What is driving price volatility in the wood products industry?
Deacon Lumber Company’s Stinson Dean shares his insights on the causes of price volatility and managing price risks
Hear from Stinson Dean, CEO of Deacon Lumber Company, as he explains the three main challenges that contributed to recent price volatility in wood products markets and describes how he manages price risks using futures contracts. Watch the interview or read the summary below.
What are the main challenges that contributed to volatility in wood products?
In my opinion, the three factors that contributed to the volatility in wood products are:
- Conservatism. The challenges faced back in the Great Recession in 2008 resulted in the learned behavior of conservatism in the industry. Even when lumber prices and demand were starting to recover, there was reluctance to lean into the bull rally in the market, even when the prices were breaking all-time highs. This ultimately contributed to the volatility.
- Lack of infrastructure. The height of the Covid-19 times gave people the chance to think more about their homes and there were a lot of people looking to move, remodel and build. However, the industry did not have the infrastructure, from flatbed truck and rail car availability to mill capacity and production, to meet the need and demand in that compressed time period.
- ‘Emotional trading’. Volatility means prices go up and down, so this boom-and-bust cycle is largely related to the emotion of the market. Being a heavily traded commodity that is market price driven, some people who were not usually participants in lumber trading had decided to join the market. This ‘emotional trading’ where everyone wanted to become a lumber trader resulted in demand destruction due to interest rates or lack of availability. Combined with home builders reducing sales and supply chain issues, this contributed mightily to the volatility we experienced.
How are companies navigating the volatility?
Managing volatility is all about managing your price risk. If you have long inventory, you will need to be aware of lower prices. If you are sold forward to a customer, you will need to worry about rising prices to make sure you are buying at a lower price than that fixed price you are delivering to the customer.
A lumber futures contract can help to mitigate the risk. If you are long inventory, you can short a futures contract. If the market corrects lower, you can make up for your physical inventory loss with your futures hedge gain. Conversely, if the market goes up, you could refrain from participating in the upside.
The volatility we have seen in the market in the last couple of years means you have to be prepared. In might be worth playing more conservatively to take some upside potential off the table and make sure you are not going to be blown out if the market goes lower.
Interested in learning more about the lumber markets? Read our lumber market outlook by senior economist, Dustin Jalbert or take a look at our prices and market analysis on our timber and lumber page. Speak to our team to explore how our wood products prices, news and forecasts can help your business.
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