Here is what awaits the timber market after a 2021 whirlwind

Lumber saw a flurry of action last year, with prices rising to an all-time high followed by a drop to year-long lows, and a rally that led to the best quarterly performance raw material never recorded.

The lumber price action in 2021 was “nothing short of amazing,” said Steve Loebner, director of risk management at Sherwood Lumber. While many have accurately predicted the move to all-time highs in the first half of last year, “no one predicted the price extremes that we have experienced both on the upside and on the downside, and in particular the speed and violence of these movements “.

“No one had foreseen the [lumber] price extremes that we have experienced both upward and downward, and in particular the speed and violence of these movements ”in 2021.


– Steve Loebner, Sherwood Lumber

LBH22 Timber Futures Contracts,
+ 0.65%

LB00,
+ 0.65%
more than doubled in 2020, hit a record settlement of $ 1,670.50 per 1,000 board feet on May 7, 2021, then hit an intraday low that year at $ 448 on August 20, the lowest since July 2020.

“Enough demand has been suspended” to cause a price “avalanche” of around 75% in less than three months, said Loebner, who calls 2021 a “wild ride” that looked more like cryptocurrency trading.

At $ 1,219 on January 6, prices traded about 27% below the record high, but posted an 83% gain in the fourth quarter of 2021, the best quarterly performance for the most popular lumber futures contracts. assets based on records dating back to 1984.

Despite extreme highs and lows in prices, lumber finished last year with a gain of almost 32%. “Strong demand and supply chain constraints” have driven prices up, says Scott Reaves, director of forestry operations at Domain Timber Advisors.

In response, the industry “is investing in sawmills and other production facilities to meet increased lumber needs, while adding substantial demand for solid wood raw materials,” such as standing lumber. , on the market. This should benefit forest owners, Reaves says. Sawn timber is defined as trees suitable for sawing into lumber.

Among the largest private forest owners, Weyerhaeuser Co. WY,
+ 0.57%
saw its share price climb nearly 23% last year.

Loebner, however, points out that changes in the dynamics of the lumber industry have helped amplify price volatility.

“Many end buyers have not adjusted their sourcing strategies to accommodate changing market dynamics” seen over the past two years, he says. End-use buyers have traditionally been trend followers, waiting for prices to start rising before they make wholesale purchases, he says. But there is so much variability around these numbers that by the time the price indicators start to rise, it is “too late and prices are already significantly higher”, creating a wave of demand that is driving more production. more until demand is “finally exhausted and prices are level off,” Loebner says.

The market has also seen a “huge” consolidation of producers and customers, so there is “a huge concentration of buying and selling power in less and less hands,” he says. The big players “swing a big bat” and coordinate their purchases, he adds, either “by buying everything they can get their hands on, all at the same time, or they are hiding while waiting for lower prices – and when that happens there is a huge liquidity hole and the prices plummet. These dynamics have contributed to “boom and bust price cycles,” which have become more prevalent, he says.

Looking ahead, Reaves says Domain Timber Advisors expects continued demand for lumber to positively impact the dynamics of lumber supply and demand, particularly in the south. of the United States, bringing the lumber market closer to “a point of equilibrium, moving away from the oversupply of the past.” several years.”

Lumber will likely move towards more “stabilized” prices as supply chain challenges are overcome, but will also remain at historically high levels, he says.

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