The Hidden Costs Behind Falling Lumber Prices

by | Jul 3, 2024

Earlier this week, I delved into the rising shipping costs and their potential to kick off another round of inflation.

We looked at the issues in the Panama and Suez Canals and how these are affecting the prices of goods and services. Today, I want to expand on this by discussing another critical area impacted by these rising costs: the lumber market.

Impact on the Lumber Market and Housing Sector

While shipping costs are a big concern, other areas of the economy are feeling the strain, too.

One area is the lumber market. Lumber prices have been falling since March of last year and are now below pre-pandemic levels.

But, the cost of labor and trucking has significantly increased. Many lumber mills are losing money at today’s prices — and if this trend continues, we could see mill shutdowns or large layoffs of skilled workers.

Usually, this time of year sees an increase in lumber prices due to high demand from home builders.

A strong labor market and a shortage of homes have kept builders active, but higher interest rates are now taking a toll on the housing market. 

Last year, there was an 18.7% decline in home sales from 2022, and recent months have seen a further decline, with median home prices falling by 4% so far.

So there’s no end in sight for the troubles lumber mills are seeing right now.

Connecting the Dots: Rising Costs Across the Board

The increasing cost of transportation is not just limited to ocean freight. The price of labor and trucking within the US have also gone up. This trend impacts various sectors, with lumber being a prime example. When mills face higher transportation costs, they pass these costs onto consumers, further driving inflation.

Understanding these dynamics is crucial. The interconnected nature of our economy means that rising costs in one area, like shipping, can ripple out and affect other markets.

As traders and investors, staying informed about these developments can help us make better decisions and anticipate market movements.

As an example, take a look at these charts. Boise Cascade (BCC), a lumber mill on the left, and lumber futures on the right.

Both are down over 30% from their peaks just a few months ago.

The key thing right now is to keep a close watch on how these rising costs impact various sectors, because one of the big things markets are watching for is when the Fed plans to cut rates.

And the only way that’s going to happen is if the Fed believes it’s tamed inflation.

Despite some recent positive data, Powell has said he’s still waiting for more reports like those to keep adding up before deciding to issue a rate cut.

— Geof Smith

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