Lumber futures are surging. Driven by an unexpected rebound in the construction of new homes in the US and Canada, the price of lumber soared to new heights, reaching $916.30 per 1,000 board feet last in late August. This is an increase of over 350% since the low of $251.50 that was seen when the pandemic hit.
The rise in the price of wood is, in part, due to the resurgence of home remodelling projects motivated by the crisis and its response. With hundreds of millions of people confined to their homes, many found time to make some changes. Although experts expect this run to cool off in the fall, the surge is a sign of a strong market in the long term.
Mill closures at the outset of the pandemic also had a bullish effect on prices, as the remaining industry participants struggled to meet the rise in demand. Lumber prices are also strongly tied to interest rates, and with central banks lowering rates worldwide, the resulting uptick in home building led to a resurgent lumber market.
From an investment standpoint, timber REITs have benefitted, as have the stocks of companies involved in the industry, such as construction material suppliers and timber processors. Those who control crucial stages of the supply chain, such as transformation and processing facilities, will be able to charge more for their services.
Timber REITs Outperformed in Q3 2020
Often considered a barometer for inflation, commodity prices, and other indicators, there are many who keep a watchful eye on the price of lumber. Some say that the rising price of lumber is a hint at future inflationary pressures caused by the massive infusion of liquidity into financial markets through federal stimulus packages.
Indeed, the combination of economic contraction, large-scale QE, and a falling US dollar have caused fluctuations in other commodity prices, such as oil, which briefly traded below zero earlier this year. Commodities tend to feel these factors acutely, and drastic volatility is not uncommon in these markets.
For the immediate future, it is likely that lumber prices will level off. The housing market can only absorb so much of the added cost, and remodelling projects will probably decrease as people emerge from their homes.
Nonetheless, lumber is a fundamental commodity whose growth is driven by macroeconomic trends such as population growth and the rise of the middle class in developing countries. In the US and other developed markets, housing rises and falls, but in emerging regions, trends are more consistently positive.
As an asset class, one advantage of timber is that it can be left in the ground until prices are up. Now that they are, holders of timberland will be eager to liquidate their tree assets, which will increase supply and balance out prices. So, for the future, expect lumber prices to normalize, depending on the housing market.
Lumber is an essential commodity and a reliable indicator of overall conditions. Although prices may spike (or plunge), the continued growth of the industry overall is a virtual certainty thanks to population growth and urbanization. Look for prices in developed markets to calm down and for emerging market construction sectors to outperform.