On today’s show we’re examining the price volatility of a critical building material and the impact that it can have on the cost of both construction and renovation projects. 

In March of 2018, the White House imposed tariffs on Canadian softwood lumber. Overnight, prices jumped nearly 25%-30%. The impact on the construction industry was felt immediately. 

Softwood lumber makes up about 16% of the cost of new home construction historically. So the overall impact of that price increase was about 4% on the total cost of building a new home. It’s a significant increase in less than 30 days. 

After that, regular market forces continued to play a role throughout the year. There is an annual pricing cycle that is tied to demand. Demand for construction materials is lower in the 4th quarter and the 1st quarter of each year. Every year, prices fall in November and December, and they pick up again in the second quarter when construction activity heats up the next spring. 

Today, prices for softwood lumber are at their lowest level in more than a year. The assertion that low pricing from Canada was the reason why softwood prices were so low is, in retrospect a bit of a red herring.

The real story starts back in the 1980’s, when there were millions of acres of timber land planted in the southeastern US. The managed forests were planted as investments by companies that promoted forestry as a great long term investment. So much forest was planted at once, that many of these trees are now of harvesting age at the same time. The surplus has crushed timber prices in Mississippi, Alabama and several other states in the southeast.

At the depths of the 1980s farm crisis, when prices for agricultural commodities plunged, the Reagan administration launched the Conservation Reserve Program. Starting in 1986, it promised farmers annual payments of about $30 to $50 for each acre they planted with trees or grasses. By 1994, more than 2.2 million acres of farmland in the South had been converted to pine forest. Other federal programs added about 2.5 million acres more to the supply.

It has been a big loser for some financial investors, among them the country’s largest pension fund. Calpers spent more than $2 billion on Southern timberland, and harvested trees at depressed prices to pay interest on money borrowed to buy. Calpers sold much of its land this summer at a loss.

The 2008 crisis worsened the situation. We went through years with little new home construction in many markets. That depressed demand prompted many owners to postpone harvests. Numerous sawmills closed. Even with new demand from the housing recovery, there remains about 25 years worth of supply in the Southeast. Adjusted for inflation, the price of Southern pine is down about 45% since 2007, Saw timber used for making lumber, is at a 50-year low.

To put this in perspective, today tree growers are getting about $20 per ton of wood headed for the mill. The finished product you buy at Home Depot in the form of kiln dried 2×4’s is being sold at $2.69 per 8’ board. That comes to a price of $489 per ton. That’s a huge markup.

Most land owners are stuck with whatever the nearest mill is paying. Hauling logs cross-country chasing better prices isn’t an option. Waiting for better prices has its own risks, because after a certain age, trees become more susceptible to disease. 

The constraint in lumber supply for construction is not the supply of raw material. The saw mills are the bottleneck in the supply chain. Georgia Pacific and Canfor have both announced billions of dollars of new saw mills and plant expansions. 

If you’re looking to undertake a new construction project, it definitely pays to shop around. It’s clear that the lumber industry is filled with inefficiencies. It also pays to shop at the right time of year. You can definitely get some good deals right now