Why is lumber so expensive right now?
thehustle.co
thehustle.co
The Hustle gave me a useful overall explanation of the phenomenon, while your comment pointed me to an ‘insider’ resource to refer to for up-to-date information.
Unless we had a crystal ball we were unlikely to do better than the market and we would have likely predicted demand to go down during the pandemic as well and decommissioned some of the sawmills that we need right now.
If you predicted what the article is citing as the causes for the shortage, you would have started a sawmill in 2020.
In general, I’m deeply skeptical that central planning and government “picking winners” would achieve an overall benefit. At a minimum, it does not appear to have a strong record so far.
Surely, in this case, there are better ways to smooth out these spikes and dips in flows than just letting the price go sky high so that only the rich can build or repair housing for a year or two.
In fact, it’s legal for you to create one today, and if you operate it successfully, you’d make a lot of money.
Blackrock Investment is doing everything you describe, but for housing. They are being heavily derided by the media for doing so.
The government wants to make sure things are moving in the government, not sitting around
How do you know the price is low and to start buying or wait because the price might fall down more?
These shortages will all smooth out relatively soon. It can cost a lot of money to be prepared for everything.
The market is made up of sane adults. It's a feature, not bug. Fortunately. Or unfortunately.
I'm curious to see what economic system would be able to foresee a drastic increase in the demand for lumber during the pandemic-induced depression, despite all the evidence suggesting that the opposite would happen.
Demand didn't skyrocket, it simply stayed the same but because humans tried to preempt things sawmills closed and boom now there’s no supply to meet the existing demand so prices skyrocketed.
According to Bloomberg lumber dropped ~18% this past week, the highest drop on record since 1986. [1]
[1] https://www.bloomberg.com/news/articles/2021-06-11/lumber-pr...
There is a whole lot to understand but possibly never be able to fully understand about human nature.
The market, after all is just a sum of all human behaviours.
Economics is the same, human are highly irrational.
So viewing the whole thing from a rational perspective will make you feel like the market is really dumb. But if you look at it from a human perspective, in the seat of those managing their company from Fear, Greed, Risk and Security everything makes lot of sense.
You only know it is a temporary swing retrospectively. It is impossible to know if it is a temporary swing. It seemed more likely a year ago that we would still be waiting for a vaccine in 2021. If someone was trying to guess the future and massage the market, they just as likely might have assumed even less demand and subsidized shutting down more mill capacity to reduce virus spread which seemed like a bigger problem than lumber prices.
The idea I’m trying to capture is to specifically not apply arbitrary human sentiment and planning to the daily operations of the market and instead have the impetus to keep e.g. prices stable built into the market itself (and only in scenarios where a less volatile economy is desirable) so that the market remains like an AI but just operates a little better for the given problem it is solving. I think it’s fair to treat markets like software that can be changed and improved over time in order to better solve the problems they’re deployed to address. Maybe a more volatile market is better for some other set of goods or services? I think it is up to humans to determine the parameters and desired outcomes of the market they want governing the exchange of goods and services in different areas of society.
The price and lead times on raws are incredible now. Buying steel now is almost 2x in cost. With having 'caps' put onto orders, so that suppliers can keep their customers on.
The resin shortages which hurt the plywood industry also have spilt over into other markets. For example PVC/CPVC manufacturers are experiencing shortages in resins used in their manufacturing of pipe. Thus they're limiting order sizes to their companies and buyers to keep more of them on.
Meanwhile lots of factories and construction have never been busier with more demand for raws. So with large leadtimes, supply chains and manufacturing gets choked up and it just kind of ripples out.
That's assuming someone wants to open one. The demand was spiked by the pandemic which is subsiding. According to the article a new mill take 2 years and technology impacted by the microprocessor shortage.
Now that the pandemic waining and people are heading back out, is it not safe to assume some of that demand will be subsiding?
Pun intended?
This is purely protectionism, and keeps lumber prices artificially high. (Mind you, the reverse is true in the dairy industry with the trade barriers that Canada imposes.)
@nntaleb comment:
> First, learn to tell the difference between inflation and congestion. Inflation: price rises cause prices to rise. Congestion: squeezes are followed by series of price collapses.
https://www.cmegroup.com/trading/agricultural/files/AC-243_R...
We do have Biden putting tariffs on Canadian lumber to help keep prices high, but that's the only thing I'm aware of.
My data comes from inside sources in the lumber industry.
Yours comes from… where exactly?
In other words, you have to include past levels when you say it is very high level, it isn't high relative to last year nor last decade either.
Inflation on its own doesn't explain ~100-400% price hike in the past year. Inflation hasn't even broken 10% yet.
It also doesn't explain that this started long before COVID as well.
This is mostly a supply and demand issue; the supply has taken a huge hit since the recession and lot of companies went out of business since then. COVID didn't help the matter.
As a thought experiment, imagine we print 2x the money supply and hand it to all citizens. Suddenly they can buy twice as many goods, so we would expect shortages, and prices to rise to compensate.
But likely a surge in discretionary income will hit certain types of goods first. We won't see people start stockpiling toilet paper with their newfound money, will we? Most people have all the toilet paper they need already. Funds will hit discretionary things, before spreading through rest of the economy as it circulates.
This thought experiment demonstrates an extreme, but this is the exact policy we enacted, just to a lesser degree.
At the face of it, a shortage looks great for producers, but can bite them in the long-term.
I would like to mention that the money supply in this thought experiment is irrelevant. The key reason why the though experiment drives inflation is that "all citizens" includes a large group of people at the bottom of maslow's hierarchy of needs and they all want those needs to be met..
If you were to give all the money to Jeff Bezos he may not even be able to spend the first trillion and we would forever be doomed with extremely negative interest rates.
Lets say you give that money to Bezos. What does he do with it? Unless he literally builds an Uncle Scrooge money bin and hoards physical $100 bills, having the money allocated to Bezos in no way prevents it from being injected directly into the economy.
Lets say we hand Bezos $1B today, what does he do with it?
Puts it in a bank: Banks want deposits so they can loan more money out at a higher interest rate than they pay to the depositor. Bezos putting money into a bank will cause interests rates to go down slightly and an extra $1B in loans to be issued, and people borrow money to buy things immediately.
Buys stocks: For Bezos to buy a stock, that means someone else sold a stock. Now the cash is in someones hands and they have to do something with it.
Buy treasuries: Treasuries are used to finance the federal debt, which is money the government is already spending now. Most of it goes to salaries of government employees or direct payments such as social security, both of which are spent by regular people for necessities. The rest of the budget is used to purchase things or to pay interest on the debt, and interest payments put cash in hands of people who then have to do something with it.
Note your 4 options is what will happen to prices. If he chooses to buy consumption goods, those things will rise in price by some amount. If he chooses stocks, the person that sold that stock to him will want a higher price than before that $1B was handed to Bezos and he increased the demand for stocks by $1B. Likewise for the other two. These are just supply and demand curves. Basic macroeconomics 101.
So we can see that when new money is created in an economy, it must necessarily be split within all the asset classes according to the decisions made by the person given the money. The person given that money proceeds to do the same thing in a chain of purchases.
So now when we zoom back and look at the Federal Reserves mandate we can see it much more clearly. "We need to ensure that when we print more money than goods are created, that money is chosen to be put into stocks and not consumption goods.". They do so by directly affecting the prices of stocks by buying company bonds, which then is directly used to buyback stocks. In effect, the Federal Mandate is wealth inequality.
The big problem with that is its a house of cards. Once you start supporting inequality, the greater inequality means that you have even less room to mess up and smaller and smaller hedges will have larger and larger impacts. And if the wealthy choose to go against their overall utility and cashout today, the entire system collapses. If the wealthy work out that someone else can cashout and they become the bagholder (like BOA margin-calling Archegos Capital), then that will trigger themselves to do so to save risk.
So we can see that the Federal Reserve's plan does not in fact deal with the risk, it pushes it forward as a bigger risk. The Federal Reserve is just a Martingale.
It might be possible for this system to last for hundreds of years, it's already worked for 50. I have no idea how close we are to some limit.
False, the price run-up started in April 2020, after staying in a fairly narrow band of prices for 40 years. By August 2020 prices had hit an all time high, and then continued to rise to 2.5x that previous record.
Compare these graphs, and explain why we should ignore the obvious possibility that this correlation might be meaningful. The money supply went from 4 trillion to 19 trillion (an increase of 4.75x) and the price of lumber went from $300 per 1000bf to $1500 per 1000bf, an increase of 5x over precisely the same period. Probably just a coincidence...
https://tradingeconomics.com/commodity/lumber
https://fred.stlouisfed.org/series/M1SL
> What high level of production?
Wood production is at it's highest level since 2008. There was a slight dip during peak covid lockdown, but there was also an offsetting drop in demand during the same period so this can't be explained by the temporary drop in production.
It's called demand pull inflation. Suddenly populace has many more dollars, and thus can buy out supply of whatever... In this case, new housing stock. Or it could be driven simply by changes in preferences... The exact breakdown can't be known.
Whether it persists or not is the important question.
https://www.google.com/amp/s/fortune.com/2021/06/10/lumber-p...
A lot of people handwave away shortages as a supply side issue, but an increase in demand leading to a shortage is not supply side at all. The distinction is subtle but important.
The article then discusses the challenge of expanding or opening a saw mill.
You don't talk about expansion if you're running below peak capacity.
They talk about opening new sawmills because a huge number of them went out of business since the last great recession.
It's a supply/demand issue and the production relative to COVID or last recession hasn't recovered.
Edit: My point is that if it is such a tiny portion, then a nation wide change in demand can have a huge impact on pricing without necessarily requiring monetary policy as cause.
Yes, the increase in price of a good is the definition of inflation.
That’s a tautology, not an explanation.
(It is not general inflation, because the lumber price increases are way out of line with general inflation.)
> When you consider the fed printed trillions of dollars for easing in the last year this should be even more apparent.
That... doesn't explain the specific increase in lumber not seen across the broader market of goods and services.
When the government prints trillions of dollars to bail out corrupt wallstreet firms and hedge funds so that the super rich can avoid the consequences of their high risk investment strategies, and this causes the purchasing power of money to decrease, that is inflation, and that is what is happening. Wood just has a low ability to flex up production quickly compared to many other goods.
The price of a Big Mac has gone up 12% in the last year and a half. I encourage you to pick something and price compare it from pre to post covid and see if inflation might not be higher than the official number.