New home construction is at a 14-year high despite lumber prices increasing 188% from last year. Find out why tree growers aren't all that ecstatic.
My graduate program was a whirlwind of emotions and experiences. I occasionally find myself reminiscing and thinking how much more fun it would be to do it all over again with the knowledge I have accumulated since graduating. I spent most of my time in Pullman just trying to keep up with my gifted classmates. I didn’t really appreciate the opportunity I was experiencing at the time. Now that I’m 7 years out, I still have flashbacks to classes and even particular lessons. This week was a flashback to my Natural Resource Economics course with Gregmar Galinato.
The flashback lesson was a particular class that focused on “when to cut down a tree.” It seems simple enough, but tree farming is serious business. There's some fun (for me) math associated with the problem. Waiting an extra year can be incredibly beneficial because the product grows in two dimensions: height and volume. Waiting an extra year also means tree farmers (yes, they’re called farmers) take the risk that timber prices won’t fall. It’s a fun problem to solve in graduate school, but it’s a real issue facing producers around the world.
Over the last 12 months, tree farmers have experienced a fairly volatile lumber market thanks to the pandemic, but prices have mostly been higher than before the pandemic started. Americans have taken it upon themselves to start remodeling their homes thanks to all their free time during the lockdown. On top of that, and despite one of the worst recessions on record, the US recorded a 14-year high for new housing construction in December. This sudden increase in demand has caused lumber prices to jump 188% over pre-pandemic prices.
Those tree farmers, though, aren’t seeing the big gains in their bank accounts. Despite the rising prices, most of the gains seem to be going to the sawmills, not the growers themselves. Sawmills are running at near capacity to keep up with the demand, but it turns out there is actually a glut of trees ready to be harvested. There are only a limited number of sawmills ready and able to turn them into lumber. The sawmills are actually paying the lowest prices they have paid in decades for timber. This is an interesting case where the timber-lumber industry seems to be a bit monopsonistic.
It’s much easier to teach about monopoly markets because so many people have played the board game after the same name. In a monopoly market, there is only one seller of a product, like a small town with just one General Store. They can charge prices a bit higher than more competitive markets because there aren’t other competitors nearby. Monopolists will earn economic profit and enjoy their power for as long as possible. If they get too greedy, some other sellers may enter the market or people will find it beneficial to drive to the next town over.
A monopsony market is one dominated by a single buyer of an input. The classic examples were labor markets in coal towns or Walmart pressuring suppliers to offer those always low prices. When there is really only one buyer, the market is considered a pure monopsony. Monopsony markets push prices/wages down below a competitive wage. In any other market, sellers would just find a different buyer willing to pay more, but there are no nearby alternatives.
Just as most product markets are not pure monopolies, most input markets are not pure monopsonies. Markets with a limited number of buyers would be considered monopsonistic. Labor market monopsonies have been a growing concern in the US over the past few years. Workers in particular areas have been earning significantly less than other regions, but have no alternative employment options.
The lumber industry may be looking similar. Despite record-high prices over the past year for the final product (lumber), the input (timber) sellers haven’t seen increased prices for their products in nearly a decade. If the market were more competitive, some of those gains would be passed down to the input sellers. A market that was fairly competitive before may now be tilting in the favor of the timber buyers. Here’s a look at lumber/timber prices over the past few years:
The largest 10 sawmill companies operate about 40% of the US’s sawmills, and the top 4 companies account for about 20% of the industry’s revenue. There are about 3,000 sawmills operating in the US, but that doesn’t make the market competitive. Most sawmills companies operate only a single mill and some regions may have only one mill nearby. The number of mills has dropped by almost 1/3rd over the past decade. Those characteristics enhance the monopsony power of the sawmills.
Sawmills have also been facing worker shortages because of the pandemic, so there’s a limit to how many trees they can physically process in a given day. This reduction has put downward pressure on tree farmers to sell their products at lower prices to the sawmills so that they aren’t left with downed trees and no buyers. This pushes the power (again) in favor of the sawmills. Those higher prices you see at Home Depot are mostly going to the sawmills, not the growers.
On top of all that, there’s also a global warming element as well. It doesn’t have to do with the trees themselves, but rather a particular type of bug that destroys trees. The mountain pine beetle is a tiny little bug that can levy an enormous hit on the timber industry. Between 2000 and 2015, the bug has destroyed more than a decade’s worth of lumber supplies in Alberta, Canada. A decrease in the supply of the input would raise the price of the final output.
As Canadian growers expand into the Southern US, the bug has come with them. The Canadians’ footprint is expanding because of the profitability of Southern tree farms, but the pine beetle’s territory is growing because of global warming. Warmer winters have made it difficult to keep this little bug in check. Canadian exports of lumber to the US have slowed tremendously over the past decade, which means the current high prices of lumber likely won’t fall for a while. That’s all good news for sawmills, but not such good news for tree farmers.
Facts and Figures You Didn’t Know You Wanted
An estimated 36% of forests in the United States are owned by families and individuals [US Forest Service]
Almost 90% of Maine is covered in forest, the highest percentage of any US state [US Dept. of Agriculture]
The average cost of a new home has increased by $24,000 to account for the increased cost of wood [National Association of Home Builders]
In 2019, the US consumed almost 50 billion board feet of wood [Quartz]
There are about 91,400 people employed in the Sawmill and Wood Preservation industry [BLS]
Reading Goals & Reading Progress
I try to read at least 52 books each year, and the past couple of years I’ve been able to get up to a little over 80. This year has started a little slow, but I plan to make that up soon! I figured I would devote a new section each week to let you know what new books I’m reading or a book I would recommend. Feel free to add me on Goodreads if you have an account.
We have made it through 11 weeks this year and I have finished 11 books. Two of the books I’m currently reading are Narconomics and We Wanted Workers because I’ve also assigned them to my classes to read. I typically read 3-4 books at a time, so I should have plenty to tell you about each week in this section.