As we reported in late 1Q2021, delivered wood fiber prices in the Lake States hit their lowest point since Forest2Market began collecting transactional pricing data from the region over eight years ago. As we approach the end of 3Q and what has been yet another tumultuous year, prices continue to inch even lower.
However, the Lake States is not alone in the wake of the devastating economic impacts caused by the COVID-19 pandemic; wood fiber consumption has fluctuated significantly in every wood basket across North America. As the global economy slowly gains momentum, some regions have experienced structural changes in fiber demand that continue to impact their respective wood supply chains.
Uniqueness of the Lake States
While seasonal access to all species groups is important, hardwood production is the key driver in the Lake States. Meticulous hardwood inventory management is therefore crucial to understanding market pricing for all regional fiber. Hardwood inventory typically peaks in late February or early March. As a result, regional mills fill their log inventories during 1Q to include as much as 80 days’ worth of system-wide inventory designed to last through the spring season. It is equally important for the system to maintain a minimum of 30 days’ worth of hardwood inventory during the rest of the year, particularly late summer, so that winter surge capacity is not stressed beyond its capabilities.
There is little flexibility in these numbers, as spring “break up” is traditionally the low point for wood deliveries because the rainy climate from March - May results in difficult forest and road conditions. Procurement managers throughout the Lake States have learned that it’s far better to carry excess inventory during break-up than it is to risk running out of wood or paying exorbitant spot prices in an effort to play catch-up.
What’s Driving Prices Lower?
The Lake States has a concentration of printing and writing paper mills, and the evolving pandemic has accelerated the decline of this industry sector. Verso mills in Wisconsin Rapids, WI and Duluth, MN were both shuttered in 2020, and many other mills in the area curtailed production in the wake of lockdowns. This resulted in the permanent removal of over 1.5 million tons of (what had been) stable hardwood demand from the region, and fiber prices have plummeted in response.
Recent inventory data also confirms that regional mills are maintaining lower inventories than in years past – suggesting that there is now more flexibility throughout wood supply systems based on the decrease in demand. Lake States hardwood inventory levels for January and February 2021 were 30% below the 5-year average for the same two-month period, and inventory levels for June and July were below 30 days. At the same time, regional hardwood prices continue to tumble to new lows.
Outlook & Important Questions for the Region
Despite seasonal inventory targets that have been used by procurement managers in the Lake States for years, a new regional demand dynamic is taking shape within the market. While there was an uptick in price and inventory in March/April, it didn’t have a lasting effect on the overall downward trend.
Key questions the Lake States forest industry needs to be asking as we head into 4Q2021 and winter 2022:
- Low inventory/price levels in late 2014 led to competition for wood during winter 2015 that drove huge price increases. While inventories aren’t yet at critically low levels, what’s different this time around?
- How low can inventories go without causing a repeat of 2014/2015?
- Are mills playing a dangerous game by assuming they can get fiber “on demand” and at the current low price?
No one knows where the market will settle moving forward. You might know the price at which you buy and sell wood fiber, but how do you know whether that price is really competitive unless you know what the market is doing? Could you be making more margin by paying less for your fiber?
Forest2Market Delivered Price Benchmarks provide buyers and sellers of wood raw materials with the market intelligence they need to increase performance and profit margins. The sole source of transaction-based data available in the marketplace, sellers of wood raw materials use the Delivered Price Benchmark service to negotiate wood raw material and residual price, secure and stabilize supply and off-take agreements, compare pricing and performance to the market at large and much more.