If you pay a visit to your local Home Depot for lumber supplies to build that deck for your backyard, be prepared for a shock.
Since last summer, lumber prices have gone through the roof.
The price of lumber – the wood used to build houses, cabinets, doors, floors and more – has surged more than 80% this year.
The price of a lowly two-by-four may have risen as much as 340% over the past year.
What explains lumber’s meteoric rise?
Chalk it up to a combination of reduced supply after the economic shutdown, an unexpected surge in demand for new homes and an e-commerce explosion that created a surge in demand for paper packaging materials.
The lumber shortage is having its most noticeable impact in the housing sector.
The National Association of Home Builders estimates that the shortage increased the average price of a new single-family home by nearly $36,000.
In late November, the U.S. Commerce Department lowered duties on Canadian lumber coming into the U.S. from 20% to 8.9%.
Others are asking the Biden administration to cut tariffs on imports from Canada, the top lumber exporter to the U.S., even more.
But for U.S. consumers of lumber, it’s too little, too late.
Skyrocketing Prices as Far as the Eye Can See
Last week, lumber may have pulled back from its all-time highs.
But prices are still more than double the pre-pandemic record.
And this is unlikely to change anytime soon.
Lumber is a cyclical – and capital-intensive – business.
In economics textbooks, the cure for high prices is more supply. But that does not seem to apply to the lumber market.
New mills cost hundreds of millions of dollars and take two years to build from scratch. Modern mills need all sorts of equipment, from microprocessors to heavy machinery, all of which is in short supply. Throw in the shortage of workers in rural areas, and it’s no wonder mills are staying put.
For now, sawmills seem content to rake in the cash while lumber prices are sky-high.
Here’s What Makes Timber Special
You’ve probably never thought of investing in timber, the unprocessed version of lumber you see at Home Depot.
Still, there are good reasons to do so – even when prices aren’t sky-high.
First, timber as an investment is almost unique.
Companies go out of business every day. Even countries disappear off the map.
None of that matters to timber.
Trees grew through two world wars, the Great Depression, the rise and fall of the Soviet Union, 9/11, and even the global pandemic.
Trees will keep growing, no matter the crisis du jour.
Second, unlike wheat or corn, trees don’t need to be harvested every year.
You can harvest trees when timber prices are up…
And you can delay harvests when prices are down.
Banking timber “on the stump” helps smooth out prices and ensures against crashes.
Third, the global supply of timber is falling even as demand is exploding.
The world has lost the equivalent of 1,000 football fields of forest per hour for the last 25 years. That’s about 10% of the world’s wilderness.
Meanwhile, there’s been a surge in demand for timber as global economies recover from the pandemic.
Exploding demand combined with dropping supply is almost a guarantee of higher prices in the future.
How Timber Trumps the S&P 500
Historically, timber has been a terrific investment.
It has outperformed the S&P 500 for more than 100 years.
From 1971 to 2010, timber generated average annual returns of more than 14%.
That’s enough to have turned $10,000 into more than $1.6 million.
Timber has also been a terrific investment during times of financial crisis.
During the Great Depression, timber gained 233% even as stock prices fell more than 70%.
In 2008, while the S&P 500 fell 38%, the value of timber rose 9.5%.
Timber also performs exceptionally well during times of inflation.
From 1973 to 1981 – when inflation averaged 9.2% – timber prices increased by an average of 22% per year.
So if you’re looking to protect yourself against inflation or a financial crash, you could do far worse than investing in timber.
How to Invest in Timber
Most of the options for investing in timber are complicated at best and unwieldy at worst.
First, you can trade lumber futures. But with their leverage and volatility, futures are best left to the professionals.
Second, you can buy a forest. But forests aren’t as liquid as stocks. You can’t sell timber overnight to raise cash. And you never really know how much your timber is worth until you try to sell it.
Third, you can invest in timber-related stocks.
My favorite way to do this is through the iShares Global Timber & Forestry ETF (Nasdaq: WOOD).
This exchange-traded fund tracks the S&P Global Timber & Forestry Index. It consists of the 25 largest publicly listed firms in both developed and emerging markets that manage and develop forest and timberlands.
The biggest chunk of the ETF – 34.7% – is invested in U.S. companies.
Timber is, however, a global industry. As such, the ETF invests in stocks across the globe.
Sweden accounts for 14.8% of the ETF. Plus, the ETF has significant allocations in Canada (14%), Japan (10.3%) and Finland (9.5%).
Wood is in a stable, long-term uptrend and has strongly outperformed the S&P 500 over the past year.
With lumber prices near record highs – and supplies remaining scarce – the investment case for timber has rarely been stronger than it is today.