From Trees To Lumber, Sawmills Boost Profits As Crack Spread Erupts 

Lumber prices soared to new records on Tuesday morning but faded in the afternoon following new concerns of COVID-19 pushed commodities and equities deep into the red. 

In this commodity note, we’re going to concentrate on the lumber prices over the stumpage fee, the price a firm pays for the right to harvest timber from a given area. Think of this ratio as the lumber crack spread, sort of like how the oil industry measures the profitability of an oil refinery (crack spread) by taking the difference between the price of crude oil over petroleum products. 

One of the essential features of the explosion in lumber prices is the spread between lumber futures and stumpage fees for Lousiana pine have almost quadrupled since the beginning of the virus pandemic. 

The spread between futures and the Louisiana stumpage fee is around $1,144 per 1,000 board feet, based on Bloomberg’s calculation that assumes eight short tons of logs per 1,000 board feet. 

What this all means is that sawmills are making a killing on selling lumber to wholesalers. For some comparison, when lumber prices surged in the first half of 2018, the spread peaked at around $440.

In Alabama, the stumpage fees are slightly higher than in Louisiana at around $23.34 per ton but have barely moved since 2016 and are only half the price as in 2005 prices. 

“If you can source the lumber, you’re making a whole bunch of money right now,” Stinson Dean, chief executive officer of Deacon Lumber Co., told Bloomberg last week. 

Forest Economic Advisors LLC said muted stumpage fees boost profits for sawmills as the housing frenzy results in a massive demand for lumber. 

Mills in the southern half of the US are operating at 93% capacity, cranking out as much lumber as they can to meet demand. 

But lumber crack spreads in the southern US can’t hover at record highs forever. 

“As soon as the supply disruptions sort themselves out and everything gets back to normal, we expect a major correction in prices,” said Joshua Zaret, a senior analyst at Bloomberg Intelligence. “But right now, if you’re producing lumber in the US South — or anywhere for that matter, but particularly in the US South, where your log cost hasn’t come up — it’s very profitable.”

There are so many cheap harvest-ready trees in the South that currently exceed sawmill capacity. The problem with all these logs is that it’s expensive to ship to other sawmills around the country. Supplies generally stay in a localized region. 

Lumber crack spreads are likely to contract later this year into 2022 as sawmill capacity increases.