To Our Valued Customers: Let’s get right to the question on everyone’s mind. How long will commodity lumber prices continue at this historic level? A variation may be: what will lumber prices do next? Or perhaps: when will prices return to normal?
These are great questions all. Of course, I must begin with the disclaimer you are no doubt expecting, that being that you should not bet on my predictions because I, like you, can neither see nor control the future. But there are markers which may prove helpful in making an educated guess.
If by now you despise hearing the word “unprecedented” then I will spare you that description. I do recognize, however, the fact that these are record high commodity lumber prices in general. It is also worth noting that they came on fast, seemingly without warning. We could call July 1 the end of normal times. The climb has been straight up since then.
In order to answer the question “what will happen?” I think we need to start with the question “what just happened?” Homebuilding has been strong all year. In fact, it has been strong for the last two and a half years over much of the country. It has certainly been at full capacity in our region for the past 12 months. It begs the question, what triggered the sudden change in prices?
During much of the last two years lumber prices were not remarkable. They were at a slight two-year high when the Covid hit us in March, but they quickly dipped in April and May. That drop was likely a reaction to the sudden fear that gripped the Nation and our industry when the unexpected pandemic shook all of us. Everyone expected an economic calamity. Homebuilders accelerated existing jobs, but many scaled back on specs in April and May. Distributors and lumber dealers, still remembering the Great Recession, began scaling back orders for lumber in an effort to trim inventory. All of us were preparing for the cliff that never came.
Producers were, as always, on the tail end of this reaction. Orders slowed, inventory on the ground at mills started to stack up, Covid worries hit the mills and plants, and thus production was curtailed. Hence lower prices in April and May.
As we all came out of the shut down, about the time we started our weekly Homebuilder Pulse Survey at the first of June, cautious confidence began to return. Home sales were strong. Homebuilders regained confidence. It took a couple of weeks for some lenders and some dealers to believe the demand was real in spite of the pandemic. We all began carefully building back inventory levels.
The producers, too, were increasing production, even as they managed the Covid outbreaks in manufacturing facilities. In the interim, consumers had been working from home for two months or more and besides baking sourdough bread, they started home improvement projects with enthusiasm. Inventory on the ground at mills was purchased by the boxes, to feed the sudden demand for DIY home projects. This new-found demand for mills was welcome, but at the expense of capacity to produce for the professional stream.
It is safe to say the system is at production capacity currently. Mills cannot produce fast enough. There is no additional capacity to bring on board. What they make, they sell and ship immediately. Most, if not all, are selling commitments to produce into the future. For example, we are currently buying lumber we expect to receive in October and November. This is the supply side.
The demand side is equally hot. You know what projects are in front of you. Our customers tell us they are committed through this year and into 2021. Interest rates are at (I won’t say unprecedented) lows we have not seen in multiple generations. Housing is leading the nation’s economy again. Housing inventory on the ground is so low it nearly qualifies as no inventory at all. We simply cannot build enough housing, fast enough, to fill the demand.
All of this during the first pandemic to sweep America in 100 years. I simply do not see evidence of anything on the horizon that will cause commodity lumber prices to go down. The hurricanes hitting the gulf region right now generally hit prices the other way. I do not see a way in which mills can out produce the demand before them in the near term. It certainly looks to me that we are in for another few months of strong lumber pricing.
Having said all of that, keep two things in mind. First, prices always come down. They always have in the past. It may take a while, but at some point price gravity will pull them down. Second, this is 2020. Anything is possible.
Our job is to keep you informed, and it is our pleasure to do so. You should not hesitate to talk to your lumber salesman about pricing. They are happy to help and trained to get you answers. You may also bring questions to the general manager of your local lumberyard at any time. As I said, this is our responsibility and we sincerely appreciate the trust you place in Franklin Building Supply. We endeavor never to take your business for granted.
If you are worried about making sure you have lumber when you need it, let me assure our customers that we have your back. Our buyers are second to none. Our relationships with producers are deep. We gather data from you regularly about your needs so that we can ensure we have the materials you will need, when you need them. Your help in this process is invaluable. Thank you for being our customer!
Sincerely,
Rick Lierz
CEO