For many forest products, there has been an increase in demand and prices are at historic highs. This is especially true for lumber prices. Beginning in the second quarter of 2020 and continuing into 2021, lumber prices have been on a roller coaster, reaching historic highs on multiple occasions. However, stumpage prices have not rebounded. These prices, especially sawtimber stumpage prices, continue to remain low. According to Timber Mart-South, Southern pine sawtimber stumpage prices were on average $23.35 per ton in 2020, compared to $23.47 per ton in 2019. There are several factors that have led to this difference in responses between lumber and stumpage prices.
Oversupply of Standing Timber
Over the last decade, dating back to the recession in 2008, many landowners opted to not harvest their timber because of poor prices from the housing market collapse. Also, with the help of Conservation Reserve Programs, tree planting over the last few decades has increased and stayed at a high level, the peak of which was in 1988. Interestingly, trees planted around 1988 just started to produce sawtimber after 2008 when timber markets collapsed. The combination of these factors resulted in a serious oversupply of standing timber, not only in Alabama but across the South. The good news for landowners is that their forest lands are more productive than before.
COVID-19 Effects on Markets
Going into the spring of 2020, the strong housing market of 2019 was continuing its pace. The strength of the housing market was driven by high demand for new housing starts, low mortgage interest rates, and low unemployment. For most of the year, interest rates for 30-year home mortgages ranged on average between 3.2 and 3.5 percent. The average is now currently below 3.0 percent. At the beginning of 2020, the average lumber price in the United States was approximately $402 per thousand board feet (MBF). The average then increased to approximately $457 MBF near the latter half of February.
Initially, COVID-19 affected lumber production and the overall capacity across the South. Lumber mill managers had to follow COVID-19 operating guidelines set by the CDC, such as social distancing and maximum persons in an area at one time. It was expected that the housing market would weaken and the demand for lumber would decrease as a result of a slowed economy. During the month of March, lumber prices steadily declined and bottomed out in the beginning of April at approximately $264 per MBF. Prices started to slowly rise through May and the first part of June, reaching approximately $350 per MBF. Prices then increased exponentially through the summer, fall, and have continued this trend for much of the first few months of 2021. The increase in lumber prices was caused by the following short-term factors all merging at the same time:
- strong reductions in lumber production and capacity as a result of COVID-19 and the resulting safety guidelines
- the real-time demand growth from home renovations
- persistent housing markets, fueled by low mortgage rates
These short-term factors were also met with one long-run factor. Sawmills had not expanded or even reduced their production capacity when lumber prices were down after 2008.
All of these factors ultimately paved the way to a shortage in lumber and an increase in price. During the second quarter of 2020, home renovation projects soared as more people were stuck at home. Also, housing starts accelerated. Wholesalers and retailers were not expecting such an increase in the demand for lumber and inventories were planned accordingly. As a result, softwood lumber inventories were depleted and the reduction in lumber production and capacity of mills magnified the situation.
The combination of these factors resulted in a tremendous supply gap in the lumber market. By the second week of September in 2020, lumber prices were nearing a new record high at approximately $989 per MBF. Throughout the remainder of much of 2020, lumber prices fell drastically as a result of increasing capacity of returning to mills and the supply of lumber entering the market.
Lumber production and consumption are still behind 2019 values, as is the pace of new home builds. Therefore, the issue appears to be more a result of a restraint on the supply of lumber rather than expanding market demand. For the start of 2021, lumber prices again increased to new historic highs, rising above $1,000 per MBF at the end of February and beginning of March. This is likely a result of limited capacity of mills during the winter months as they do repairs and updates, paired with a continual strong demand for lumber.
While lumber prices could be jumpy and may remain high for the remainder of 2021, we have seen some homeowners deciding to postpone their renovation or new home activities as lumber prices are currently too high. As for timber prices, it is unlikely to see a substantial improvement in the short-run because it is a buyer’s market and sawmills do not have to pay more than they have to pay. It may take a while before an increasing sawmill capacity can absorb the oversupply of timber that has been accumulating for more than a decade. Until then, the industry may continue to see the usual decoupling of lumber and timber prices that has been seen since the spring of 2020.