#Commodities Corner: Why now might be the best time to buy lumber

“Remaining on the fence as to whether or not to start your coming project may likely result in missing the best opportunity to buy lumber in all of 2021,” he said.

On Thursday, lumber futures
LBU21,
-4.96%

LB00,
-4.96%
settled at $574.90 per 1,000 board feet— their lowest so far this year—and they trade more than 30% lower year to date, according to Dow Jones Market Data. The move down in lumber prices follows a 115% price rally in 2020.

Michael Gayed, portfolio manager of the ATAC US Rotation exchange-traded fund
RORO,
-0.43%,
which uses lumber and gold prices to help gauge volatility in equities, believes prices may still be headed for more declines, however.

The “vertical” move in lumber prices that ended in May of this year was “not justified fundamentally,” he said. “The surge made no sense because it’s not like housing and construction suddenly went ballistic in a matter of eight weeks.”

The decline in prices the market has seen more recently may be a sort of “undoing” of that unjustified advance, and a “function of mean reversion” taking place in the commodity, said Gayed, pointing out that mean reversion centers around the idea that asset prices historically revert to their long-term average.

For mean reversion to occur, lumber would have to revert to its historical average and likely go below it, he said, so prices may drop another 20% to 30%, given lumber’s typical historic price range.

The market has seen an increase in production more recently. North America added 1.4 billion board feet of sawmill capacity in the past 12 months, with another 1.6 billion board feet of capacity coming online in the second half of 2021, according to a report from Forisk Consulting published in June.

Over the past few months, there’s been an increased amount of lumber capacity coming online and sawmill workers returning to work, which has “substantially boosted supply,” said Joe Sanderson, managing director and chief executive officer of natural resources at Domain Timber Advisors.

Still, Sanderson expects lumber prices to return to “more normal levels and becoming in line with housing starts data,” with $550 to $650 a “market equilibrium price” given current building permit data. That assumes no major supply chain disturbances from further Covid-related challenges or natural disasters, such as catastrophic hurricanes or wildfires, he said.

Meanwhile, drought conditions are likely to “adversely impact lumber,” said Sanderson. Dry conditions have increased the fire danger in many areas of the West Coast and with “casualty loss and harvest restrictions, we expect a slowdown in timber production and subsequent increase in lumber prices.”

Looking ahead, Sherwood Lumber’s London said it’s possible, but also unlikely that lumber prices will reach a fresh record this year. Lumber futures saw a record high settlement at $1,670.50 on May 7.

Even so, London expects to see a “rise in lumber prices again very soon, with a gradual slow down during the winter months when construction slows more in many regions of the country.” For 2022, he expects volatility to be the theme for lumber.