Headlines are full of warnings about plummeting lumber prices. So, why haven’t pallet prices dropped like a rock? That’s what a lot of pallet buyers are wanting to know.
The reality is much more complex than the headlines. Prices are dropping for new pallets in some regions as more expensive inventory works its way through the supply chain. This is especially true in regions dominated by softwood supply.
Let’s look at the lumber futures dynamics and compare to the reality of the pallet market. For starters, futures focus on what is likely to happen down the road, not the reality on the ground today. Futures look exclusively at grade lumber not low-grade materials. Higher-grade lumber usually tends to spike faster and higher, and the low-grade segment of the market lags trends. That means it won’t hit as high, and the decreases will take longer to materialize.
Pallet industry leaders are telling us that they are working through higher-priced lumber inventory and won’t be able to drop prices significantly until they get rid of more expensive material.
Also, hardwood and softwood are different markets. Usually, these commodities move in similar directions, but that isn’t always the case. And the rate of change can vary widely. While softwood grade lumber prices have dropped sharply over the last few months, they have leveled off recently giving up some but not all of the run-up over the last year or so. By contrast, the hardwood market is going in the opposite direction hamstrung by a very short supply. So, currently, softwood is becoming less expensive while hardwood is rising in price. So, this is one of those markets where the softwood and hardwood low-grade prices are headed in different directions.
Beyond the price of lumber, there are other factors that are causing major input costs to go up. For starters, the labor shortage is hurting every aspect of the wood supply chain from loggers to sawmills to pallet companies to truck drivers. Even if some of the inflationary trend is transitory as the Biden administration suggests, the part that relates to worker pay is likely to stick and will just keep going up from here. The Bureau of Labor Statistics claims that the logging industry lost 7,500 workers from 2009 to 2019.
The median age of loggers in the country is old and keeps getting older. Overall, every aspect of the forest products sector needs workers, and automation can only do so much to pick up the slack. So even if lumber prices drop over the next year or so, don’t expect that to mean that supply will magically improve a ton. Pallet buyers still need good relationships with their pallet suppliers.
Another concern for pallet lumber is the reality that sawmill technology is improving the yield for lumber processors. This means more grade material and less low-grade lumber is coming out of each log due to optimization and scanning technology. Much of this is already baked into the market. But it is only going to get worse as sawmills automate more.
Nail prices have gone up significantly this year. See the article on page 77 for more information. Everything from fuel to insurance to trucking is becoming more expensive, thanks partially to easy money and inflation pressures.
Pallet demand is very strong at a time where there is limited supply and capacity to boost production. A huge boom in e-commerce is increasing the need for pallets. These supply constraints are affecting both the new and used pallet markets. Prices for recycled pallets have reached “ridiculous rates” in some parts of the country over the last year. Supply may be improving in some areas, but that won’t last long with the Christmas rush about ready to start in the fall.
So, what’s a pallet buyer supposed to do? It all starts with having real conversations with suppliers about costs, pallet need forecasting and ways to improve the overall pallet program. You want to find real partners who will shoot straight with you and be responsible as markets go both up and down. It never hurts to ask about the headlines you read, just keep in mind that the reality for your pallet supplier may be different than what you read.
