Lumber prices on the rise, but for how long?

Myles Udland, Brian Sozzi, and Julie Hyman speak with John Duncanson, executive VP of Corton Capital Inc. and analyst on the Corton Global Timber Fund, about the rising costs of lumber due to the shortage in supply and high demand across the nation.

Video transcript

MYLES UDLAND: All right, welcome back to "Yahoo Finance Live" on this Monday morning. We see all three majors under a little bit of pressure here. But the big story that's been happening in the background of this stock market action has been what's happened in the lumber market.

We see lumber prices down a bit now. But futures still trading at about $1,300. Our next guest sees a floor of $1,000 going forward. John Duncanson is the executive VP at Korten Capital and a timber analyst on the Cortent Global Timber Fund. John, thanks for jumping on this morning.

Let's just start with-- maybe if you could kind of level-set, as the consultants say, for us. What has happened in the lumber market this year? How did we get to the point we are today where you could pick someone off the street, and they might be able to tell you that lumber prices are high, given the kind of height that's come into this trade?

JOHN DUNCANSON: Well, good morning. Good questions.

There are a number of reasons, I guess you could say, for the big jump in lumber prices. I'd like to point out that the number one reason is supply-driven. There was a lot of supply taken out of the North American lumber industry over the past three or four years. And that is actually now right upon us and catching up.

And then you've got, obviously, the demand side. And it was spurred on by the shutdowns with COVID and people staying at home, taking a look at their backyards, and deciding, OK, we're going to be in the house for a couple of months. Might as well do some work around the house, fix it up.

But basically, there was an interesting article that came out the other day that actually said that this demand for more people working from home was starting to appear about three years ago. A lot of people were being priced out of the big city. They couldn't afford to live in the cities.

And they wanted to get away from the long commutes. And so, as they put it, the genie has been left out of the bottle. And so what we're seeing now is, during the height of the first wave of the pandemic last year at this time, we saw about 60% of people that usually worked downtown in big cities were forced out of their homes.

Traditionally, it's been running around 5% was the number of people that were working out of the house. This analyst actually puts it settling out at about 25% to 30%. So that has probably been the biggest single reason why we've seen the jump up in lumber prices coupled with the supply is that we're going into some brand new fundamentals here we haven't seen before.

JULIE HYMAN: John, it's Julie here. We've been talking about the supply-demand equation for a lot of different goods recently. And things like chips, for example, semiconductors, you can envision why it takes so long to build a new factory because there's a level of complexity. But I was surprised to read there's actually a pretty high level of complexity to build something like a sawmill as well because a lot of those mechanisms are now automated, for example.

So what do you think is going to happen with building out new supply, new sawmills? And how much is that going to continue to affect the pricing also?

JOHN DUNCANSON: You're right. It does take a long time to build a new sawmill. You just can't flick a switch, and you have more capacity. It takes anywhere up to two years to build a high-tech sawmill. And nobody is going to build a low-tech sawmill.

The other thing that's happened too is that, during the very weak lumber markets we've seen for the last 20-odd years, the number of engineering firms that can physically build a new sawmill are down. There are only two left, really, in the world-- or two left in North America, at least.

And I can tell you, everybody with the higher prices and the higher profits, anybody that has access to fiber, i.e. timber, is looking at building capacity to meet the surging demand. However, you can only build so many sawmills if you have a very limited number of people that can build them.

And COVID has actually played a part here too because these sawmills don't come in a box, ready to assemble, like buying something like at an IKEA store. You've got about 120-odd very skilled workmen and engineers working on the site. And where do you put them up if you're in some small town in Georgia or in North Carolina? You can't put them up at a motel because this COVID has basically delayed the construction of a lot of these mills.

So I think this tightness in the market is going to last well through next year and well into 2023, until we get a sort of meaningful new supply. But then you have to look at the demand again. And we've had this one-time event, people think. But I see it more as structural, that people want to work out of their houses. And they're adding extra rooms and offices and expansions. And there is a real drive towards moving into the, as I call it, suburbanisation.

BRIAN SOZZI: John, what's the best way to make money or invest in timber? How would you go upon doing it? It's like I can't go out and stock up my house with timber. I live in a one-bedroom. Or I go out there and buy gold coins, for example, and put them away. What's the best way to do it? How do you make money?

JOHN DUNCANSON: Well, we saw this coming. In the timber fund that I co-manage, we saw this tightness in the lumber. I am a forester. I follow the industry, have been following it for 40 years. So I called the lumber price. When it was $440, I said this thing's going through $1,000. Everybody laughed. Now we're at $1,600.

We are going to retrace our steps a little bit. But what we're doing in the timber fund right now, believe it or not, is we're positioning. We're taking some profits from our lumber names. And we're actually adding-- it's going to go downstream. So we're adding to our timber position.

So if I were you right now, I would start looking at the Raniers. That's a big position of ours in the fund. You've got a fully integrated company like Weyerhauser. Unfortunately, most of the Canadian names don't have the timber. It's all Crown timber. That's a whole different subject altogether.

But don't get me wrong. The profits from the lumber and the panel product producers, the plywood producers, your oriented strand board producers, are going to be phenomenal going forward. I mean, you thought the first quarter was big. Wait till the second quarter.

But in answer to your question, where I see the big upside for investors is to get back into straight timber. And if you look at-- everybody's worried about inflation right now. If you look at some of the leading investors globally have always pointed out the timber and timberland is a natural hedge against inflation.

Trees don't stop growing. So you're continuing to add the value on there. And as we build the new sawmill capacity, the demand on timber and logs, basically timber, is going to grow. So that's what we've done to position our timber fund right now.

MYLES UDLAND: All right. Really interesting conversation. And John, as you alluded to, in just my very cursory knowledge, there's a lot that goes into actually getting the wood to build your house that is a lot more complicated than I think we got into today. Maybe we'll sort that out another time. John Duncanson with Corton Capital and the Corton Global Timber Fund. John, really appreciate your time this morning.

JOHN DUNCANSON: Appreciate it. Thank you.