- How lumber tends to be one of the leading indicators of what’s going to happen in many different markets
- Why lumber prices spiked so dramatically during the pandemic
- Logistics and what the lumber journey looks like from the forest to the Home Depot
- Why lumber has been volatile for a long time, and where the next 100yrs of supply can come from?
- Why there isn’t any wood in sci fi movies
- And, we discuss how Kyle and Stinson are competitors, vendors, customers all wrapped up into one, plus more!
Follow along with Stinson Dean on Twitter @LumberTrading and Kyle Little on Twitter @lumberlittle
Find the full episode links for The Derivative below:
Check out the complete Transcript from this weeks podcast below:
Wood is Good! With the Lords of Lumber: Stinson Dean and Kyle Little
Jeff Malec 00:05
Happy day after Groundhog Day everyone one of my favorite movies to be sure. This episode is brought to you by RCM ag that’s ag as in agriculture, and RCM ag helps all sides of the ag business from the farmers to growing the crops to the commercials purchasing and moving them in bulk. To the end users who are worried the million pounds of bacon they’re buying each year is up 50% That’s a lot of bacon RCMA services construct hedges facilitate swaps and other OTC trading and work day in day out to protect revenues or costs depending which side of the fence you’re on. Oh, and if that fence is made of wood, like we’re going to talk about in this pod ag group has a dedicated lumber specialists. Go to the website and sign up for Brian biners lumber commentary and get a weekly updates on how the big cash market players are handling that market. To learn more visit RCM ag services.com RCM ag se RV IC e s.com Our Sam egg services.com Oh yeah, and while you’re there, check out the new infographic they just put out on what it takes to feed the world super cool. Okay on to this pod which was great. I’m enamored by the lumber store I can’t get enough of it as it appears much of the world is we were able to get not one but two of the best in the business enjoys we talked about growing it cutting it shipping it replacing it hedging it buying it selling it a lot it so send it here we go with the Lords of lumber wizard of wood philosophers of fiber. What else you guys got any good nicknames?
Stinson Dean 01:40
Oh, no.
Kyle Little 01:43
No, not at all.
Jeff Malec 01:44
I think I’d love hearing and talking about this stuff you right everyone has a different word of timber fiber wood lumber, like it’s all synonymous. I guess we’ll dig into it but gets pretty interesting. But anyway, welcome to Stinson, Dean of Deacon lumber and Kyle Liddell of Sherwood lumber. Stinson I think as the best email signature and LinkedIn profiles ever seen putting in parentheses, first name behind Stinson and last name behind Dean. How many times was that done incorrectly where you had to go resort to that?
Stinson Dean 02:18
Ever since I was a little kid one time I couldn’t get on an airplane because I kept transposing My names. And so you know, it happens often enough to put it in my email signature. I don’t blame anyone. But yeah, every time I meet someone new pretty much
Jeff Malec 02:33
it’s a derivative of the Never trust someone with two first names never, never flipped someone’s first and last name. There we go. And Kyle share with lumbers that not so subtle play on Sherwood Forest.
Kyle Little 02:46
Absolutely is a play our fat we’re a family owned and operated business of a second generation or third generation taking over for second generation and the first generation, the wife of our founder, actually named the organization Sherwood based off of Sherwood Forest, because sure what it was kind of founded of, you know, basically buying from the big guy to help the little guy very similar to what we had to deal with with Nottingham Forest and the Robin Hood day so it absolutely came from that background,
Jeff Malec 03:21
what kind of species they have in Nottingham Forest anyone unlock something. So big picture I want us I want to sort of start philosophically before getting into the nitty gritty and ask why do you think lumber is such a big deal? Right like the Euro dollar markets 100x the lumber market, but there’s nothing like lumber Twitter talking about euro dollars. Kyle, you go on CNBC Stinson you’re on Bloomberg sideline podcast most listened to episode. So just throw it out there. Why do lumber prices speak to everyone from my retired father in law to fed economists Why is it such a big deal for people?
Kyle Little 04:02
Since anyone to take it away? Lead us off.
Stinson Dean 04:05
Yeah, well, I kind of live in a bubble where lumber futures. It means everything to me. But I think really, the reason it gets a lot of pub and folks are talking about it from your uncle to Bloomberg is because it’s one of the rare commodities that get to the end user unchanged isn’t an ingredient that is part of a larger widget. I’d say that out loud. I’m thinking about a house but like you get that price are you gonna walk into Home Depot and see a two by four? It’s the same thing that that was priced at the mill, you know, a month earlier where other commodities or true raw materials that get mixed into widgets, they don’t really see one for one, what you’re buying so I just feel like maybe it’s because we all have access to the untouched raw commodity to feel the action.
Jeff Malec 05:08
Although I talk we have in Chicago here, people steal the catalytic converters for the Palladium. And like there was an incident a couple weeks ago, like Palladium is down 40%. What are they doing? Like? They’re not tying and they don’t see the raw raw input, as you’re saying. What are your thoughts? Why is it such a big deal for people?
Kyle Little 05:27
I mean, I think that’s definitely part of it. It’s, it’s, it is an ingredient into a hole. But in the most in the purest form, it’s about one of the simplest commodities traded in, you know, in North America, let alone the world. And the one interesting thing about lumber, I think, is that it tends to be a leading indicator of what’s going to happen in a lot of different markets. And I think that’s why there’s so much interest in it outside of the lumber industry. But what we inside the lumber industry call, it’s a really, really big, small business. Huge industry, law of touch across the North America and obviously the world. But it’s really a very unique, Lee traded uniquely district distributed, and product. And there’s a lot of prior to 2020 or 2019, there’s very little talk about lumber, in the sense in the, in the grand scheme of things, and, you know, when people used to talk about, go down the street and ask, he asked me what that I do, and I’m over 25 years in the business, I’m like, you know, I’m in the wholesale lumber business, and they’re like, Well, you know, you know, what, 20 acres behind my house, I’d like to timber that I’m like, no, no, that’s not exactly what we do. We’re, we’re actually selling the finished commodity for homebuilding. But I understand why you would do that. And they’re like, broker lumber, but but it’s a very, it was a very, what it was, say an industry that very many, many people didn’t know about was very much flying under the radar. And not until, you know, the pandemic, and, you know, prices moving 300 400 500% In lumber become more of a mainstream, you know, topic. Because it really changed the way that people ultimately, you know, had to spend and possibly build, build shelter. So, it’s been pretty cool to be part of that conversation over the last few years, and or last couple years, and to allow, people kind of get more insight on our business, which I think is really, really good. But that being said, it took, you know, some serious hyper volatility to get us in the news, so to speak. So but but the going back to why do I think people talk about lumber, even in 2020, when we’re in the beginning of the pandemic, and ultimately, when we talk about inflation lumber was really the first commodity to go do that. But let’s go back, you know, 10 years prior in or 12 years prior when we went into the financial collapse when there was high speculation in housing and what have you lumber was trading, you know, half of what it is today or almost two and a half times below what it is today. But when lumber ultimately rolled over in that environment, it was well before we saw the problems on Wall Street with Lehman and everything else the housing industry and what else happening inside of that commodity was very a key indicator of what was about to come which ultimately was you know, you know, a major sell off across the broad economy and lumber was like a reflection and really provided a lot of insight of what was about to come back then as it did just previously here in the last few years.
Jeff Malec 08:44
That tells me this little market sell off we’re having a this week what are we third week of January here maybe in the s&p isn’t quite because lumber didn’t sell off till stocks led lumber this time. And I was gonna touch this later but Stan to maybe if you can just take us through the whole journey from the forest to the Home Depot lot. How’s it how’s it start out? Has it get there where we get involved?
Stinson Dean 09:11
Right? So depending on what type of tree it is, what species a tree produces a different type of lumber, and we largely trade and traffic in Canadian spruce trees, the lumber that comes from Canadian spruce, so and there’s a lot more going on, but it’s soft, its soft wood framing lumber, it’s the stuff behind the drywall, there’s no hardwood there’s no decorative it’s a commodity to buy for that largely comes from Canada. It gets logged by logging companies that then sell the logs to the sawmills. The salt Mills process the log the technology is really advanced these days. They throw a laser on it to figure out what’s the most efficient yield out of that log. And they just go on production runs. And they don’t generally know exactly what they’re going to produce. Because the logs are all different shapes and sizes, but they can get pretty close. And they try the producers, then try to mark it on a three to four week forward sale, they try to pre sell their production as close to that production estimate as they can. So once they produce the lumber, they sell it either in the open market, which is becoming harder and harder to find, or they’re just on contract, volume contracts, price time of shipment to a Home Depot or Lowe’s, or a big contract or lumber yard. And then what’s left goes to the open market and kind of sets the price. From there, it’s railed almost exclusively on rail to different locations in the US and unloaded and either trucks to its final destination a lumberyard, which then trucks it to a job site or can rail directly to a lumberyard. So that’s the physical journey. And a couple of important points as we trade lumber, as we’re so dependent on Canadian lumber, that whole process if they’re selling forward four weeks, and then they got to ship it from Prince George to Atlanta, it’s eight weeks of when you buy it to when you actually receive it. And that’s becoming more and more common. And that transit time, depending on weather and rail efficiency changes all the time. So we’re heavily influenced by railroad efficiencies, and then the ability for mills to meet their commitment, like, okay, hey, in three weeks, this is going to ship, but then they have a COVID outbreak, and they’re brought behind their production schedule. So now it’s going to ship at six weeks. And then there’s a rail delay, for whatever whether COVID release and reason. So it’s six weeks out. So all of a sudden, you’re not getting it for 12 weeks. And like that’s where a lot of our volatility comes from. So it’s important to understand the life of a piece of lumber starts out as a tree gets processed to a two by four. And then it doesn’t get touched. It goes all the way to the builder in that form. But it’s that logistics piece that really causes a lot of the volatility.
Jeff Malec 12:31
Anything that there Kyle?
Kyle Little 12:33
Yeah, I would just add that, you know, a lot of what Simpson said is absolutely correct. The only thing I would say is differences, that the volumes that get bought from the mill and then down to the consumer get continues to get broken down into smaller pieces. And that adds into that logistics challenge, right. Specifically, what we’ve been dealing with the previous time that we had the most challenging logistics, prior to COVID was back in 2018. That was when the federal government finally instituted the, the electronic he logs for trucking, which took for a short period of time about 20 to 30% of the capacity out of the marketplace. On top of that we had Canadian issues with rail traffic, it was a historically cold, cold, cold winter, and traffic speeds slowed across all of Canada and all of the northern tier of the United States, which added into what was historically a two, four and six week lead time to 810 1214 week lead time, which ultimately spikes lumber and in that instance, roughly about you know, two times two prior to that, you know, prior to 2020.
Stinson Dean 13:45
We thought that was a pretty good deal. At the time. Right? Dollar lumber, this is crazy.
Kyle Little 13:54
Yes, $100 lumber. And now we essentially tripled that in during the pandemic. But that being said, that that supply chain and the way that lumber is produced in large quantities and broken down into smaller quantities takes time. And whenever you see a disruption of that supply chain, it’s going to inflate the Meet the value of that commodity. And you know, we saw it prior to COVID. And multiple times. It wasn’t just in in 2018. We saw it in 1993 and years before when we had spotted out disruptions and other things that challenge supply. It just so happens that that’s the most recent one in Dean’s demonized career to go on reference.
Jeff Malec 14:37
And who who this just popped in my mind little off topic, but who pays or earns that carry? for that? 12 weeks, right? If someone has paid out and then they’re I mean interest rates are zero so it doesn’t matter too much. But right is someone on the hook for that money sitting somewhere for 12 weeks until the delivery?
Kyle Little 14:56
Yeah, I mean, look, it’s from a casket virgins perspective. It’s What is one thing to deal with it in times when lumber is sitting at its, you know, 10 year and 15 year mean, but when you’re trading at three, four or five times above that, obviously, it’s challenging from a cash flow perspective. So, in most cases, the buyer is out that until they receive the material can turn it into cash. So, the Mr. Dean and I sitting in the middle of the chain, and in on the, in the, in the wholesale brokerage or wholesale distribution, we could see, you know, what would normally be a cash conversion cycle of, you know, 50 to 70 days, you know, double or triple and that’s that definitely happened. And that’s what, you know, kind of fed into the volatility both on the upside and the downside, over the last three to three to five years when we’ve had these enormous swings in lumber.
Jeff Malec 15:59
We’ve touched on the price you’ve touched on the swing. So next, just want to get to basically habit lumber, go up like this again, after the huge sell off last year. And just ask if there’s something fundamentally wrong with the market that can roundtrip? 300 to 400%. And just a little over a year, right, we were at right 400 Up to what was it 1800? Back into the four hundreds back up to 1300. And just a little what is it? 1314 months?
Kyle Little 16:26
Yeah. So since and I’ll take this totally off, like so one of the things that we identified roughly 16 months ago, was that the question was what was happening in the initial part of the pandemic? And when lumber started this hellacious run higher? And the question at that time was, Is this the new norm? Is this going to continue to be like this, and we’ll have you tell me why this can or cannot happen, or we’re just going to essentially have a reversion to the mean, go back to the old norm, the what are lumber has always traded. What we found in our, in our analysis was that lumber over the last 30 years, what happened, there are two key metrics point that we’re measuring. And in that circumstance, that happened seven times prior to the 2019 2020 pandemic. And it basically it was an inflection point to tell you that we were going to create a new cycle. And that cycle could last in those seven times, anywhere from a shortest nine months, and as long as 40 months. And the average time of those seven times was 24.7 months. So you might have seen me talk in a variety of different media’s and said that I believe we’re in somewhere in an 18 to 24 month cycle in this this new this new cycle. And that’s where we are and and right now we’re in month 19 of the cycle that we that we identified. Does that mean we’re you know, closer to the end and the beginning, I would have to say yes, that’s where we’re leaning towards. But it could go longer, because the longest period of time ended up being 40 months. And that was back in, in the early 2000s. But in all of those circumstances of those seven times, we had a price appreciation that was outside of the normal range, only to sell off to, to where it began from to only go back and retest a number at it at least 50% of the of the previous move. Five of those seven times the move went 60% of the previous move, we just hit in the lumber market 60 60% of this most recent one, which in my mind, always has been I think about as far as we could go, it doesn’t mean that we can’t go higher, because we’ve already had been higher, but we were not necessarily holding out for an 80 or 90 or 100% Retreat, you know, retest of the highs. So that being said, once you have that retest of the 60% number, the market tends to fall off in the next the following 12 to 18 months. So I believe that sense now we’ve hit that second move, or that second retest of the most recent highs, we’re moving into latter end of the cycle. And therefore, we’ll start to see more of a pullback and a reversion to historical means, meaning that we’ll probably have to go back to the One Year Two year means and we’ll be rolling back could possibly see five and 10 at some point. And that really depends on you know what the economic climate is going to be long term in a rising interest rate environment and it’s in a environment where the Fed clearly has to put in some extraordinary measures to slow down the growth of the current economy because of the inflationary factors that we have would lead me to think that that’s sooner than later. That nor new normalizations
Jeff Malec 20:00
Yeah, sent in and out. I’ll twist it unless you got immediate thoughts. I’ll twist a little bit for you in terms of like, is the market broken with those swings? twisted a little bit? Like does it break people or firms with those wild swings? Right? Is it unhealthy to have such wild swings?
Stinson Dean 20:17
Yeah. And I first want to talk about the futures market, which, which gets dogged on a lot for being, you know, and then Lee traded. And my argument is that I’m a big lumber futures trader. So my bias and my, my angle here is to promote lumber futures. It really, in my opinion, represents the cash market really well. You know, if you looked at cash, print prices, kind of third party publication prices, or if you’re in the market, you can see what’s actually traded. It’s wilder than lumber futures, like lumber futures have limits in the cash market doesn’t have limits. And it’s, it’s thin in the cash markets. And that’s from the consolidation of buyers, the kundala consolidation sellers assault Mills there’s just not a lot of folks in the middle that can make markets and there’s not a lot of independent buyers and independent sellers that create a an efficient marketplace. So in that respect it you know, it’s represented, it really represents the cash market fairly well. And the fact that so much business is done on contract for cash contracts, very little sees the open market then used to be in previous cycles. So, you know, open market Bid and Ask cash, lumber, there’s less of that to begin with. So the extreme volatility, like volatilities good I think extreme volatility breaks markets. I’m I’ve been shocked that we really haven’t seen lumber firm blow up like be a real public well known explosion, I really a testament to the industry, I guess that they’ve all navigated it well enough not to blow up. The reality is much like homebuilders and I’ve talked about this in the past, the firms like Sherwood and all the folks who’ve made it for 2008. On know what’s possible. They were at the forefront of the Great Recession, like housing and lumber was the ground zero. Yeah. And if you live through that, you’re just going to be conservative, and you’re going to have more cash and you’re going to have more cushion and you’re going to you’re going to have more parameters in place, you’re not going to take as much risk.
Jeff Malec 22:57
Also, your bankers aren’t willing to lend you as much aren’t willing to lever you as much.
Stinson Dean 23:02
Right? Yeah, you’ll find in our industry, very little leverage on inventory, a lot of leverage on AR like most folks, but like, I don’t even think that’s the bank’s decision. I just think that’s the type of personality that’s still in the lumber business today. They just don’t want to be covered because things get weird. Nothing that goes to the why we didn’t have any blow ups. Go ahead. Just what was
Jeff Malec 23:27
that? Oh, wait, drawdown like what was that decline in price in lumber? All
Kyle Little 23:33
that kind of price is over before Stinson. You started after that, right. So I was trading in the trenches during that time. I started in 97. And was going through that and we essentially went from 2 million housing starts to 400,000 housing starts in about a two year period or, you know, two and a half year period. So you can imagine that you had production, equalized to 2 million starts to see that go down in the way that it did, how much excess capacity was sitting all over the country. So every time you bought something you had to you had to make sure that it was sold immediately. Because the next day, maybe the next that afternoon, I think it likely could be you know, worth less. So I was just going to comment a lot talking about a bank and financing inventory and lumber in an environment with hyper volatility that we had to think about the balance sheet expansion that we’ve had this the last two years versus what it was, you know, prior and what it’s going to be when the cycle ultimately does roll over. It’s going to be, you know, challenging. I mean, think about it, if you have $10 million of order inventory. And if you just look at what happened in May or June of this past year to August, that $10 million, all of a sudden is worth, you know $4 million. If you really think about it, if you’ve marked a mark that at that period of time. Yeah. And you know, so banks not going to necessarily have a lot of appetite to go and help you through that process. So you’re gonna have to really work through that and making sure that you have the proper cash behind, you know, all that to be able to weather that storm. So they are hedging. Yeah. And the funny thing is that, you know, the lack of liquidity in lumber, and the volatility in lumber really has to do with the majority of the industry not using the tools that are available to them. You know, Stinson and I talk about that a lot, I just don’t understand, I can’t imagine how organizations that buy as much lumber as they do, do on pure speculation, just thinking that they’re going to buy or they operate their business on this cost plus, only to see that cost plus become cost minus triple what they you know what, they had to go out there and do an ultimate minus.
Jeff Malec 25:55
Let me unpack that for a minute. So I’m buying a lumber deal, I’m buying from the mill $10 million worth of inventory. And now I’ve got that 10 million of risk. If it has in price, I can only sell it for five. If it doubles, I’m gonna sell it for 20. I’m looking great. So it seems like they’re more wildcatters of just hey, I’m taking this risk. I want to go out there and do that. We’re big proponents of hedging, obviously, and futures and the derivative here. So how do you how do we get them convinced? How do we convince those guys that? Yeah, right. It’s better to make less
Stinson Dean 26:28
of the more than Yeah, I used to, I used to be a lumber futures risk management consultant. And I’ve been in the rooms I’ve been in the war rooms, with these folks trying to convince them, you probably hedge, and you get answers like, Well, why would I hedge? If I know it’s gonna go higher? Yeah. What?
Jeff Malec 26:52
Point but how do you know? Yeah.
Stinson Dean 26:55
So it’s hard to argue with a feeling you can’t argue with, with people’s feelings. And people have been able to get away with it for so long, because volatility has been after what we’re experiencing now, I guess, somewhat measured, I would argue, lumber has been volatile for a long time on just the percentage basis of moves. But again, these lumber yards are have a lot of cash, not very levered, and hey, if you missed a move in any previous lumber trading paradigm, you’d be out 100 bucks, 1000, it would sting. But you’d be alright. You just kind of wait long enough, it’ll come back to you. Where now, if you make a mistake, it’s $500. Plus, and folks are getting exposed left and right on their lack of risk management, and their ability to you know, if I know it’s going higher type mentality. So I there, I know I’m sure Kyle, same thing, like just tons of folks, because we talked about futures so much reach out, and like how do I use this a ton of end users, you’re finding out that folks in the supply chain weren’t managing the risk. And if they were blown up, or got offsides, they would just go to their customer and be like, hey, I need more money. This didn’t work out. And so those folks that the true end users are trying to figure out how they can protect themselves, which has been good. For me it the simplest way to think about it? And to answer your question, how do we get people more people involved, you need to think about it as a substitute sawmill, or a substitute customer, depending on if you’re long or short. Like that’s it, it’s a real car to buy for. And if you’re looking at your book, and you’ve got a bunch of commitments, like you need to get long to buy course. So by the futures contract, it does not mean you’re taking delivery doesn’t mean you know you’re going to have real car showing up at your house. It’s a derivative instrument 99% financially settled to protect yourself against higher lumber prices, we’re focusing to get comfortable with is if you’re long, and you did it for budget reasons, and you’re comfortable with that, and then the prices go down, you are no longer participating on the downside. And you feel that pain every day through margin call. And so wrapping your mind around the philosophy of risk management, what the margin calls mean to your book, and why you put the hedge on in the first place. So a little bit of education but for me, it’s it’s just like, hey, if I need to get long, I could buy a futures contract. And I’m good. Or you know, I could go buy real cars or lumber from a sawmill that there’s five or six people in between me and the sawmill so it’s way more efficient just to use the board to protect your risk
Jeff Malec 29:39
and what is storage look like in the grains right if people aren’t happy with the price they’ll throw it in storage and wait a year or two oils notorious right of like, hey, I can make more money keeping it in the tanker in the Gulf of Mexico than bringing it on shore and selling it. What what is storage look like? And is that a play to just hold on to it until prices return or the demand to.
Stinson Dean 30:02
Yes, so the carry in our markets because it’s illiquid, and inefficient, it’s gets ridiculously lucrative if you have a place to store it. We run into a place the summer into the fall where places that there are lumber storage facilities like ran out of room, they were embargoed, you couldn’t send rail cars there, because there was wood everywhere. And the futures, again to bolster my argument that it represents the cash market really well had this huge contango that just kept getting wider and wider and wider because you couldn’t put the word anywhere, similar to negative oil in a way. But you know, you can find a place to put lumber, but all the traditional places you would store it were completely full, and they wouldn’t accept rail cars. So there’s a great contango trade in lumber. And then conversely, when things get tight, they invert in a big way, and you get penalized for storing it. So if you’re if you have access to physical inventory, the carry trade is unbelievably profitable. You just got to stand in there and pay the margin call the carrier.
Jeff Malec 31:11
And then we mentioned rail cars. So the futures contracts 110,000 board feet, that’s about what fits on one rail car. Is that correct? That’s correct. And what’s a board feet, just a six foot long, two by four is six boards.
Kyle Little 31:26
So two before eight footer is 5.333. board feet. So that’s basically to two inches by four inches by eight feet long divided by 12 feet. That gives you a board foot.
Stinson Dean 31:40
Karen, it’s made my brain. Yeah, it’s made my brain hurt when I got introduced the lumber mouth, but I think it’s like a volume measurement of the wood. Correct? You know, and weight that comes with that.
Jeff Malec 31:53
And then I’ve heard you at sure what do you guys do a billion board feet a year?
Kyle Little 31:56
Yeah, we’re approaching a billion board feet a year. So that’s roughly 10,000 rail cars of material. I’m rounding up. But 10,000 rail cars material or 40,000 truckloads on an annual basis?
Jeff Malec 32:08
How many trees is that for environmentalist? Friends? How many trees died?
Kyle Little 32:12
That I don’t know.
Stinson Dean 32:15
You’re asking the wrong question. How much how much carbon has been permanently captured inside that two by four.
Kyle Little 32:23
But the interesting thing is, though that to answer your question in regard to trees, if you go look at any any tree cut down in North America, there’s anywhere from three to five trees planted for every tree that’s cut down. So like it’s a very well managed resource inside of North America and Europe, for that matter. I think South America in least in the Manage properties are moving that way. It’s it’s just a it’s a 40 year plantation process, as opposed to you know what, you know, I think, unfortunately, my kids get thrown out a couple times if they go and read the Lorax or what have you. It’s yeah, it’s not a it’s not like that. But it’s not isn’t that is not the one Fleur he’s he’s going out there. And any look at the forest industry in general, for the last 100 years, it’s inside of North America, in particular, has been a very, very well managed resource. And you know, they’re
Jeff Malec 33:19
like a match there. Even with the carbon capture, right, like, Okay, I planted a tree like some of these guys plant trees to offset one year of carbon, but that tree might take eight years to grow to offset actually that carbon. So it doesn’t really count. And like what how does that time mismatch works are planting three for everyone? But then you have to wait 4080 years?
Kyle Little 33:41
What does depends on what species and what Mark? You know what climate that had been? I mean, in the Southern Neil in the Pacific, I mean, in the US South, that lifespan is 2020 to 30 years. Whereas in the Pacific Northwest, your point it might be more like 50 or 60 years. And then you go into northern Canada, it might be 80 years. It really just depends on the climate that it’s in. But the interesting thing is, you know, you look at where we’re where we’re timbering today, versus where we were, you know, just 10 years ago, and then 20 years ago is totally different. Like what, since it’s talked about, you know, Canadian markets really rolled the US Well, that’s changing, and that’s part of the volatility that we’re dealing with right now is that the US South is the largest resource, not only in the US, but really the world. It’s a cheapest fiber in the world right now. And it’s underutilized here in North America. So we’re not building houses with just Southern Yellow Pine, it’s still predominantly, you know, managed through Pacific Northwest species or Canadian SPF. So, you know, there’s going to have to be a change and evolution and the way that we build here in the United States to meet the fiber basket that that can support it.
Jeff Malec 34:54
Back to that fiber fiber work. You can’t put this fiber in your diet It
Stinson Dean 35:01
depends how you spell it.
Jeff Malec 35:09
Moving on, so I kind of have this thought of you guys as competitors as vendors as customers all wrapped up in one Stinson, I’ve heard, you know, to another pods, you mentioned at the top of this, that there used to be pricing via hundreds of lumber yards. Now, it’s really only five big suppliers that have rolled up those yards. Kyle, I think you’re one of those five, correct. So how does that dynamic work? I kind of gonna sit back for a minute and let you to ask each other questions in terms of your own businesses, and how you look at it and and what you want to know from each other.
Stinson Dean 35:41
Yeah, we, you know, we talked about how there’s fewer offers and fewer bids. And so there’s a there’s a lot of inefficiency between there and colonized companies sit in between they’re Sherwood’s much larger, and has a more diverse product offering. But the lack of liquidity in the cash markets has created a big opportunity, if you’re able to stand in the middle and make markets provide liquidity to the sell side that’s desperate to sell, while the buyer sides, you know, they’re not answering their phones, you can you can be the one that step in there, you just can’t be small anymore. That’s that’s as things have consolidated, it’s made it harder and harder for new entrants to come in and be a onesie twosie trader in physical markets, and get anyone to open an account with you on the buy side or the sell side. So we really stand in the middle, and try to smooth out the markets and provide buyers and sellers a place to lay off risk effectively, whether that’s they’re desperate to buy, and the main sellers in the market are nowhere to be found and vice versa. So, you know, for me, my only business line is commodity, two by fours and two by sixes. And I don’t touch it, I don’t see it. I mean, it’s like in other states. And it’s just, it’s just price, I gotta certainly perform and deliver on time and do the things I’m saying I’m going to do. But at the end of the day, my two by fours are the same as everybody else’s, which is the nature of a commodity. But you know that this volatility is your phone rings, and there’s all sorts of people on the other end who need stuff. So it’s been a really wild time. But I mean, that’s at least Rafik, Kyle can can certainly walk you through sure with but I just consider myself a liquidity provider for the buy in the sell side when when liquidity is tight.
Kyle Little 37:55
Yeah. So just to add, you know, Stinson and I, we sit in the middle of the market. And we are, you know, for lack of better terms, market makers in our own right and a variety of different things. But each of us has a distinct value proposition to the sawmill producer and to the end user or customer that we’re distributing the product to so he’s probably heavier leaning towards the risk management tools and the brokerage opportunities that he fits in providing that liquidity or market movement inside of what he does Sherwood historically, we’re almost a 70 year old company. So we’ve been around for a long time, like I said, third generation taking over. We were founded based off of buying large quantities of lumber, actually taking delivery of that lumber into our locations in the metro, New York New Jersey markets and distributing it to the local lumber yards now with consolidation and things have changed since and noted, we’ve had to go out there and evolve accordingly with the market but of the billion board feet that we’re talking about that we’re trading 70% would be something that we physically take into one of our distribution centers and and break down into smaller quantities and sell to our customers. So we’re Yes, we sell straight truckloads to the biggest customers on the planet. Whether they be you know, builders for source or Home Depot or Lowe’s 84 lumber us LVM but the majority of what we do is sell the guys below them have smaller quantities like have mixed truckloads of two by four through two by 12 or with plywood and OSB on the same truckload. And they might not even be full units of the material it might be broken down to even smaller quantities than that and that’s that’s the value proposition that that we provide to that group and some of for some of those guys were their primary supplier for others like the biggest guys on the planet. filters for source are 84 lumber, Lowe’s, Home Depot were like the, their primary or one of their primary secondary suppliers because they’re buying deeper into the chain, they’re buying, you know, from or higher up in the chain and buying maybe direct from the sawmill and doing a variety of different things there. So, so the value propositions are distinctly different, but what we do in the marketplace and a lot of different things are very, very much the same. So because we still do 30%, of what we do as a direct ship, where we buy it from the mill and dropship it to one of our customers, we do a lot of business on the Ford pricing side, where we’re working with a variety of different entities to help them price lumber at a fixed price for a period of time to cover a job, you know, throughout the year that business is growing. And, you know, I think it’s mainly growing because of the volatility that we had over the last, you know, two or three years, it’s provided us the opportunity to educate people take the risk off of their table, and provide them you know, a value added product that not so many different people can do, and you
Jeff Malec 41:04
look like a, like an elevator or something in that regard, like can become offer some products that set the price, then you manage the risk around it.
Kyle Little 41:12
Absolutely. And then we’ll deliver them over to them in the the said period of time, in the quantities that we’ve committed to over, you know, like I said, you know, upwards of a year or two so and that’s provided, you know, you know, some good opportunity, the quite the challenge we have is getting more and more people to kind of plan accordingly. I think that’s part of why lumber historically has not been a big user of the derivative. Because it’s been, it’s been a good old boys network, where a lot of guys have just managed, they’re going to manage their inventory and their risk based off of, you know, where they felt they could buy at any given time in the sad range now that we’re trading in ranges that are that nobody really understands, or 1000 points ahead. Right. Yeah, that that has, you know, maybe a throw out thrown out the window. So a little bit because, you know, people have been caught. I don’t think it has, you know, hurt enough people to the upside, because they’ve been able to one, you know, because the volatility has been so sharp and so quick, there’s been opportunities to kind of get back in and cover up a lot of mistakes. The backside of this cycle, when things start to move in a steadily session, you know, down that’s I think when ultimately, you know, some of the some of the skeletons in the closet, so to speak really, you know, come to fruition and probably, you know, blow up some of those organizations that Stenson was talking about earlier.
Jeff Malec 42:43
And you guys sort of blew that question I want to do to podcast each other there for a minute. Right? Ask each other a couple of questions of what are you seeing in this area? What are you seeing in that area?
Stinson Dean 42:52
Yeah, I was gonna ask, like, on the forward price stuff, Kyle, um, when I was a consultant, that was always a big question like, how can we commit to a price for 12 months? And and how do we honor that? And the other, there’s ways to do it. Just going along futures contracts against your your sale price, but what I saw was this unbelievable good old boys network and shake type deal, where if price went against someone down the road, like they would just kind of walk from these contracts, or delay and make these kind of wait until the market came back into their favor. And like, do these contracts not have any like these cash contracts between a builder and a developer? Or a lumberyard and a framer? Do they not have teeth in them? So I like because when you your long futures, or you buy inventory for a commitment to cover your short, like, they cannot perform on this contract? Have you seen the same thing? And how much that goes into your? Oh,
Kyle Little 43:59
yeah, no, definitely go. I mean, the people that understand it and get it that have done it over a period of time did it? Well, well, before we saw the volatility in 2018, for that matter, our largest customers full benefit in offsetting a portion of their risk, they would, you know, everybody has a different risk tolerance. So they’re not necessarily going to go out there and cover 100% on a forward price commitment, but they will say okay, I was able to get this job based off putting a margin on top of it, you know, where we are today and in the, what you want to say in the price range, I feel comfortable covering 50% I really feel comfortable, you know, covering 80%, and then I’m going to go play the market on the balance. So that’s what they have done and have found, you know, they’re all out of success because the customers that we’ve that we have today are for the most part not new customers are the guys that really understood the benefit of you know, you know, offsetting that risk getting it off the table so they can just go out there and go out and get the next sale. I don’t need to worry about you know, going in Buying the lumber and sitting on it in a third party reload, I don’t have to worry about staging, you know and setting up delivery of that product. Sherwood lumber is going to do that for me, my my partner is going to take care of he saying care of all the rest. All he gave me was the price and a period of time that I’m going to go do that. Now. We all know what jobsite activities, specifically today with the labor situation, there’s always delays. So what we do is just try to make sure that we communicate with our customer base on a consistent basis and know well in advance what the schedule is going to look like. And if there are delays, if there are it is going to cost us X amount of money to carry, you know, we’ll we’ll work that through and deal with that with those those, those accounts. So. But that being said, we do have some new guys that just don’t get it, they’re like, Oh, the market goes down, you know, can I back out of this transaction? We’re like, Absolutely not. And if we
Jeff Malec 45:54
feel like a customer is CME, if they’ll let
Kyle Little 45:56
Yeah, yeah, we’re like, No, we’re, it’s a direct correlation trade, we are offsetting our risk via the derivative or buying extra cash to hold and carry that through that transaction. So we we take the liberty of doing, you know, taking either or, I mean, we’re a long distribution company. So we always have cash inventory. So we can always say we’re gonna buy extra amount of days and, you know, you know, roll with that basis that would allow us if it allowed us on that, on that specific item. So, but anyways, has there been discussion of people trying to get out? Absolutely, specifically, last year, and, you know, years of this high volatility? Have we had anybody, you know, get out of a transaction? No, because they’ve known upfront that they have to go out there and follow through with us.
Stinson Dean 46:47
And that’s been a detriment to me. From what I’ve seen a desperate to futures participation, because your long futures on a commitment, and if you’re nervous that commitments not gonna honor it, like, do you stay long? Do you buy the physical or like, the buying options? To hedge, you know, credit risk, I guess, default risk. So that that doesn’t help. And what’s interesting to me, unlike grains, Kyle, you guys have a big stick there. Sure what other commodities there’s, like, standardized, and I don’t know a lot about it. But there’s the standardized cash contracts and a standardized like terms that everyone’s held to because they’re part of this association. Can we do something like that? And lumber?
Kyle Little 47:35
That’s a good idea. I don’t know. I would like to look into that.
Jeff Malec 47:40
It’s doing
Stinson Dean 47:41
Yeah, I just don’t like Nala, or, like some kind of industry standard that we all subscribe to. So the big boys and the little guys aren’t so mismatched in their contracts, because of the big guy wants to change the rule, suddenly, the little guy kinda just has to go with it. Yeah. And so you got to pick your business partners very carefully, because that stuff. And it, it’s typically not a problem. And if you’re like Sherwood or these other legacy companies that have been around, you have a reputation for handling stuff. And that’s generally the vibe and lumber. But mistakes are so big nowadays, like one mistake over a 500 to $700 per file. It’s just like, that used to be a $20 mistake, times 30 trucks. Now, it’s just one truck and one move, losing 700 bucks. Well, I mean, there needs to be some kind of standardization of cash markets.
Kyle Little 48:42
Yeah, I think generally speaking, the reason people want don’t trade our derivative as much as well isn’t totally tied to one item, right? It’s to before two and better western Canadian spruce, produced in Prince George, Canada, right or origin there. And that, hopefully will change if we move to the delivery, you know, to the gateway of Chicago and get to get the eastern Canadian spruce guys in play. Love to see the Southern Yellow Pine guys come in, but I don’t think they’re going to because they don’t believe it’s a tight enough correlation to those those species. So maybe, at some point, we can write a contract and create a Southern Yellow Pine derivative, but we’ll say, but but the biggest thing I think, in lumber in general is the old generation continues to not look at as a hedge. They look at it as a speculative tool. And the term we used to talk about 10 years ago here at Sherwood is hedge Ulation. Like that’s like, everybody thinks that they’re hedging, but they’re really trying to make money on both sides of the equation. And they don’t understand how to manage basis and they don’t understand that from a margin perspective. If you have to pay a call, or have to fund a call. It’s not the end of the world because it’s not a realized loss or a realized gain until it’s till you buy or sell the stock, right? That’s why I always told my my owners like, it’s not just because of this, Mark, the market number looks the way it does today. In particular, I’ll go back to early to 2020, or late 2020. When we had, we were, we always all set our foreign price hedges with a long contract in the future, and you had inverted market where it was 300 400 $500 1000 below the current cash market, your thought, you’re able to sell cash up here, and you’re long a futures contract for later in time. And now the futures contract continues to loose thing, but you’re forced by the current cash market to cover your commitment, right. And we’re so the basis was so out of whack. And so, you know, we were like looking at, they’re like, Oh man, like, our mark, the market today was like X million dollars in the hole, like, yeah, we are today, if we had to go out there and deliver the material to the customer all today. But we don’t have to deliver the material only have to deliver a portion of it today. And the rest is spread out over time that that disparity will come back into play into some normalized range, we might not make as much money as we thought when we put together the correlation, we might not lose as much money as it looks like today. But the fact is, it’s likely going to come together over a set period of time, because we all know, in the in regard guard to reversion to the mean, everything moves back into some level of that correlation over time. So things can be overvalued or undervalued for extended periods of periods of time. But if you have more time, they’ll likely come back together into that into that mean, so you just have to allow those things to come together. And I think what happens in our industry in particular, people don’t understand that they don’t have the patience for the long term mechanism to go out there and plan and they get major pressure from their CFO or from upper management or what have you. Because all they see is this off this one part of the trade either on the cash side, or on the feature side, that’s what would be perceived as a huge loss. That is, you know, saying,
Jeff Malec 52:10
Oh, this is this is you need a single line item by line item. And
Kyle Little 52:15
this is catastrophic. How are we going to go out there and do this?
Stinson Dean 52:18
That’s so interesting, because two things like folks take flat price risk, and they don’t even know it. And the argument is, you should take basis risk, which is still risk, but it also means they’re still reward like folks going, sometimes I go into it like it’s a one to one hedge and how am I supposed to make any money, it’s like you wouldn’t if it is a one to one, and it’s not there’s basis risk still. And then secondly, that the accounting for hedges, it just folks think they cost point, they look at these two different silos instead of combining them. And I tweeted out the other day, like increased futures for I’m always short futures. You know, I have these big margin calls, but that just goes into my cost of goods sold, and it goes into my purchases account effectively, and raises my breakeven. But you know, if I wasn’t hedged, and I knew where prices were going to go, I would have a lower breakeven, but you are not losing money to Kyle’s point, you’re not realizing that loss until you blow, blow out the inventory. And then you roll it all up. And you got to make sure your salespeople understand what their basis is their ownership is. And then conversely, when you’re short basis, but that whole concept has prevented many companies who have smart people who want to hedge from from diving in because they don’t understand how margin calls flow through the balance sheet. And so, I mean, I don’t know maybe there’s some education that needs to be done in hedge accounting, because it’s really easy. It’s not complicated. Yeah. But it you know, it throws people for a loop
Jeff Malec 53:54
in the alternative investment world my day job the a lot of these hedge funds, I’ve moved to combining stocks and their hedge right in the same account and they give the customer here’s one line item so they don’t see this negative all the time in there. They just say here’s this one investment oh my god it’s up 6% The markets up 8% They don’t care it all looks good. Instead of this was up eight this was down to I’m mad at the down to right. So maybe that’s
Stinson Dean 54:21
That’s exactly it. And really, it’s just it’s just your inventory account captures all the things that go into the inventory, the purchase of them toward the edge of inventory, cost, carry all those things,
Jeff Malec 54:33
and then think you’re with your comment or go ahead.
Kyle Little 54:38
Yeah, so I’ll just say it’s like they they’re under every trade in particular whether you’re long a futures contract or short a future projects has a specific reason for in the way that we look at it right because we’re we’re not looking at from a speculative basis, or or to Simpsons analogy of like, you have to look at it as a producer or As a customer, right? So like, what do you want to go out there and and so if we are long the board, it’s usually offsetting a sale that we took in the future time or we’re long on the board because we are adding extra days of inventory to our distribution footprint. And then we would be short the board based off because we want to go and increase our sales based on our, our current inventory that we have on the ground and vice versa. So we as an organization have eight different accounts in ours. So we can account for and reconcile for the transactions that are that are in place, whether they’re an EFT, whether they’re a forward sale, whether they’re a hedge against inventory, or they’re a basis traded on just a, you know, you know, on a specific set item that we want to go out there and reconcile. So it’s just a different way of approach. And it is complicated, but it isn’t if you go out there and just really take a step back and try to put it in its simplest form. And I think the problem the Challenger industry has had, they really have a hard time in understanding the difference between an offer a risk offset, as opposed to a, you know, a speculative opportunity.
Jeff Malec 56:08
And what were the big commodity traders like Glenn Carson, why aren’t they coming in when that you said it was 500? Wide? The basis they’re like in oil, right? If it’s $3 wide, these groups are come in and sell in cash and buying futures or vice versa. So does that happen in the lumber space or no, like, just based on the volumes are learning
Stinson Dean 56:28
your markets too small, like the cash markets too small, and Glencore could like they couldn’t deploy enough capital to make it worth it. And it’s too niche. And Kyle and I’ve been working with the CME to change the language on the futures contract will that will allow just normal market participants to ARB OA, these ridiculous inverts, carries and basis swings. Basis is way more volatile in lumber than any other commodity I’ve seen. And we’re going to fix some of that by including more fellside language into this futures contract. But the to answer your question, because I get that a lot. You know, you kind of roll out this concept and folks look at you like well, why isn’t everyone doing this? And yeah, you know, it’s like, Oh, it’s too small. It’s very niche. It’s a US only traded commodity, largely certain lumber goes to Canada goes to China, but it’s it’s it’s just the US market a commodity. And the it gets out of control to the upside. Because the producers don’t participate enough. And that seems to be the the problem with most selling to cover their cut.
Jeff Malec 57:41
Yeah. Yeah.
Stinson Dean 57:45
And so basis is 500 over the futures contract when it should be 20. Over become like, come on. But so you got to get sell side participation. And, you know, I want them to open the contract up. So guys like me, and Kyle can deliver against it. And we’ll we’ll take care of that invert real quick. Yeah, so some of the reason that gets really stressed like that, is this the structural language of our futures contract needs some modernization. Yep.
Jeff Malec 58:13
And what you’re saying include more more product, like don’t have it be that slim, sliver of a of a product? Right? Um, I love it. Well, we know some people there. So we’ll put you in touch. But you guys are already on the committee and already talking. Moving on, want to talk a little bit, the more I think about everything happening in the world, thinking through lumber seems like it’s a big proxy for some of the main storylines of the 2020s, which I had to include now that we’re in 22. Right? It’s crazy. So in the 2020s, we’ve got the COVID, accelerated move to remote work, which has been increased housing demand, we’ve got commodity inflation, we’ve got supply chain issues, and we’ve got global warming. Right. I feel like lumber is touching on each of those four things. So Stanton, you were just interviewed for a piece in The Atlantic talking global warming. So let’s start there with you and kind of get your general thoughts on what said, what that’s doing to the market and what it could continue to do for the next 510 years?
Stinson Dean 59:18
Yeah, I think it’s a great question, because it ties out a lot of what Kyle said early on. And if you read the article, it’s it’s just there’s such a direct link to the availability of Canadian spruce trees that are available in this housing cycle versus the last one. And you start asking, why is that? And this the forest were devastated up there by mountain pine beetle pest and that that destroyed an incredible amount of trees that they tried to harvest as quickly as they could. But you couldn’t get them all then they they make fires worse. because these trees die, you know, and if you can’t cut them and process them before they completely rot, then they just become a huge fire risk. So to me, like damage is done and lumber and if we’re going to continue to build homes with the same lumber that we do now, which Kyle said, we’ve always done it with Canadian lumber, we’re gonna continue to have a lumber boom and bust. And we’re gonna have limited capacity. There is an unbelievable amount of sudden yellow pine trees that produce suddenly old pine lumber, which is very loosely if at all correlated lumber futures. But it’s it’s darn near a hardwood. And that’s why it’s not used to just frame a house. It’s in a house, there’s uses for it. It’s incredibly dense and heavy. But you basically can’t do stud walls, you can’t go vertical with it, they twist and they’re not very efficient on the job site. So
Jeff Malec 1:00:56
what does that mean hardwood versus like you it’s harder to actually put a nail into it, things like that. Yeah.
Stinson Dean 1:01:00
Yeah, like like the, the, I’m way over my depth here. But the science behind it, like it’s really close to being considered a hardwood, which you know, is flooring and super strong, and so it’s still considered a softwood. But when you throw a nail into it, the nail doesn’t sink all the way. And it’s heavy and wet, and he can’t dry it completely. So it dries while it’s behind your drywall and it’ll twist it, these are the risks, we are getting better at processing Southern Yellow Pine, so maybe it’s a little bit more dry. But also it chews up your saw blades, it just makes job sites less efficient. When you’re a production builder, you get a blow and go. Things we can’t overcome. But there has to be a sea change in how builders, what materials are used to build wood. So there’s just not going to be this is the easiest way to put it an increase of Canadian lumber. That’s not there. If there was ever he would have seen it at 700 bucks 1000 in where there’s gonna be mill shutdowns in 2022.
Jeff Malec 1:02:03
And they have environmental controls there too. Like you can only cut so many trees. And
Stinson Dean 1:02:08
yeah, they the Canadian government owns 99% of the forest land, and they’ve reduced the annual allowable cut, which I’m speaking for Canadians. Maybe this isn’t right, but most Canadians I’ve talked to don’t disagree, like the math is like we got to slow down like we had to overlock to get these beetle kill trees out of there really got to pull it back while we let the forest recuperate. And in the meantime,
Jeff Malec 1:02:31
beetles started the betas were because it got warm and they can move further north.
Stinson Dean 1:02:37
They they didn’t. The winters weren’t cold enough for long enough for enough years in a row. So they didn’t die off in those winter months. So they would just kind of come exponentially grow. Because they started each year, more and more would survive, and they just overwhelmed the forests.
Jeff Malec 1:02:56
And then I’ve heard I was talking with Brian Leonard or reading his annual update in our office saying the is it the timbers done in the winter, when the when the grounds harder. So the ground if it doesn’t freeze as much they can’t even get in there. The trucks are stuck in the mud essentially.
Stinson Dean 1:03:13
Yeah, yeah, you got to have hard, thick ice over forced to get to get your big equipment back there. So when it’s rainy and warmer, and it’s not frozen over, you have problems with with logging. So there’s a logging season, which we’ll watch really, really closely and then it’s you know, the opposite and the South. At least the seasonality is I think, is that right Kyle? Reality of logging is opposite in the USL. Yep. Yes.
Kyle Little 1:03:42
So I mean, yeah, typically, you’ll see the largest logs and the largest quantity of fiber is harvested now, like when everything’s frozen in the Canadian north and in the US north for that matter. But in the south, it’s the opposite when it’s raining, because it’s rainy in the spring and rainy this time of year, it’s hard for them to get into the forest. So they’ll be logging in, in the summer in the fall. So when you see hurricanes happen in the sick about it in the fall, that usually hampers Southern Yellow Pine production for a period of time, because that’s typically one of the best times or Windows to go out there and harvest the largest amount of timber
Jeff Malec 1:04:22
and then kind of while you’re there, your company’s got a bunch of distribution centers and the rest. So talk to us a little bit about the supply chain issues. Is it temporary? Is it semi permanent?
Kyle Little 1:04:34
I think I think the supply chain issues overall are probably past their peak of peak challenges. Trucking is very difficult across the part most of the most of the North America, but it’s slowly but surely getting better. The rates are you have to pay to move. The move material is very high. Probably will stay elevated here for the first half of this This year, but as we start to see, you know, some demand wane, you’ll see that be able to be alleviated. So we expect logistics to be still very, very difficult but slowly improving over in the coming months. As far as like lumber, or I should say housing in general, I think we can all say, with a high level of confidence, we under Bill from 2010, through 2020. So there has to be a catch up. And part of the catch up that we have right now is, I believe, pandemic related where we’ve sold some of that future demand, we pulled that forward. And we’re dealing with some of those challenges that we have right now. And now, as we kind of reset in a higher interest rate environment of supply chain that slowly but surely improving, you know, you see prices normalized at a level, they might be still historically high overall for lumber, but they obviously don’t need to be at, you know, three, four or five times, you know, above the 20 and 30 year averages. So we as as middlemen and market makers, from a volume perspective, Stenson and I and anybody else that sits in the segment, and then you look at the the retail lumber yards and the largest home centers, they’re likely going to sell more volume of lumber to the all of 2022 and into 2023. Cuz it’s it’s there, the demand overall is there, it’s just it’s going to be different, a little different from a pricing perspective, because supply chain has been will be slowly but surely improving to meet that demand requirement. So I think from a, from a volume perspective, we all should be very bullish in forest products. The question is this, you know, this price volatility and what we’re dealing with right now, the hyperinflation, you know, that that’s going to, you know, ultimately get, you know, work work itself out, you know, as we move into the second half of 22 and into 23.
Jeff Malec 1:07:04
And what are your What are both your thoughts of this price spike is because of inflation, inflation is pricing in this or is just a byproduct? Where do you see inflation in your seeds?
Kyle Little 1:07:16
Well, I mean, I think overall, we, you know, I think a lot of the think questions, I had early days on the in the national media and abroad for podcasts, and what have you, what is inflation for real? And is it transitory? Because that was the early word, right. And I was, I was because I felt that we were in a cycle of lower price and high demand and in challenge supply, that this was not transitory. It was, in fact, a part of the new cycle. I think we’re moving to the latter innings of that cycle in regard to lumber, which will probably be a leading indicator that we’re moving into the latter stage of a cycle in a lot of different things, because supply chains overall, will start to improve as we, you know, move from a pandemic into an endemic and start to see a normalization of the workforce and people not to stop and go a economy that we’ve been dealing with. That’s I think the biggest part of why we have this problem right now is that things, it’s just been really very hard for things to move along, at any, any steady speed. I think this as we move forward, that becomes, you know, more and more steady, and therefore, the price, you know, what we deal with the price peaks and troughs, they should start to smooth out into whatever that new equilibrium is.
Jeff Malec 1:08:34
Stinson How about you inflation thoughts?
Stinson Dean 1:08:36
Yeah, I mean, by the definition of inflation of higher prices, yeah, showed up in lumber. My argument has been, it’s structural from the supply side. And the lack of Canadian lumber. I don’t think that’s because of low interest rates. We are just unable to complete. We’re at a pace of 1.3 million home completions, we have all these big start numbers, which still have not Eclipse pre cycle highs. And yet at the pre cycle 2005 and six, the price of lumber never or barely got about 500 bucks. And I’m like, what, where’s the disconnect? And we’re like Forex. So we’re just, there’s just a structural shortage of lumber. And I don’t think that has anything to do with money printing in Washington, DC. I think home price inflation is a thing from low interest rates and a lot of money. But the lumber part, I don’t think is that it fits in the same bucket as the why the price is higher as much as the price of a home.
Jeff Malec 1:09:42
You could argue the mills are the producers, right? They have to pay the people more the trucks cost more the equipment costs more all they cost more to get
Stinson Dean 1:09:49
not that much more. Yeah, right. Not that 100% more. Yeah, yeah, I think the floors I think the floors are raised. I think largely curious with that,
Jeff Malec 1:10:01
what is the cost of production? Why we’re talking about that?
Kyle Little 1:10:06
I think, yeah, I’d say it’s closer to 600 mil, specifically out of BC, I think, obviously lower and a little bit lower in Eastern Canada, it’s lower in the US sell yourself is not as low as I think what a lot of people think it is. We’re seeing timber prices now start to come up there, you have higher fuel costs, you obviously have higher labor costs. So there’s a lot of things channels there, Europe was very cheap for a period of time, but that now has moved back up more of what the western Canadian number is. So the floor is definitely higher. So So going back to a 30 year, you know, reversion to the 30 year mean, probably not something that we’ll see. But you know, it’s gonna it’s going back to the five or 10 I think it’s probably more realistic.
Jeff Malec 1:11:00
And then wanted to talk real quick. touched on this a few times on this part of tech is highly deflationary for commodities, right? In food, we invent new methods and genetics and chemicals. And oil, we can drill under the Gulf of Mexico, 2000 feet, and then sideways 1000 feet. What does it look like in lumber? Does this same dynamic work in lumber? Is it so old school, I’m just cutting down a tree and cutting it that there’s not that much tech there?
Stinson Dean 1:11:27
I think, you know, profits and numbers are big manufacturing operations. So yeah, you’ll see a lot of efficiencies from automated audit, automating lumber production. Not being an expert at all in lumber ops. But you’ll see you’ll continue to see pressure, especially as wages are up to to automate and make processing more efficient.
Jeff Malec 1:11:49
And you said, would you say before it’s laser guided? So used to get along? And I’d see basically eyeball how many is
Stinson Dean 1:11:56
that? Yeah, now I got a laser that, you know, measures the volume. And that’s like, this is what you should, you should cut two by fours instead of two by sixes out of this one. You know, so they’re using logs more efficiently. And that technology is moving its way from Canada, to the US South as the US self, these Mom and Pop Mills get bought by more sophisticated companies.
Jeff Malec 1:12:16
And I’m sure there’s like satellite imagery and all sorts of that stuff for the forest management or No, yeah,
Kyle Little 1:12:22
yeah. There is there is that and I think, you know, from a production perspective, if you go to a fault if you went in toward a sawmill planer mill, anything, you know, 1020 years ago, looks vastly different than something that you would see today, and particularly the ones that are being built today. Because there’s there are these mega operations where, you know, you had just like we had lumberyards, you know, you know, kind of like a Starbucks on every corner here in the Northeast, and now I’ve gotten consolidated into these mega centers. Across the country, the fall mill, the production side has been the same. The US South was largely owned and operated by independent fall Mills, like hundreds of them across it now it’s, it’s being ruled by like five and they’re basically warehouser Georgia Pacific West Fraser Cannes, for inter for so like, that’s your your guys that are running it, and they’re going and they have a tremendous amount of capital that they’ve made over the recent years, that’s going to go out there and put to retrofit the current operations and build new operations that are going to be highly technologically advanced, to the point where there’s a few sawmill manufacturers now that you can run a whole operation with two employees, two guys running a whole whole line product. And, and that’s pumping out, you know, a million board feet a day. So I mean, these things are, you know, highly sophisticated, operations, very technologically advanced, that only are going to get better at what they do. I think the the challenge we have right now, specifically, and why we have this the biggest price moves is not not necessarily the amount of supply that that we have, in general, from a production standpoint, it’s how do we get it to the market in an efficient manner when the marketplace needs it? That’s when you have big price spikes. You know, it’s not like back in 2018. For example, when we went to 640 mil that Stinson talked about. There was plenty of production, there was plenty of production to supply the market needs and we are sitting at 1.3 million housing starts none. And yes, you could say arguably we’ve seen a little bit of a decline from that but into 2020. But now sitting at 22 and 23. Our production is going to be more than what it was back in 2018. Like North American production, world production overall. The inefficiency of being there when the marketplace needs it is why prices Like, and today, the reason we can’t supply what we need is because we have extra ordinary demand today, but that demand, you’ll, at a certain point because of the price, whatever the price or, or because things change or what have you, you’ll start to see demand destruction. So it will get spread out over time. The challenge you have now with the stay at home and the millennials that want to and and where we are at the interest rate level that is rising, everybody’s trying to get in at the same time. But there’s going to be a portion of that that says, Okay, maybe we’re that even though I won’t really want to buy a house, or I won’t really want to go do this project. Well, it’s gonna cost me 3040 50% more to go do that today. Maybe Maybe I should wait. So that
Jeff Malec 1:15:47
what’s what what’s the cost to the average US House? How much more expensive? Is it with willandra? 1500 versus 500?
Kyle Little 1:15:55
What is it roughly 55 or $60,000? On a framing package? Is that right? That’s been something kind of
Stinson Dean 1:16:00
Yeah, it Yes, it’s the nhB you know, they’ll they’ll release kind of the price of lumber has added $50,000 to to what it costs to build a house. But what I always caution folks against or at least bring light to is the fact that homebuilder margins are expanding. Now, the caveat is that publicly traded large home builders, we don’t see smaller, regional, large custom home builder margins, who are probably more susceptible to price fluctuation. But the builders speaking about the public’s have been able to pass on the price of lumber and then sound. Now they’re making more money from a gross margin perspective. And that that, to me is cheap. There’s an interest rate problem, they’re driving up the price of a home. But I think what’s going to give, as Kyle says, as things normalize and high prices cure high prices, is not the price of lumber, but the margin the builder has. And, you know, they have points to give to just get back to where they were operating a few years ago. So I you know, it’s if housing cools, and if mortgage mortgage rates are jumping, currently, you know, it’s okay, if it cools off some and and if we can get some of the homes to buy on the market, existing home. I because I was just paradigm, okay, I want to sell my home. But how do I get into the next one. And this is all well covered. And we’re not housing economist. But you know, the whole thesis is demand is there’s a very strong bid in homes for the next five years. And I don’t think there’s enough lumber to meet it in the in the time period that we’re used to eventually we can meet it. But we just can’t produce enough homes in a short amount of time to meet the demand that we’re seeing.
Jeff Malec 1:17:53
My brother was out in Colorado lost his home in that fire. So right what’s there 1000 homes that need to be real? My
Stinson Dean 1:18:00
goodness? Yeah, that was so sad, though. Yeah, just
Jeff Malec 1:18:03
hours, he literally was at the grocery store. He smelled some smoke. He went home, power went out. He came at open his garage manually. And the fire trucks coming down the street saying mandatory evacuation man. So he grabbed a few things. He lost all his fly fishing gear, which I know you’re a fly fisherman, so yeah, devastating. But that’s not enough. I was thinking that like 1000 homes isn’t really enough to move the needle, like in that area. That’s gonna cause some some supply demand issues, right?
Stinson Dean 1:18:32
Yeah. Yeah, it won’t move the needle for someone who’s buying lumber in Dallas?
Jeff Malec 1:18:38
Yeah. And then real quick back on the technology. Like, I don’t watch any sci fi movies and there’s wood framing. So like, what price does it need to get if it’s at 5000? A mil 10,000? When did they switch over to like composites or some other material or 3d homebuilding? Like in the future? We still using
Stinson Dean 1:18:58
wood? Yeah, I haven’t thought I don’t think that far ahead. Kyle. I’m sure you guys have gotten your brains together.
Kyle Little 1:19:03
Yeah, we’ve we’ve talked, we’ve talked about it. And I’ve had a few Canadian producers asked me like, When does one new steel studs come into play as an offset to you know, lumber? I, the challenge you have right now is steel. And all the alternatives have gone up now in that the same type of or maybe not the exact same type of increases, but they’ve increased substantially from where they were so. So it lumber is not unique in the sense of a building material rising in price, right. So everything now is it’s kind of like followed suit from what lumber already did. So, you know, I don’t think there’s one number because there’s multiple levers that have to have to happen to go out there and do that. The fact is, is that we don’t produce enough steel to supply the housing business. We have to build 1.4 to 1.5 million houses a year. So if you look at that as a As far as building materials in general, there’s not probably not enough overall to go out there and meet the needs of the market. So we still could be, you know, you know, it might be me the wrong in the sense that I’m the latter innings of this cycle. And we could see a continuation of this for for a period of time longer. But we have to, you know, recognize that, you know, things are changing, we did get here for a reason. And it was mainly because of a stop and go economy. And now, you’re going to see products, not just Lumber Products in general start to move to the marketplace in a much more normalized pattern as we get into the latter half of this year and into 2023. And, you know, what does that do? I mean, what does that do to car purchasing? What does that do to anything that you’re going out there and buying, I would think it’s going to become easier, as opposed to harder as we move forward.
Jeff Malec 1:20:54
Hopefully, I stopped hearing stories of friends who made 10 grand on their truck they bought two weeks ago. Let’s finish with our hottest take segment. Give me something either nobody else is talking about something that’ll make either one of you little uncomfortable, or something off topic like lumberjack should go to therapy. I’ve seen you on Twitter talking about that since and so yeah, what do you got it?
Stinson Dean 1:21:26
Yeah, big proponent of therapy is not really my take, but certainly, you know, take care of your mental health, big advocate for that. Man, my take is inflation is good and overdue. And if we’re if businesses are getting squeezed to figure out how to manage higher wages, versus employees getting squeezed that forgot how to manage lower wages, that’s a problem that I’d rather have that problem for to close an income inequality gap. So inflation, inflation, is scarring to Baby Boomers having, you know, their interest rate at 20% in 1981. Which, which I hear endlessly about. But the reality is, inflation is long overdue, that you’ll have having it happen in shorter time periods, kind of painful, but but wages are, are sticky. So as to me, COVID, in supply chain, inefficiency, things get sorted out, wages, wages are going to stay there. I think folks are going to see that, hey, inflation was actually a good thing. And that’s, that’s my con controversial take. Inflation is good.
Jeff Malec 1:22:40
Inflation is good. I like it. I like a coyote.
Kyle Little 1:22:45
Well, I would kind of mirror those comments. I I like the fact that, you know, we are doing what we’re doing right now in regard to seeing, seeing things move up, particularly wages, the middle part of America has always talked about and then you talk about this wage and inequality, but there’s never been a better time to be a working American than today, right? To go out there and do whatever you love to do. And work with your employer, work with your your teams to go out there and fight for more. It’s it’s a really, really cool thing. You know, the lumber business, we’ve been blessed with some amazing opportunity. I think the majority, the industry never thought we would be doing what we’re doing over the last two years, which has been a great blessing. And I’m so happy to be part of it. But to coincide with what Stinson talked about inflation is the driver of growth, right? Like that means you’re growing as an economy. So would you rather be growing? Or would you rather be decaying or declining and I say growth all the all the way and so just because it cost me a little bit more, to go out there and buy something today? Well, hopefully I’m making a lot more and we continue to, you know, make a lot more as a society. So we can go out there and overcome that there does come a point of concern, but even where we are today, I don’t think it’s that much of a concern all as long as we’re, you know, allowing the working American to go out there and have the same opportunities that a lot of the other people are having right now. So I’m excited about that. I’m also excited about our industry in general like we were we talked about this earlier lumber in general flew under the radar for the vast majority of all of our careers and that the fact that we were getting recognition in the national spotlight in regard to our craft and and being able to go and see how this product is produced and then distributed and consumed in the marketplace is really, really cool thing and our industry in particular It’s very green, and probably does not get enough recommended record recognition for that offset. I mean,
Jeff Malec 1:25:08
not only are we you know, being like environmentally green, not new, right
Kyle Little 1:25:11
or mentally green. Yeah, I mean, they’re very old but we being carbon neutral, you know, like we’re, you know, we’re carbon negative, we’re taking carbon away from these other industries. And if you look at our competing building materials, whether it be steel or concrete, what have you, there’s no comparison to what lumber does for the, for the environment in that aspect, so great, you know, the grip you know, wood is good, and, you know, we need to, you know, go out there and continue to be an advocate of that and how how we can really bring people together in this world. I can do that.
Jeff Malec 1:25:52
Well, it is good, man. The W got it. What is good? Inflation is good. What is good before I go, cow, I’m a big Star Wars fan. So I have to ask you about your Yoda back then.
Kyle Little 1:26:03
Well, that’s if I’m every question of who to make a buy thing. Or sell decision. i That’s who I go to, to, you know, these are
Jeff Malec 1:26:12
my whole my entire case. Oh, that’s awesome. Thanks so much, guys. It’s been fun. We’ll talk to you soon and keep up the good fight.
Stinson Dean 1:26:24
Thanks for having us. Yeah.
