By Pierre G. Villere
I can tell you that of all the things I have aspired to in life, being a lumber dealer has never been one of them. Goodness, the fluctuations in prices is far worse than dispensing gasoline at a convenience store, and now thousands of lumber dealers have seen their standing inventory significantly devalued because of the crash in lumber prices.
One publication wrote in a very tongue-in-cheek manner that rising interest rates have taken an axe to one of the pandemic’s hottest commodities. Lumber prices have fallen to their lowest level in more than two years, bringing two-by-fours back to what they cost before the pandemic building boom and reflecting the sharp slowdown in new housing starts.
Lumber futures were recently trading around $429 per thousand board feet, down about one-third from a year ago, and down more than a stunning 70 percent from their peak in March, when the Federal Reserve began raising interest rates to fight inflation. At their peak, lumber prices closed well above $1,600 per thousand board feet.
ROLLER COASTER PRICING
Wood prices crashed in the early days of the 2020 lockdown, but they exploded that summer when stuck-at-home Americans fueled the robust remodeling market, and suburban home sales surged. Two-by-four prices nearly tripled the pre-pandemic record in an early sign of the inflation and broken supply chains that would blunt the economic reopening.
But lumber has led the way down for commodities since the central bank took aim at rising consumer prices and the overheated housing market. For two years, climbing lumber costs lifted home prices. Now home builders say that cheaper wood is giving them wiggle room to offer buyer incentives and to trim prices without crimping their profit margins.
This is not great news for lumber dealers. Like the convenience store business, when gas prices are climbing, inventories should be high, and when prices are falling, they should be low. This is the same for any commodity. Well, it appears there was a buying frenzy during the shortages caused by the spurt in building activity during the pandemic, and lumber dealers were hoarding lumber, paying any prices, and stacking two-by-fours to the roof. Prices really crashed, and many were caught with inventories worth hundreds of thousands, or even millions, less than they paid.
This is problematic for the ready-mixed concrete and concrete products industry. Wood has traditionally had a cost advantage over concrete construction, but that gap closed significantly during the months that lumber prices surged. Now that prices have fallen back to earth, the lumber cost advantage is a threat to concrete consumption of all types.
Behind lumber’s threat to the concrete industry is an extremely well-funded check-off program known as the Softwood Lumber Board, which collects marketing funds on every board foot of lumber produced in America. Like all other industry check-off programs, including the famous “Got Milk,” it is administered by a Board and supervised by the U.S. Department of Agriculture. In 2022, the initiative has budgeted $18.5 million for their well-established programs like “Think Wood,” “WoodWorks,” and their Wood Institute, and puts a large number of boots on the ground as they claw for market share—at the expense of concrete building methods. Likewise, the threat of the “mass timber” initiative, which translates into ever larger and taller, all-wood construction, is a further incursion into concrete’s building advantage, despite the visceral objections of the National Association of State Fire Marshals.
To be sure, the concrete industry isn’t sitting back and watching; almost every national association has undertaken promotional initiatives for ready-mixed concrete, as well as all the various concrete products we produce. It is interesting to note that the masonry industry has successfully initiated their own check-off program very recently, and that should bear fruit for block producers and their customers. And NRMCA’s “Pave Ahead” and “Build with Strength” initiatives have grown dramatically and are making a real impact.
But in the end, lumber is a threat, and we need to remain committed as an industry to grow the market share of concrete in construction.
Pierre G. Villere serves as president and senior managing partner of Allen-Villere Partners, an investment banking firm with a national practice in the construction materials industry that specializes in mergers & acquisitions. He has a career spanning almost five decades, and volunteers his time to educating the industry as a regular columnist in publications and through presentations at numerous industry events. Contact Pierre via email at pviller[email protected]. Follow him on Twitter – @allenvillere.