Un-Inflation: The Lumber Industry Defies an Old Saw

Photo by Karolina Grabowska from Pexels

KNOCK ON WOOD: IS INFlATion CAUSED BY storytelling, not Rising COSTS?

Inflation, it appears, is no longer a Thor’s hammer of the economic magnitude capable of imploding Germany, circa 1914 or 2nd-century Rome, for that matter. In today’s oddly reordering new economy, the effects of rising prices – even those that rise by hundreds of a percent – are in the eye of the beholder. 

Certainly today’s stakeholders in currency valuation are standing pat on a benign post-pandemic inflation story. Federal Reserve chairman Jay Powell spent more time talking with the Economic Club of Washington about his personal bike riding regime than the nuances of rising prices. 

“The Fed, for quite some time, has tried to get through inflation but has not been able to get 2% inflation in the economy,” said Powell. “I worked in government many years ago when we had double digital inflation. We won’t get that again.”

Fed Chairman Jay Powell was as concerned about personal bike riding habits than the possibility of hyper-inflation.

The president of the Boston Fed, Eric Rosengren, echoed Mr. Powell’s take on rising prices. He predicted price increases would be targeted and short-lived. Bank of Canada governor Tiff Macklem concurred with the U.S. Fed: Macklem told Canada’s House of Commons it should ignore consumer price increases of more than 3%. And U.S. Treasury Secretary Janet Yellen kept up a similar anti-inflationary rhetoric. She was “unconcerned” about rising prices, even though comments she made that day caused a brief – but steep – market sell-off. 

Banks, too, have been assuming the price of money, by and large, will stay cheap. Thirty-year fixed mortgages; Federal Funds rates; short-, medium-, and long-term LIBOR; and U.S. Treasury rates are staying as low as they’ve been for decades. 

Market participants seem similarly unconcerned about stubborn, long-term price increases. Supply chain managers in affected industries, like construction and industrial systems, are shrugging off things like a 200% increase in the price of lumber. Such price spikes are seen as irrational pandemic-inpsired panics, like shortages in toilet paper and ketchup. Steep lumber price increases are supposedly all about logistical frictions in the supply chain. Timber mills were shuttered across the U.S. in mid-2020 as fear of pandemic limit crew access to forests and distribution and availability of lumber was impacted by Covid-19. Changes in demand like increased housing starts further exacerbated supply chain frictions. Even an outbreak of Canadian pine beetles was seen as a cause of higher prices of Canadian timbers. 

Lumber prices may have tripled but, long term, market participants expect prices to return to normal.

Lumber managers point to this single hard fact of history: No matter the market conditions, over the past decades, the price of lumber has remained stubbornly fixed at about $350 per thousand board feet. Timber yields are said to be such a well-understood discipline that supply is quantifiable decades in advance. Such lumber yield prediction models are also under constant public review, in forums like the Western Forestry and Conservation Association. 

“I sit in those meetings where we argue about the availability of lumber,” said one construction project manager working in coastal northern california. “There is no way prices get to $1,600 per thousand board feet level they are now, on anything close to the fundamentals of supply. Prices have to come back down.”

Economists also point out that the lumber industry has been a miserable, race-to-the-bottom business for so many years, that it knows little else but razor-thin margins achieved through just-in-time logistics. They argue it will simply take time for the industry to reinvent itself as a higher-margin, more service-oriented sector.

“All told, we forecast that the price of U.S. lumber will plummet to $600 and $550 per 1,000 broad feet by end 2021 and end 2022, respectively, as domestic supply surges and imports remain strong,” said Capital Economics Ltd, commodities analyst Samual Burman.

However, an unlikely challenge with assuming rising prices are based mostly on supply issues. Dozens of direct interviews with on the ground members of the lumber supply are saying that the skyrocketing price of lumber does not appear to be under the sway of the invisible hand of supply-and-demand. 

Particularly when studying the large rectangular sheets of engineered lumber called plywood, there appears to be no logical reason why lumber prices should double as they have. 

When Inflated Prices Don’t Equal Inflation

Why plywood is illogically expensive starts with understanding the logic of plywood itself. There’s nothing new or complex about making structurally-sound sheets of glued together plys of wood. There’s reliable archeological evidence that furniture, tomb cases, and tables were constructed of such glued wooden veneers in ancient Egypt. Plywood played a roll in Czarist Russia. Painted plywood panels appeared in 1880’s New York. In fact, a fellow named John Mayo was awarded a patent for the technology. Plywood found uses in both world wars. It led the U.S. building boom in the 1960’s. And in the modern era, plywood is found across the supply chain in boats, homes and buildings. Output wobbles around in line with overall U.S. timber production. 

Plywood’s popularity makes sense because it is one of the simplest engineered lumbers to make. Veneers are simply peeled from suitably prepped logs. Thicker, low-grade slices are aimed at the plywood’s core. Thinner, high-grade slices wind up on the panel’s face. These newly peeled veneers are then baked in large ovens to remove moisture. But if the veneers are dry to start, ovens are not needed. Glue is then evenly spread on the dried veneers. The veneers are stacked, or “layed up.” The whole sandwich is then either cold- or warm-pressed. Filler may be added. Calibration and sanding may be required. But essentially, the dry, smooth, and firm sheets are then mostly cut into 4’ x 8’ sheets for consumers and 4’ x 10’ sheets for commercial construction. 

Plywood is among the simplest and most flexible engineered lumbers to produce

Since essentially all of plywood’ production processes can be automated, output can be dazzling. Even a medium-sized maker, like Columbia Forest Products, can produce 50,000 panels a day in its 7 plywood facilities across North America. Assuming a 4 x 8 sheet, that’s 18,250,000 panels, or 584 million square feet per year. Assuming there are 300 panels required to make a 2,500 square-foot home, and that’s the upper limit, most homes need far less, Columbia Forest by itself can annually make enough plywood for about 1,967,000 homes. 

That’s roughly equal to what the Census Department says is the number of all U.S, housing starts for March of 2021. 

Columbia Forest Products has just a fraction of the production capacity compared to truly giant lumber firms like Boise Cascade (BCC), Universal Forest Products (UFPI), or Weyerheauser (WY). Also, Columbia is just one of thousands of smaller custom veneer makers that service an endless stream of niche market. 

Such targeted plywood makers thrive in communities from British Columbia to Indiana and Florida.

Plywood is so simple to produce, it’s a popular material for do-it-yourselfers. Pretty much anybody with some saw horses and clamps can make a perfectly sound sheet of AA plywood. The veneer layers can come from hardwoods or soft. Scrap lumber milled down to size can work. Fancy glues are nice. But cheap white wood glue works perfectly well. Simply find the veneers, stack them, glue them and clamp them. A few hours later, a sheet of plywood is ready for use, that costs 1/3 that of a commercially-sourced product.

The supply chain for plywood is so varied, flexible, and deep that even in a pandemic era, there are few niches that the North American production capacity could not serve. We contacted mill operators for giant paper companies that said there was plenty of excess capacity. Shifts could have been added. Production could have been ramped up. 

When we spoke with medium-sized milling and lumber firms, like N.C. Hunt Lumber in Maine, they talked openly about selling discount manufactured lumber products. We spoke with lumber crews saying there was plenty of access to timber stands in the past 6 months. There was no shortage of transport for logs. Fuel has sold at a discount for the past year. Distribution costs are somewhere near 10-year lows. 

Interviews indicate there are few practical shortages in the plywood supply chain.

Over and over, throughout the plywood supply chain there alternative, lower cost, faster-to-market options for upping output. It appeared all the operational muscle, bones and systems were in place so the invisible forces of the free market could react to the rising prices of lumber. But somehow, similar to the centrally managed Soviet Union Economy of the 1970s, the price of lumber was simply not reacting. 

A sheet of 4’ x 8’ plywood was twice as expensive this year from last, for no other reason than people were willing to pay for it. 

Uninflationary High Prices

Disconnects between what market players say about prices and what those who regulate, manage, and profit from the prices in that market is nothing new. Back in the 1980s, when the Reagan-era, Milton Friedman-inspired free market concepts were given free rein over the American economy, traditional money supply models were scrapped. Mundane monetary measures like the M1 or M2 dropped from vogue. The Fed, U.S. banks, and market participants entered into narrative agonies over inflation. Think tanks like the Brookings Institute struggled over the wage and price equations. Backbone concepts like the Phillips curves that connect inflation and unemployment were reinvented and eventually discarded. 

There appears to be a similar narrative reinvention in today’s inflation story. Tricky economic concepts, like Modern Monetary Theory and the power of the U.S. dollar as a global denominated currency, question the effects of governments printing money and borrowing vast sums. There is Covidonomics that made once unthinkable direct subsidies common. There’s the rise of cryptocurrencies that allow for money to inflate itself, in real time. 

All these new ideas challenge the basic assumptions underpinning rising prices. And if the lumber sector is any indication, it doesn’t seem to matter how much if prices actually rise. What matters is what major actors, like the Fed, the banks, and large market participants, believe in the story those rising prices tell. 

True hyperinflation won’t happen until the stakeholder storytellers in the value of money says it’s happening.

As long as these stakeholders in the value of money tell a “low inflation” story, that’s exactly where inflation will remain. And rationalizing skyrocketing prices of products like lumber, with half-baked supply shortage stories is a dangerous oversimplification. 

It is much more productive to openly accept that lumber prices are high because they are. Those higher prices will only translate into recognizable “inflation” when the actors in this monetary melodrama – Jay Powell, Janet Yellen, and Tiff Macklem – stand up and clear their throats and tell markets inflation is happening. 

Until then, the smart money seems to be relaxing and enjoying the eerie feeling of translating American stories about hyperinflation from German news sources, all the while realizing that skyrocketing prices mean as much as any other meme floating around the Web right now.