Lumber Prices Crash Below Break-Even as Mills Face Impossible Choice

Lumber trader Stinson Dean explains how prices have fallen so far below production costs that mills are bleeding cash while hoarding workers in a race to outlast competitors.

Key Takeaways

• Lumber prices trading well below break-even costs for both British Columbia and Southern yellow pine producers for over six months
• Mills reluctant to curtail production due to fear of losing skilled workforce to competitors like Amazon
• Super contango in futures markets paying traders premium rates to store lumber rather than sell immediately
• Repair and remodel demand represents largest lumber consumption category, surpassing single-family construction
• Pandemic created massive pull-forward demand that exhausted five years of typical renovation projects in just 24 months
• New sawmill capacity from 2018-2019 investments coming online just as demand weakens significantly
• Strategic lumber storage becoming profitable investment strategy in current market conditions
• Labor market dynamics shifting from worker shortage to employer advantage across multiple industries

Timeline Overview

• 00:00–05:42 — Opening Banter and Injury Story: Casual conversation about Tracy's face injury from lumber-related accident, setting up lumber market discussion themes
• 05:42–12:18 — Price Crash Analysis: Discussion of lumber prices falling below British Columbia break-even levels, challenging traditional trading philosophy about price floors
• 12:18–18:35 — Supply Response Challenges: Mills implementing curtailments rather than closures due to workforce retention fears, creating oversupply despite losses
• 18:35–25:16 — Futures Market Dynamics: Explanation of super contango conditions where markets pay premiums for storage, incentivizing inventory hoarding over immediate sales
• 25:16–32:47 — Economic Indicator Discussion: Lumber prices as traditional harbinger of economic activity, with current weakness suggesting broader growth concerns
• 32:47–39:58 — Demand Categories Analysis: Repair and remodel representing largest lumber demand segment, followed by single-family construction and minimal multifamily impact
• 39:58–46:23 — Pandemic Effects and Pull-Forward Demand: How 2020-2021 renovation boom compressed five years of typical projects into 24 months, creating current demand vacuum
• 46:23–52:14 — Housing Market Structural Issues: Connection between aging US housing stock and ongoing maintenance demands, plus new mill capacity coming online
• 52:14–58:37 — Mill Survival Strategies: Comparison of newer state-of-the-art facilities versus older operations, with location and efficiency determining competitive advantages
• 58:37–65:28 — Industry Consolidation Discussion: Storage-focused business model advantages over production, with inventory management as key differentiator in volatile markets
• 65:28–71:15 — Inventory Management Evolution: Industry attempts to build buffers during price peaks, followed by return to just-in-time models due to interest rate costs
• 71:15–76:33 — Broader Economic Conditions: Observations about hiring market shifting from worker shortage to employer advantage across multiple business sectors

Breaking the Break-Even Floor

The lumber market has shattered fundamental assumptions about price floors that traders have relied on for decades, creating unprecedented conditions where production continues despite sustained losses.

• British Columbia 2x4 producers traditionally served as the industry's pricing benchmark, with markets rarely trading below their break-even costs for extended periods. Current prices have remained "well below that" break-even level for "six plus months probably," challenging core trading philosophy.
• Southern yellow pine break-even costs typically provided a secondary floor when BC lumber lost its pricing leadership, but prices have fallen "below even the southern yellow pine the cheap species break even" creating market conditions nobody anticipated.
• The pandemic disrupted traditional species preferences as customers "switched species to cheaper more available species from the US South" when supply chain problems made BC lumber unavailable, potentially breaking the historical pricing relationship permanently.
• Mills face impossible choice between curtailing production to match demand or continuing operations at losses to retain skilled workers who might "go work for Amazon" if laid off, with workforce replacement representing existential threat.
• Accumulating curtailments across the industry happen "onesie twosies" rather than dramatic announcements, making the supply response less visible to markets despite reaching "over a billion board feet in British Columbia" in reduced capacity.
• The sustainability of below-break-even pricing remains "kind of a mystery" with traditional economic logic suggesting this represents temporary dislocation rather than new equilibrium, but duration has exceeded all expectations.

Labor Hoarding and Supply Rigidity

The post-pandemic labor market has created perverse incentives where lumber mills continue unprofitable operations rather than risk losing workforce investments built over several difficult years.

• US South lumber producers face acute workforce retention pressures where reducing shifts means workers "are going to go work for Amazon" or other competing employers offering immediate employment without industry-specific skills requirements.
• Significant capital investments in new mill capacity throughout 2018-2019 created debt service obligations that force continued operations regardless of current profitability, with "debt to service" and "cash flow motivations to just run who cares what the break even is."
• Labor hoarding represents broader economic phenomenon where companies prioritize workforce retention over short-term profit optimization, creating disinflationary pressure in commodity markets while maintaining employment levels above natural market clearing.
• Canadian companies own "over 50% of the US South production" and delayed expansion projects during pandemic are now coming online precisely when demand has weakened, adding supply at worst possible timing.
• The "race to the bottom" dynamic emerges when multiple producers face same constraints, with survival depending on balance sheet strength rather than operational efficiency, creating extended periods of industry-wide losses.
• Geographic advantages of newer mills include strategic placement "closer to a fiber supply for trees and logs" plus "state-of-the-art less manpower higher yields out of logs" while older facilities face increasing transportation costs as nearby timber resources become depleted.

Strategic Storage and Market Structure

Extreme contango conditions in lumber futures create unprecedented opportunities for traders with storage capacity while revealing structural problems in traditional just-in-time inventory management.

• Super contango markets pay storage operators "above and beyond what it actually costs to store for 60 days" between contract months, with premiums exceeding normal interest, insurance, and storage costs by substantial margins.
• Physical lumber trading requires "indoor storage specifically you have to be able to keep lumber out of the weather and dry" making storage capacity a scarce resource that commands premium returns during market dislocations.
• Deacon Lumber's investment in storage infrastructure during "the windfall of COVID volatility" positioned the company to "take advantage of these carries in the market" by buying physical rail cars and warehousing inventory with futures hedges.
• Traditional lumber yards operate "lean just in time inventory models" that work efficiently during normal conditions but create vulnerability during supply disruptions, opening opportunities for intermediaries with storage capabilities.
• The futures market structure rewards patient capital as "the Futures they don't have to be right until you get into expiration" allowing sophisticated traders to profit from temporary supply-demand imbalances.
• Public companies face constraints in executing storage strategies due to investor pressure for efficient capital deployment, while private operators can "execute on these fairly sophisticated storage strategies and not really have to explain" temporary margin calls and carrying costs.

Demand Composition and Pandemic Distortions

Understanding lumber demand requires recognizing that home renovation represents the largest market segment, creating different dynamics from new construction cycles that typically receive more attention.

• Repair and remodel activity constitutes the largest lumber demand category, followed by single-family construction, with multifamily representing "less than 10%" of total consumption, making residential renovation health crucial for market dynamics.
• The pandemic created massive "pull forward demand of repair and remodel" where "projects that would have been spread out over five years got crunched into 24 months" leaving current markets dealing with demand exhaustion.
• Big box retailers including "Home Depot Lowe's Menard's" depend heavily on repair and remodel traffic which represents "50% of lumber that's produced" going through their channels, making this segment critical for overall market health.
• Current repair and remodel activity remains "flat to down and dead in the water" according to industry observers, creating sustained weakness in the largest demand segment that cannot be offset by other categories.
• The structural aging of US housing stock creates ongoing maintenance demands as "houses have to be repaired they're like any other asset" with deterioration beginning immediately after purchase, providing long-term demand foundation.
• Single-family construction weakness compounds repair and remodel problems, with mortgage rates above 8% significantly reducing new home activity that typically generates follow-on renovation projects in subsequent years.

Supply Chain Efficiency Paradox

The lumber industry has achieved unprecedented supply chain efficiency precisely when demand has weakened, creating oversupply conditions that traditional economic models struggle to explain.

• Post-pandemic supply chain improvements mean "lumber getting produced as much as you could ever want everyone has it there's no fear of a shortage" with rail transportation achieving "record time record speeds" from British Columbia to southeastern markets.
• End users including lumber yards can operate "lean just in time inventory model again" without fear of stockouts, reducing overall system inventory while mills continue producing at capacity to maintain workforce.
• The efficiency gains represent permanent improvement over pandemic-era disruptions when positive COVID tests required workers to "sit down stay away from work" and supply chains experienced frequent disruptions.
• "Very efficient supply lines now" contrast sharply with early pandemic conditions when "covid supply chain shutdowns" created artificial scarcity that drove historic price increases, showing how quickly industrial systems can adapt.
• Industry participants describe supply chains as "too fixed" meaning the pendulum has swung from shortage conditions to oversupply faster than demand adjustment mechanisms can respond effectively.
• Traditional inventory buffers remain minimal despite recent volatility because "the cost to do so is expensive with where interest rates are" making companies "very uncomfortable with having low inventory turns" even after experiencing shortage risks.

Economic Signaling and Broader Implications

Lumber price weakness serves as important economic indicator while broader labor market conditions suggest significant shifts in post-pandemic employment dynamics across multiple industries.

• Lumber markets gained prominence as economic indicators after becoming "the first thing to hit headlines and set new all-time highs back in 2020" making current weakness particularly notable for macroeconomic analysis.
• Housing market resilience despite 8% mortgage rates demonstrates "structural housing shortage" that prevents traditional price crashes, with home values maintaining stability despite financing cost increases creating affordability challenges.
• Employment dynamics across multiple industries show dramatic reversal from worker shortage to employer advantage, with hiring processes returning to pre-pandemic conditions where "the employee really needed the job."
• Service businesses unrelated to lumber report ability to "hire whenever we want and frankly let go of folks without fear of being able to replace them" suggesting broad-based labor market normalization.
• Professional job candidates now provide "more professional follow-ups" and actively compete for positions rather than employers "vying for them" indicating fundamental shift in negotiating power between workers and management.
• While specific industries like lumber show material weakness, broader economic activity appears stable with service sector businesses maintaining consistent demand levels despite easier hiring conditions.

Common Questions and Answers

Q: Why don't lumber mills just shut down if they're losing money below break-even costs?

A: Mills face a workforce retention crisis where shutting down means losing skilled workers to competitors like Amazon. The cost of rebuilding a trained workforce often exceeds short-term losses, especially for newer mills with debt service obligations.

Q: How can lumber prices predict economic activity if they're affected by pandemic distortions?

A: Lumber remains a leading economic indicator, but current weakness reflects both pull-forward demand exhaustion from 2020-2021 renovation boom and genuine economic slowing. The repair and remodel sector weakness particularly signals consumer spending constraints.

Q: Is the super contango in lumber futures sustainable or does it signal market dysfunction?

A: Extreme contango reflects genuine storage economics where physical shortage of warehouse capacity meets oversupply conditions. Markets pay premiums for storage because immediate demand is weak while future demand should recover as supply adjusts.

Q: Could lumber shortages return quickly if mills close permanently rather than just curtailing?

A: Yes, the industry's boom-bust cycles often feature violent supply responses. Current gradual curtailments could accelerate into permanent closures, creating future shortages when demand recovers, especially given workforce replacement challenges.

Q: How does the housing shortage reconcile with weak lumber demand?

A: The housing shortage reflects zoning and permitting constraints rather than construction material availability. High mortgage rates prevent new construction while existing home sales remain limited, reducing both new building and move-related renovation activity.

Q: What makes storage-focused lumber trading more profitable than mill ownership?

A: Storage operators can time market entry and exit while mills face continuous operational pressures. During oversupply periods, storage businesses profit from contango carries while mills lose money on every board foot produced.

Conclusion

The lumber market's current crisis illustrates how post-pandemic economic adjustments create complex interactions between supply chain efficiency, workforce retention, and demand timing that challenge traditional market mechanisms. Stinson Dean's storage-focused strategy represents sophisticated adaptation to these new realities, while broader mill industry faces existential questions about operational sustainability in structurally changed markets.