The Price Of Lumber Is Collapsing When Will Barrels Follow
Since the start of the pandemic, the cost to build or improve a home has skyrocketed because of the rising prices of lumber, and lumber prices haven’t settled after returning to pre-pandemic levels during Summer 2021. Futures contracts fell to $501.00 per thousand board feet of lumber as of August 4 — a 68% drop from the record-breaking high of $1,670.50 on May 7, 2021, according to The Wall Street Journal. As of August 4 2022, the price has returned to $501 per thousand board feet after its most recent high of $1,464.60 on March 3, 2022.
U.S. lumber companies started to scale back production so they wouldn’t be stuck with a supply glut with little demand. In addition, there were no workers available.
When states around the country began issuing stay-at-home orders in March 2020, many industry professionals were unsure of how long the pandemic would last or if the economy would slip into a recession. This was one of a handful of causes that contributed to the high prices of lumber.
Future Lumber Prices
Like many other commodities, such as corn or wheat, lumber is bought and sold with futures contracts.
“The lumber that will be produced next March is already sold to somebody on a futures contract. Some investors are buying it in hopes that they will get an uptick.
Homebuilders typically get lumber pricing from a framing contractor, who got the information from a lumber yard, which priced a train car of product based on a middleman’s contract with futures holders.
Binyomin Terebelo, the owner of Terebelo Distillery, has seen his business affected by price uncertainty. “Cooperages need to have a firm idea of their costs to calculate and price the cost of a barrel. With moving prices, it’s a tightrope to walk because there are limitations from the lumber suppliers.
Greatly influenced by the housing market, the wood that was designated for the cooperages seems to have ended in houses.
According to Binyomin, wild cost swings deeply affect profitability and production. In April 2020, I was purchasing barrels at $300, that same barrel today is $700. And there have been three-month periods where prices vacillated at $200.
Binyomin says he’s heard from cooperages that they’re getting five-day quotes for plywood and oriented strand board (OSB). “That becomes difficult on my end as I must factor in the price of corn and transportation, which is a whole other story.
Then I have to contract and order the product within five days. It becomes difficult for anybody to respond to that kind of time limits,” he notes.
Lumber prices have started to slide downwards, but it will take time for the end users like my distillery to see those savings.
“It’s like gasoline at the pump, “Binyomin explains. “People hear about a pipeline breaking, and gas at the pump goes up 50 cents per gallon. Then we find out it didn’t break, but it takes two months to get back to where it was finally.”
David agrees, adding that a decrease in demand or increase in supply will need to continue for some time before price reductions happen further down the pipeline. “Futures will come down because investors recognize that production will come back up. But the demand is still there, so producers have no compelling reason to drop prices until they finally see a reduction in orders. And right now, they’re selling everything they can produce,” he says. “There has to be a drop in demand or a big increase in supply before prices start to come down at our level.”
Binyomin concludes, “Everybody has seen articles saying lumber prices are falling 49% or more and think that affects their ability to acquire a new home. It’s completely disconnected. The only place you see that is in The Wall Street Journal. The volatility of that market is creating the need for everybody to understand that the buyer is the one who’s going to be at risk.”
“I believe short term there will be a shortage as the “great barrel panic” in March has every cooperage on back order for 8-12 months. However, since many distilleries over ordered, I believe there will be a lot of distilleries trying to offload their extra barrels or simply not making payment on the remainder of the purchase leading to a glut of barrels on the market.
On particular if transportation doesn’t come down many distilleries won’t be able to afford both.