Prices for industrial softwood are notorious for being considerably more volatile than those for low-grade hardwood. Pallet markets located in the western third of the continental United States are comprised of almost exclusively softwood due to its abundance in the Pacific Northwest and in Western Canada.
Typically, these drastic swings are caused by a variety of issues such as breakdowns in log supply, additional demand brought to the market via exports, and even unexpected shifts in pallet demand. At times, sawmills will shut down due to an inability to get logs. It’s not uncommon to observe swings of 50% and, even, as much as 100%. This year, in the first quarter, we saw a jump of 36% on delivered Doug fir in our composite graphs, and reports of mill prices in the Pacific Northwest have increased by as much as double.
Doug fir has become extremely tight over the last few months, and there have been several factors that have caused this condition. The primary reason Doug fir has gotten so tight is adverse weather in the Pacific Northwest. Contacts have indicated that this past winter has been one of the worst for logging in a couple years. Wet weather not only makes it difficult to log, it also causes road closings that prevent the transportation of raw materials.
Weather conditions are not the only factor that has played a major role in lumber availability being so tight this year; there have been some industry shifts that have only exacerbated the situation. More and more sawmills have installed optimizers. An optimizer allows a mill to take in the same amount of material and convert a larger portion into higher grade material. This, of course, means that less material gets converted into industrial #4 grade lumber. This trend suggests that any shortage of logs that we experience moving forward will be harsher on industrial and less significant for grade than it would have been in the past.
Another practice that has become much more prominent over the last few years is purchasing kiln dried (KD) Doug fir. Since the majority of demand is now for KD Doug fir, recoveries from shortages will be more challenging. Kiln drying introduces a delay, so when log availability improves it will take longer for these improvements to be felt for the majority of pallet producers. Also, there is only a finite amount of lumber that can be kiln dried simultaneously. Even if logs drastically improve, there is a limit to how much of the milled lumber will immediately be brought on the market.
Understanding the past can frame our expectations of what’s feasible in the future. This year we have seen a rapid climb in the price of Doug fir in the first quarter. Historically, it is not uncommon to observe an aggressive climb in Doug fir prices in the first quarter. In fact nine of the first quarters since 2005 have shown at least some upward trend. While the upswing typically happens in the first quarter, the downturn typically happens in the second or third quarter. The fourth quarter tends to flip flop between continuing the downward pressure of the second and third quarters and sparking a climb that continues heavily into the first quarter.
While this is the most common trend to see throughout the year, it is by no means a rule that this is how things will happen in 2016. Softwood is extremely unpredictable from year to year. Also, the pallet industry is constantly changing, so what has been normal in the past may not be typical moving forward. However, we have recently been hearing reports that Doug fir’s climb may be slowing.
Editor’s Note: All statistics on lumber pricing have been based on our Pallet Profile composite lumber prices, which is an average of delivered prices to the Pacific Northwest, Northern California, and Southern California. The Pallet Profile is the only weekly market report dedicated to the pallet industry and has been serving the pallet industry for the last 39 years. For more information call 800/805-0263 or email rick@palletprofile.com
