Lumber Market Outlook

After having declined by about 30% from $408 per MBF in late March to $287 per MBF in mid-June, the price of SPF 2x4s, which is the product specified in the lumber futures contract, now seems to be headed back up. Limited buying during this period of price decline has resulted in low field inventories of lumber, and there may have been some curtailment of production due to the price weakness. Also, there are problems with adequate availability of trucks and rail cars for shipping, which is something that is usually supportive to wood products prices.

Given the big price decline in lumber this past spring, I think there will be a significant move up from the low in mid-June to a high in August or the first part of September as the pace of buying picks up, and SPF 2x4s could possibly reach a high of $360 per MBF. Then we could have a sell off to a seasonal low, which normally occurs in October. From there it would be normal for the market to move up seasonally to a high around the following March.

Also, at times during the coming months there will likely be sizable demand for lumber to be exported to China, which will help push prices higher. The magnitude of this source of demand is significant, and it is likely to continue to be an important market factor for years to come.

In 2012 about 3.4 billion board feet of lumber was exported from British Columbia, Washington, Oregon, and northern California to China. This is enough lumber to build a mix of about 264 thousand single-family and multi-family homes in the U.S., and it is incremental demand in addition to the lumber that was used in actual total housing starts of 781 thousand units in 2012. Also, it is notable that this is a relatively new form of meaningful demand. It was only as recently as 2009 that annual exports of lumber from the aforementioned geographic regions to China first exceeded 1.0 billion board feet. Before that, export volumes to China were comparatively small.

The purest equity investments to take advantage of rising lumber prices are the stocks of four Canadian companies. These companies are West Fraser (WFT.TO), Canfor (CFP.TO), International Forest Products (Interfor) (IFP-A.TO), and Western Forest Products (WEF.TO). The price of all of these stocks will likely trade higher, but these stock prices have already moved up significantly.

I think the best way to take advantage of rising lumber prices is to own lumber futures. I got long futures in mid-June with the intent of holding this position till August or early September.