Lumber prices notched a record on Thursday but are likely to fall back to earth.
September lumber futures closed at $939 per thousand board feet, eclipsing the previous high mark set on Sept. 1 and pushing to 47% its climb above the commodity’s prepandemic high.
There are a few more days for prices to push farther into record territory before that futures contract expires on Sept. 15 and prices make their seasonal step down.
Most trading has moved to November futures, which closed Thursday at $611.40. Lower prices for autumn wood are typical in the highly seasonal market. Yet the current price is still roughly 80% more than what futures usually fetch in fall, when demand from DIYers wanes and inclement weather freezes home construction in the northern U.S.
There may be fewer decks and fences going up, but home builders have picked up their pace and are back on track for their busiest year since 2006. That could keep prices for wood products uncommonly high and big profits rolling out of mills, whose shares numbered among the standouts of the stock-market rebound.
Shares of Weyerhaeuser WY +0.39% Co. have more than doubled since stocks bottomed in late March. Interfor IFP 1.53% Corp. has better than tripled. The S&P 500 index has returned 49%.
Third-quarter sales are booked for mill owners and profits will likely set records, said Mark Wilde, a forest products analyst for BMO Capital Markets. In recent weeks, mills have been selling wood that will be delivered and paid for in the fourth quarter, setting them up for an unseasonably strong finish to the year, he said.
“The question will be just how long can the builders continue to build at this pace before the weather starts to dial it back,” Devin Stockfish, Weyerhaeuser’s chief executive, said at a recent investor conference.
At the start of the pandemic lockdown, neither mill owners nor investors expected much demand, given widespread job loss. Lumber yards and dealers liquidated. Mills were idled from British Columbia to the Carolinas. As much as 40% of North America’s output was curtailed.
“No one knew what was coming, but no one wanted to go into it sitting on a whole lot of inventory they couldn’t move,” Mr. Wilde said.
Speculators also bailed. Hedge funds and other money managers in February began to abandon bets on rising prices. Some went short, wagering that prices would fall. No one went long. By mid March there wasn’t one wager on rising prices logged with the Commodity Futures Trading Commission. Over the next eight weeks, into mid May, just a single long position was disclosed.
They were right about prices dropping, but were out of position for the rebound.
After falling to $259.80 on April 1, lumber futures rallied. Americans stuck at home got to work on their surroundings. They emptied shelves at Home Depot and Lowe’s. Home builders raced to keep up with demand fanned by historically low mortgage rates and renewed interest in suburban living. Restaurants and bars built decks and pergolas so that they could serve outdoors.
Mills ramped up. In May and June, more than twice as many truckloads of lumber hit the road than the year before, according to DAT Freight and Analytics. Still, wood remained in short supply and prices soared to records.
It was late August when the trusses finally arrived at JM Kelley Builders Inc.’s custom-home sites in Newport Beach, Calif. The frames had been ordered in March and were three weeks late. The manufacturer had run out of wood. Kevin Kelley said his firm looked for another supplier but they were all awaiting orders from sawmills.
Housing starts, which dropped 40% between February and April, returned in July to their prepandemic level of about 1.5 million on a seasonally adjusted annual rate. Builders are having an easier time finding lumber, but they are paying dearly for it.
Rising wood prices have added $3,000 to $4,000 to the cost of each home for American Homes 4 Rent, which is building hundreds across the Sun Belt and along the West Coast to lease, said Jack Corrigan, the company’s chief investment officer.
Hovnanian Enterprises Inc. HOV 2.94% began raising the prices of its homes, which have averaged $395,000, to offset rising lumber costs. “We understood that demand could cool down from the white-hot sales level,” said CEO Ara Hovnanian. “Nonetheless, during August, we sold 735 homes, up 65% over last year’s August.”
Executives with Toll Brothers TOL +1.32% Inc., which builds big houses in the $800,000 range, said they have increased prices by at least 1% over June and July to keep up with lumber costs. They expect to continue to raise prices a few thousand dollars a quarter to keep up.
Curtis Hodgson, executive chairman of mobile-home builder Legacy Housing Corp., LEGH 0.25% said he considered using the futures market to hedge, or lock in, low lumber prices. He decided not to and came to regret it.
“Lumber’s eating our lunch,” he told investors.