If you purchase a lot of lumber or make products out of lumber, you've probably noticed huge price increases and material shortages over the last few months.
Overall, the price of lumber - which includes both softwood and hardwood lumber - has soared 50 percent since April of 2020.
In fact, The National Association of Home Builders (NAHB) asked over 300 remodelers to report on material shortages and price changes they noticed in Q1 and Q2 of 2020.
Here's what they found:
As you can see, framing lumber has taken quite a hit.
But it's not just framing lumber that's experiencing massive shortages and price increases. At least 40 percent of remodelers reported shortages for millwork, cabinets, and plywood. These shortages indicate a low supply. And as we all know, when supply goes down, prices usually go up.
And that's exactly what happened.
When the remodelers were asked "How much have total material costs changed over the last 6 months for a typical project?" Here's what they said:
25% of remodelers report cost increases of 20% or more.
So why are the prices so high? Well, there's a lot of reasons and factors coming together to create this perfect storm. Let's take a look.
It's not just toilet paper and hand sanitizer. The coronavirus pandemic has significantly affected the lumber industry, too.
In the early days of the pandemic, the U.S. Forest Service reported, "a lot of hardwood mills had closed, instituted layoffs, reduced production, and lost revenues and that National Forest System hardwood timber sales were at risk of default."
Due to stay-at home orders and social distancing measures enacted by state and local governments, several mills around the country closed. Even mills that stayed open weren't operating at 100% capacity and staggering shifts to protect their workers.
As you can imagine, this ended up affecting production and lumber supply. A lot.
Largest hardwood industry trade association The Hardwood Federation wrote in a letter to the U.S. Senate that several companies that work with hardwood reported declines of 50% and more.
And because prices fell between March and April of 2020, mills projected the construction industry would be affected and therefore anticipated a large drop in demand.
But that wasn't the case at all.
Increase in DIY projects
What do you get when you mix a national pandemic and millions of people stuck at home with nowhere to go? A lot of DIY projects. A lot.
We're talking: new decks, refaced kitchens, remodeled bathrooms, you name it.
And since big box retailers were designated 'essential businesses' during the shutdown, it's no surprise they reported record profits during the height of the pandemic. According to CNBC, Lowe's second quarter revenue increased by about 30%, and Home Depot said its quarterly sales soared by 23%.
That's a lot of wood being used that nobody predicted, which resulted in supply and demand being completely out of sync.
Leading us into our next point:
Lumber mills misread the 2020 market
It's not just DIYers and an increased demand that's making prices so high. Supply is extremely low because both mill operators and lumber dealers misread the 2020 market.
In 2019, new builds and remodels were pretty low. Production was pulled back and everybody in the industry assumed 2020 would be the same.
And then COVID hit.
The uncertainty from the pandemic had a lot of really smart people convinced that the demand for lumber would significantly decrease for the unforeseeable future. Because of this, production stopped and lumber dealers let their inventory drop to record low levels.
But the unexpected happened.
The housing market bounced back stronger and faster than anyone could have planned for. Low interest rates turned renters into buyers. By June 2020, housing starts had increased by 17%.
The comeback was great, but it ended up putting a lot of pressure on the lumber industry to keep up with demand with such a limited supply. Which is why the price of wood was pushed to record levels.
Here's a simple supply and demand curve diagram we put together to help explain what's happening in the market.
Do you see where the brown dot on the graph is? That's where the supply curve and the demand curve intersect - otherwise known as the equilibrium point. At this point, both supply and demand are met. This is what a typical year in the lumber industry looks like.
But for the year 2020 (shown in red), you can see there was an extremely high demand with a pretty low supply. In economics, this is known as an excess demand. The result? Your price of lumber goes up.
Unrelated to the pandemic, there have also been other factors that have played a part in the increased lumber prices.
Tariffs. From 2017 to late 2020, the U.S. raised tariffs on Canadian lumber, which caused issues within the wood industry. That, on top of introducing a global health crisis into the mix, made a wood shortage kind of inevitable. Luckily, some tariffs were recently reduced from 20% to 9% this past December so that'll provide some relief and hopefully allow prices to stabilize moving forward.
It's also important to mention the trade conflict with China and its effect on the hardwood sector. The U.S. hardwood industry relies on exports. And over the last few years, China has been our largest foreign customer, purchasing about 25% of the boards produced by U.S. hardwood sawmills. In 2018, the U.S. raised tariffs on China imports. China then responded with retaliatory tariffs on U.S. wood products.
This resulted in our hardwood industry seeing a 40% drop in U.S. hardwood exports for the year 2019. Hardwood exporters lost millions each quarter and many sawmills were forced to cut production.
Wildfires across the west coast. The wildfire season also took a big hit to the industry. Not only did it wipe out millions of acres of timberland, but it also increased the demand for building materials in West Coast communities to rebuild.
Composite materials are low supply, too
If you use materials like MDF or HDF for your cabinetry projects, you might have noticed a shortage, too.
Resin, a primary ingredient in these composite materials, has been going through a national shortage due to the pandemic and widespread production issues. The 2020 hurricane season, high export demand, and unexpected outages are just a few of the issues the industry experienced that ultimately created the perfect storm for unstable market conditions.
But there is good news.
Whenever markets go through rapid changes, there's always new innovative options that come out of it. Some mills are finding new and alternative materials to produce products that'll help reduce the burden in the lumber market. For example, there's a new mill in California that uses a rice byproduct to create a rice-based board similar to HDF. And out here in the Midwest, there's a new mill being built in Iowa that will be using corn harvest byproduct to manufacture a corn-based particle board.
So when will the prices go down?
I'm sure you're sick of hearing the word 'unprecedented'. But that's exactly what 2020 was.
We are experiencing a historic run in lumber prices. And although future lumber prices can be difficult to predict, they're likely to remain elevated.
Just to put it in perspective how high the demand is right now: Most mills have lumber sold before it's even out of the kiln.
Fortunately, here at Ruck Cabinet Doors, our mills have put us on 'allocation', which is them allocating a certain amount of material for each production run (in most cases a 4 to 6 week rotation) to high volume customers. They're doing their best to get ahold of the lumber we need and helping us out on price wherever they can.
Until we see signs of slowing demand to give production the time to catch up though, prices won't go down. But the market will adjust itself - it always does. New mills will open and the demand/supply will level out.
How to protect your business
There are a few things you can do, whether you're a one man crew or a medium to large sized shop, to help protect your business during this time in the lumber industry.
- Plan, plan, plan. With the market where it's at right now, planning is more important than ever. It's something we've been doing and it's something we urge our customers to do, too. Forecast what you need from us or your other suppliers as far in advance as possible. Doing this helps us know what wood you need from us and gives us the time to get our hands on it.
- Communicate. Along the same lines as planning, you should always be communicating with your suppliers/partners. Especially on larger, higher volume or reoccurring projects where you might need more material. That way we can work with our mills and get you the wood you need so the job gets done in a timely manner. We need to all be working together during this time.
- Order in bulk. With materials that you order frequently and aren't very job-specific, like panel material for building cabinet boxes, we suggest ordering in bulk. If you usually order enough for the job, try to order enough for a few jobs at a time. It ends up being cheaper for you in the long run and it's less time you have to spend waiting for your materials.
- Talk to your customers. It's important to be open and transparent with your customers at all times, but now more than ever, it's crucial. Make sure they understand what's going on in the industry. It'll help prepare them to set realistic expectations on the project timeline and budget. If your material costs are increasing and the amount of time required to procure materials is also going up, set the stage with your customers to ensure everyone is on the same page. Proactive strategic planning are paramount with the volatility of the current market. If you need to increase your prices to your customers to keep up with rising material costs, don’t wait until your business has already taken a hit.
The bright side
To end on a positive note, even though lumber prices are through the roof, this is an exciting time for the homebuilding industry and all the businesses that serve that sector. These prices are a reflection of the strong demand for housing developments. Which means continued business for all of our remodelers, builders, and cabinetmakers.
In the meantime, hang in there. We'll do everything we can to get through this and make sure to get you the wood products you need.