The Strange Economics of the Lumber Market

If you go to Home Depot looking to buy some wood, you may have some sticker shock. The price is the highest it's ever been. Here's our colleague Ryan Dezembre, who covers commodities. Lumber prices are astronomical right now, and there's a few reasons why that is. One, we have a huge housing boom that is being fueled by historically low borrowing costs. You also have a lot of fiscal stimulus that people are getting these checks, and they're like, you know what, let's build a new deck. So you have a lot of remodeling demand. And then, on top of that, in cities across America, you had like every restaurant bar and cafe that wanted to survive had to build a deck. So haven't been many times in American history where lumber has been more in demand than it is now. Now you might think that if demand for wood at Home Depot is so high, the price of the raw material that makes up those 2x4s would also be high. But that's not the case. Prices for pine logs, which are sought to produce a lot of the country's lumber, are at their lowest level in 50 years. So lumber prices right now, and I've tried to figure this out, and I've talked to people, and no one can come up with any historical precedent for when the raw material, timber, you know, logs, freshly cut pine trees, when the price of that moves in an opposite direction of the sort of refined commodity. So it's very bizarre and sort of unprecedented situation in a commodities market. It doesn't make any sense. Welcome to the journal, our show about money, business, and power. I'm Kate Limbar, it's Thursday, April 29th. Coming up on the show, the strange economics of the lumber market. This episode of the journal is presented to you by Accenture. Behind this podcast, and the music you listen to, Spotify has a sophisticated advertising business. 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I guess at this point in my life, there's no expression, but if you enjoy what you do, you never work a day in your life, well, I enjoy what I do. Joe may like being a tree farmer, but unlike when his uncle ran the family business, Joe's barely making a profit now. He started to notice a problem about a decade ago, when the housing market was rebounding after the 2008 financial crisis. When we really realized I think things were bad, when we saw the demand come back for wood, we started seeing a number of prices going up and historically we'd always track them. They went up, we went up, they came down, we came down, we just went and tanned them. This time they went up and we actually started dropping. The price you're getting now, how does that compare to 25 years ago? In 1995, I was getting $37 a ton for the same wood that I'm getting about $27 a ton for today. I'm getting less money today, I'm going to talk about adjusting for inflation, I'm talking about just real constant dollars, I'm getting less money today for the wood I'm selling I got 25 years ago. My cost to reinforce those lands is over doubled, my employee costs you can imagine what that's done in 25 years, just keeping up with inflation, cost of our equipment, everything has gone up drastically and the price of our product has actually dropped. One reason for the price drop, there's a huge glut of pine trees, the type of trees that Joe grows. These trees are grown on farms specifically to be chopped down and used for lumber and pulp. They're bred to be incredibly tall and with straight trunks, so they make good 2x4s and telephone poles. And the south has a lot of these trees, here's our colleague Ryan again. There's just a tremendous glut of pine trees in the south, the south is covered in pine trees, despite all the cutting that's going on to supply this housing boom, and to create the pulp for all these Amazon boxes, we're still not outpacing how much wood the trees are growing every year. What's behind why there are so many trees in the southeast? The southeast was covered in trees when the first European column has arrived, just covered in long leaf pine. That was logged basically to oblivion. And then Americans wanted to land for cotton and tobacco in these cash crops. So it was basically wiped out, right? The south was a forest, and by the 1980s, it was scorched, just really worn out farmland. And so the government went around and said, "Look, we'll pay you landowners in the south, we will provide you with seedlings, and we will pay you if you plant pine trees." The government wanted more pine trees in the south, largely for economic reasons. Because retiring some farmland would help stabilize the prices of corn and soybeans. And, more trees can have environmental benefits, too. They were trying to return a lot of the natural sort of ecosystems of the south. Trees are great because they very quickly become a place for wildlife, they stop erosion, they clean the air and the water. For some landowners in the south, the government's offer was a great deal. Many didn't want to be farmers anymore, but they didn't want to give up their land. And so the government was paying them to make money off their land without as much work. And trees were supposed to be a stable, long-term investment. You know, tree grows and gets fatter and adds value and less wood and value. And it doesn't matter what the stock market is doing or what interest rates are doing. So it was seen as a very safe investment, long-term investment, decades long. That would only get more value because it was adding volume. Also in the south, you had people who, again, have had land in their families for generations and those families were farming and suddenly, you don't need so many farmers, but how do you keep that land? Well, if you plant with pine trees, that's a way to, especially if the government's helping you out, that's a way to hang onto the land and still work it. And to have, you know, an agricultural business without having to be a farmer every day. So a lot of people jumped at that offer, right? It was a great offer. But this offer had an unintended consequence, precisely because a lot of people took the government up on it. The problem is, you know, this happened in largely the 1980s and a little bit in the 90s. Well, pine trees take about 15 to 30 years to become mature to the point where you cut them down and you send the logs to the mill. Well, if everybody planted trees at the same time, they're all ready to cut at the same time. And that time is now. Those trees are ready to be cut. But the payday Southern tree farmers had been waiting for isn't materializing. And these low prices are especially frustrating for farmers because the U.S. is having another housing boom. In a normal market, this would be their time, right? These folks, they planted the trees and then the housing market comes roaring back and there's huge demand for lumber, but the prices of their trees have gone down. And that's sort of when we talk about sort of like a broken market. That's pretty broken, right? The price of the log should move in unison with the things that you make out of the log. That's how it works in other markets. markets, but it's not working that way in timber and lumber. But a tree glut isn't the only reason the lumber market isn't working. That other problem is after the break. This episode is brought to you by Indeed. Running a business means dealing with the dreaded hiring process, and the stakes are high when the right hire could make or break your business strategy. 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People like Marley Dias, making sure every kid sees themselves in books. Kyle Mesteth, a native skateboarder building a movement for kids nationwide. Joy Alotakoon, whose music moves from protests to daily commute. Find out how they started something bigger than themselves. And listen wherever you get your podcast. For Southern pine trees to end up as lumber in a hardware store, they have to be processed by a saw mill. The big problem in the lumber market is there's not enough mills. And why are there not enough saw mills? Well, there's a short-term reason and a long-term reason why they're not meeting demand. The short-term reason is like many other businesses, they shut down last spring. They sent workers home just like our company did. And you can't saw it longer from home, like, you know. So at one point last spring and last early last summer, something like 40% of North America's saw mill capacity was shut down. And they just haven't been able to catch up. All these other disruptions that we see from basically any business in America has dealt with these. And saw mills were not immune. That's the short-term explanation, what's the long-term one? Now longer term, you know, the housing crash, the began in like 2007-2008, that was a devastating period for saw mills in the South. There was very little demand for wood. So a lot of mills went under. A lot of family run mills sold out to big giant companies that came down from Canada, big public companies that consolidated the industry. So now there's just not enough mills to saw all that timber in the South. For the saw mills that managed to stick around, now is a really great time to be in business. Because there are so few saw mills, the ones that remain have pricing power. So they're paying farmers low prices for the raw material and selling the finished product at a big markup. Saw mill companies, you know, it's a very sort of old-fashioned, it's not a very glamorous business compared to a lot of the companies that we follow in the hot stocks that have sold the last year. But you have companies like West Fraser, Timber, and Can4, and Inner Four. And those are some of the hottest stocks in the market. I mean, those stocks have like doubled and tripled over the pandemic. And that doesn't sound like maybe a lot in our sort of like tech mindset nowadays. But for an old-fashioned business of cutting a tree into boards, that's a really remarkable stock price performance. They're having record profits. So you know, these companies are just printing money. So if there's a shortage of saw mills, why doesn't some enterprising entrepreneur just build more? You know, when we think of a mill, we might think of like an old-fashioned thing where you're thinking like a big saw and a bunch of brawny people doing like sort of frontier-looking work. That's not what a mill is these days. A mill nowadays is highly computerized, very high-tech, very expensive to build. There's only a few contractors in the world that make the equipment and build a mill. So they're backed up. And let's say you do build a mill and you get the permits and you get the land and you do all the studies to make sure you have a supply of wood that makes it worthwhile to you know spend a billion dollars or hundreds of millions of dollars to build this thing. That'll take probably two years. And then you have to worry about staffing it. And where they build these mills, there's not a lot of workers with the qualifications to run a modern mill. You know, you don't need people with strong backs and shoulders so much as you need electrical engineers and the sort of people who can run the computers that look at a log and tell the saws and the machines exactly how to cut it. And those people are hard to come by in places where all the trees are like rural Mississippi or southern Georgia. It's hard to just get a mill up and running. So where does the sawmill shortage leave Joe Hopkins, the tree farmer? Well, he used to have three sawmills in his area, which meant he had options. He could shop his wood around for the best price. But now between closures and consolidation, there's only one mill left. So I'm at the mercy of whatever price they want to pay. I don't have a whole lot of negotiating power. How does it feel to have sawmills having the best business ever and you're struggling? Well, it's very frustrating. It's one of those things that haven't yet come up with a way to solve that problem. There has been some talk about some landowners building a mill, but it's 68. I don't really want to build a sawmill with a bunch of folks who try to get into that. Maybe at 45, I might have jumped on it, but not now. So what do you think is going to happen to your business? I think we will continue to hang on until either we financially, it really, we can't afford to do any longer, which we're not there yet. It's not that drastic, but we're, I mean, we're getting there. You know, it comes a point when you're cost and your profits as they continue every year to get a little closer to each other. At some point, you have to say, hey, before they cross, we need to do something. Joe says that if he ever gets to that point, he has a plan. We have a potential out. It's not what anybody wants. It's not what I want. It's not what the environmental community wants. I don't think it's what anybody really wants. But our out is to start just breaking it up in small parcels and selling it. We're about an hour from Jacksonville, Florida, which now has over a million people. We've got a pretty good source for folks that would love to buy. Have 150, 200 acres in the woods. Have them a cabin, you know, have a place that they want to go out to back door and hunt, or just whatever, I could easily sell four or five tracks a year to a three times what is worth this timberland to sell it like that. But every time I do that, not only have I reduced my wood base, I've also probably just brought five set tanks and five wells to what originally was a forest. And I don't think anybody wants me to convert what I have to 1000 wells and 1000 septic tanks. But at some point, you've got to sit down and go economically what I'm doing just doesn't make a lot of sense anymore. What would need to happen for your grandkids to be tree farmers like you and your great-great grandfather? Hopefully, they won't have to have a second job. But I think just a good strong market, good price structure to where it makes sense to make the investment. The one thinks any more long term than a forest landowner. The trees I'm planting this year, I'm never see them cut. You know, I'm planting them for somebody else. And I had people planting them for me. Joe is thinking long term and he may need to. According to analysts Ryan spoke with, it may take a decade or two to fix the mismatch in the lumber market. There's a lot of questions about when that will end, the prices that we're at an hour to sun real, and I don't think anybody thinks that the price will stay three or four times what's normal, but double what the historical average was. That doesn't seem a stretch for it to remain around that price. It seems like this is a really difficult market to fix, because trees take a long time to grow, sawmills are expensive and hard to build and need to be close to the trees. And those both take so much time that it's hard to fix the price at the store. Right. When gasoline prices get out of control, oil companies go out and drill a bunch of new wells and turn on the taps and the price corrects pretty quickly. Same with food, corn and wheat. Even if it takes a season or a year, these markets adjust to demand by changing supply. Timber takes decades to grow, so you can't just fix it really quickly or in a year. In the south, these trees were planted and bred to become boards and telephone poles, and they will eventually become that. So they're just going to have to be patient and wait until we sort of saw through this giant glut of timber. (upbeat music) That's all for today, Thursday, April 29th. The journal is a co-production of Gimlet and the Wall Street Journal. If you like our show, follow us on Spotify or wherever you get your podcasts. We're out every week day afternoon. Thanks for listening. See you tomorrow.