Lumber Prices Extend Plunge Amid Increasing Sawmill Capacity

Lumber futures on Chicago Mercantile Exchange have been nearly halved in a matter of a month to $879 per thousand board feet from the all-time high in May of around $1,711. The reason for the latest downdraft is because sawmills are boosting output and domestic production is increasing, catching up with demand. 

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"High prevailing prices have already encouraged lumber mills to boost output, and we anticipate that domestic production will rise even further as labor shortages in the trucking and forestry sector dissipate," Samuel Burman, assistant commodities economist at Capital Economics. 

Lumber, which is typically transported on one of three types of cars — center beams, boxcars, and bulkhead flatcars, has increased above 7,000 railcars for the first time in two years in May. He said besides "slipping back so far in June, they remain relatively high by past standards." 

We wrote a note at the beginning of the month titled "Lumber Prices Slump As Historic Boom Hits A Wall," pointing out how "sawmills could be catching up amid the flurry of demand from North American homebuilders." At that time, lumber futures were trading around $1,300. 

Shortly after that, about mid-month, lumber prices began to dive, experiencing one of the largest down weeks since 1986 and one year before the 1987 stock market crash. 

At the end of last week, we noted that price action in lumber futures resembles a "classic commodity blowoff top." We highlighted then, the curve for lumber futures is sloping downwards and suggests that "the market is looking for quite some weakness as we head into the autumn and winter months."

With the term structure of the futures market indicating falling demand and supply ramping up - Capital Economics released their forecast that prices may drop to $600 by the end of 2021. This is a relief from $1,700 prices but still, more than double the prices from pre-COVID levels of around $300. 

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