On this episode of Odd Lots, we speak to Stinson Dean, the founder of Deacon Trading, about the soaring price of lumber and the general lumber market structure. You can find the episode here. Transcripts have been lightly edited for clarity.
Hello and welcome to another episode of the Odd Lots podcast. I’m Joe Weisenthal.
And I’m Tracy Alloway.
So Tracy, I’m guessing there isn’t much construction of new homes anymore in Hong Kong is there?
Um, there’s always some, but we definitely aren’t having a housing boom, like the U.S.
It is absolutely crazy what’s going on here. There is a housing boom here. There is a renovation boom. People are buying existing houses, driving the prices up. People are starting new homes. It’s super wild what’s going on here in real estate.
Yeah. So I’ve seen a lot of stories on this. And then of course one of the things I’ve seen that’s been really striking, is the price chart of lumber. And that’s just been absolutely soaring and is actually like — I see it mentioned in the Pantheon of meme stocks nowadays. But of course, lumber is an actual thing that people use to build homes and other important structures.
It is kind of becoming a meme stock. Lumber itself. Like there’s like meme stocks and crypto, and now people are making TikToks about the price of lumber. And the line literally is just straight up for days. We’re recording this April 21st and actually in the last two days, I think, lumber actually sold off a bit too. Maybe, I don’t know. Maybe there’s some sort of peak, I have no idea, but the point is for days and days in a row, the lumber futures market went limit-up every single day. It’s absolutely wild. And it’s like becoming a cultural thing — how much wood costs right now.
Yeah. It’s also sort of becoming a moment for, I guess, Lumber Twitter, which is a really interesting community as I think you recently discovered, right? There’s a really vibrant conversation around the lumber industry and lumber trading, construction, things like that. Online lumber’s having its moment in the sun. And I just have to say, this is our chance to dive into lumber market structure. I’ve been doing a little bit of research. It is an absolutely delightful market. Like just some of the terms that they use, like stumpage fee. That is such a great word.
It’s great. There’s so much good stuff here. There’s the futures market. There’s the cash market. There’s all these different entities. There’s the lumberyards, the sawmills, the forests, the timber yards where they sell timber or turn it into lumber, there’s the home builders, everything. Just a super interesting market that up until very recently, probably very few people other than people in the industry had thought about, but now everyone wants to learn. And you mentioned Lumber Twitter, it’s kind of taking over everything. And the guest we’re going to have on today — we recently had him on TV to talk about the lumber market — and I’ve never posted a clip that got so many views. I think it was literally one of the biggest ever. Everyone wanted to hear more from the guest.
So we had to get him on the podcast to really do a true, a deep dive into what’s going on right now and how lumber market structure actually works.
For sure. Let’s do it.
All right. So I’m very excited to go — we’re going to go deep on the lumber market. We’re going to be speaking with Stinson Dean. He is the CEO and founder of Deacon Trading, which is a lumber trading shop that operates all over the country. He’s @lumbertrading on Twitter. So he’s sort of become one of the preeminent lumber, Twitter experts blowing up. Now everyone wanted to hear him on Odd Lots. So, Stinson. Thank you so much for for coming on.
Yeah, thanks for having me. I’m excited to talk potentially endlessly about all the nuances of lumber.
We’re going to go super deep on lumber. So I have this idea (I’m an expert on lumber now because I’ve been paying attention to it for two weeks), I have this idea that there’s, you know, there’s the home builders and they buy from the lumberyard. And the lumberyards buy from the sawmills and the sawmills have a lot of pricing power these days. But why don’t you give us the sort of very high level overview of the different players in this market and also specifically what Deacon Trading does and how it fits into the sort of the broader lumber trading ecosystem.
Sure. So the players in the supply chain, there’s the producers on one end and the end users, which would be the home builders on the far end. And it’s easier to kind of start with the home builders. So the home builders are going to buy from what we call lumber dealers, commonly called lumberyards. Those are the lumberyards that you and I aren’t allowed to walk into. They’ve got the high fences, they’re big, there’s a lot of activity going on and they sell only to commercial accounts, home builders and large contractors, and they sell them framing packages. So it has the OSB and other sheeting and panel goods.
Wait, what’s OSB?
Oh, oriented strand board. That’s the sheeting that goes underneath like your roofing shingles.
Great, okay keep going.
And that for the record, it’s in even worse of a shortage or at least from a pricing perspective than lumber.
It’s really insane, but it’s like the most common kind of four by eight sheet you see on the end cap at Lowe’s when you walk in, okay. The point being the lumber dealer buys in bulk, all of these different products that go to build a house, and then they put them together in smaller housing packages, a little bit of each and deliver it to you. Your pads and job sites, right? So the lumber dealer buys in bulk, all these building materials and the bigger the lumber dealer, the more likely they buy direct from the producer. So I would say most of the lumber that goes into a home was produced at a sawmill and sold directly to a lumber dealer and then put on a flatbed truck for a framing package to the home builder. So it’s pretty efficient in that way, but it’s a highly volatile commodity where there’s frequent scrambles for supply.
There’s scrambles of oversupply, where you’re scrambling just to get rid of whatever product you have. And there’s all sorts of breakdowns in the supply chain. So it sounds easy. Hey, Canada, Canadian sawmill to lumber dealer in Houston, Texas, to home builder. But the reality is that lumber purchased in Canada, you had to make that purchasing decision eight weeks before you actually get the lumber. And so you’re having to anticipate what are my lumber needs two months from now? And when the market gets really hot, it’s like you’re 12 weeks out. And these lumber dealers and the buyers that work for them are often in a really impossible decision to forecast — and they all get their heads together and they try to forecast how much, how much lumber do we need? So in between the sawmill and the lumber dealer, there are several different types of wholesalers or middlemen-type folks. And that’s where I fit in.
And I said on the show. I look at myself as a liquidity provider because the market is illiquid as a physical market and a futures market. So it just gets scarce very fast or oversupplied very fast. So I can stand in the middle and provide liquidity to sawmills that have a backlog of inventory, or I can provide liquidity to a lumberyard that misbudgeted 10 weeks ago, it needs prompt wood tomorrow because where I sit, I buy lumber from Canada and eight weeks later I have it in anticipation of someone needing it over the next 30 days because they misforecast eight weeks prior.
Okay. So that’s where I sit. And there’s not a lot of us because I take a tremendous price risk. The second I agree to buy lumber. I have risk on. It won’t ship to me for two to three weeks if the mills are shipping on time and they’ll take three weeks if the rail lines aren’t running slow to actually get it, and then another 30 days to market it. So I have risk on for a significant amount of time. The other type of wholesaler in our supply chain — and this kind of rounds it out — we call them a transit wholesaler where they buy the rail car and they immediately try to sell it to a lumber dealer before it ships. And they’ll, typically like right now, mills are selling for June production. So a wholesaler could buy a handful of cars for June and then they have six weeks to find a destination for it. And that’s kind of the, that’s more common, there’s less risk. They try to kind of sell it before they pay for it. And that’s more or less their model.
So you laid out the ecosystem really well for us. Talk to us about how I don’t want to say how bad things are at the moment, but how intense the price surge has been? What the scramble for wood actually like and where in the ecosystem those pressure points are coming from?
It’s a short squeeze. It’s from the dynamic of the sales model that lumber dealers, I think, I don’t know really how they did it before the recession, but coming out of the recession, they’ll commit to deliver lumber, 60 to 90 days out sometimes.
Just to be clear, when you say the recession, do you mean the last recession? Like the 2008, 2009 one
Right. The great one, which was the epicenter of the housing crash. And since then the model has been, and maybe this was modeled before I wasn’t in the industry, but they commit to these sales. Let’s just say 90 days worth of sales, the most inventory these folks can hold is 45 days because of cash constraints and kind of how they manage their inventory. When they’re bullish they’ll go 45 to 55 days. When they’re bearish, they’ll work their inventory down to 30 days. And if you think about that, you’re 50% covered and you got 90 days worth of commitments and 45 days worth of inventory. So they’re buying on the open market. You know, they have their average costs of 45 days worth of inventory, but then they’ve got to cover the next 90 days or excuse me, the next 45 days.
And when they don’t cover that aggressively, maybe they dial it back to 30 days worth of inventory anticipating a dip. Well, the dip doesn’t come, didn’t come, which we were all anticipating, me included. In Q1, we stayed kind of flat at a thousand dollars for six weeks, and it felt like things were going to crack to the downside but the mills were able to hold out. I think they were able to sell the Canadian market. They were able to say, sell to Asia and this kind of standoff, the mills won.
So now you got 90 days of commitments, 30 days worth of inventory. You got a lot of ground to make up with your purchases. And I think that’s, what’s happening. That’s what’s happening right now is you’ve gotta cover your commitments. Eventually they’re going to get covered. Eventually they’re going to buy enough wood, cover, get the lumber out the door. They’re going to have made a ton of money on the inventory they had on the ground. They’re not going to make as much money on these open market purchases where they’re scrambling the cover, and those two dynamics, or those two profit margins will average out. And I think ultimately they’ll be okay, but what’s happening right now is there’s commitments that need to be covered. And we’ve all waited too long to get those covered.
So basically you have the lumberyards and if they don’t deliver the lumber they’ve promised, they’ve defaulted. So to avoid that they have to cover those shorts. Let’s talk about the the mentality coming out of the Great Financial Crisis. I have to imagine that numerous players in the industry got totally wrecked. And I remember for years people talked about, “Oh, housing is never really going to come back the way it did.” And then of course we had the crash last March and a lot of people got deja vu, but then we saw, okay, we got some people started renovating their homes and that caught people by surprise, but people didn’t think that would last. And then, okay, the winter is going to come, but then that didn’t slow it down. So talk to us about the role that essentially diminished expectations, permanent pessimism and fears of the ongoing fears of another shoe dropping, how that contributed to the yards not carrying that much inventory.
Yes. So it’s such a great point and I can speak confidently about my market. And I think I can say that we’re more conservative than others because of what we went through 2006, 2007 and 2008. And what we ignored in 2006 and ‘07, and paid the Piper in 2008. And we, we really were one of the sectors that really never — still haven’t — reached and eclipsed our peak, if you just look at housing starts. And it was pretty devastating, as you can imagine, for everyone involved. And so a lot of people got cleaned out. And if you survived and you’re still around today and you survived 12 years ago, it’s because you’re extremely conservative, right? You hold a lot of cash. You don’t put your neck out too much. You’re slow to reinvest. You’re slow to hire. You’re slow to expand. You’re slow to buy more trucks because — what if, right?
It’s such a fear. And ultimately you’re also slow to buy a bunch of inventory. You want as little inventory as possible in case the bottom falls out. So that’s very fresh even all this time later in everyone’s mind. And again, the names that are around right now are around because they were able to scrap, scrape and survive being the epicenter of the great financial meltdown. And so there’s just a characteristic of these legacy names and the folks who run them that they’re just conservative. And the same with the home builders. You’re listening to the home builders, they’re paying down debt and they’re not aggressively going after land and they’re playing it safe. And it’s like, what are we doing here?
We have this massive housing shortage, but you can just feel how hesitant everyone is to believe it. Me included last March! I was like, depression. This is bad. Stock market sell off. Lumber future sell off. And I mean, I was quoted in the WSJ that April that nobody’s thinking about buying a new home. That’s the last thing on anyone’s mind. And so we all derisked, we sold down our inventories to almost nothing. The sawmills, if they had any extra inventory on the ground which they typically operate with to fill in the gaps and smooth out the supply chain in case there’s a weird production run glitch, they can pull from inventory, fill the car and get a gun. They sold those stacks down to pavement. Lumber dealers went and sold, their inventory down to nothing. Middlemen and liquidity providers — same thing. None of us wanted the risk on. So then we started the rebound and the short of it is prices went from 250 on the future screen to $350 to $450 to $500.
And we’re all thinking: ‘Oh, this is the top.’ Like, 500 is historically a great price. And in 2018, we went to $655 and that was the top. So we get the six $650, $655, this is it. There’s no way. And then $700, $800, $900, $1,000 by September. And those last $300 were just backbreaking for the industry. High prices cure high prices. But in our industry, high prices raise concern and people get really scared that it’s just going to crash. So everyone was slow to believe in the recovery. So no one invested in inventories, effectively. The mills didn’t invest in inventories. Lumber dealers didn’t invest in inventories — prices were too high. I’m going to wait for them to come down. This can’t possibly last. So that hesitation to lean in and to put risk on perpetuated the situation that we’re in that has been such an acute run up. We’ll talk about larger structural issues supporting the price of lumber, but what happened and this happening right now, I think, is ultimately from the scars of the great recession and the conservative nature of our industry, not wanting to put risk on via lumber inventory.
So what would it take to actually change that conservative mindset? Or maybe another way of putting it is what would it take to make the industry more flexible and better able to respond to change? Is it just a function of trees taking a long time to grow and taking a while to transport, that means you have sort of longer lead times that feeds into that forward planning?
I don’t know the answer to that question. I hinted at the larger structural problems. The Canadian forests are where the problems are. The Canadian government a few years ago decided we are logging these too fast and that we’re just not going to have the forest if we keep going at this pace. So they reduced what they call the annual allowable cut — the AAC. Before, they had expanded AAC because there was a bunch of what we call beetle kill trees out there from this Pinewood beetle infestation.
Most folks have heard of it, but it was devastating. It was ravaging forests up there. So they opened up the forest for logging to get those trees cut while they’re still harvestable. You can still use them for lumber. You can still find blue-stained lumber in the stores. Some people use that for decorative reasons, but a lot of houses built in the 2010, 2020 have blue-stain studs on them. And those are beetle-killed logs, which is also a thing in the U.S.