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Prices for low-grade lumber – the main input cost for pallets – have moved sharply higher since the start of 2026, and the Iran conflict is now adding a second layer of pressure through fuel and freight. In this viewpoint, we look at what is driving the run-up in pallet lumber prices, why the low-grade market has tightened faster than framing lumber, and how higher diesel and tighter trucking conditions could compound those costs in the months ahead. We also spotlight the chemical industry, where Gulf Coast producers are especially exposed to this combination of rising pallet input costs and worsening transportation expenses.
The first sign of this tightening is the shrinking gap between low-grade and framing lumber prices. Since the first week of January, our low-grade lumber composite price (LGLCP)index has risen 27%, compared with a 14% increase in the framing lumber composite price (FLCP). That has pushed the spread between the two to its narrowest point since May 2024.
Notably, #4 grade lumber has been driving most of these gains. In Southern Yellow Pine markets, #4 grade posted the largest gains, with 2×4 in the Westside market rising 41% since early January and 2×6 seeing a 46% increase in the same Westside market. This isn’t isolated to Southern Yellow Pine, with similar dynamics emerging in western species as well. #3 Hem-fir and Douglas-fir have risen by just over 30%, while hem-fir #4 2×4 rose by 65%, and fir-larch #4 2×4 rose by 53% since early January.
Supply of industrial lumber has been tightening for structural reasons. Modern softwood mills, particularly across the Southeast, have invested heavily in scanning, optimization systems, and newer profiler heads that remove wane before the first cut scan. The effect is greater recovery of higher-grade boards and less low-grade lumber making its way into pallet markets. At the same time, mill curtailments and permanent closures have reduced the amount of lumber available overall. Fastmarkets estimates that 775 MMBF of capacity was lost in 2025 through indefinite and permanent closures, following an even larger 3,665 MMBF reduction in 2024. Canadian duties, fiber constraints, and the aftereffects of SYP oversupply have all contributed to a smaller and more volatile supply base.
As #4 lumber becomes harder to source, buyers are pushed up the grade stack into #3 and, in some cases, even #2. That substitution effect is important because it spreads inflation through the pallet lumber basket rather than leaving it isolated in the lowest grades. By late February, that pressure had already started to show up in the pallet market. Producers who had struggled to pass through higher costs in January found more room to raise quotes as February progressed, helped by reduced pallet production, leaner field inventories, a tighter core market, and continued inflation in low-grade inputs.
The next risk is that freight will start amplifying the lumber story, particularly with the fallout from the Iran conflict. Trucking employment has been steadily falling since late 2022, after the significant ramp up after the pandemic caused freight rates to fall drastically as there was too much competition.
This slow shedding of trucking availability suggests the industry is already operating with thinner capacity and weaker margins. Now diesel prices are rising sharply as geopolitical tensions in Iran lift energy costs. According to the EIA, the national average diesel price for the week ending March 23 reached $5.375 per gallon, up $1.808 from a year earlier and about 40% from a month earlier. That raises delivered lumber costs, squeezes already thin trucking margins, and increases the risk of further carrier exits. For pallet buyers, that means additional cost pressure through more expensive low-grade lumber at the mill and a more expensive trip getting it to market.
Further upstream in the pallet supply chain lie more challenges. For loggers, diesel is not just another cost, but something that could destroy their already tight margins. With product prices still weak and little room to pass higher costs along, a sustained rise in diesel increases the odds of logging cutbacks, setting the stage for tighter log supply in the second half of 2026 should the increase in diesel prices be prolonged.
As the table shows, the U.S. chemical industry is heavily concentrated along the Gulf Coast, with Texas and Louisiana seeing the majority of shipments originate in these states. This is significant as a large share of U.S. chemical activity is clustered in the same region that is now facing rising Southern pallet wood costs and a worsening freight bill.
With East and Gulf Coast ports handling about 90% of U.S. waterborne chemical shipments, the region sits at the center of both production and export flow, making it especially vulnerable when pallet and logistics costs rise together.
Given how heavily U.S. chemical production is concentrated in the South, the Southern Yellow Pine low-grade market is the most important lumber market to watch for pallet buyers in this region.
So far, #4 grade 2×4 and 2×6 prices have moved broadly in line across all three regions, but #3 prices in the Eastside and Westside markets have generally been about $40 to $60/mbf above Central since the start of the year, though that premium has narrowed somewhat in recent weeks.
Chemical companies along the Gulf Coast should use these regional SYP price differences as a cue to review how exposed they are to any single pallet sourcing area. If Westside and Eastside #3 prices remain meaningfully above Central, buyers should ask whether their pallet supplier base is too concentrated in one subregion and whether shifting part of their procurement footprint could lower costs without creating new freight inefficiencies.
Companies can also reduce their exposure by expanding pallet retrieval and repair programs, carrying slightly more safety stock at key Gulf Coast sites, and working more closely with suppliers on lead times so they are less vulnerable when lumber markets and freight conditions tighten at the same time.
Due to the shrinking availability of low-grade lumber, procurement teams may need to be more proactive than they were over the last three years, when a supply glut kept lumber prices relatively low. We saw in the pandemic how quickly pallet prices can rise overnight if there is severe supply chain tightening. We are not yet at the point where we expect that kind of disruption, but if diesel prices stay high for a significant amount of time, this will trigger more freight exits and cause transportation costs to increase and drag pallet prices up with them.
Moreover, because so much of the chemical industry activity in the Gulf is centered around exports – $53 billion in exports for Texas and $10 billion for Louisiana – procurement teams should also make sure they have enough ISPM-15 export-compliant pallets on hand. These are pallets that have been heat-treated or fumigated with methyl bromide and stamped with the ISPM-15 compliance mark. This is so that they aren’t caught short-handed for exports, which have higher standards than interstate travel.
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