You might not pay much attention to it in your day-to-day life, but lumber is all around you. The desk you’re sitting at, the chair you’re sitting on, the bed you sleep in- they’re probably all made from lumber to some extent.
That’s without even mentioning the sheer volume of lumber used in construction.
With lumber being in constant demand, you might think that it makes a relatively stable, secure investment. There’s some truth in that statement, but the reality is that lumber is a relatively unique investment.
The lumber market is largely cyclical, and lumber is one of the most renewable resources that you can invest in.
So, if you’re going to invest in lumber, how do you go about it? Luckily for you, you’ve come to the right place.
First, we’re going to have a general discussion about investing in lumber, before recommending a few potential investment opportunities if you decide to take the plunge.
Is It Worth Investing In Lumber?
Lumber is a ‘soft’ commodity, meaning that it is grown, like agricultural produce, rather than mined or extracted like ‘hard’ commodities such as copper or gold.
As we mentioned previously, lumber is also cyclical, with much of the ebb and flow of demand being driven by the construction industry, particularly the housing sector.
At the time of writing, lumber is coming off the back of a surge in share prices driven largely by pandemic-related issues in the supply chain.
There have been some fluctuations, but investors have largely been rewarded over recent years. Certainly, prices are higher now than they were a few years ago.
Although much of the increase was driven by pandemic-related issues, lumber share prices have also been kept relatively high by a housing boom.
Lumber prices have generally sat somewhere between $200-$400 per board feet in the last couple of decades, but that shot up to about $1,600 in 2021 as a result of extremely strong demand in the U.S. housing market.
With more and more Americans looking to escape the big cities and build their own large houses in the countryside, demand for lumber skyrocketed, and is expected to stay that way for years to come.
At the current rate, 1.5 million homes are being built a year, and with a housing crisis- The U.S. needs to increase construction of single-family homes by around 80% to sustain long term trends.
There’s every reason to suspect lumber will remain relatively strong for some time to come.
That being said, investing in lumber is not without risk. Whilst trees may grow regardless of the economic situation, they are not immune from the broader environment, neither the natural environment nor the broader political environment.
For example, lumber can be destroyed where it stands before it ever reaches the market. Climate change is steadily increasing the risk of wildfires, which can destroy huge quantities of lumber and create logistical problems.
Other extreme weather events like major storms and snowstorms, ever more common due to climate change, can also impact the supply network.
It’s not just the weather to be concerned with either. In some years, it is possible for as much as 50% of the lumber stock to be lost to beetle infestations.
How To Invest In Lumber
If you’re set on investing in lumber, we would recommend going straight to the source and investing in a real estate investment trust (REIT) like PotlachDeltic Corporation (PCH), Rayonier (RYN), or Weyerhaeuser Company (WY).
Weyerhaeuser Company (WY)
Weyerhaeuser is the largest private timberland owner in the United States, with 13 million acres of timberland spread across the south, west, and north of the country.
The company has grown rapidly over the last decade or so, more than doubling its land holdings in that time.
Rapid expansion now seems unlikely, but the potential for inorganic growth still exists, such as the 2016 acquisition of competitor Plum Creek.
The business is the third largest lumber producer in the U.S. market and has 19 mills, but also produces a whole range of other wood products. Most of the company’s output ties them tightly to the U.S. construction market, so you should expect some volatility.
Don’t worry about sustainability, if that’s a concern. Like the other companies on this list, Weyerhaeuser carefully manages its forests so that they are healthy. We’re not talking about slash and burn or illegal logging here!
Rayonier is a much smaller operation, with just under three million acres focused mostly in the southern United States. They do, however, also have land in the Northwest and New Zealand.
This gives the company a degree of international reach, with the northwest historically exporting to Asia and its New Zealand stock only serving overseas markets.
In fact, between its operations in New Zealand and the northwest, about 45% of Rayonier’s business is tied to foreign markets, mostly China.
Rayonier is different in a couple of key ways from Weyerhaeuser. Being relatively small means that Rayonier still has the opportunity to expand its operations significantly via acquisitions.
In addition, Rayonier doesn’t own any lumber mills, though that is what most of their stock is used for.
PotlachDeltic Corporation (PCH)
PotlatchDeltic is a leading REIT that owns approximately 1.8 million acres of timberlands, mostly in the south, but with holdings in Idaho and Minnesota.
The company operates an industrial-grade plywood mill as well as six sawmills. Being the smallest of the three, it faces the smallest barrier to growth relative to its size.
That could come through smart acquisitions, but equally one of the bigger players might make PotlachDeltic a target for acquisition.
Potlatch uses timber sales contracts that are tied to lumber prices. Between its own lumber mills and lumber contracts, more than half of the business is tied directly to lumber sales.
This makes the company particularly reliant on a healthy U.S. construction market, particularly for housing.
In other words, PotlachDeltic will be hit hard if we see another housing downturn like the one that happened in the late noughties. In the current housing boom the company are big winners, but that could change.
So there we have it, a neat little guide to investing in lumber. We hope that the information provided here will help you to decide whether investing in lumber is for you. If you do choose to invest in lumber, consider our three picks.
If you enjoyed this article, you might enjoy our post on ‘How To Invest In Art Singulart‘.
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