that have themselves been affected by the pandemic.
Third, the log supply is extremely inelastic due to the way the trees grow. Plantation trees, which provide about 50% of our wood in the United States, have gained great value in the 5-10 years before they were harvested. Most owners of these trees don’t want to cut them down too early as they will miss this growth in value, which could be 8-12% or more per year.
When plantation trees are cut, they are still growing, maybe 6% or more per year, so if prices start to rise very quickly, many landowners may actually keep them longer than they otherwise would. , because they get a nice volume growth as well as price growth. .
So when prices rise rapidly as they are now, the supply of logs shrinks a bit because landowners hold onto their trees. It sounds odd, but the growth in value that comes with rising prices gives tree owners a real reason to delay logging for a while.
Fourth, the supply of logs from our main source of imported timber, Canada, is extremely inelastic because most of the supply comes from public lands and is controlled by cutting constraints authorized by the government. These authorized cutting constraints are set administratively and not economically and thus limit their ability to increase supply in times of high demand.
There are other issues at stake, including US tariffs on timber, but most of this dramatic price increase is due to short-term market phenomena related to the rebound of the pandemic, not long-term structural problems or supply limitations. in the United States, indicates that a huge area of ââtrees has been planted over the past decade, providing a reasonably large long-term supply of timber.
Finally, Sohngen suggests that supplies of plantation timber to other productive regions of the world, particularly South America, but also China, New Zealand, Australia and parts of Southeast Asia. East, are expanding.
Current high timber prices could persist for some time as demand continues to rebound after the pandemic and due to overall inflationary pressures, but over the next six months to a year, prices are expected to stabilize.
And in the long run, there will be a lot of wood to move around.
Tony Nye is the State Coordinator for the Small Farm Extension Program at Ohio State University and has been an OSU Extension Educator for Agriculture and Natural Resources for over 30 years, currently serving Clinton County and the Miami Valley EERA.