North American Softwood Lumber: 20% Duty

Source: The Forest Blog
By Russ Vaagen

Something finally happened.  The US government imposed a 20% duty on Canadian softwood lumber imports to the United States. Everyone seems to have an opinion.

For those that think this is something new, it’s not.  This dispute has been going on for decades and will continue far into the future.  Why, because both nations rely on each other, yet there are enough differences to cause market problems.  Let’s keep in mind that we just completed a decade-long (2006 -2016) Softwood Lumber Agreement that included duties and quotas on lumber entering the US marketplace from Canada.

I think Canadian producers are very fortunate that the circumstances are what they currently are.  Prices are high, and the Canadian dollar currently trades at $1.37 (or .73 cents if you like it that way).  Random Lengths printed the framing lumber composite price at $435/thousand board feet (mbf) dated April 27, 2017.  For those that don’t know, Random Lengths is a trusted news and pricing company that collects information about lumber sales and publishes those prices every week.  If prices were lower and/or the currency was closer to par, this could be devastating for Canadians. For now, it’s tolerable.

Yes, prices are up about 20% since Trump was elected President.  Many say it’s due to the pending duties on lumber.  People in the know seem to suggest it has more to do with market activity and inventory levels.  There is no doubt that the duties have been on the minds of everyone in and near the lumber world.

Fortunate Situation for Canadian Mills

With prices at $435/mbf and the exchange at 1.37, that means the mills in Canada are getting $594/mbf in CND.  With the duty that puts today’s sale realization at $475/mbf in CND.  That’s still almost 10% more than the US mills are getting.

Canadian dollars don’t buy you the exact same in Canadian goods as American dollars by you in American goods, but it certainly isn’t over 30% as the currencies were trading.

Prices over $400/mbf are pretty good historically.  Unless a mill had logs that are priced way too high, they should be able to weather this storm.  All of the producers that I know were expecting something like this and were preparing for the worst and hoping for the best.  As for now, we are somewhere in between.

Effect on the Price of Homes

I have also heard pundits talk about how this is going to raise prices to consumers and how this price increase of 20% has added $3000 to the price of a home.  People need to keep in mind that softwood lumber is an unregulated commodity.  That means that the price is negotiated for each transaction.  If lots of wood is available, the price drops.  If there’s short supply, the price goes up.  Mills can ask for 20% more to be added on, but that won’t work unless backed up by a shortage of supply.

The average 3 bedroom, 2 bathroom home requires about 15,000 board feet of framing lumber to build.  That is exactly what this duty is going to affect, softwood lumber used for framing.  Since the election in November, the price of softwood lumber has gone up $85/mbf.  Simple math suggests that would increase the framing cost on an average home of $1,275.  That’s still real money, but nothing compared to the overall cost of the home.

That makes a total framing cost, using 15,000 board feet at $435/mbf, of $6,525.  The US Census Bureau states that average new home in the US  over the last year costs over $350,000.  That means that today, framing lumber is 1.9% of the sale price.  Not exactly headline worthy.