A huge increase in lumber inventories (which have doubled in 45 years) and a falling demand for housing are responsible for the persistently low lumber prices, which are now also squeezing the margins of lumber companies in Arkansas and several swing states in the Deep South.

That’s the assessment of leading economists at the Arkansas Center for Forest Business, who report that one of the United States’ most wood-dependent economies is struggling with an increasingly difficult lumber market – and the situation could get worse before it improves.

Last week, Wood Central reported that the housing crisis—particularly in low- and middle-income neighborhoods with single-family homes, duplexes, and multifamily housing—will impact the presidential election, as the American construction market is currently flooded with lumber.

Now Freddie Mac, one of the largest government-backed mortgage lending companies in the United States, reported that “net timber growth (in the American South) continues to exceed harvest by 25 million tons annually” and that the total amount of standing timber in the state (Arkansas) has nearly doubled since 1978.

According to Nana Tian, ​​​​an economist and associate professor at the University of Arkansas at Monticello, “The South – including Arkansas – has long had a large supply of timber. (However) declining lumber prices – especially after the great economic recession of 2008 – have made many landowners more cautious about harvesting timber.”

“The forecast decline in housing starts is contributing to relatively low demand for wood. Combined with a downward trend in demand and market prices, wood supply is therefore very strong.”

For Associate Professor Tian, ​​this “wall of wood” is putting downward pressure on wood prices:

Wood Central estimates that Arkansas’ economy is the most dependent on forestry of any southern state (and second only to Wisconsin in the U.S.). More than 4.1 percent of the state’s gross domestic product – or about $7 billion – is tied to forests.

“Given the uncertain economic situation, global unrest in major energy and fertilizer producing regions, an election year and a decline in projected U.S. housing starts, Arkansas’ forestry industry will experience little to no growth in 2024,” the Arkansas Center for Forest Business forecast said.

For Tian, ​​factors that could help strengthen the industry include:

• Introducing climate-resilient solutions, such as creating a wood product-friendly consumer base.
• Contribution to bioenergy projects such as the conversion of biomass into electricity.
• Combined heat and power.
• Wood pellet segments.

The new concerns come after Wood Central reported that the North American market (particularly the United States and Canada) remains the safest investment for lumber in the world despite “some headwinds,” with demand being driven by the rise in single-family home construction, which uses three times as much lumber as multifamily housing.

This is the statement of Russ Taylor Consulting, one of the world’s leading forestry consultants, which has analyzed the timber markets in the USA, Canada, Russia, China and Europe over the past 30 years.

According to Taylor, this has created an environment in which “a spate of sawmill expansions and new sawmill construction over the last six to seven years has resulted in tremendous growth in wood processing capacity, particularly in the southern United States.”

“As lumber prices fell below break-even in some regions in 2023, higher-cost sawmills were closed, sometimes to rationalize lumber supplies around several of the Company’s sawmill locations. Nine sawmills were permanently closed in 2023. To date, three new sawmills have been commissioned in the Southern United States in 2024, while nine additional sawmills – in all regions of North America except Eastern Canada – have announced their closures.”

These changes have created an environment where Southern Yellow Pine produced at sawmills in the Southern U.S. is trading at significant discounts: “Many Southern Yellow Pine sawmills are now trading below cash costs, which has led to temporary and permanent constraints on sawmill capacity in the South – something not seen since the housing market collapsed 15 years ago,” he said, adding that “the constraints on mill capacity are expected to lead to higher prices over the next few months.”