Lumber Price Upsurge Unexpectedly Resurfaced as Inflationary and Supply Fallouts Returned to Spotlight

Lumber prices made a surprising U-turn and returned to their mid-of-the-year peaks as inflationary expectations rise and home prices are expected to climb even higher despite expected interest rate increases. Futures for January delivery ended Friday at $1,089.10 per thousand board feet, twice the price for spot delivery in mid-November and a 126% gain since the August bottom. Open interest is also rising, meaning a new bullish trend is likely forming again.

The lumber-cardboard composite index, which tracks on-the-spot sales, jumped 65% since October, to $915. A $129 gain this week was the biggest on record, overshadowing a $124 price spike in May when lumber prices reached all-time highs.

Back in May, the futures price of lumber peaked at an all-time high of $1,711 per thousand board feet. But during the summer lumber prices crashed, prompting ubiquitous skeptics to call them a bubble. Lumber prices had hit their bottom of $454 in August. But in recent months that price correction has flipped back into another price run. That's already translating into a higher wholesale "cash" market price ($731) and will ultimately cause prices to rise for do-it-yourselfers who shop for lumber at retailers like Home Depot (HD) and Lumber Liquidators (LL).

What's driving this run is different from the last time it happened. The previous spike was simply a supply shortage combined with increased demand due to Covid-evoked flights from big cities. Lumber production, which fell during the Covid lockdowns, was overtaken by rising demand from a coinciding housing and renovation boom during the pandemic. This time around, it may be less to do with physical shortage and more of a supply-chain issue. Record rainfall in British Columbia – the epicenter of North American lumber production — last month created flooding and mudslides that caused road, bridge, and train closures across the province. That created mounting wood supply bottlenecks in the Port of Vancouver — the largest port in Canada. Flooding in Canada’s British Columbia has reduced capacities of sawmills, while unusually warm autumn weather has extended the building season and wood buyers are loading up in fear of further price increases and supply problems. The prospect of higher interest rates cooling the hot housing market also looms. Higher borrowing costs would reduce buyers’ ability to keep up with the price hikes that builders have used to offset their own increased costs.

Of course, supply and demand are playing a role too. Additionally, a bad wildfire season in the U.S. Pacific Northwest forced some major lumber producers like Canfor to cut production over the summer and fall months.