Things Have Changed

Lumber Prices Have Been Surging. Could Other Commodities Follow Suit?

May 16, 2021 Things Have Changed
Things Have Changed
Lumber Prices Have Been Surging. Could Other Commodities Follow Suit?
Show Notes Transcript

Online search for “inflation” have multiplied over the past few months..

The surge in attention comes during a supply demand mismatch, resulting in computer chip shortages, gas lines,  surging metal prices, & food prices on the way up as well.

Lumber, specifically, has been on a tear,  up 500% since last year!
The price increase in lumber actually leads to a price increase in residential homes, with new single-family homes up a staggering $35K that can be attributed to the rise in the price of lumber!

As prices rise, people look to the federal reserve to curb inflation, but we fear they may have dismissed the dangers of a red-hot economy. 

So what do we do about this. How do we curb this overheating of commodity prices? The crew at THC dives in!

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Reporter [00:00:05] What have you tried a home improvement project lately? If so, you know, the cost of wood is soaring. 

Reporter [00:00:11] You ain't kidding. In fact, all building materials have skyrocketed during the COVID 19 pandemic. 

Lianne Dings [00:00:16] It's not just wood. Commodity prices are rising all over the place,. 

Reporter [00:00:20] Keeping in line with the reopening story. Commodity prices have surged as demand for everything from oil and lumber to soybeans, sugar and even rubber is ramping up big time. 

Jed Tabernero [00:00:31] Over the last year. There's one commodity that has blown up lumber, 

Reporters [00:00:36] lumber, lumber. Two by fours are more than three times their price. Other wood products that we use to build houses like plywood have also seen increases thanks to an unexpected boom in demand. Lumber futures have more than tripled since the rally began, and even between hunker down homeowners remodeled en masse and low mortgage rates drove demand for suburban housing, while restaurants raced to construct outdoor dining combinations. Lumber and plywood started flying off shelves. Wood was in short supply. Sawmills ramped up capacity but couldn't catch up, leading to a surge in prices. 

Lianne Dings [00:01:08] New family homes are increasing by a staggering $35,000, that can be attributed to the rise in the price of lumber. 

Reporters [00:01:15] But with the housing market continuing to run hot, the price continues to rise. 

Jed Tabernero [00:01:20] As prices rise, people look to the Federal Reserve to curb inflation, but we fear they may have dismissed the dangers of a red hot economy. 

Reporter [00:01:29] I think the Fed is making a very bold call here on the economy and on inflation, how things are going to work. But everything I hear, Melissa, suggests to me that they are not about to change their general idea, which is that this inflation is going to pass through the economy and that the key metric to figure out when and if it's time to change policy is more linked to the jobs numbers and the overall growth in the recovery of the economy from the pandemic that it is to these inflation numbers that it sees as temporary. 

Lianne Dings [00:02:00] If you're curious about why home prices are surging and why restaurants are struggling to find wood to build their outdoor patios, stick around. 

Jed Tabernero [00:02:18] Welcome to THC, where we unpack the ever changing technology economy 

Adrian Grobelny [00:02:23] hangout with Jed, Shikher, and Adrian as we tackle the industries of tomorrow. 

Shikher Bhandary [00:02:29] This is things have changed. 

Shikher Bhandary [00:02:40] So there's a lot of interesting stuff happening in the economy. One big thing has been there's a shortage of everything from cars, ships, chips. You know, we've covered this extensively over the last month, month and a half. Ketchup packets, toothpicks,. 

Jed Tabernero [00:02:56] Toilet paper. 

Shikher Bhandary [00:02:57] Again, toilet paper. 

Jed Tabernero [00:02:58] Yeah, my gas bro. People be stealing gas and 

Shikher Bhandary [00:03:05] people freak out about things so quickly and they just go into this survival mode and hoard like, I don't know, 20, 30 gallons of gas. It's it's crazy, but there is some merit to it. Prices of commodities, you know, the things that we use daily, like, you know, things that you take for granted. Right. Corn, wood, oil. Right. The things that basically run the economy, but we don't really think about it have all been in shortage and the prices have been increasing quite drastically. It's up 500 percent over the last year. If you guys had invested in GameStop, you know, you had a good return. But if you guys had invested in lumber, you had a good return to, you know, and the list goes on. You have crude oil that did like almost 200 percent. You have gone up 100 percent, copper up 100 percent. Like everything is up 100 percent except for my portfolio, which is down 50 percent. 

Jed Tabernero [00:04:01] That's sounds like a YOU problem 

Shikher Bhandary [00:04:03] That's a problem. But this phenomenon that is being caused in commodities, you know, this is this has been seen before and it's something that people call as a supercycle. You have a cycle and it's super. And that sounds lame, but wow. It's basically that those. 

Adrian Grobelny [00:04:24] So what is a super cycle, you might ask? Well, a super cycle is a rapid increase in pricing for a broad spectrum of commodities. You know, sugar mentioned lumber, metals, all these various commodities that really come together to build up our whole economy and all of our consumption that we use day to day. 

Jed Tabernero [00:04:43] The example back in the day for commodity supercycle, like it's so intense and things were destroyed, you know what I mean? Like, entire economies were destroyed, like villages were destroyed, like during World War Two. That's why they needed to build up certain places. Right. Like Germany and Japan, the way they were messed up after World War Two, they had an intense rebuilding effort. Right. But take another example, like something that's more recent. And today was was early 2000s. Right. Is the the idea of BRICS, you know, if you haven't taken an economics class before, that's that's Brazil, Russia, India and China. Right. These are the countries that were catching up to traditionally western world is that had really built up their population and their economy like they have grown at a really staggering rate since the 80s. Right. Brazil, Russia, India and China are all economies that required upscaling like ridiculous amounts because their population was this massive, like there's this massive demand that was unmet before. And they didn't realize, like these new products that were coming into the markets, like, for example, if we think about China and how they've lifted, like, what, half a billion people out of out of poverty since the 40s, like, it's ridiculous how many people now have money to buy certain things. Right. So with any economy that's reshaping or restructuring any sort of way, there is a possibility of a commodity supercycle to occur. So for the BRICS use case, like in the early 2000s, that's a lot of fucking people think all those combined Brazil, Russia, India, China, that's 40 percent of the world population. That's a lot of people getting more access to. Let's say, you know, this family now earns a certain amount of money because they started manufacturing, I don't know, more clothes in China. And so they'll be able to go buy houses. So what are they going to need when they go buy houses? They're going to need lumber, right. So they're going to do all sorts of commodities to build up build up the economy. And so that's what a commodity supercycle is. And that plays out obviously in the world markets because, for example, what just happened with a shortage of chips. Right. We think about how many fucking people wanted chips now because of the smart technologies that we have, that's the same way we can think about how much they wanted when we started building products that already existed, as simple as chairs, tables, toothpicks, as we were talking about earlier. But, yeah, I guess, like, why now? Why is the commodity super cycle happening now? 

Adrian Grobelny [00:07:04] Well, like like you said, it's an imbalance in supply and demand. And the pandemic only created a bigger shock into the supply side of things with everything shutting down lumber saw mills closing, factories being shut down, and then the demand just coming back stronger than ever as we're coming into recovery. And so we have that imbalance and an inability to meet that new demand due to various reasons whether that be infrastructure. Issues, bottlenecks in the supply chain or 

Jed Tabernero [00:07:39] prices could be high, too high for them to rebuild. One thing that we can really think about right now is how much spending we have done in the past couple of months. Right. So if you think about what's been on the news, whether you're in an EU country or whether you're in the United States. Right. What's coming recently and was a really popular plan that everybody's having is infrastructure plans. It's quite interesting, right? Like we're at a time where covid-19 just pillage through the frickin universe and the world and people are thinking about what can we do to rebuild roads? What can we do to rebuild certain economies? Right. Because one of the things that happened during covid-19 is that we got little irresponsible spending money or maybe not to characterize it like that. We got trigger happy with with spending. You know, rates have been historically low for such a long time. So there's a lot of incentive here to keep spending right beyond like fiscal policy. There's monetary policy that makes it really easy for us, for private businesses to go and borrow. And then I think, like one really interesting thing that's that's happening now is right. We just talked about this last year where we're going into what's looking to be the pinnacle of of the Green Revolution. Right. Like we are seeing so many countries, private businesses, changing their focus onto more sustainable options, renewable energy. You know, would this massive infrastructure plans containing, you know, the blueprints for a green revolution, quote unquote? We know that the composition of certain materials will change. Right. Think about it. Like if if this infrastructure plan includes any sort of spending on on solar panels. Right. Let's say the plan includes creating a 100 percent sustainable electricity source for a certain city that will need frickin, you know, hundreds of thousands of solar cells. Right. And so you'll see certain commodities be more needed. So that demand will be so high that that the existing suppliers, even pre pandemic, would be enough for that. So regardless of the pandemic, there could be things that are just more in demand for every revolution. Right. Think about Cobalt's lithium nickel sulfate. You know, like these products that go into an actual battery of an electric car. We talked about electric car manufacturers. Right. And how they're supposed to frickin find the next cobalt mine. It's really complex. But we're seeing that revolution take effect now. 

Shikher Bhandary [00:10:15] Yeah. So the pandemic came by. Manufacturing in general just stopped or slowed down. And what resulted is no production to had drastically slowed down. Right. To brace for whatever housing slump. No one knew back then. Is this the greatest recession that's going to happen? Like who's going to buy houses at this time? Now, thanks to a bunch of monetary policies, fiscal policies and stuff, that slump never arrived. And now suddenly the market was so hot where rates were low, people wanted wanted to buy houses and people wanted to renovate their existing furniture. And there was a lot of demand for lumber. Right now, production was not able to meet that crazy demand. And it's still and even now, Hasmet is not able to meet like the CEO's entire demand for lumber and housing. That's how scorching the market is right now. And what's incredible is because of this, all these the confluence of events, lumber has more or less like, you know, over the past ureters, five Xed, but from the lows in April, that's like seven Xed. That is so, so substantial because now there's this crazy, crazy stat that was like just the price in lumber has added almost thirty five thousand thirty six thousand dollars to a single family home. Wow. That's like your down payment for a half a million dollar house. Right. So huge increases and I mean easy access to money and capital. So you're seeing the cycle where, again, anecdotal evidence, but a lot of people are just bidding like 10 percent, 20 percent, 40 percent above the market price of the house, which itself is really high. Right. So it's becoming pretty unsustainable, especially in the housing market and people are being priced out of the market. 

Jed Tabernero [00:12:24] If we think about the artificial rise of prices, you you try to find out what is what led to this event, you know, and like us looking at the inflation over in. Latest prices of the raw materials used to create houses like, hmm, seems like it's unsustainable here. So, you know, it it's just like with the increases of of the prices of homes because of this. Right. There's still people out there buying houses. 

Shikher Bhandary [00:12:58] So, yeah, why don't they just stop this, you know? Well, they're buying houses so they can just break it down and sell it for parts because the parts itself are so expensive now. So do the biggest. 

Jed Tabernero [00:13:12] Five hundred percent sell that fucking wood, bro. 

Adrian Grobelny [00:13:14] Sell you buy a three bed and I could get by with two beds. So, so everything in my third bedroom. 

Jed Tabernero [00:13:21] Our next business should be, you know, putting a platform for lumber, recycled lumber. Honestly, that'll be a good idea. 

Shikher Bhandary [00:13:29] You know, this was a funny topic that was just circling around, I guess, finance Twitter and stuff where the biggest Fleck's today is to have just boards of lumber with you. So it's not your Gucci bags. It's not your you know, Prada should it's not your Rolex is none of that. If you're carrying a bunch of lumber, you've made it a 

Jed Tabernero [00:13:52] 500 percent, bro. Yeah, I'm on. 

Adrian Grobelny [00:13:55] So, you know, with the shock that the lumber industry has had from pandemic and then just the surge in demand of people buying and remodeling their houses, 

Shikher Bhandary [00:14:06] also to add the throughput of lumber has been actually reduced quite a bit because Canada saw like this pest infestation, which really affected the lumber quality and yield. So there are a lot of factors that have added to this, I wouldn't say have been primary drivers, but have added to it. And now, you know, just to meet demand, it's going to take, what, 12 months from today to catch up to what housing construction and renovation demand is out there. 

Adrian Grobelny [00:14:37] So are you saying that in 12 months longer prices will go down? So therefore you should short lumber futures, 

Shikher Bhandary [00:14:43] bro, but it could the market can stay extended longer than you can stay solvent. Right. So it could you go shotting that itself. It's going to double and you're going to be like you'll have to sell your entire bed and stuff for parts that 

Jed Tabernero [00:15:02] I mean, did a supercycle, a commodity supercycle typically lasts a decade, bro. So if you're if you're down to short for a decade, that's your period. And, you know, that's OK. But, you know, looking at the demand side, right. Like we talk so much about real estate and all that stuff. But a more close example to you, if you're just a consumer not looking for housing, you know, if you've gone out to a lot of cities that that during lockdown only allowed, you know, outdoor patio seating. Dude, have you seen San Francisco? San Francisco, after being required to have only outdoor seating, they kept it so that they they kept the closed streets for certain areas of San Francisco so that the businesses could have outdoor seating areas. 

Shikher Bhandary [00:15:48] Yeah, same with same with New York. And I wanted to mention that, like restaurants, they're adding like a 10 percent, 15 percent, 20 percent rate as a corporate tax. 

Jed Tabernero [00:15:59] Yeah, I mean, I people 

Shikher Bhandary [00:16:00] in New York need that brunch, that brunch rooftop view. So they are willing to do it. You wouldn't believe how expensive it is. I was shocked. 

Jed Tabernero [00:16:11] I can believe it's OK. San Francisco is the same shit. But, you know, to connect that outdoor patios are made out of wood. Right? You look at them. So some businesses are having a hard time just creating the outdoor patios for those requirements, although it should be opening up soon. So that shouldn't be a main source of lumber shortage problems. But still to see that like to them to have to make those decisions on lumber that has increased five hundred fucking percent, like, that's nuts. 

Shikher Bhandary [00:16:42] Yeah, and, you know, the Fed policies don't really help as much, I mean, rates are increasing slightly, but they're still at historic lows. And I know that you're right now in London, right, dude? Over the past year. The pound has is up like 20 percent of the dollar. The dollar has been and is still very weak compared to what it usually is. So, you know, that also influences all of this. If the dollar is weak, the other things that strong commodities are strong demand, a strong supply is weak. You know, prices are going to rise. So it's interesting that the conversation now you're going to hear a lot more of inflation talks and inflation worries. And six months back, everyone was like, hey, we're printing all this money. Where's the inflation, Bob? Six months later, five X number. Is that good enough? Is that good enough? 

Jed Tabernero [00:17:40] That's so crazy. You know, we talk about how with all this government spending that we are experiencing in 2020 and the onset of covid-19, we were expecting inflation to come right. And we left that message, that call saying it's like target. Check us back out in six months where there will be some crazy inflation in certain areas. 

Shikher Bhandary [00:18:00] We we named that episode getting fed up with inflation. Yeah, yeah. I remember there was some brilliant. 

Jed Tabernero [00:18:08] Yeah, yeah. 

Shikher Bhandary [00:18:10] Obviously. Obviously we might be 50 percent down in my portfolio, but at least the titles are good, but 

Jed Tabernero [00:18:17] I don't think it's working out for us. So, you know, we're seeing the Fed sort of become a little powerless at this moment in terms of inflation and how a a really fast rise of the interest rate will also be bad for us so we can see them doing that. So it seems like an environment where it's dangerous to be doing certain types of businesses because you know that you're going to expect higher commodity prices for whatever raw materials you're dealing with or where higher prices for, you know, certain activities that are reliant on your business. As we were talking about earlier, the economy is insanely interconnected. 

Adrian Grobelny [00:18:56] Yeah. It just shows you that whatever business you're in, whatever startup you're working towards, you have to consider every single risk that is relevant to it and ones that you might not think might affect it. 

Shikher Bhandary [00:19:08] But there's still a chance. How do you how do you begin a risk of a bat biting some guy and then he spreading everywhere and then the world shutting down for two years? 

Adrian Grobelny [00:19:18] You have to consider all angles, all possibilities now, actually. 

Jed Tabernero [00:19:23] I mean, we're thinking about, you know, I mean, it's not covid-19. You got to be just looking at, you know, you can't you can't price in Black Swan events. It's actually irresponsible to be doing that. Right. Like, you can't expect Black Swan events in your certain time in your model like that. It doesn't work. But what we can do is we know that that the Black Swan event had happened. Right. We knew about the supply chain disruptions. We knew about the demand that's going to come back like it's not like we were blindsided completely from the beginning of the pandemic. We were talking about food inflation in the beginning. We talked about all sorts of types of inflation, like it was coming, dude, like we. Knew. 

Shikher Bhandary [00:20:00] Right on 

Jed Tabernero [00:20:01] on that, you know, like what should you have done knowing that inflation was coming? 

Shikher Bhandary [00:20:06] Yeah, a lot of business owners, restaurant owners, real estate owners, a lot of entrepreneurs, actually. Did the smart move and they could foresee this being an issue of demand being an issue of supply being an issue, and they tied their vendors to long term contracts at the existing price. So now anyone coming in new, they have to pay like crazy high labor costs. But the folks that actually tied a five year contract like six months ago are going to get that price, 

Adrian Grobelny [00:20:38] you know, and that's that's a win win for both parties because for one, you have the guarantee of the supply. So you know that no matter what, you're going to be given the amount of materials that you need. And on the other hand, the supplier, their benefit is they have a guarantee customer that no matter what, through a pandemic, they're going to be selling a set amount and they can project and plan ahead responsibly. 

Jed Tabernero [00:21:07] They actually also might get, though, the suppliers because, OK, think about this use case. All right. So I was I was reading some articles about like the the lumber price, the lumber surge pricing. Right. And some some developers had already signed contracts to build X amount of houses. Right. X amount of buildings and whatnot. When they signed up to do the deals, they didn't have contracts with their lumber suppliers. So what happened? Lumber raised 500 percent. They're losing money on that contract. It would be really nice if they had the ability to delay the development of certain areas. If we could delay so that the developers don't get fucked, then we may be in a place where we're forcing supply and demand to equal. Right. But again, we don't know when lumber prices are going down. So this this may be an issue across the board of companies being insolvent 

Adrian Grobelny [00:22:02] checks things that's going to be down in a year. 

Shikher Bhandary [00:22:05] You know, I think I think listen, guys, if you want to take my advice to make money, if you want to take my advice, the white guy who lost 50 percent on his whole portfolio shot the lumber futures to shut. Do they do the opposite of what? I think you would go long after a five XCOM? Come on, dude. 

Jed Tabernero [00:22:26] You don't know. You don't know. 

Shikher Bhandary [00:22:27] Yeah, but you never know. 

Jed Tabernero [00:22:28] Long after a five X 

Shikher Bhandary [00:22:29] and then it goes double and it could double from that. 

Jed Tabernero [00:22:31] We live in a time of bitcoin Ethereum 

Shikher Bhandary [00:22:33] crypto 

Jed Tabernero [00:22:35] like there's no way. So I mean, you know, if last note there is you know, if you're a business that heavily relies on these commodities for your production. Right. Which pretty much that's fucking all of you. Right. Well, a good thing to do is to start planning ahead of of what happens if it's going to be like this for the next ten years. What do I do? One thing is, you know, maybe switching your raw materials with other, you know, other commodities that aren't experiencing a supply and demand. Right. Right. You could think about different ways to hedge on the prices of said commodity. Write out a little bit of finance. 

Shikher Bhandary [00:23:14] I would say buy used stuff, use furniture or use whatever. But there's a run on that as well. I don't know if you guys know, but used cars are the highest it's ever been in history. The price of a used car. 

Jed Tabernero [00:23:28] That's crazy. You weren't sure what you were going to take away from this call was after listening to us babble about, you know, commodity prices, at least one thing you can frickin take away for sure is that long before it invested in lumber grow long 

Shikher Bhandary [00:23:42] wood, not right now, 

Jed Tabernero [00:23:43] wood long. 

Shikher Bhandary [00:23:44] We actually have to have a disclaimer after this episode. Otherwise people go to us. Hey, thanks so much for listening to our show this week. You could subscribe to us. And if you're feeling generous, well, you could even leave us a review. Trust me, it goes a long, long way. You could also follow THC, @thc_Pod on Twitter and LinkedIn. This is things have changed.