Lumber futures have declined 33% since May 7, which likely reflects a mix of falling demand as contractors—shaken by the 372% surge in lumber prices during the past two years—back off potential projects and the slow but steady return of supply.
Lumber is one of the key input prices to watch amid the intensifying debate over inflation.
In our estimation, this is one of the key input prices to watch amid the intensifying debate over whether the recent overall increase in prices is transitory or if that increase will turn into higher inflation.
While we are in the transitory camp, there is no denying that the cluster of the economy that uses raw materials at earlier stages of production is dealing with higher prices, which are being passed along to consumers. That increase is one of the root causes of the recent decline in lumber futures.
Futures provide a method for firms and investors to hedge against risks to the market like droughts or supply disruptions, and to protect themselves against price volatility. Although futures are excellent predictors of near-term pricing, they are not as accurate over the medium to long term. Over that longer time frame, they can be affected by policy shifts like a decision to impose, or roll back, tariffs.
In fact, future prices of lumber will most likely be affected this year by trade negotiations between the United States and Canada. Tariffs on Canadian softwood lumber stand at 9%. Should those tariffs be reduced to zero, then one should anticipate a further decline in lumber prices.
From our vantage point, keeping a tax, or increasing a tax, on a commodity that is currently in short supply does not make sense for either producers or consumers. Given the fact that demand for housing currently outstrips supply, rolling those tariffs back to zero is in the interest of the economy as it moves into the post-pandemic era.
For more information on how the coronavirus pandemic is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.