Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.
Speaker 1: I'm Joe Wisenthal and I'm Tracy Alloway. So, Tracy, I'm
Speaker 1: guessing there is a much construction of new homes anymore
Speaker 1: in Hong Kong? Is there? Um, there's always some, but
Speaker 1: we definitely aren't having a housing boom like the US
Speaker 1: is now. It is absolutely crazy what's going on here.
Speaker 1: There is a housing boom here, there is a renovation boom.
Speaker 1: People are buying existing houses, driving the prices up. People
Speaker 1: are starting new homes like it's super it's super wild.
Speaker 1: What's going on here in real estate? Yeah, So I've
Speaker 1: seen a lot of stories on this. And then of
Speaker 1: course one of the things I've seen that's been really
Speaker 1: striking is the price chart of lumber, and that's just
Speaker 1: has been absolutely soaring. And it's actually like I see
Speaker 1: it mentioned in the pantheon of meme stocks nowadays, but
Speaker 1: of course, you know, lumber is an actual thing that
Speaker 1: people use to build homes and other important structures. No,
Speaker 1: it literally is like kind of becoming a meme stock,
Speaker 1: like lumber itself. Like there's like meme stocks and crypto
Speaker 1: and now people are making TikTok's about the price of lumber,
Speaker 1: and the line literally is just a straight up for
Speaker 1: days we're recording, there's April one, and actually the last
Speaker 1: two days, I think lumber actually sold off a bit.
Speaker 1: So maybe I don't know, maybe there's some sort of peak.
Speaker 1: I have no idea, but the point for like days
Speaker 1: and days in a row, the lumber futures market went up,
Speaker 1: limit up every single day as absolutely wild and it's
Speaker 1: like becoming a cultural thing. How much would cost right now? Yeah? Um.
Speaker 1: It's also sort of becoming a moment for I guess
Speaker 1: lumber Twitter, which is a really interesting community, as I
Speaker 1: think you recently discovered, right there's a really vibrant conversation
Speaker 1: around the lumber industry and lumber trading, construction, things like that.
Speaker 1: Online lumbers having its moment in the sun, and I
Speaker 1: just have to say, this is our chance to dive
Speaker 1: into lumber market structure. I've been doing a little bit
Speaker 1: of research. It is an absolutely delightful market, like just
Speaker 1: some of the terms that they use, like stumpage feet
Speaker 1: that is such a great word. No, it's great. There's
Speaker 1: so much good stuff here because it's got its own
Speaker 1: market structure, there's the futures market, there's the cash market.
Speaker 1: There's all these different entities. There's the lumber yards, the sawmills,
Speaker 1: the forests, the timber where they sell timber or turned
Speaker 1: into lumber. There's the home builders. Everything. Just a super
Speaker 1: interesting market that up until very recently, probably very few
Speaker 1: people other than people in the industry, had thought about.
Speaker 1: But now everyone wants to learn. And you mentioned lumber Twitter,
Speaker 1: it's kind of taking over everything. And the guests we're
Speaker 1: going to have on today, Um, we recently had him
Speaker 1: on TV to talk about the lumber market and I've
Speaker 1: never posted a clip that got so many views. I
Speaker 1: think it was literally one of the biggest views ever.
Speaker 1: Everyone wanted to hear more from the guest, so we
Speaker 1: had to get him, get him on the podcast to
Speaker 1: really do a true, uh deep dive into what's going
Speaker 1: on right now and how lumber market structure actually works.
Speaker 1: For sure, let's do it all right, So I'm very excited.
Speaker 1: Together we're gonna go deep on the lumber market. We're
Speaker 1: gonna be speaking with Stinson Dean. He is the CEO
Speaker 1: and founder of Deacon Trading, which is a lumber trading
Speaker 1: shop that operates all over the country. He's at lumber
Speaker 1: trading on Twitter, so he's sort of like become one
Speaker 1: of the pre eminent lumber Twitter experts blowing up now here.
Speaker 1: Everyone wanted to hear him on nod lots and now
Speaker 1: he's here. Uh, Stinson, thank you so much for uh
Speaker 1: for coming on the show. Yeah, thanks for having me.
Speaker 1: I'm excited to talk uck potentially endlessly about all the
Speaker 1: nuances of lumber. We're gonna go super deep on a
Speaker 1: lumber We're gonna go beyond just the church. But you know, like,
Speaker 1: so I have this idea I'm an expert on lumber
Speaker 1: now because I've been paying attention to it for two weeks. Um,
Speaker 1: I have this idea that there's you know, there's the
Speaker 1: home builders and they buy from the lumber yard, and
Speaker 1: the lumber yards buy from the sawmills, and the sawmills
Speaker 1: have a lot of pricing power these days, and they
Speaker 1: so forth, Well, why don't you give us the sort
Speaker 1: of like very high level overview of the different players
Speaker 1: in this market and also specifically what Deacon Trading does
Speaker 1: and how it fits into the sort of the lumber
Speaker 1: trading ecosystem. Sure, so the players in the supply chain.
Speaker 1: There's the producers on one end and the end users,
Speaker 1: which would be the home builders on the far end,
Speaker 1: and the it's easier to kind of start with the
Speaker 1: home builders. So the home builders is going to buy
Speaker 1: from what we call lumber dealers commonly commonly called lumber yards,
Speaker 1: those little lumber yards that you and I aren't allowed
Speaker 1: to walk into. They've got the high fences, they're big,
Speaker 1: there's a lot of activity going on, and they sell
Speaker 1: only two commercial accounts home builders in large contractors, and
Speaker 1: they sell them framing packages. So it has the OSB
Speaker 1: and other sheathing and panel goods. It has the framing
Speaker 1: lumber OH oriented strand board, that's the sheathing that goes
Speaker 1: underneath like your roofing shingles. Okay, and that, for the record,
Speaker 1: is even worse of a shortage, or at least from
Speaker 1: a pricing perspective, than than lumber. It's really insane. But
Speaker 1: it's like the most common kind of forbright sheet you
Speaker 1: see on the in cap at lows when you walk in.
Speaker 1: The point being the lumber dealer buys in bulk all
Speaker 1: of these of front products that go to build a house,
Speaker 1: and then they put them together in smaller housing packages
Speaker 1: a little bit of each and deliver it to pads
Speaker 1: and job sites. Right, So the lumber dealer buys in
Speaker 1: bulk all these building materials, and the bigger the lumber dealer,
Speaker 1: the more likely they buy direct from the producer. So
Speaker 1: I would say most of the lumber that goes into
Speaker 1: a home was produced at a sawmill and sold directly
Speaker 1: to a lumber dealer and then put on a flatbed
Speaker 1: truck for a framing package to the to the home builder.
Speaker 1: So it's pretty efficient in that way, but it's a
Speaker 1: highly volatile commodity where there's frantic scrambles for supply, there's
Speaker 1: scrambles of oversupply where you're scrambling just to get rid
Speaker 1: of whatever products you have, and there's all sorts of
Speaker 1: breakdowns in the supply chain. So it sounds easy, Hey, Canada,
Speaker 1: Canadian sawmill to lumber dealer in Houston, Texas to homebuilder.
Speaker 1: But the reality is that lumber purchased in Canada had
Speaker 1: to You had to make that purchasing decision eight weeks
Speaker 1: before you actually get to get the lumber, and so
Speaker 1: you're having to anticipate what are my lumber needs two
Speaker 1: months from now, and when the market gets really hot,
Speaker 1: it's like you're twelve weeks out and these lumber dealers
Speaker 1: and the buyers that work for them are often in
Speaker 1: a really impossible decision to forecast, and they all get
Speaker 1: their heads together and they try to forecast how much
Speaker 1: how much lumber do we need? So in between the
Speaker 1: sawmill and the lumber dealer, there's several different types of
Speaker 1: wholesalers and or middle middleman type folks, and that's where
Speaker 1: I fit in. And I said on the show, I
Speaker 1: look at myself as a liquidity provider because the market
Speaker 1: is ill liquid as a physical market and the futures market,
Speaker 1: so it just gets scarce very fast or oversupplied very fast.
Speaker 1: So I can stand in the middle and provide liquidity
Speaker 1: to sawmills that have a backlog of inventory, or I
Speaker 1: can provide liquidity to a lumber yard that misbudgeted ten
Speaker 1: weeks ago and needs prompt wood tomorrow. Because where I sit,
Speaker 1: I buy lumber from Canada and you know, eight weeks later,
Speaker 1: I have it an anticipation of someone needing it over
Speaker 1: the next thirty days because they miss forecast eight weeks prior. Okay,
Speaker 1: So that's where I sit, and there's not a lot
Speaker 1: of us, because I take a tremendous priced risk. The
Speaker 1: second I agree to buy lumber, I have risked on
Speaker 1: it won't ship to me for two to three weeks
Speaker 1: if the mills are shipping on time, and they'll take
Speaker 1: three weeks if the rail lines aren't running slow to
Speaker 1: actually get it, and then another thirty days to market it.
Speaker 1: So I'm I have risk on for a significant amount
Speaker 1: of time. The other type of wholesaler at our supply chain,
Speaker 1: and this kind of rounds it out. We call them
Speaker 1: a transit wholesaler, where they buy the rail car and
Speaker 1: they immediately try to sell it to a lumber dealer
Speaker 1: before it ships, and they'll you know, typically like right now,
Speaker 1: mills are selling for June production, so a wholesaler could
Speaker 1: buy a handful of cars for June and then they
Speaker 1: have six weeks to find a destination for it. And
Speaker 1: that's that's kind of the and that's more common. There's
Speaker 1: less risk. They try to kind of sell it before
Speaker 1: they pay for it, and that's that's more or less
Speaker 1: their their model. So you've laid out the ecosystem really
Speaker 1: well for us. Talk to us about how I don't
Speaker 1: want to say how bad things are at the moment,
Speaker 1: but um, you know how intense the price surge has been,
Speaker 1: what the scramble for wood is actually like, and where
Speaker 1: in the ecosystem those pressure points are coming from. It's
Speaker 1: a short squeeze. It's from the dynamic of the sales
Speaker 1: model that lumber dealers. I think. I don't know really
Speaker 1: how they did it before the recession, but coming out
Speaker 1: of the recession, they'll commit to deliver lumber um days
Speaker 1: out sometimes. Sorry, just to be clear, would you say
Speaker 1: the recession? Do you mean the last recession? Right? Yeah?
Speaker 1: The great one? Yeah, you're right, Sorry, keep going no, no, Well,
Speaker 1: which was which was the center of the housing crept?
Speaker 1: And since then the model has been and maybe this
Speaker 1: was model before I wasn't in the industry, but they
Speaker 1: commit to these sales. Let's just say ninety days worth
Speaker 1: of sales. The most inventory these folks can holds forty
Speaker 1: five days because of cash constraints and kind of how
Speaker 1: they manage manager inventory. When they're bullish, they'll they'll go
Speaker 1: forty five to fifty five days. When they're barished, they'll
Speaker 1: work their inventory down to thirty days. And if you
Speaker 1: think about that, you're fift covered, and you've got ninety
Speaker 1: days worth of commitments and forty five days worth inventory.
Speaker 1: So they're buying on the open market. You know, they
Speaker 1: have their average cost of forty five days worth the inventory.
Speaker 1: But then they got to cover the next ninety days
Speaker 1: or excuse me, the next forty five days. And when
Speaker 1: they don't cover that aggressively, maybe they they dial it
Speaker 1: back to thirty days worth of inventory, anticipating a dip. Well,
Speaker 1: the dip doesn't come. Didn't come, which we were all anticipating,
Speaker 1: me included um in Q one. We we stayed kind
Speaker 1: of flat at a thousand dollars for six weeks, and
Speaker 1: it felt like things were going to crack to the downside.
Speaker 1: But the mills were able to hold out. I think
Speaker 1: they were able to sell the Canadian market. They were
Speaker 1: able to say sell to Asia and this kind of
Speaker 1: standoff the mills one. So now you've got ninety days
Speaker 1: and commitments, thirty days worth inventory. You've got a lot
Speaker 1: of ground to make up with your purchases. And I
Speaker 1: think that's what's happening. That's what's happening right now is
Speaker 1: you've got to get you gotta cover your commitments. Eventually
Speaker 1: they're going to get covered. Eventually, they're going to buy
Speaker 1: enough wood cover, get the lumber out the door. They're
Speaker 1: gonna have made a ton of money on the inventory
Speaker 1: they had on the ground. They're not going to make
Speaker 1: as much money on these open market purchases where they're
Speaker 1: scrambling the cover, and those two dynamics, or those two
Speaker 1: profit margins will average out, and I think ultimately they'll
Speaker 1: be okay. But what's happening right now is there's commitments
Speaker 1: that need to be covered, and we've all waited too
Speaker 1: long to get those covered. So basically, you have the
Speaker 1: lumber yards and they you know, if they don't deliver
Speaker 1: the lumber they've promise, they you know, they've defaulted. So
Speaker 1: to avoid that, they have to cover those shorts. Let's
Speaker 1: talk about the um the mentality, you know, like coming
Speaker 1: out of the Great Financial Crisis, I have to imagine
Speaker 1: that just sort of like numerous players in the industry
Speaker 1: got totally wrecked. And I remember for years people talked
Speaker 1: about housing is never really gonna come back the way
Speaker 1: it did, And then of course we had the crash
Speaker 1: last March and a lot of people got DejaVu. But
Speaker 1: then we saw, okay, we got some people started renovating
Speaker 1: their homes and that called people by surprise. But people
Speaker 1: didn't think that would last and then okay, the winter
Speaker 1: is gonna come. Then didn't slow down. So talk to
Speaker 1: us about like the role that essentially diminished expectations, permanent
Speaker 1: pessimism and fears of the ongoing, fears of another shoe dropping.
Speaker 1: How that contributed to the yards, uh, not caring that
Speaker 1: much inventory. Yes, So it's such a great point. And
Speaker 1: I can speak confidently about my market, and I think
Speaker 1: I can say that we're more conservative than others because
Speaker 1: of what we went through in two thousands six, seven
Speaker 1: and eight and what we ignored in two thousands six
Speaker 1: and seven and paid the piper in two thousand and eight,
Speaker 1: and we we really were one of the sectors that
Speaker 1: really never still haven't reached an eclipsed our peak. You know,
Speaker 1: if you just look at housing starts, and it was
Speaker 1: pretty devastating, as you can imagine if for everyone involved,
Speaker 1: and so a lot of people got cleaned out. And
Speaker 1: if you survived and you're still around today, and you
Speaker 1: you survived twelve years ago, it's because you're extremely conservative, right,
Speaker 1: You hold a lot of cash, you don't put your
Speaker 1: neck out too much. You don't. You're you're you're slow
Speaker 1: to reinvest, you're slow to hire, you're slow to expand,
Speaker 1: your slow to buy more trucks because what if? Right,
Speaker 1: it's it's such a year. And ultimately you're also slow
Speaker 1: to buy a bunch of inventory. You want as little
Speaker 1: inventory as possible in case the bottom falls out. So
Speaker 1: that's that's very fresh, even all this time later in
Speaker 1: everyone's mind. And again, the names that are around right
Speaker 1: now are around because they were able to scrap, scrape
Speaker 1: and survive being the epicenter of the great financial meltdown.
Speaker 1: And so there's just a characteristic of these legacy names
Speaker 1: and the folks who run them that they're just conservative.
Speaker 1: And the same with the home builders. You listen to
Speaker 1: the home builders. They're paying down debt and they're not
Speaker 1: aggressively going after land and they're playing it safe, and
Speaker 1: it's like, what are we doing here? We have this
Speaker 1: massive housing shortage, but you can just feel how hesitant
Speaker 1: everyone is to believe it. So me included last March,
Speaker 1: I was like depression, this is bad stock market sell off,
Speaker 1: lumber future sell off. And I mean I was quote
Speaker 1: in the Wall Street Journal that April saying, no one's
Speaker 1: thinking thinking about buying a new home. It's the last
Speaker 1: thing on anyone's mind. And so we all de risked.
Speaker 1: We sold on our inventories to almost nothing. The sawmills,
Speaker 1: if they had any extra inventory on the ground, which
Speaker 1: they typically operate with to fill in the gaps and
Speaker 1: smooth out the supply chain in case there's a weird
Speaker 1: production run glitch, they can pull from the inventory, fill
Speaker 1: the car and get it gone. They sold those stacks
Speaker 1: down to pavement. Lumber dealers went sold their their inventory
Speaker 1: down to nothing. Middlemen and liquidity providers same thing. Like
Speaker 1: none of us wanted to risk gone. So then you know,
Speaker 1: we started the rebound. And the short of it is,
Speaker 1: prices went from to fifty on the future screen to
Speaker 1: four fifty to five hundred, and we're all thinking, oh,
Speaker 1: this is the top, like historically a great price us.
Speaker 1: And in two thousand eighteen we went to six fifty
Speaker 1: five and that was the top. So we get to
Speaker 1: six fifties sift five, like this is it, there's no way,
Speaker 1: and then hundred thousand by September, and those last three
Speaker 1: for just backbreaking for the industry. High prices cure high prices.
Speaker 1: But in our industry, high prices raise concern and people
Speaker 1: get really scared that it's just going to crash. So
Speaker 1: everyone was slow to believe in the recovery, so no
Speaker 1: one and no one invested in inventories. Effectively, the mills
Speaker 1: didn't invest in inventories, lumber dealers didn't invest in inventories.
Speaker 1: Prices are too high and go to wait for them
Speaker 1: to come down just can't possibly last. So that hesitation
Speaker 1: to lean in and to put risk on perpetuated the
Speaker 1: situation that we're in. That's that has been such an
Speaker 1: acute run up. We'll talk about larger structural issues supporting
Speaker 1: the price of lumber, but what happened and is happening
Speaker 1: right now, I think is ultimately from the scars of
Speaker 1: the Great Recession and the conservative nature of our industry
Speaker 1: not wanting to put risk on via lumber inventories. Well,
Speaker 1: so what would it take to actually change that conservative mindset?
Speaker 1: Or maybe another way of putting it is what would
Speaker 1: it take to make the industry more flexible and better
Speaker 1: able to respond to change. Is it just a function
Speaker 1: of you know, trees taking a long time to grow
Speaker 1: and taking a while to transport. That means you have
Speaker 1: this sort of like longer lead times um that feeds
Speaker 1: into that forward planning. I don't know the answer to
Speaker 1: that question that I hinted at the largest actual problems.
Speaker 1: The Canadian forests are where their problems are. The Canadian
Speaker 1: government a few years ago decided we are logging these
Speaker 1: two fast and that we're just not going to have
Speaker 1: the forest if we keep going at this pace. So
Speaker 1: they reduced what they call the annual allowable cut a
Speaker 1: C annual allowable cut before they had expanded that a C.
Speaker 1: Because there was a bunch of what we call beat
Speaker 1: beetle kill trees out there from this pinewood beetle infestation
Speaker 1: that it's most folks have heard of it, but it
Speaker 1: was devastating, it was. It was ravaging forests up there.
Speaker 1: So they opened up the force for logging to get
Speaker 1: those trees cut while they're still harvest the bowl. You
Speaker 1: can still use them for lumber. You still find blue
Speaker 1: blue stain lumber in the stores. Some people use that
Speaker 1: for decorative reasons, but a lot of houses built in
Speaker 1: the two thowenty have blue stain studs on them, and
Speaker 1: the those are beetle kill logs, which is also a
Speaker 1: thing in the US. So they opened they opened up
Speaker 1: logging to a much faster pace to harvest the trees
Speaker 1: before they rotted and that you couldn't harvest them in
Speaker 1: the lumber, and also reducing the fire risk of having
Speaker 1: dead trees in your forest. Right. And you know, there's
Speaker 1: a long discussion about why is their pine beetle infestation
Speaker 1: is it so bad? Um? A lot of that points
Speaker 1: to the winters not being as cold for as long
Speaker 1: to kill those beetles off, But ultimately it leaves the
Speaker 1: forest vulnerable the fire. So they wanted to get in
Speaker 1: there and coal as much of those as they could.
Speaker 1: So if you look at lumber prices pretty flat, and
Speaker 1: you look at lumber stop, the publicly traded lumber sawmill companies,
Speaker 1: pretty flat pricing, not a lot of dividends, um, really
Speaker 1: low returns over over ten years on just their their
Speaker 1: stock price, it was not a great business to be in.
Speaker 1: We're just flooded with lumber, partially because we were overproducing,
Speaker 1: because we've got these beetle kill trees We've got to
Speaker 1: take care of. That changed in two thousand and fifteen
Speaker 1: or sixteen, they reduced the a c and that that's
Speaker 1: set by the Canadian government who they called the Crown.
Speaker 1: Crown Land, they own the forests up there. And I
Speaker 1: am not a deep expert in these licenses and tenure,
Speaker 1: but the mills and logging companies are allotted timberland to
Speaker 1: the harvest. They control basically the paste of what they
Speaker 1: can harvest, so they just cut what you're allowed to cut.
Speaker 1: So the mills they're they're just there's these mills all
Speaker 1: over in the bushop in Canada, and if there aren't
Speaker 1: enough logs to keep them going, and then lumber prices
Speaker 1: were low and the returns were low, like these these
Speaker 1: mills started getting shut down. And that was mostly two
Speaker 1: thousand nineteen. Lumber prices were very low. Housing market was
Speaker 1: mediocre second half of eighteen and the nineteen, and it
Speaker 1: just devastated the industry, like it was really sad, Like
Speaker 1: main employers lumber towns just like devastated. The main source
Speaker 1: of employment in this tiny town is shuttered. Now, of
Speaker 1: course we're missing that supply. I don't think all of
Speaker 1: them would still be here. I think the log supply
Speaker 1: was going to ultimately shut down several of those mills anyway.
Speaker 1: But now here we are less logs to cut, a harvest,
Speaker 1: less mills to do it with. And you have an industry,
Speaker 1: a sawmill industry that really has had mediocre returns for
Speaker 1: ten years and now that here's their their moment to maximize.
Speaker 1: There's so many different strands on and pull on, but
Speaker 1: let's keep talking about this sort of the relationship between
Speaker 1: the sawmills and the tree growers the forests. Some reports
Speaker 1: have said, uh, oh, there, so there's plenty of trees.
Speaker 1: The real issues at the the just the saw mill
Speaker 1: capacity as you just described. I've seen others say, actually,
Speaker 1: there isn't as many trees as people think because a
Speaker 1: lot of the trees that are available there in the South,
Speaker 1: and those trees aren't really great for building homes. Maybe
Speaker 1: they're like better for cardboard boxes of the e commerce
Speaker 1: industry or something like that. So are there a lot
Speaker 1: of trees available? And then also like how do the
Speaker 1: Trump teariffs play into it? Um, No, there's not a
Speaker 1: lot of trees available to build. To build homes as
Speaker 1: we build them today, the plate material, which is kind
Speaker 1: of the horizontal laying lumber and the studs in between
Speaker 1: them behind your dry wall is is most likely a
Speaker 1: Canadian specie piece of wood, and that's how we build homes.
Speaker 1: There's there's certainly a lot of production in the US
Speaker 1: and the Pacific Northwest that is interchangeable with Canadian spruce,
Speaker 1: but they don't they don't produce as much as the
Speaker 1: Canadian lumber mills do. And um, that is the way
Speaker 1: we build the homes. We don't build up. We don't
Speaker 1: build homes with southern yellow pine from the US South.
Speaker 1: You could, and I guess you can, but it's it's
Speaker 1: a different stick. Um, it's heavy, wet, dense, crooked, twists,
Speaker 1: a lot of waste on the job site. You can't
Speaker 1: store it. So it's like we'd have to change what
Speaker 1: we do. So, yes, there's a ton of trees in
Speaker 1: the US South, but we don't build houses with trees
Speaker 1: from the US South. We build houses from trees from
Speaker 1: the Pacific Northwest. In Canada and particularly Canada, as we
Speaker 1: just talked about, they're getting more and more scarce because
Speaker 1: they just made the decision. And you talk to most Canadians,
Speaker 1: they don't disagree with this decision. It's like you've got
Speaker 1: to stop logging at this pace where the forest won't
Speaker 1: won't be here, So it's not really a point of
Speaker 1: contention up there. It's taken as factum, and I'm not
Speaker 1: gonna argue with them, So I don't you know, I
Speaker 1: don't want the force to go away and go away.
Speaker 1: And they told me. I thought it was thirty years.
Speaker 1: It takes eighty years to grow a Canadian lumber tree. Okay,
Speaker 1: So they gotta they had a hard decision to make,
Speaker 1: and they made it, and we're all going to have
Speaker 1: to adjust. So given that long lead in time, I
Speaker 1: mean eighty years to grow a tree, is the solution
Speaker 1: to the squeeze on the demand side rather than the
Speaker 1: supply side, because it feels like you can't fix the
Speaker 1: supply issue anytime soon. Yeah. Amen, I've been saying that.
Speaker 1: That's kind of been my narrative. Once prices went the
Speaker 1: seven hundred and they kept going, I goes. I was like,
Speaker 1: something's wrong here because these mills have never seen seven
Speaker 1: dollars in their life and we still couldn't find lumber, Like,
Speaker 1: why why aren't they producing more? And there used to
Speaker 1: be an old adage when I was taught in the
Speaker 1: lumber industry the sawmills can always outproduce the market and
Speaker 1: then I had a bad habit of doing so. So
Speaker 1: when returns got good, they turned the switch on and
Speaker 1: they produced a ton of lumber and crushed price. And
Speaker 1: I'm like kept waiting, kept looking around, like where, why
Speaker 1: why aren't they doing this? Where's like this hidden inventory?
Speaker 1: I keep hearing about seven Why aren't they selling futures?
Speaker 1: You know, they're not showing up as as headers in
Speaker 1: the CFTC report, Like something's wrong, and clearly the supply
Speaker 1: side can't fix this. Clearly they just can't. Like they would.
Speaker 1: It would be criminal of them. I mean, like maybe
Speaker 1: fiduciary wise if they were like secretly not producing as
Speaker 1: much as they could when lumber hits seven eight nine, Um,
Speaker 1: it's just folks were like, oh, they're hiding it, and
Speaker 1: there's more that we don't know about. But I like,
Speaker 1: they're publicly traded. They can't do that, and it would
Speaker 1: be complete shifting from all their past behaviors. So it
Speaker 1: is not a supply side fix, not in the near term.
Speaker 1: So yeah, it's a demand side, and it's high prices
Speaker 1: cure high prices. And we have not found that equilibrium
Speaker 1: or that tipping point where we start slowing demand because
Speaker 1: the high lumber prices and it's astonishing and it makes
Speaker 1: you think maybe lumber should have been more expensive for
Speaker 1: a lot longer. So I'm glad you mentioned the futures
Speaker 1: market because we haven't really gotten into that, but it's something.
Speaker 1: You know, we had this long streak of like limit up,
Speaker 1: limit up every day. Talk to us a little bit
Speaker 1: about the relationship between the futures market and the cash
Speaker 1: market and how you use both and how they slip,
Speaker 1: but how tightly a line they are, Like, give us
Speaker 1: a little overview of m the future market. Yeah, and
Speaker 1: it's relationship to the whole thing. So I'm like, full disclosure,
Speaker 1: highly dependent and a huge user of lumber futures. That's
Speaker 1: how we run my business. And I don't care if
Speaker 1: they go up or down. I care that it's easy
Speaker 1: to execute and get in and out, so I care
Speaker 1: about liquidity. The lumber futures is one rail car of
Speaker 1: lumber priced Prince George, British Columbia in US dollars. So
Speaker 1: the number you see on the screen is per thousand
Speaker 1: board foot, which is a volume measurement, and the two
Speaker 1: by four eight I think there's like six board feet
Speaker 1: in a two eight stick you can build like four
Speaker 1: to five houses out of one futures contract worth of product.
Speaker 1: It's a it's a large volume, but that's how our
Speaker 1: industry traits lumber by railcar, especially out of the Pacific
Speaker 1: north western Canada. Being a cash and futures trader, I
Speaker 1: I can tell you that it's highly effective, highly correlated.
Speaker 1: But convergence and which would be the cash or spot
Speaker 1: price converging with the futures price of expiration. It happens
Speaker 1: every contract. It's a physically delivered contract, so it has
Speaker 1: to happen, and the correlations are really high. The problem
Speaker 1: when you look at it, you know, people see the
Speaker 1: volume and or the open interest. So when we were
Speaker 1: going locked limit up on this run, there'll be a
Speaker 1: hundred and fifty trades on the screen on the front
Speaker 1: rount and people would point that out and I would say,
Speaker 1: that's about a hundred and thirty more trades than what
Speaker 1: was happening in the cash markets. The cash markets were
Speaker 1: there was no market, There was no market for wood.
Speaker 1: There was no wood to be found, so the only
Speaker 1: alternative was to buy lumber features for your purchase. Because
Speaker 1: again these folks are making purchasing decisions today for wood,
Speaker 1: they're going to need eight to ten weeks out, so
Speaker 1: buying a May futures contract in March like that aligns
Speaker 1: with what they would be doing in the cash markets.
Speaker 1: So the cash markets and the future markets are are
Speaker 1: really marry each other really well in that they're highly
Speaker 1: i liquid, highly volatile. One of my observations has been
Speaker 1: the consolidation of our industry from sawmills to lumber dealers.
Speaker 1: Um not so much homebuilders because they're not buying real
Speaker 1: cars with lumber from sawmills. That's not how they operate.
Speaker 1: So lumber dealers and sawmills make the market. They're they're
Speaker 1: the ones moving rail cars all all across the country.
Speaker 1: They've been consolidating since the Great Recession to the point
Speaker 1: where there's basically four or five major Canadian producers and
Speaker 1: there's basically three or four, maybe five major US lumber dealers,
Speaker 1: and so that's five asks and five bids, and they
Speaker 1: always get these massive standoffs. And you can imagine if
Speaker 1: your bid asked is hundreds of dollars apart, well, when
Speaker 1: someone blinks, the whole market makes this hundred dollar move
Speaker 1: because you heard this rumor that's so and so made
Speaker 1: a block purchase, and now the mills are off the
Speaker 1: market and there's no more open market would to buy
Speaker 1: and it's because there's not a lot of bids and
Speaker 1: asks in the cash markets and the futures markets kind
Speaker 1: of represent the same thing where the folks who taught
Speaker 1: me lumber cash markets. When they started, there was a
Speaker 1: bunch of independent, mom and pop lumber yards and there's
Speaker 1: a bunch of family owned legacy sawmills dotted all around
Speaker 1: Canada and Pacific Northwest. So you could information arbitrage just
Speaker 1: by working the phones and find a sawmill that that
Speaker 1: is behind the market pricing, find a buyer that didn't
Speaker 1: understand the market has moved because you're just making thirty
Speaker 1: calls to the buy side, thirty calls to the seal
Speaker 1: side of every single day trying to find the market.
Speaker 1: So you could just do this information arbitrage, and like
Speaker 1: you just make a killing and you're back to backing
Speaker 1: most of it, so you're not even taking the price risk. Well,
Speaker 1: now there's five and there is no information or arbitrage,
Speaker 1: Like you can't find an inefficiency in pricing because there's
Speaker 1: only five of them and same on the buy side,
Speaker 1: Like you can't find anyone sleeping there. All know exactly
Speaker 1: where they're at. They all know exactly where the mills stand.
Speaker 1: So there's no way to to to find a busy
Speaker 1: lumber yard owner who's worried about a truck that's late,
Speaker 1: you know, not paying attentional lumber prices, and you can
Speaker 1: goose them for ten or twenty bucks per thousand because
Speaker 1: they're not paying attention. Like that doesn't happen anymore. We
Speaker 1: have professional, extremely sophisticated and very smart centralized buying floors
Speaker 1: at these dealers that buy at their corporate headquarters for
Speaker 1: all their their locations across the country, and they're extremely
Speaker 1: smart and savvy and crafty. Like these guys are very
Speaker 1: very good at what they do, so it's hard to
Speaker 1: understand what decisions they're going to make because they represent
Speaker 1: hundreds of yards where twenty years ago hundreds of yards
Speaker 1: represented hundreds of yards. So there's just all sorts of
Speaker 1: different inefficiencies. So that dynamic, that consolidation dynamic, has made
Speaker 1: it harder to trade lumber because there's just these massive
Speaker 1: moves and it makes futures mirror what's happening in the
Speaker 1: cash markets. I'll often say, if you think futures is
Speaker 1: crazy right now. You should see what's happening in cash markets. There.
Speaker 1: There are days, there have been days during this run.
Speaker 1: You call the sawmill, they don't answer the phone. It's
Speaker 1: like we've got nothing to sell, Like there's nothing for sale.
Speaker 1: So what are you gonna do. You gotta buy lumber
Speaker 1: futures to at least get something on so you can
Speaker 1: get a delivery in June. It will ship to you
Speaker 1: in mid May. It'll take a few weeks to get
Speaker 1: to you. And that's so that's why we see these
Speaker 1: squeezes and the big limit moves at the open of
Speaker 1: the market, because they called the sawmills five minutes before
Speaker 1: and they're what we call off the market. They're not
Speaker 1: even showing any inventory to sell. This is a really
Speaker 1: dumb question, but what's the normal state of the lumber
Speaker 1: futures curve? Is it contango or backwardation? It's um typically
Speaker 1: in contango, yes, um. I did a study when I
Speaker 1: was launching the business over twenty years. It's there's typically
Speaker 1: a five dollar carry five dollar contango in the market
Speaker 1: on average, and the highest backwardation we've ever seen was
Speaker 1: in two thousand eighteen. I think it was forty bucks
Speaker 1: or something like that, and that was crazy crazy at
Speaker 1: the time. And the biggest carry we've seen was later
Speaker 1: the same year. It was a forty five dollar carry
Speaker 1: or contango um where the front month was fort discount
Speaker 1: to the next contract six days out. You know, it
Speaker 1: only takes twelve bucks per thousand to store it, and
Speaker 1: the market was paying you forty five dollars to store
Speaker 1: it in the second half of eighteen and now we
Speaker 1: have a hundred and thirty dollar invert. Last contract we
Speaker 1: went up over two hundred. The biggest one was in
Speaker 1: September when this whole thing got kicked off, we had
Speaker 1: a three d dollar invert. So um it it is
Speaker 1: way out of whack, but representative of the cash market.
Speaker 1: So you talk about how like there it's hard to
Speaker 1: get an informational edge in the market. You talk about
Speaker 1: how sophistic catered these sort of big players are. So
Speaker 1: I have like sort of two related questions. One, what
Speaker 1: is your edge? I mean like essentially like where does
Speaker 1: your alpha is the term? Where does your premium come
Speaker 1: from into such an efficient market? And be what is
Speaker 1: the role now of relationships in the industry data you
Speaker 1: as a trader might have your relationship to the sawmills,
Speaker 1: to the lumber yard. How important is that in this
Speaker 1: sort of the current structure of the market. So for me,
Speaker 1: I talked about being a liquidity provider. If you can
Speaker 1: manage your risk and provide liquidity in an illiquid market,
Speaker 1: there's a lot of reward there and if you could,
Speaker 1: if you can reduce the risk compared to the reward um,
Speaker 1: you can do pretty well. I just take on a
Speaker 1: lot of physical lumber risk where I'm buying real cars
Speaker 1: a lumber, I get them unloaded, I put them on
Speaker 1: the ground in different markets across the country for someone
Speaker 1: to need something right away because they their blumber budget
Speaker 1: was off on their inventory. And I'll use futures to
Speaker 1: manage to downside risk. So when futures go up, like
Speaker 1: I have massive margin calls. But the way it works,
Speaker 1: hopefully is your cash value is moving up faster and
Speaker 1: further than your future's losses. And you can imagine if
Speaker 1: there's a scramble for wood and the mills will get
Speaker 1: you would in eight weeks, and I can get you
Speaker 1: would tomorrow. Folks pay a premium for that to get
Speaker 1: it tomorrow and get it in I also sell in
Speaker 1: truckload quantities, so I'll charge a higher price, but they're
Speaker 1: not committing to a car load. There's four trucks for
Speaker 1: everyone car load, so they can swallow one higher price truck,
Speaker 1: get it in, get it out, and kind of go
Speaker 1: hand to mouth in that fashion. Um. So I'll I'll
Speaker 1: be able to provide just in time inventory at a
Speaker 1: higher price, but it may not move their average costs
Speaker 1: that much because it's one truck versus a carload. That's
Speaker 1: something I learned from grain traders. I basically use a
Speaker 1: grain elevator business model with risk management basis seasonality. Um.
Speaker 1: And it's pretty basic and agg like. You won't find
Speaker 1: folks who quote you flat price corn. They're going to
Speaker 1: tell you it's twenty over des Moines or something, or
Speaker 1: twenty over Chicago Futures because everyone's hedged, because they're not
Speaker 1: crazy and and Lumberd's, it's just different. Folks use futures
Speaker 1: as a physical proxy. They use features to speculate even
Speaker 1: if they're in the physical marketplace. So that causes a
Speaker 1: lot of inefficiencies and futures which allowed me to arbitrage,
Speaker 1: you know, the cash value versus a hedge. I can
Speaker 1: get off and that those those windows were open and closed,
Speaker 1: and it works both ways. So we had this massive
Speaker 1: sell off yesterday in futures, and that was beautiful for
Speaker 1: me because nothing changed in the cash markets at all.
Speaker 1: In fact, cash went up eighty dollars and futures went
Speaker 1: down forty five dollars forty eight dollars from the day before,
Speaker 1: and so like that was a weird speculative move that
Speaker 1: did not match fundamentals, and I was able to arbitrage
Speaker 1: that and and make good money. And you know, it
Speaker 1: goes against you too. Sometimes it will make a speculative,
Speaker 1: non fundamental move to the upside and I'm kind of
Speaker 1: locked out of the market. I could buy more. Typically
Speaker 1: that would be a recipe. Futures are up and the
Speaker 1: cash market didn't go up with it. Then cash is
Speaker 1: cheap and futures is expensive. I'll sell the expensive thing
Speaker 1: and buy the cheap thing. But don't always work that way,
Speaker 1: so often I just kind of get locked out. I
Speaker 1: can't price competitively because I have hedges that are working
Speaker 1: against me. But that's the life of a hedger. And
Speaker 1: I just make modest, and I mean modest, at least
Speaker 1: consistent margins and up and down markets. I don't really
Speaker 1: care if the market goes up or down. I just
Speaker 1: care that there are spikes in demand and scarcity in
Speaker 1: my markets that I can fill. You get my hedges
Speaker 1: off and then wait for another opportunity to restop. So yes,
Speaker 1: we're where is the edge now? And it's not making
Speaker 1: sixty phone calls a day. It's being big. It's it's
Speaker 1: having access to the mills, it's having access to that
Speaker 1: information at the middle level, and it's being a big
Speaker 1: customer that an already big producer wants to pay attention to.
Speaker 1: You have to be big. The producers won't pay attention
Speaker 1: to you. You're not You're not worth their time. And
Speaker 1: it's not like personal, but like they got to move
Speaker 1: a bunch of wood. They're massive company and they got
Speaker 1: to face another massive company. So if you're big and
Speaker 1: you move a lot of wood, that's the edge. And
Speaker 1: if you are small, you've got to go through a
Speaker 1: buying group or buy on the secondary market from from
Speaker 1: folks like me. So that that now is the edge,
Speaker 1: and I think that's what you're seeing in consolidation. One
Speaker 1: of the motivations was for the buy side, but another
Speaker 1: factor of consolidating. Another benefit is I think you're going
Speaker 1: to see pricing power facing the home builders. That power
Speaker 1: dynamic is going to change because all of a sudden,
Speaker 1: these vendors are getting big enough to say, we're not
Speaker 1: gonna do ninety day pricing. Because the homebuilder used to
Speaker 1: be used to say, okay, you won't this other lumber yard,
Speaker 1: they'll do it, and they would do it and they
Speaker 1: wouldn't care if they lost money. They just got a
Speaker 1: huge home builder as a customer. Right now, it's now
Speaker 1: the homebuilders going to start seeing there's less options and
Speaker 1: if they're not going to give me ninety day pricing,
Speaker 1: there might not be another lumber yard to give me
Speaker 1: ninety day because now those lumber yards on each other
Speaker 1: and there's gonna be a power shift and how that
Speaker 1: risk is managed. And just today we saw some comments
Speaker 1: from home builders via Ali wolf On on Twitter. She
Speaker 1: said they're no longer locking in prices when there's just dirt.
Speaker 1: They're they're offering homes for sale once they got the
Speaker 1: lumber literally on site, so then know what the cost
Speaker 1: is and then they can mark it up. That used
Speaker 1: to not be the case. Homebuilders had a pretty good
Speaker 1: run where they did not have price risk, and I
Speaker 1: think you know these contracts and how they're priced. I
Speaker 1: don't have visibility to them and their proprietary but I
Speaker 1: think we're seeing a risk transfer back to the home
Speaker 1: builders because they're losing supplier options, so that the size
Speaker 1: now is where the edge is. I want to ask
Speaker 1: you about the home builder response, but before I do,
Speaker 1: you mentioned this idea of moving lumber just then, and
Speaker 1: I imagine that when you're dealing with, you know, big
Speaker 1: amounts of a physical commodity, whether it's fogs or sheets
Speaker 1: of wood or whatever. UM transport costs can be pretty high.
Speaker 1: And one of my pet themes for the year is
Speaker 1: this idea that economics doesn't actually do a great job
Speaker 1: of appreciating transport costs and UH and taking into account
Speaker 1: shocks to those. And we've seen a lot of shocks
Speaker 1: in transportation this year, so I'm just wondering how that
Speaker 1: has affected the business, if at all. Are you seeing
Speaker 1: UM gridlock or shortage of truckers things like that. You know,
Speaker 1: there there was a big pinch and truck truck drivers
Speaker 1: truck availability and it made a lot of headlines. I
Speaker 1: think it does an eighteen nineteen like with assigning bonuses,
Speaker 1: and they're trying to recruit long haul truck drivers because
Speaker 1: a lot of lumber is moved. Like I move all
Speaker 1: of my lumber from my storage facility to my customer
Speaker 1: via a flatbed that I go find an open on
Speaker 1: the open market, the trucking market, on the quote board,
Speaker 1: the load boards that have online, and tell them what
Speaker 1: I'm going to pay for lumber. It lays shipment prices
Speaker 1: have gone up. I'd say from two years ago, from
Speaker 1: from typical lanes that I would sell consistently, Prices are
Speaker 1: now higher than they were a year ago. You're a
Speaker 1: pre COVID, but the liquidity of trucks has has vastly improved.
Speaker 1: I think that push for hiring drivers and investing in
Speaker 1: more trucks. You're able to get trucks more easily than
Speaker 1: you were a year and a half ago. Two years ago.
Speaker 1: Now that's just me and my little niche, and I'm
Speaker 1: sure there's there's data that at my point otherwise, but
Speaker 1: in my experience, there's more trucks two move loads. I
Speaker 1: I get all my loads moved in one or two
Speaker 1: three days. It's pretty rare that I get stuck a
Speaker 1: week out but that was happening all the time, and
Speaker 1: I'm remembering in two thousand eighteen massive logistics issues with trucking.
Speaker 1: The other element for lumber is and this it's the
Speaker 1: biggest transportation costs is the rail freight from the Pacific
Speaker 1: Northwest to Atlanta. So the futures contract is priced FOB
Speaker 1: Canada British Columbia hundred and twenty dollars per thousand board
Speaker 1: feet gets it to Atlanta. Hut. If you're in Atlanta
Speaker 1: and you look, you want to do the math. You're
Speaker 1: not paying the futures price. You're paying the futures price
Speaker 1: plus a hundred and twenty to to get it there,
Speaker 1: plus the handling to get it undone. And then if
Speaker 1: it's got to move from distribution facility to a store,
Speaker 1: you know that's that's another twenty to thirty bucks per
Speaker 1: thousand board feet. And what we've experienced in lumber is
Speaker 1: the c N and the CP rail lines obviously dominate
Speaker 1: original rail origination out of Canada, and the c N
Speaker 1: is the biggest mover of lumber out of Canada, and
Speaker 1: the sawmills or the seller controls freight, so I'm always
Speaker 1: buying delivered Atlanta delivered Dallas, delivered Baltimore. That's my price.
Speaker 1: I don't face the rail line. I don't pay them,
Speaker 1: I don't book rail cars. I pay a delivered price.
Speaker 1: And the sawmills have contracts with the rail lines. None
Speaker 1: of us are privy to to have a certain amount
Speaker 1: of cars, you know, each week, each month, depending on
Speaker 1: what they think their needs will be, because they don't
Speaker 1: want to have more cars contracted than they need. So
Speaker 1: you can imagine sometimes they under budget how many rail
Speaker 1: cars they need and we'll get bottlenecked and there's not
Speaker 1: enough rail cars moving across the country. Because I'm making
Speaker 1: this up, but because two months ago they miss interpreted,
Speaker 1: they miss forecasted how many rail cars they're going to
Speaker 1: need in June. This is the one thing that strikes
Speaker 1: me is there's only one national price as you describe it.
Speaker 1: Like when I think about the oil market. Obviously we
Speaker 1: talked about like West Texas Intermediate, but I can like
Speaker 1: go on the Bloomberg and there's like there's dozens, I
Speaker 1: don't know, like dozens of actual oil prices everywhere around
Speaker 1: the country, and they tend to correlate, but they're all
Speaker 1: slightly different because it's slightly grade, or it's a different
Speaker 1: logistical network to get there. But as you describe it,
Speaker 1: there's like one price of national price of lumber, and
Speaker 1: then you add on a cost of transportation depending on
Speaker 1: how far it has to go, whether it's to Dallas
Speaker 1: or Baltimore, in Atlanta or whatever. So how does that
Speaker 1: change the lumber trading game? The singularity of their just
Speaker 1: being the one price you know, to me, it makes
Speaker 1: it easier and less there's less arbitrage opportunities because I
Speaker 1: know in grains and an energy, when I was around
Speaker 1: those traders local basis, that was an information arbitrage and
Speaker 1: you could point the market would get so inefficient that
Speaker 1: you could rail it to Kansas City and then truck
Speaker 1: grain to Tulsa instead of railing at to Tulsa because
Speaker 1: the rail to Tulsa there's a spike in rail freight. Right,
Speaker 1: we don't experience that and lumber because the sawmills control
Speaker 1: the freight, which for me is kind of a nice
Speaker 1: perk that I don't have to deal with that and
Speaker 1: I don't have to have a logistics person manage all
Speaker 1: those things. But it's interesting because if Phoenix is blowing up,
Speaker 1: the sawmills and buying a bunch of lumber, they're driving
Speaker 1: up that fob Prince George price. So if you're in
Speaker 1: Dallas or Atlanta, you're kind of at the mercy of
Speaker 1: how busy is it in Phoenix because they're bumping up
Speaker 1: everyone else's price, and that that dynamic is unique, I
Speaker 1: think to lumber. And that's because the shipper controls freight.
Speaker 1: And that's also because because the shipper controls freight, they
Speaker 1: are the importer of records, so they're actually paying the
Speaker 1: tariff instead of the by side, which I think is
Speaker 1: unique for for imports. You know, it's hard for me.
Speaker 1: I haven't don't have a ton of experience in other commodities,
Speaker 1: but in a way, I think it makes it more
Speaker 1: efficient and I know for me running my business, um,
Speaker 1: it really simplifies things. The other side of that sword
Speaker 1: is some of those situations where I was talking about
Speaker 1: you cannot bid up freight to get the product because
Speaker 1: you need it so badly, like it is a very finite,
Speaker 1: like there is no price you can pay because you
Speaker 1: don't control the rail cars. You can't tell the c
Speaker 1: N I will pay two, three, four x whatever it
Speaker 1: is because I gotta have the product. So it causes
Speaker 1: major issues and peak lumber season shipping seasons. And if
Speaker 1: you look at lumber shipment seasonality, it's it's big and
Speaker 1: January and February and then there's another bulge in the fall.
Speaker 1: And if there's a shortage of rail cars, there is
Speaker 1: no open market wholesaler of rail cars that you can
Speaker 1: go to to get your lumber for me to be
Speaker 1: like your ap the mercy of the sawmills contract with
Speaker 1: the rail cars, so that will drive out price in
Speaker 1: the on the futures contract. But more than anything, it
Speaker 1: drives up prices for local basis for someone like me
Speaker 1: who has it so so lumber yards have learned this
Speaker 1: over the years and they try to anticipate and buy
Speaker 1: before there's a rail shortage um and load up on
Speaker 1: inventory ahead of time so they so they don't get
Speaker 1: starved out from lack of contracted rail supply UM. And
Speaker 1: I think that was from the traders that have been
Speaker 1: doing this longer than me. That transition happened about twenty
Speaker 1: years ago UM And I imagine it's because the rail
Speaker 1: lines just wanted to face a bigger player who they
Speaker 1: could just deal do volumes with versus onesie tuesies, little
Speaker 1: lumber yards. So I have a really basic question, but, um,
Speaker 1: who is making money from the price rise in lumber?
Speaker 1: Because I get the sense from this conversation that even
Speaker 1: though we've had this big surge, it's sort of made
Speaker 1: things difficult for everyone, and there's no one in the
Speaker 1: lumber ecosystem who's like making out like a bandit at
Speaker 1: this moment in time. Yeah, that is very true. The
Speaker 1: sawmills are doing great, I mean unbelievably great, and it's
Speaker 1: long overdue, and I'm happy for him. I think we
Speaker 1: were going to grind higher to a price like this eventually,
Speaker 1: but COVID, you know, did its thing, and and we
Speaker 1: did it all at once. And the reason I think
Speaker 1: that was because that's what the Canadian experts that I
Speaker 1: work with and the folks who cover that sector have
Speaker 1: been telling me for a while, like it's coming, it's coming,
Speaker 1: We're reducing the cut, and um, eventually prices are going
Speaker 1: to be astronomically high. It just happened very quickly, and
Speaker 1: it also happened after it sell off the two fifty
Speaker 1: dollar low and now were at basically twelve months later.
Speaker 1: So the mills, for sure, easy answer after that because
Speaker 1: it's the rise has been so sharp, it's going to
Speaker 1: compress margins for under lumber dealers and homebuilders that kind
Speaker 1: of have that forward price lock dynamic. But prices have
Speaker 1: been this high for six plus months. We know then
Speaker 1: that these prices have been able to been marked up
Speaker 1: and sold over the past couple of quarters. So higher
Speaker 1: prices generally are more profitable, and we love it as
Speaker 1: an industry. How we got there is not ideal, But
Speaker 1: if we stay here, everyone's gonna make a lot more
Speaker 1: money everybody, just because gross margin for a lumber dealer,
Speaker 1: according to publicly traded financials on lumbers is a lot
Speaker 1: better than six lumber, right, So if we're higher for longer,
Speaker 1: everyone's going to do very well. This transition into it
Speaker 1: is fairly painful, but I am of the belief that
Speaker 1: the floor for this market, because the market's going to
Speaker 1: stay volaible. It hasn't been volatile. If it only goes up,
Speaker 1: that's not volatility. That's just one direction you needed to
Speaker 1: go up and down. Eventually, folks will get covered and
Speaker 1: they'll get the lumber they need and will roll over.
Speaker 1: But if they've been selling forward nine thousand lumber purchases
Speaker 1: are extremely profitable for them, and this idea of am
Speaker 1: I going to get caught in a short squeeze again,
Speaker 1: shame on me. So I think you're gonna see bigger
Speaker 1: lumber purchases on these dips so they can be well
Speaker 1: supplied and have the product, because that's ultimately driving this behavior.
Speaker 1: It's not the price, it's it's having the product on
Speaker 1: hand to fulfil your commitment to the builder. So higher
Speaker 1: for longer means these prices get normalized. A gross margin
Speaker 1: on a higher price is I deal for everybody involved
Speaker 1: the transition to get there. Obviously it's painful, but I
Speaker 1: think at the end of the day, for this housing cycle,
Speaker 1: it's a great thing for the industry. Stinson, this was fantastic.
Speaker 1: I loved learning about this totally new market structure and
Speaker 1: hearing your perspective on it. Really appreciate you coming on
Speaker 1: a lot. Yeah, Hey, I appreciate it. Folks learn something
Speaker 1: and uh happy to contribute. Thanks so much. Yeah, I
Speaker 1: think they definitely will. Thank you so much. Tracy. Remember
Speaker 1: a recent episode with um Sam Bankman Freed the Cryptoga. Yeah, sure,
Speaker 1: I kind of been thinking about that a lot actually,
Speaker 1: with like the with the Lumbar conversation, and his whole
Speaker 1: story is about No, I'm serious, like his whole stories,
Speaker 1: it's like okay, like you bought this and then like
Speaker 1: you sold it, transferred it to someone in Japan and
Speaker 1: stuff like that. Like I feel like all the interesting
Speaker 1: markets essentially involve they guess they involved legwork, like they
Speaker 1: involved of like putting in the work to like, well,
Speaker 1: this sells for this and this place, and this sells
Speaker 1: for this in another place, that you have a relationship
Speaker 1: with this and you get to some size that you
Speaker 1: can do it. And it feels like even though like
Speaker 1: we kind of joked at the beginning, like lumber is
Speaker 1: kind of a meme stock or it's kind of a crypto,
Speaker 1: Like they're kind of are similarities in market structure, I
Speaker 1: feel like, is that contrived? No? I mean, I think
Speaker 1: it makes sense that markets with arbitrage opportunities are more interesting,
Speaker 1: and certainly they're going to attract people who are quite
Speaker 1: keen on making money. But again, like making that money
Speaker 1: does involve having some sort of edge or informational advantage
Speaker 1: or some sort of ability, for instance, to arbitrage the
Speaker 1: price of bitcoin in South Korea versus somewhere else in
Speaker 1: the world. So there is that. The other thing that
Speaker 1: this reminded me of is our conversations around COVID and
Speaker 1: just this idea that the coronavirus sort of accelerated all
Speaker 1: these previous trends that were already underway. And if you
Speaker 1: think about lumber Stinson was describing the supply issues in Canada,
Speaker 1: the pine beetle infestation and the fact that Canada was
Speaker 1: sort of becoming more conservative about how much would it
Speaker 1: was actually chopping down. That seems to have gotten worse,
Speaker 1: um over the past year or so, and so it
Speaker 1: feels like a lot of this was on its way,
Speaker 1: but because of COVID, the impact has just sort of, um,
Speaker 1: you know, multiplied. Yeah, And that's the other thing, Like,
Speaker 1: you know, the population of the United States has grown
Speaker 1: a lot, because that's what populations do. The home buying
Speaker 1: population has grown, and like people have like talked for
Speaker 1: a long time about how the US was just like
Speaker 1: under housed and the scars And I love that point
Speaker 1: you made about the scars of two seven eight continuing
Speaker 1: to link over the industry, linker over the industry. So
Speaker 1: it's kind of like we're getting this like shock therapy
Speaker 1: for the housing market overall, where we knew we've been
Speaker 1: under housed for years, and suddenly we're like trying to
Speaker 1: like make up for that under housedness in like the
Speaker 1: span of like a year or two. And so you
Speaker 1: get you get these like you know, super like painful
Speaker 1: periods like we're seeing right now. Yeah, it also makes
Speaker 1: you wonder if we're going to flip from being super
Speaker 1: conservative in the aftermath of the two eight financial crisis
Speaker 1: to everyone being scarred by the undersupply issues in one
Speaker 1: like for the next decade, is lumber just going to
Speaker 1: be this huge market and everyone's ramping up production. Well
Speaker 1: that's what he kind of was hinting. Yet at the end,
Speaker 1: right because you're like, well, no one wants, you know,
Speaker 1: no one wants to get short anymore. Like if you
Speaker 1: basically if you think of all the lumber yards, is
Speaker 1: having just been like brutalize in the short squeeze, and
Speaker 1: now that becomes the new thing that scars them, then
Speaker 1: maybe you start to get this other correction. You have
Speaker 1: to start to get like more building and more investment
Speaker 1: and more capacity to probably ultimately good for the economy
Speaker 1: rather than rather than shrinking. Yeah, more houses at least. Okay,
Speaker 1: shall we leave it there? Yeah, let's leave it there. Okay,
Speaker 1: this has been another episode of the Albots podcast. I'm
Speaker 1: Tracy Alloway. You can follow me on Twitter at Tracy
Speaker 1: Alloway and I'm Joe wisn't Thal. You can follow me
Speaker 1: on Twitter at the Stalwart. Be sure to follow our
Speaker 1: guests on Twitter Stinson Dean. He is under the handle
Speaker 1: at lumber Trading. You really want to check out all
Speaker 1: of lumber Twitter. It's a really good spot. Follow our
Speaker 1: it really is. It's great. Follow our producer on Twitter,
Speaker 1: Laura Carlson. She's at Laura M. Carlson. Follow the Bloomberg
Speaker 1: head of podcast, Francesca Levi at Francesca Today, and check
Speaker 1: out all of our podcasts at the handle at podcasts.
Speaker 1: Thanks for listening.