Why is wood so expensive?

By Contributing Writer on May 25, 2021

https://www.farmanddairy.com/news/the-180-increase-in-lumber-prices-explained/665497.html

The 180% increase in lumber prices explained

By Other News -May 21, 2021
By Brent Sohngen | Ohio State University, professor of environmental and natural resource economics

In case you haven’t noticed, lumber prices have increased a lot over the last year. Based on the U.S. Bureau of Labor Statistics Lumber Price Index, lumber prices have increased 180% since April 2020. This increase started last fall, and has continued ever since.

So, why have they risen, and how high will they go?

Let’s start with the first question. The economic explanation is relatively straightforward: demand rose rapidly due to pandemic-related building, and supply is really inelastic, as we say in economics. Thus, while the demand of wood has increased dramatically, the supply of wood hasn’t been able to keep up.

Demand

Let’s break this down. Consider the demand side first. The construction sector, specifically building and remodeling houses, is one of the largest demanders of lumber in the U.S. and around the world.

New home starts and construction spending cratered at the beginning of the pandemic, but they rebounded pretty quickly. Remodeling in particular seems to have picked up a real head of steam.

But while demand for new construction and remodeling is hot, it’s actually now at about the same level as before the pandemic. So something else must be going on.

One other factor is the price of steel, which has also increased dramatically in the U.S. Steel is a substitute for wood, especially in commercial construction, and rising steel prices have also driven up demand for lumber and other things that can be made out of wood or steel.

Supply

OK, so the demand side is going crazy. What about supply? The supply side in forestry is really inelastic. That is, it’s hard to make big increases in supply in short periods of time.

There are lots of reasons for this.

First, you can’t build a lumber mill overnight. And after some mills slowed down during the depths of the pandemic, and others closed, it’s not as simple as just turning the key to start the remaining ones back up. You need trained workers. The machines are pretty complicated and may need some maintenance work before restarting production. And you need logs.

Second, getting logs is not easy either. There is a complicated supply chain associated with delivering logs to mills that has also been affected by the pandemic.

Third, the supply of logs is super-inelastic because of the way trees grow. Plantation trees, which supply around 50% of our timber in the U.S., put on a lot of value in the 5-10 years before they are harvested. Most people who own these trees don’t want to cut them too early because they’ll miss this value growth, which could be 8-12% or more per year.

When plantation trees are cut, they actually are still growing, perhaps 6% or more per year, so if prices start rising really quickly, many landowners may actually hold them longer than they would otherwise, because they get some nice volume growth, plus the price growth. So when prices rise rapidly, as they are now, the supply of logs contracts a bit because landowners hold onto their trees.

Fourth, the supply of logs from our main source of imported lumber, Canada, is super inelastic because most supply there is from public lands, and is controlled by government allowable cut constraints. These allowable cut constraints are set administratively, not economically, and thus limit their ability to increase supply in times of high demand.

Long term

There are some other issues at play, including U.S. tariffs on wood, but most of this dramatic increase in prices is due to short-term market phenomena related to the rebound from the pandemic, not any long-term structural issues or limitations in supply.

In fact, evidence from the U.S. South, which is our main timber growing region in the country, indicates that an enormous area of trees has been planted in the last decade, providing a reasonably large long-term supply of wood.

Further, supplies of plantation timber in other productive regions of the world, especially South America, but also China, New Zealand, Australia and parts of Southeast Asia, are expanding.

The current high prices for lumber may linger for a while as demand continues to rebound from the pandemic, and due to overall inflationary pressures, but over the next six months to a year, prices should stabilize. And over the longer-run, there will be plenty of wood to go around.