Demand for wood appears to be strengthening as price volatility gives way to a ‘new normal’

The timber market has been particularly volatile over the past three months, but demand and prices for the commodity are likely to rise in the long term as a “new normal” emerges, analysts say.

Among the major commodity futures, wood is one of the biggest price gains for the month, but also one of the biggest declines for the quarter.

DIY and over-the-counter wood and building materials consumers led the dramatic price moves in 2020-21, said Kyle Little, Chief Operating Officer of Sherwood Lumber. When white-collar workers moved to a work-from-home environment for much of the pandemic, there was “literally nothing to do but complete most, if not every, project that had previously been dormant.”

That boosted demand for wood, pushing LBX21 futures prices up,
+0.97%

LB00,
+0.97%
to a record $1,670.50 per 1,000 board feet on May 7.

However, the DIY project boom was a “generational event that we won’t see for a while,” Little says. The market is “moving back from the overloaded extremes and developing its new normal.” That new normal hasn’t been fully established yet, but its reach appears to be “better than pre-Covid times,” he says.

At $602 on Sept. 21, wood is trading 64% below the record settlement price. Wood prices have increased by almost 25% this month, but have fallen by 16% this quarter. “There will definitely be an ebb and flow in the housing market in the coming years,” said Scott Reaves, director of forest management at Domain Timber Advisors. “We expect a continued increase in the demand for wood from homes during that time.”

For now, the real opportunity for investors lies “further down the supply chain for forestland investments,” he says. Increased demand for raw materials, including lumber, packaging and bulk timber, coupled with a growing interest in reducing carbon emissions, suggests an “attractive entry point for forestland investment”. At the beginning of this year, for example, Weyerhaeuser Co. WY,
-0.19%
reached a deal to purchase 69,200 acres of Alabama Timberlands from a unit of Greif Inc. GEF,
-0.67%
for $149 million.

Housing demand, meanwhile, will be very high for the next eight to 10 years, even without a pandemic, Little says, as the US “needs underbuild shelter” from 2008 to 2018 due to the 2007-09 recession.

In August, US homebuilders started building houses at a seasonally adjusted annual rate of 1.62 million, up 3.9% from July’s upwardly revised rate, according to the US Census Bureau. “Lower commodity prices alleviate some of the cost pressure on builders,” said James Knightley, chief international economist at ING. “We believe that housing activity is returning to its pre-Covid trend.”

News that Chinese real estate giant China Evergrande Group 3333,
-11.61%
on the brink of default on more than $300 billion in debt, contributed to a 6% decline in wood futures on Sept. 20.

“This shifts the balance of risks towards slower growth in China and slower growth in demand for raw materials, including for wood,” but for now this is seen as a China issue with no broader global impact, assuming Chinese authorities intervene to mitigate the risks, Knightley says.

Looking ahead, Steve Loebner, director of risk management at Sherwood Lumber, sees an opportunity in physical money wood, citing on-site pricing and product delivery.

Lumber futures are way ahead of the cash market and have a cash delivery premium into next year, which is bullish, he says. That, coupled with robust demand and customers positioning themselves in the money and derivatives markets to avoid the risk of explosive price movements, point to a “money market where risk/return definitely points upward over time”.

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