Lumber Prices Growing Almost to The Sky
In December, I wrote about US lumber futures prices by new highs at $679. Then, they more than doubled in the next couple of months. After a correction, I still think this market is fascinating.
American lumber prices on the Chicago Mercantile Exchange (code LB) jumped last year and skyrocketed in the first four months of 2021. As low as $400-500 in January 2020, the price reached $700 end of the year and topped at $1,730 in May. Then, the price crashed to approximately $700 in June.
There is an insatiable appetite for lumber–wrote Investorplace.
Last week we saw a moderate positive correction to $787. But many news keeps talking about supply shortages and record prices in different countries. The price explosion in the USA pulled exports from Canada, Germany, Russia, Sweden, Finland.
Lumber Price Explosion Also in Europe
Consequently, the lumber shortage extended also to Europe, and prices jumped. Construction companies are struggling with steeply rising costs and material shortages. Some news:
Prices explode in Germany: wood is the new gold (Global wood markets info). The president of the ZDH spoke of an unprecedented shortage of materials with a simultaneous price explosion. “The situation has worsened and worsened again in the past few weeks,” he said. (Der Spiegel Online)
Another consequence is, production companies, wood owners may earn big. But be cautious. Not all lumber is so desperately wanted. Some forestry products, like paper mill raw materials, paper products, packaging, may stagnate or surge slightly. In the first line, construction materials are in high demand. Second, furniture elements.
Why Did The Price Explosion Happen?
Many news and posts described the lumber price explosion in the past months. Let’s see only a summary here:
- The US housing market was strong, with indices on all-time highs.
- People wanted to move out of the cities to the green areas, where houses are built of lumber.
- The Fed stays dovish and supportive, and the housing loan (mortgage) interest rates move near all-time lows.
- Government spending, economic stimulation surged to high levels.
- Production bottlenecks arose in the US and Canada, mainly due to the pandemics.
- The US has imposed higher tariffs on lumber imports from Canada since 2017.
- Pests destroyed many forests in North America and Europe.
- In some areas, such as Europe, older forests have been cut down earlier, and new-planted, young forests need time to mature.
Why Are Lumber Stocks Promising?
I think despite the price falls–or even for that–lumber companies may be a good investment choice now. American lumber prices may surge again, European prices may follow, exports jump, and producers on both continents may earn big. Because many factors point to this:
- Further housing boom is possible in Europe. For example, German housing prices stay in an upward trend for approximately a decade.
- Various governments are supporting ESG-solutions in construction and industry.
- The lumber industry has a good ESG-score, is considered environment friendly. For example:
iShares Global Timber & Forestry ETF has an MSCI ESG Fund Rating of AA based on a score of 7.91 out of 10. These companies may be more resilient to disruptions arising from ESG events. (ETF.com)
- Seasonal effects:
Kyle Little, COO of Sherwood Lumber Corp., expects a bounce in lumber prices in the next two or three weeks as the market responds to normal seasonal pressures. Even with the extreme volatility of the last several months, lumber remains a seasonal commodity. (CNBC on SeekingAlpha.)
- US Infrastructure development program and more economic stimulus are on the way.
- Chinese demand is also high.
- The supply is inflexible. See next chapter.
My Special Expectations
1. This Is a Very Long-Term Trend
By the charts, the lumber price surge is a long-term trend, which began far before the Covid-19 pandemics. Perhaps in 2009-2010 already, shortly after the last substantial financial crisis.
The supply of forestry products is inflexible because, very simply, trees grow slowly. If you read about raw materials, you learn soon that supply and demand work at a very different pace. Demand may surge a lot in the short term, even in some weeks or months. But the supply can’t, as most mines or plantations need a development, investment, and construction phase of many years.
Some agricultural goods can be grown in a year, like cereals—others, only in many years, like the ones growing on trees or bushes. (E. g. coffee, cacao, orange juice.)
But timber is even much worse. Trees need decades, often 50-70 or even 80-100 years, to reach the state ready to be harvested. (This is the “optimal forest rotation age,” see Wikipedia.) So, the timber market is hugely inflexible, although builders may substitute some wooden elements with other materials (like plastic, bricks, or concrete).
2. Can More Leverage Effect Unfold?
Suppose a company sold its products for $100, and expenditures were $90, so the earning was $10. But if the price surges to 110, the inputs don’t rise automatically. Sometimes the spending stays the same or swells only slightly. So the earning may double, or almost double. (Taxes also reduce the earning.) For example, gold miner stocks often surge 2-3 percent while gold price increases only one percent.
So I suppose lumber stocks should overperform the lumber price, not underperform it. Although, the mixed portfolio (construction purpose lumber, furniture materials, papermill-lumber, etc.) makes the issue more complicated. But I assume lumber companies will present excellent quarterly reports soon and, perhaps, also lift dividends.
But How to Invest in Lumber?
You can invest in lumber futures on the CME commodity exchange and also buy options or CFD-s. But there are less risky solutions. So I prefer buying forestry-related stocks or stock ETFs because companies pay dividends. (And with derivatives, you pay implicit interests.)
Companies can also adapt to the market and increase or decrease production in the longer term. And with the stocks, you also buy farmland, full woods. The timber in the woods is an essential real asset, defending your wealth from inflation. If a depression approaches, harvesting can be delayed, even for many years. The trees in the woods keep growing, increasing their value.
Investing in ETFs
There are two US-registered but globally active lumber stock ETFs:
- iShares Global Timber & Forestry ETF (WOOD), in Europe: IUSB or WOODT
- Invesco MSCI Global Timber ETF (CUT)
Some authors also recommend other ETFs, specialized in homebuilder or construction stocks. I find this riskier because some material expenses may also eat the profits of construction companies. (Depending on how they can elevate their prices.)
The Contango Effect by Lumber
Last Friday, July lumber (LSN21) was 756,70, and for September (LSU21), 787,30. That means a moderate contango of 4 percent (in 3 months), but November and January prices are already lower. Conclusion: The contango is not very strong but doesn’t affect the returns of short and middle-term investments very much.
Readings about the contango:
More Recommended Readings about Commodities: