Why do lumber prices keep soaring? And when might they come back down?

Have you priced lumber lately? The price of lumber futures on the Chicago Mercantile Exchange recently surged above $1,500 per thousand board feet. That’s a 300% rise from this time last year.

2x4s are suddenly very, very expensive and so are things made with the softwoods. The cost of building a new home, for example, is up by about $36,000 on average. What’s going on?

That question led me to Bob Bauer, Executive Director of the Kentucky Forest Industries Association. Our conversation has been edited for clarity and length. You can listen to the interview on the May 20 edition of Eastern Standard, 11 a.m. and 8 p.m. on 88.9 WEKU.

Martin: What sectors of the forestry industry do you represent?

Bauer: Our association represents a wide range of the industry mostly dominated by hardwood sawmills. Of course, we represent the loggers out there in the woods and also a lot of the secondary people that produce things like hardwood flooring and in the paper industry.

Martin: Going into the pandemic last year, was there an expectation that COVID-19 would lead to an industry-wide slowdown instead of the industry-wide boom that has actually happened?

Bauer: Yes, as far as the hardwood industry, actually there was a lot of anticipation that the markets were going to get better. In early March of last year, they finally worked out agreements as far as export markets, which has a big impact on the hardwood industry - a lot of the higher grades of lumber are exported.

That was decided in early March, so there was an expectation that things were going to get better. But, when the pandemic hit, we actually had things fall off considerably. Then the market started to recover a lot faster than people thought.

Martin: Your members deal mostly in hardwoods, the woods used for flooring, cabinetry, doors, items inside the home, correct?

Bauer: Yes. We’re dominated by hardwood because that’s what’s in our forests here. Our members that produce all types of things that are in the home: the flooring, doors, millwork, the cabinets, furniture. And our industries heavily produce a lot of palettes, cross ties for the railroad industry and those types of things, which the lower quality wood goes into.

Martin: Are these price spikes and the supply situation limited to softwoods or have they impacted hardwoods as well?

Bauer: We’ve seen an impact in the hardwoods. The pandemic did cause a slowdown. It was harder for everybody to work. Luckily the hardwood forestry business was declared an essential industry, so they were able to work and operate throughout the pandemic. Part of our industry is the paper industry and you know how important all of that is, the packaging, toilet paper.

And we did see quite a slowdown through probably the first four to six months. But as last summer ended the market started to improve some in the hardwood business and they’ve continued and now the markets are pretty strong - better than they were last March for sure.

Martin: Does that translate all the way down the supply chain line to paper products? Can we expect price increases on that end?

Bauer: Here in Kentucky, our paper industry is tied closer to fine paper which would be office paper, that type of thing. We lost a large paper mill down in Tennessee because of the demand for office paper, those kind of things, which has had a ripple effect on our industry because all of these hardwood sawmills, anything that they don’t use in the lumber is chipped into chips that then go to the paper industry. So, we did see an effect where it made it a little tougher to get rid of those – those things from the hardwood sawmills.

Martin: Let’s turn to to the softwoods. This is the lumber used in construction to make things like palettes and fence posts, not to mention in homes. What is happening on the softwood side?

Bauer: The softwood side obviously was affected too going into the pandemic. Obviously, there was a huge concern just like every other industry. So, as that started our industry cut way back with the assumption that the markets were going to slow. And for a brief period of time they saw that just because everybody was held at home.

But, as time went on, people had time on their hands, so they started doing more home improvement, adding on a garage or whatever. The softwoods go into that construction: lumber, plywood, all those things that are used in the structural parts of building. So, that market quickly stayed the same or improved. And with the demand increasing, those large mills tried to start ramping up. Of course, they had the pandemic to deal with so it’s basically put them behind the eight ball and they’re still struggling. And one difference between the hardwood and the softwood business is in the the way those hardwood logs are sawn. There’s much smaller volume at hardwood sawmills. An average size hardwood sawmill may produce 10 million board feet a year, whereas some of the (softwood) mills in the south produce 300 to 400 million a year.

One of those mills closing down, you can see how that would quickly affect the supply. So, that demand, came back quickly and they’ve struggled to catch up. And on top of that, the housing markets are very much improved and we’re seeing that on the upswing the last number of months, so that’s also created even more demand.

Boy, it’s really been a tough time trying to get back up to that level of production to meet all the needs out there.

Martin: What about over on the labor side of the equation as they have tried to rebuild capacity and get back up to a point where they can meet that demand? Have they been able to find employees to come in and make it happen?

Bauer: That’s a huge issue. With the pandemic there were things they had to do to keep people protected, which they continue to do, but that has made it very difficult to get people back online. I’ve been out in the last month visiting a number of mills and nearly every place I go they’re looking for employees and can’t find them. Without enough people, they can’t ramp up production.

There are a number of things driving that. The number one thing that I hear, especially out in the rural areas of the state and from my counterparts in the south is with all of the packages that have been put together, the high amount of money that’s going into unemployment, they simply can’t compete with somebody that can sit at home and make that kind of money instead of working. So, that’s become a real issue out there for the industry.

Martin: Lumber industry analysts say that $1,500 per thousand board feet of softwood that I mentioned earlier is, of course, not sustainable. But, the pre-COVID price of $300 to $500 may never come back and instead we might get stuck in a higher range, maybe $800 to $1,000. Do you agree with that assessment?

Bauer: Well, it’s hard to say. It’s a great question. What I’ve seen especially related to the hardwood industry over the years is that eventually that supply reaches back to where it meets the demand. I guess I wouldn’t be surprised that maybe it’s a little higher. I think we’ll see the upper range in the $500 or $600 area. But, I think as you see production increase – and we’ve already seen some newer mills coming online and people increasing production — that will stabilize that back. I don’t think we’ll see a huge change in that obviously.