The CEO of Deacon Lumber, Stinson Dean spoke with Ali Wolf of Builder Online to discuss the construction lumber market, including the changes in supply and demand, policy, how natural disasters can have outsized effects on pricing and availability, and other related topics.
Read on as Stinson Dean and Ali Wolf discuss the progression of the lumber market and how it is affecting new construction as well as home remodeling projects.
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Ali Wolf: Can you share a bit more about what your company does?
Stinson Dean: What we do at Deacon is buy lumber from producers to be stored in local markets. We then supply lumberyards with truckloads of just-in-time lumber inventory. Put simply, we are a middleman broker of lumber.
Ali Wolf: Why do you do what you do?
Stinson Dean: I was a consultant in the lumber industry starting in 2014 where I consulted on using futures to hedge risk. I stepped away and started Deacon in 2018.
In the lumber market, you have to analyze macro events, national and international policy, regional trends, county-specific data, and even local building codes to make sense of the market. I am constantly trying to put together a mosaic of all those factors, which is endlessly fun.
Ali Wolf: When you joined the lumber industry in 2014, what was the state of the market?
Stinson Dean: Chinese lumber purchasers really pushed around the market to meet the demand of their expansive growth plans domestically, but the market shifted in 2014. It was an interesting time to start in the lumber business because it marked the end of the Chinese influence on the lumber market, allowing new dynamics to take center stage.
So, there was less influence from Asia, but, then in 2015, we started to see the impact of the slow-moving disaster—the mountain pine beetle infestation. The beetle infestation resulted in a rise of dead or decaying trees. The Canadian government reacted by implementing logging reduction rules in 2015.
Ali Wolf: How did the market look by the time you started your business then?
Stinson Dean: As anyone in the housing market knows, 2018 was another interesting year with some parallels to today’s market. I watched lumber prices jump to all-time highs as housing demand was ramping up. Suppliers were struggling to source product, especially around spring 2018, as logistic issues like trucker shortages were holding back supply. The market was chaotic.
As the year progressed, logistics improved, and supply become more plentiful right as mortgage rates jumped. Demand for housing cratered, and it became apparent that it was a good time to start a business because there was finally some lumber to be bought.
Ali Wolf: So bad time for housing, good time to stock up on lumber. What happened next?
Stinson Dean: Lumber was a slog. Lumber prices stayed below $400 because there was so much lumber left over from the year prior that the industry still needed to chew through.
At that point, prices got so low that there was a big wave of curtailment. Canadian producers started to permanently shut mills in response to the slower activity in 2018 and the low lumber prices; lumber wasn’t hitting the break-even price to keep the mills open.
That, plus the restrictions on logging from the Canadian government, reduced raw material so the belief was that they weren’t going to access more logs so it made sense to shut some mills.
That all sets the stage for the circus we are in now.
Ali Wolf: Beetles, restrictions, a glut of inventory. There was already a lot to ingest, and then the pandemic hit.
Stinson Dean: And then the pandemic hit. There was a sell-off in March, and no one wanted inventory because we were all nervous about what the world was going to look like.
As we know, housing demand rebounded very quickly, and lumber prices started to rise. The problem became that the lumber producers were so scarred from the Great Recession that they didn’t believe the higher prices were here to stay so they refused to increase production. We got to the point that we were approaching record-high pricing and mills were still not producing more.
Ali Wolf: Any chance of resurrecting the formerly, shutdown mills?
Stinson Dean: No. Those mills were done and never coming back. The equipment was sold. The workforce moved away. So the mills that were still open were dealing with workers out with COVID, COVID regulations, disbelief of the market, and an ability to increase production only so much.
Ali Wolf: We hit on the housing demand part of this. What about the remodeling side?
Stinson Dean: The remodeling boom was huge in this as well. The big box stores were caught with not nearly enough inventory, and they were a big driver of the first rally in early 2020.
They were panic buying because at-home remodeling also took off during the pandemic. Remember, we have a finite supply of lumber. So, if it’s at The Home Depot, it’s not going to the home builders.
Ali Wolf: What was the lumber roller coaster like?
Stinson Dean: Lumber prices reached a new all-time high in August 2020 and started to go down in September once the mills finally believed the market was here to stay. Lumber prices were down by 50% by November. The drop in prices was short-lived though. Lumber prices were back to all-time highs by Christmas 2020, and we kept steadily gaining and hitting new all-time highs for the first six months of 2021.
But then you have this increasing share of building reducing sales by design because the teams didn’t haven’t production capacity resulting in less lumber demand from the builders. The stretched-out time from start to completion also become an important metric to track for lumber demand.
At the same time, Lowe’s and The Home Depot didn’t re-up their contracts because their initial order in 2021 lasted longer than they anticipated.
The market kept evolving, and the volatility was making it hard to get lumber supply right. Suppliers were making money and losing money all while trying to figure out where the market could go from here. Lumber prices fell again in summer 2021, reached the low by August, and traded sideways until Thanksgiving.
Ali Wolf: What changed around Thanksgiving?
Stinson Dean: Well, we look at it like builders were now ramping up for spring. Lumber suppliers were taking orders from builders but were not buying the lumber right away. That was the normal way to do business before the pandemic, by the way, but with lumber volatility, a lot of suppliers stopped doing that to avoid making pricing or inventory mistakes. The return of not buying the lumber right away was because prices had been stagnant for those three months in 2021 and suppliers got complacent.
This perhaps would have been fine, but then British Columbia had this freak rainstorm that caused mudslides that washed out the rail lines and logging roads needed for lumber shipments. That sparked panic the week of Thanksgiving. People looked up and realized we have a lot of business on the books in the first quarter of 2022 but not a lot of inventory.
Ali Wolf: What does this mean for builders?
Stinson Dean: We’ve seen a buying frenzy since as the lumber yards are trying to get ahead of their first quarter commitments. The market dynamics are now hitting builders as we go through yet another round of higher lumber prices. We now have to watch the reaction from builders; will we see more warehousing to lock in prices, or will builders pause in an effort to wait out the higher prices?
Ali Wolf: Where do you anticipate lumber going from here?
Stinson Dean: We see lumber prices stabilizing at a number of about $700 to $1,000 per board feet. Our thesis is that lumber prices will be higher for longer but with big swings related to demand, policy, and/or natural disasters.
I’d say we are near the high for lumber prices and may even say we are at the high of the year; spring is normally the highest for lumber prices with another run-up around fall. I think we may never touch the all-time high for lumber prices again.