An examination of current lumber prices if paid in the current price of other commodities, IE: WTI Brent, Copper, and even Bitcoin. Comparison of current WTI Brent price if paid in Bitcoin.
Much has been made of the recent sharp increase in the price of lumber, with a whole crop of suddenly new commenters saying this is “price gouging”. Where were these people for the past ten years when lumber was undervalued?
The normal workings of construction framing wood products and building materials through the supply chain, are that: retailers hedge. So while wholesaler lumber prices go up and down by — for example — $150 throughout the year due to normal seasonal factors (home building and buying season vs winter), the prices of wood on the shelf of a hardware store remain essentially the same.
But one year ago, as a result of a combination of factors deeply explained by Madison’s over the past year, wholesaler prices shot up so drastically and so quickly that retail suppliers could not hedge and simply had to pass that cost on to customers.
It is important to understand that the largest volume of wood construction materials sold across North America goes into US home building. It is the demand of large-volume home builders in the US which sets the price of lumber products. Retailers can only adjust their books according to levels the sawmills are selling to home builders.
— Madison’s lumber reporter
By way of background: lumber is sold in USD per mfbm (thousand board feet) (a lumber truck can fit between 2 – 4 mfbm per load).
The below graph shows the price of lumber futures converted to Canadian dollar, and the price of the lumber Composite (USD):
For the purposes of this economics exercise … the graph below shows the price of 1,000 Barrels of Crude oil paid in 1 Bitcoin (Right Hand Axis):
Now the price of lumber futures (USD / mfbm) if paid in Bitcoin:
Ah, interesting …. let’s look at the price of lumber if paid in barrels of WTI:
The below graph is the same; the price of lumber if paid in barrels of WTI, just for a longer time frame:
Comparing the price of fuel NOW to the price of lumber NOW, lumber looks expensive (because fuel is cheap, as less people are driving to work). But comparing the price of lumber NOW to the price of fuel 2010 to 2015, lumber price now is normal.
Lumber prices just look super-high now, in comparison to crazy lows from 2007 to 2015.
— Madison’s lumber reporter
Very interesting. As explained, the largest volume of lumber is used for home building, specifically single-family building. Another material used in construction, especially infrastructure and industrial building, is copper.
The graph below shows the price of lumber if paid in pounds of copper:
The above graph shows that in 3Q 2020: lumber was cheap while the price of copper was high.
So, great … the above is showing buying power of different commodities for lumber, which is important for business and industry.
Let’s look closer at something which affects people. IE: food
The below graph shows the price of lumber if paid in corn:
The green line is simply Corn (food) price divided by Lumber Price with no conversion and no economic formulation. The blue shaded backdrop is lumber futures prices.
The graph below is the same except the yellow shaded backdrop is the price of corn:
So to the suggestion that these current lumber prices are “gouging” … is it? Comparing the price of lumber (a non-necessity) to the price of food (essential), they are both up.
Just because people are accustomed to a certain price level over a long period of time, doesn’t mean a correction to norm is “gouging”. Even if it appears that way because a massive correction happened very quickly.
Next week US housing starts and PERMITS for April will be out …. here is some very interesting data to think about until my next update: the pink states (high outbound migration) have high taxation rates and high house prices, the green states (high inbound migration) have low house prices and lower taxation rates.
THANKS to my buddy Anup at https://www.soleraadvisors.com for the detailed conversations and the images on this page!