Lumber expert says overproduction has caused prices to plummet, opening up an opportunity
With new duties being levied against Canadian lumber, most industry experts thought the price of lumber would continue to rise. Strangely, the opposite has happened, and it might be the right time to consider new construction loans.
A report in The Wall Street Journal on Monday reported a 25% drop in wood futures markets since hitting a three-year high in August. And if not for some mills cutting back production, the drop may have been larger.
Russ Taylor (pictured top), a wood market expert and analyst, has seen it all in the industry, but he was left scratching his head at this latest development.
“It's been, quite honestly, very, very strange,” Taylor told Mortgage Professional America. “Prices have absolutely tumbled. With western SPF (spruce, pine, and fir) from British Columbia, if you look at August before the new 20% duty kicked in, going from 14.4 to 35.2%, prices were creeping up a little bit.
“Fast forward four weeks, and the costs of selling lumber into the US went up by $90 a thousand (board feet), but the prices went down by $120 a thousand, so there's a $200 swing in the wrong direction for Canadian mills. That's absolutely crazy.”
Too much supply
Taylor said everyone knew the new duties were coming and prepared for the increase. Unfortunately for Canadian mills, especially in western Canada, they may have overprepared.
“This is about supply and demand,” Taylor said. “Before the run-up to the duties kicking in in early August, throughout July, prices were creeping up as more shipments went across the border in advance of the duties coming up. When you got to the high-water mark for prices, now the dealers were all well stocked. They bought before the duties kicked in, thinking that was the right price.
“Now the Acadian Mills don't have any demand for their wood because everyone's stocked. Mills keep running, but the prices are crashing because there's no demand.”
Because everyone is overstocked, and because demand for lumber has been so low due to high interest rates, Taylor thinks it may take a while for the market to balance back out.
“It's going to take months before this all unwinds, because now you've got way too much inventory in the field,” he said. “You’ve got way too much inventory at the mills, and prices are so low that anybody selling today is totally offside in Canada.”
Taylor noted that housing starts have increased in the United States, so there is some hope that demand could help boost lumber prices again.
“If you look at the housing starts, they’re actually higher than they were last year at this time,” he said. “So it's not like housing is cratered. In fact, July was an excellent month. But one month doesn't make a trend. And I think there is a sign that there's some housing slowing down in the US market. Through July, the housing market is not the problem; it's the high mortgage rates and the affordability of homes that are the real problem.”
Fed to the rescue?
Even Taylor, who has seen the ups and downs in the lumber market in the past, didn’t see this twist coming.
“I've seen crazy things, and this one caught me offside,” Taylor said. “I thought we would see prices creeping up, reluctantly, to try and chip away at the 21% increase in duties, but no, it fell like a rock from August 3rd on. They have to rectify that pretty soon. I think we'll see a lot more curtailments being announced in the next few weeks to right the ship and get the balance of supply and demand.”
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While the futures markets suggest that it might take until March 2026 for lumber prices to return to their August high, Taylor noted another possible motivator that could accelerate the market's recovery.
The Federal Reserve will announce its latest rate decision next Wednesday. While most expect a 25-basis-point cut, which economists believe is already priced into the market, Taylor thinks a larger cut could shock the market. This could kickstart new construction, increasing demand and potentially returning prices to a more expected level.
“We saw some people are forecasting maybe a 50-bps cut in the Fed rate,” he said. “That's aggressive, but that would send shockwaves through the housing market and lumber markets. I think 25 bps is built in already, but if they went to a 50 basis points … I'm not an economist, but that would be something that would really kickstart the economy.”
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