In this segment of your Woodland News we wanted to touch on a few aspects of the hardwood marketplace you might find interesting, including relationships between pricing, inflation, other economic indicators, and some species-specific observations related to export-demand-seasonality. We hope you enjoy this segment!
Hardwood Lumber Price Trends and The U.S. Consumer Price Index (CPI)
Certainly, with the recent inflationary pressures on our economy, we thought it might be worthwhile to illustrate correlations between our region’s hardwood lumber price trends and the U.S. Consumer Price Index (CPI), which is a metric traditionally cited when economists track and report on domestic inflation. While our regional hardwood spot-market lumber prices tend to fluctuate in response to domestic and global market forces, they trend in the same direction as the CPI over the longer-term – albeit not always at the same pace. Since January 2010, the average hardwood lumber price-growth has doubled that of CPI (below). One might conclude that U.S. hardwood markets have become so reliant on foreign demand that they’ve decoupled from overall U.S. economic performance. The data in this segment of your Woodland News help illustrate how both domestic and export forces influence U.S. hardwood markets. The data also suggests hardwood markets are resilient, and benefit from diverse market influences and opportunities.
Alternatively, if we only focus on the last four years (below), average price-growth rates for hardwood lumber and CPI show less divergence compared to the 12-year chart above.
One reason the hardwood lumber price-growth rate doubled that of CPI in the first chart (12-year span) is the significance of the January 2010 “starting point”: January 2010 was a point when hardwood lumber prices were still recovering from a very challenging recessionary period – a difficult time for U.S. housing, hardwood lumber markets, and the economy in general. Said another way, hardwood lumber prices had considerable room to grow from the low ebb of January 2010. Another reason for the divergence in average growth rates during the separate analysis portrayals (above) is that the CPI is a diversified “basket” of goods and services, published quarterly, and will naturally demonstrate less volatility. Meanwhile, hardwood lumber prices are published more frequently (weekly and monthly) and are a single commodity group, thus naturally prone to some short-term fluctuation. This analysis illustrates the U.S. hardwood industry’s longer-term price resilience, in line with the overall U.S. economy, irrespective of short-term fluctuations.
Here’s a look at CPI alongside relative prices for some other familiar commodities (below) which are vital to producers in our region’s hardwood supply chain. You’ll note energy price volatility is even more pronounced than that for hardwoods. You’ll also note recent hardwood lumber price growth has tended to outpace several other metrics, on a relative basis, since 2010.
U.S. Inflation (CPI), Gross Domestic Product (GDP) and “Money Supply”
We also thought it would be fascinating – in the greater context of understanding our hardwood markets – to look at the relationship between trends in U.S. inflation (CPI), gross domestic product (GDP) and our country’s “Money Supply”. “M2” (shown in the charts below) is one common measure of the money supply. It’s the amount of money available to consumers and business-people for transactions, goods and services. “M2” is also the metric our Federal Reserve influences and adjusts (via overnight lending rates and purchases of treasury assets) in its quest to maintain full employment while simultaneously keeping inflation in check. Historically, the M2 money supply has grown in the same direction as the overall economy, but at a faster pace.
Returning to our earlier discussion of hardwood markets – and using January 2010 as a base – readers will note the past 12 years’ hardwood lumber price-growth trend has outpaced that of CPI and GDP on a relative basis, but not that of the money supply (below). Expansions in the money supply don’t impact all markets evenly, nor is the correlation always direct or immediate. Although rapid increases in the domestic money supply (liquidity) can elevate market prices, other forces play a role too. One important influence on domestic hardwood markets is that of foreign demand because it tends to expand and contract somewhat independently from the domestic forces traditionally driving U.S. hardwood demand – and can shift suddenly due to policy actions or global trade disruptions elsewhere, as discussed further below.
U.S. Hardwood Export Volume and Trends
While the prior sections’ analysis focused on the domestic economy. The following discussion considers the hardwood export cohort of the overall U.S. hardwood marketplace. Below, we illustrate export volume and price trends – in relative terms – using 2010 as a base. In general, export demand (both volume and price) for U.S. hardwood lumber rose steadily through 2017, until the combined tariffs and the Pandemic period (2018-2020) impacted prior levels of hardwood lumber trade. Following that 2018-2020 period, U.S. hardwood lumber prices rose sharply in response to
- a) constrained surge capacity (supply);
- b) a rapid rebound in domestic demand plus that of incremental foreign demand, noted in the area highlighted below.
(Note: the volatility in export volume relates to a normal, seasonal decline in Chinese purchases, typically seen in December of each year.)
Despite the seasonal demand volatility seen in the monthly data above, the directional trend in year-to-date demand for U.S. hardwood lumber continues a strong positive trend for the past three years, contributing greatly to the run-up in relative prices for hardwood lumber.
Below, readers will note the significant role Chinese demand plays in U.S. hardwood lumber exports – in terms of both overall volume (34%) and seasonal volatility (note the substantial December decline in each of the most recent six years, shown further below).
Timber Stumpage Price Side-Bar
Even though there’s a noticeable seasonal dip in Chinese purchases of U.S. hardwood lumber each December, our local timber stumpage markets tend to show resilience and some level of insulation from that seasonal fluctuation. Some of the reasons include regional timber purchasers’ diverse markets, and our industry’s fairly consistent timber-purchasing needs. Readers will notice there is one species – red oak – which does tend to show a seasonal (4th quarter) dip in pricing. Meanwhile, the other major regional species show seasonal stability and help illustrate the value and price-risk-protection afforded by our region’s diverse hardwood forests.
Incremental Foreign Demand: Limited Impact
Returning To Our Lumber-Price Theme: Although most of our readers understand what incremental foreign demand can do to hardwood prices in an undersupplied post-Pandemic market, we thought it would be fun to illustrate it. As shown below, the up-tick in foreign demand for our U.S. hardwood lumber has been fairly slight, while the overall impact to pricing has been rather pronounced. The past several years’ trends in demand, pricing and seasonality suggest foreign demand for U.S. hardwoods will continue to increase in the longer-term, yet will also continue to display volatility from month-to-month. Currently, the normal, annual export-volume decline (which we see each year in December) is likely to exert downward pressure on hardwood lumber prices in the short-term, and will likely impact timber stumpage prices to a lesser extent during the same period.
We hope you enjoyed this segment of your Woodland News. We invite you to share it with a colleague, and contact your friends at FORECON for your hardwood forest management, appraisal, and analysis needs.