Many reasons for differing prices for wood

Southern yellow pine (SYP) lumber prices are at record highs — by huge margins. Forest2Market’s composite SYP lumber price for the week ending Jan. 15 was $976/MBF, which represents an almost 180 percent increase over the same week in 2020.

While this trend is benefiting southern sawmills, many timberland owners in the U.S. South are asking the obvious question: Why are log prices in local markets not reflecting those of a record lumber market?

The answer to this question is not as straightforward as it may seem. While log prices are to some degree tied to lumber prices, the association is a loose one. There are a number of mutual factors that affect lumber and log prices, but each market also has independent drivers that do not overlap, which is why we see such a stark disconnect between the two markets.

What Market Forces Drive Lumber Prices?

The two primary factors that drive lumber prices are housing starts and lumber inventory.

1. Housing starts: Historically, the main driver of SYP lumber prices has been the larger U.S. housing and remodeling markets, which require a well-oiled supply chain, steady import flows (primarily from Canada) and massive amounts of finished lumber, plywood, oriented strand board (OSB) and other building materials.

2. Lumber inventory: The market’s capacity to produce lumber is the other key factor that drives price. Manufacturers must be able to make and stock a variety of products in order to meet the demands of the huge construction market.

What Market Forces Drive Log Prices?

The two primary factors that drive log prices at the mill gate and in the forest are general economic principles of supply and demand.

1. Supply of logs (as standing timber): The inventory of standing timber products in a given supply basin must be matched to regional demand for those products; i.e., pulp and paper mills need access to deep inventories of pulpwood and sawmills need access to sawtimber. In the U.S. South, more than 12 billion tons of inventory are currently growing in southern forests; roughly 280 million tons (3 percent) are harvested and used in the production of wood products each year.

2. Demand from mills: Wood products mills require a significant amount of raw material. The cost for these materials makes up a majority of a mill’s operating costs — up to 75 percent in some instances. Of the total annual harvest in the South, approximately 145 million tons of wood go to pulp and paper mills as pulpwood; approximately 120 million tons go into dimensional lumber and panel/plywood production as sawtimber; and less than 15 million tons go into the production of wood pellets.

Immediately after the first wave of lockdowns in June, lumber prices shot up so quickly based on three primary factors:

1. Stronger than expected housing starts and unforeseen demand from the remodel sector

2. Capacity and supply chain adjustments

3. Market speculation driving uncertainty