The price of lumber has risen by more than 230% since the onset of the coronavirus crisis and timber is now trading at all time highs of around US$1,188 per thousand board feet.
Futures are trading even higher, and have been so popular that they triggered circuit-breaks in trading earlier this week.
What’s behind the price move, and what does it mean?
It’s a fairly simple story that will gladden proponents of efficient markets: lumber mills in the US were, broadly speaking, shut down during the height of the pandemic, whilst at the same time millions of Americans, stuck at home, embarked on ambitious programmes of home improvement.
Supply was squeezed, timber demand was up, and so up went prices too.
Paradoxically, though, the price has been driven even higher by the ongoing reluctance of consumers and wholesale users to buy at the new, higher prices. They held off for as long as they could, but now it seems that the dam has really breached with lockdowns in the US finally easing. Everyone is back into the market all at once, making supply even scarcer and boosting the price once more.
But it’s not just the lockdowns that are driving this. It’s the responses too. Americans are receiving stimulus checks by the buttonload, and at a time when actually the economy is poised for a serious burst of growth. At the same time, central banks around the world, and particularly the Fed, are set on keeping interest rates as low as humanly possible. Some countries have even talked of negative interest rates, and although the Fed isn’t there yet, it’s well-flagged low-rate policies have encouraged new housing starts to hit their highest levels since 2006.
Housing needs lumber, of course, and the higher lumber price is almost certain to lead directly to higher house prices. This inflationary pressure may only short-term, given that the lumber price could stabilize over the coming months, but for the time being that action in the lumber futures markets is giving no sign of it.
So far President Biden, blocked in his pursuit of certain legislative programmes, has given expression to his progressive credentials largely by initiating unprecedented spending packages, amounting on rough-and-ready calculations to as much as US$10tn.
The effect of that much money printing is supposed, by the proponents of modern monetary theory not to lead to inflation. But we shall see. Asset price inflation is already fairly evident in property, equity, and certain commodity markets. That that inflation is now moving into lumber markets too may mean that the leap from assets to consumables may not be that far away.
In the meantime, those with lumber to sell are reaping the benefits, although at the moment that applies mainly to the mills, rather than the growers. But it may only be a matter of time before growers like Woodbois Ltd (LON:WBI) also feel the benefit.