In the early days of the pandemic, business slow downs or closures meant less revenue or none at all. For Craig Forester, it meant a surprise increase in sales. Forester is the Operations Manager of Rex Lumber Company, a third generation hardwood and tropical lumber distributor headquartered in Action, Massachusetts. The increase in sales isn’t all good. Forester found himself buying larger volumes of lumber at higher prices and now is faced with some financial considerations in replacing his inventory.
“We’re kind of in toilet paper mode, ” said Forester.
Lumber sales, both hardwood and softwood, sees significant revenue in new home construction and home renovation projects. In 2020, new construction on homes fell, but lumber sales still continued to rise. With the mix of people quarantined at home and would be movers deciding to stay put, home renovation projects abounded.
When the pandemic took effect in March 2020, the production side of lumber, like many industries, began to roll back. The outlook did not signal a forthcoming demand: unemployment was growing and consumers could not move as freely. Sawmills had little reason to anticipate continued sales. Many sawmills sold off their stock and shut down their production processing logs. Mandates early in the pandemic to work from home also affected labor. Less inventory went to distributors, some of whom, like Rex Lumber Company, were buying up higher volumes of lumber due to the frequent price changes.
Lumber prices are the highest they have been since the spike last year. For softwood lumber, in April and May of 2020, prices were about $300-$350 per thousand board feet and in April of 2021 they range from $1100-$1200 per thousand board feet –board feet is a measurement used in the industry to measure lumber. Even with lumber deemed an essential business, production has taken a while to ramp back up.
“Our industry is like a train. It takes a long time for it to get going,” said David Caldwell, Associate Editor of Hardwood Market Reports, a publication that gathers information and data on the hardwood lumber industry. “You don’t just flip a switch and have people selling you timber, or have hardwood logs flowing to your mills.”
Hardwood and softwood lumber are used for different purposes. Hardwood is the go-to for flooring and furniture while softwood is used in fencing and frames for homes. Production for both can be a six to eight-week cycle from logging to shipping. According to Caldwell, Hardwood Market Reports has tracked production data since 1960, and production in 2020 has produced the lowest numbers.
Production issues were happening well before COVID-19 hit. The trade wars with China in 2018 had a negative effect on the hardwood lumber industry due to tariffs. A significant portion, twenty-five percent, of hardwood lumber that is made in the United States is exported to China. Due to the tarifs, demand from China dropped, which created some stalls in the industry that lasted throughout 2019. In 2020, with tarifs lifted, the hardwood lumber industry anticipated a better year and then the pandemic threw them a curveball.
For the softwood sector, the industry was still making a comeback from the 2008 financial crisis. It had taken the softwood market nearly a decade to get nearer to pre-pandemic numbers. Revenue for softwood is largely spurred by the building of new homes, which took a hit after the financial crises and people who lost their homes en masse. With a slower recovery, the sudden demand in housing, mainly residential DIY projects, has made housing an unexpected beneficiary in the pandemic.
“Pretty quickly it seemed that demand was not falling,” says Dustin Jalbert, senior economist at Wood Products. “It was kind of ramping up in this positive demand shock that we saw.”
In addition to production slowly ramping up, high prices may be a deterrent to distributors restocking their lumber quickly. Distributors may not want to carry that kind of financial risk on their books especially if prices begin to correct themselves by decreasing than where they are now.
Jalbert and other economists think that prices will begin to fall by the end of the year if everything with the vaccine goes smoothly and other factors like the uptick in mortgage rates and the opening of the service sector will divert consumer dollars away from their homes.
As for Forester and his thoughts on replacement cost, “I don’t think it’s going to fall off a cliff. I think it’s going to plateau because production is increasing steadily and at some point it’s going to balance.”