A viewpoint from Dustin Jalbert, senior economist of Fastmarkets Forest Products

Pandemic-related labor shortages had a substantial impact on sawmill output and productivity and ultimately contributed to record wood products price hikes. Production and shipping capacity were heavily hampered by the Covid-19 quarantine guidelines and rising positive virus cases at business operations. Unable to remedy with added shifts and overtime, mills struggled to ramp up production in response to the surprising and sudden housing demand for much of 2020 and early 2021.

Understaffed sawmills initially struggled to respond to the DIY boom and housing market demand

Although, similar scenarios played out across the broader manufacturing sector, lumber production turned out to be one of the more extreme cases of product shortages because of the pandemic-driven housing demand and the labor supply crunch at sawmills.

Industry leaders assumed soaring unemployment and economic shutdown would decrease housing demand and production. Instead of crumbling, demand grew quickly through the summer of 2020. DIY spending at home centers (like Lowes and Home Depot) fueled rising lumber prices in the US and prices eventually hit an all-time high in May 2021. Prices topped $1,500 per thousand board feet (MBF) based on the Fastmarkets Random Lengths Composite Price. Rapid recovery in single-family home construction also added further momentum because homebuyers were scrambling in a low inventory market for more space.

US and Canadian sawmill production improved in the late 2020 and early 2021. Mill bargaining power deteriorated when inventory finally started to accumulate. Heavy discounting began in earnest heading into the 2021 Memorial Day weekend as renovation demand started to show major cracks, marking the beginning of the end for the record-breaking run in lumber prices.

Pandemic case levels have a direct impact on sawmill output

On the surface, production in North America seemed to fare well after recovering quickly from the initial pandemic wave in April and May 2020. However, we estimate actual demand on mills totaled 61.6 BBF for the year (2-3% growth), 2 BBF higher than reported production. That disconnect between demand and supply contributed to a huge inventory drop in distribution that drove the unprecedented market volatility. Supply could not sufficiently respond to demand, which is unusual for an industry that has had a reputation of always quickly overproducing in a bull market.

However, the supply dynamics began to change in 2021 after nearly a year of persistent supply-chain disruptions. Paired with ample logs from salvage harvesting in the Pacific Northwest after last year's devastating wildfire season and a relatively uneventful spring breakup, mills were better able to ramp up production as the labor situation quickly improved between January and March. This coincided with Covid-19 case rates plummeting as nation-wide vaccinations rolled out.

The clearest sign of pandemic-related disruptions comes from the Bureau of Labor Statistics. For sawmill and wood preservation employment, it's evident that not only has the total number of employees on payroll dropped below pre-Covid-19 levels for many months, average weekly hours worked at the mills has consistently trended 2-5% below pre-Covid-19 levels until very recently. Even as sawmills slowly saw the employee headcount rebound, hours worked by production and non-supervisory employees struggled to recover at a similar pace during the winter months when Covid-19 cases surged to their worst levels. Mills could not add overtime, let alone operate at normal hourly levels, as more employees quarantined at home with the pandemic raging out of control. More people on payroll did not translate to more hours worked (and thus more finished product output).

The pandemic rates and rate of sawmill production are directly linked. As cases fell from their peak in January, there was a substantial surge in hours worked at sawmills. Average weekly hours worked for production and non-supervisory employees have rallied since March 2020 and peaked at 8% in April and remained above those levels as of June even as the ramp-up in overtime seems to have subsided as lumber prices crashed. The industry data for lumber production and shipments seems to square with the ramp-up in hours worked. This was the surge capacity that the market desperately needed to finally rebalance the market.

The Delta variant could disrupt US South sawmills the most, Washington and Oregon rates may be important to watch too

So if Covid-19 cases falling meant supply disruptions eased, does the rise of the Delta variant mean further wood products supply disruptions? Virus case rates are rising rapidly again in some states, especially in the US South (Figure 4). Rates per capita are poised to break the peaks seen over the 2021 winter for the region. While we are all relieved to see hospitalization and death rates not rising nearly as rapidly in most states hard hit by Delta, the key metric to gauge manufacturing and distribution disruptions remains actual case levels because employers are obligated to send Covid-positive employees home to quarantine. This significant wave of Delta in the South, which accounts for about 25 BBF of North American capacity, could tighten conditions for southern yellow pine, which has been oversupplied due to a major slowdown in the treated market.

While it appears the US South will experience production disruptions, the situation in the rest of North America appears more manageable than this past winter’s record virus case surges. Much of this can be attributed to higher vaccination rates in the Pacific North West and Canada than in the US South. Washington and Oregon are seeing cases surpass prior highs making for notable exceptions but the prevalence remains fairly low per capita despite the Delta variant being more potent.

Thus far, the vaccines appear to effectively combat community spread of the virus despite increasing reports of breakthrough cases in the vaccinated population. So even as Delta contributes to a resurgence in cases, the rest of North America outside the US South – or about two-thirds of total regional capacity – will likely see case rates per capita far below their prior peaks in the fall and winter of last year, leaving the lumber supply base more resilient compared to the last major wave of cases.

Delta poses a threat to lumber supply and could set off another wave of shortages and price hikes again but the worst of the supply disruptions from the pandemic should be behind us. The US South will probably face some challenges that could help tighten currently sluggish market conditions, but the rest of the North American market will not see the same degree of labor supply disturbances stemming from the pandemic with vaccination rates high, employment levels mostly normalized and other potential disrupting influences like supplemental unemployment insurance now expired. Hard hit states like Alabama and Mississippi are already starting to turn over because the virus is burning out more quickly due to vaccinations.

Uncertainty and volatility will remain high in the market as the pandemic continues to evolve, but the supply side now appears more adequately prepared to meet the strong demand conditions that will continue to persist for lumber in the coming months.

Join Dustin Jalbert for his complete lumber market forecast at the North American Conference on September 27th. Click here to learn more.

To read our complete report on the six factors contributing to wood products price volatility, click here.