July 9, 2021

American Timber Farms and Timber Industry Bottlenecks: Where Is the Money Going?

While lumber prices have increased dramatically over the past year, America’s forest landowners are not seeing those profits.

Lumber prices have increased significantly from pre-pandemic prices. While many producers predicted a decrease in demand for lumber due the initial decline in the housing market, the opposite occurred. Instead, the pandemic fueled a spike in demand for lumber, as consumers rushed to purchase it. Stay-at-home orders led consumers to focus on home renovations and building news homes, leading to a significant increase in demand for lumber.

377 percent – The percent increase of lumber prices over the past year.
Four times higher – How much higher the price of framing lumber was in May 2021 compared to the beginning of 2020.
$1,670.50 per thousand board feet– The peak dollar amount that lumber prices rose to on May 7, 2021.
$1,000 per thousand board feet – The price of lumber in June 2021 in comparison to just $400 to $475 at the start of 2020.
$721 per thousand board feet – The amount that lumber prices dropped to as of June 30, 2021. However, this is still drastically higher than the $435 that they were a year ago.

Pandemic-Induced Buying, Low Mortgage Rates, and More

Largely a result of the pandemic and historically low interest rates, the demand for lumber has dramatically increased in 2020 and 2021.

There was a notable spike in lumber purchases for home renovations as consumers were spending more time at home during the pandemic.
Low mortgage rates encouraged more consumers to build new homes.
A combination of government subsidy payments and increased savings left consumers with more financial capital to spend on renovations and new homes.
Market speculation fueled uncertainty in the availability of lumber and caused consumers to hoard lumber and “panic buy.”

In addition to an increase in demand for lumber, sawmill shutdowns caused by COVID-19 were a leading contributor to creating bottlenecks in lumber supply as sawmills struggled to keep up with this surge in demand once they were able to reopen. Similar to challenges in other parts of agricultural sectors, labor shortages in the timber industry have also contributed to constricted supply. The combination of shuttered sawmills and labor shortages created the perfect storm.

The Plight of the American Forest Landowner

While sawmill owners are profiting from these dramatic increases in the price of lumber, the tree growers who provide these resources are not. According to the Wall Street Journal, prices for the logs that timber is derived from are at the lowest they have been in fifty years, factoring in inflation. On the other hand, sawmill stocks have been some of the highest performing stocks on the market, with profits and share prices significantly increasing.

“Everything is going up except the price of timber.”
– Joe Hopkins, Georgia Timber Grower

This disparity between sawmill owners and forest landowners evokes much speculation about why this is occurring.

What Is Causing this Disparity?

With such a dynamic and evolving issue as this one, it can be challenging to accurately identify the root cause. The combined impact of several factors is the most likely explanation.

Sawmill Concentration

One explanation for the increase in lumber prices is the concentration of sawmills. Because timber processing is capital intensive—the economies of scale mean that sawmills must process large quantities of timber in order to operate with efficient production. As a result, there are usually only a few, large sawmills in a given area. This points towards the increasing control that few sawmills have in the market. Similarly, the cattle industry is also experiencing the effects of market consolidation with few meatpacking plants controlling the market. As a result, there is a sharp disparity in the price that cattle ranchers receive and the price that the meatpackers receive.

In order to avoid tariffs, many Canadian sawmills are relocating to the Southern region of the U.S. In addition to avoiding tariffs, the supply of timber in Canada is threatened by forest fires and pests. In fact, about one-third of sawmills in the South are owned by only three Canadian firms.

Varying Market Drivers

The disparity between log and lumber prices is also influenced by the different market forces driving them. The available supply of standing timber and the demand from sawmills affect the price of logs that tree growers receive. On the other hand, the housing market and lumber inventory affect the lumber prices that sawmills receive for their lumber. As a result, these differing forces lead to differing outcomes.

Imbalance of Supply and Demand

Another reason for this disparity is that there is an imbalance between supply and demand. This is because there is an overabundance of supply of standing timber. In other words, there is simply more timber than the sawmills can use. As a result, sawmills can set the price for the logs they purchase from tree growers.

A Challenge to the Longevity of American Timber Farms

A challenge that timberland owners often face when entering the timber industry is the long turnaround time on tree productivity. According to The Wall Street Journal, only four percent of timberland per year yields income because it takes 25 years for the pines to be usable to make lumber. However, landowners are still required to pay annual taxes on each acre. As explained by Georgia tree grower Joe Hopkins in an interview with The Wall Street Journal, “It is like managing a store where he can sell only merchandise from a few shelves.”

The time-consuming nature of tree farming coupled with the growing gap between the price received by sawmills and tree growers have placed a tremendous amount of financial strain on American tree growers. Reducing this gap is of paramount importance to the financial health of our nation’s tree growers and their families.

AgAmerica Supports the American Forest Landowner

Despite the current challenges in the timber industry, timberland is a lucrative long-term investment that yields both financial and ecological benefits. Forestry is the single largest terrestrial carbon sink in the U.S. In fact, U.S. forests offset 15 percent of total U.S. fossil fuel emissions.

The financial benefits of investing in timberland also make it an attractive investment. Investing in timberland is a strong long-term investment because the initial capital that it takes to purchase eventually leads to profit over time as the land appreciates. Over the past few decades, the long-term trends of timberland values have remained positive. As a result, they are not easily affected by inflation. AgAmerica’s flexible financing can help you begin and build on your journey of timberland investment.

An East Coast Rural Landowner Uses Loan to Purchase Timber Rights

Financial assistance can empower tree growers to run a thriving operation. On the East Coast, a family who operated a rural land management company was looking to reacquire timber rights for existing property. With a $10MM revolving line of credit loan, AgAmerica was able to help this family reacquire the timber rights and finance operational costs essential to the longevity of their operation.

To learn more about how AgAmerica partnered with these timberland owners to build a thriving operation, explore the full story.