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Apri I 6, 1984
Lumber's Knotty Recovery
In 1983, the u.s. softwood lumber industry
experienced a sharp increase in the demand
and prices for its products. This welcome
turn followed a severe slump over the
1978-82 period that reduced production to
the lowest level in the post-World War II
period. Spurred by an upsurge in demand by
the nation's homebuilders and lesser
increases by lumber's other major users, the
industry recorded sharp gains in all key
indicators of activity. Nevertheless, the
industry still found its overall performance
in 1983 somewhat disappointing. Neither
production nor profits came close to
regaining the peak levels achieved in the
late 1970s. In large part, this was due to the
failure of overall u.S. softwood lumber
consumption to regain its 1978-peak. But it
was also due to the increased share of the
domestic market supplied by Canadian
imports and to the industry's need to process
some high-costtimberfrom publicly-owned
forests that it had bid upon several years
earl ier when lumber markets were booming.
The year 1984 promises further recovery in
consumption. All markets are poised for
modest improvement - even housing has
been showing surprising resiliency in the
face of relatively high mortgage rates. But
the softwood lumber industry is I ikely to face
many of the same competitive and raw
material problems that afflicted its
operations in 1983, leaving sales and profits
once again below previous peaks.
just over 1 .0 million units in 1982 to 1.7
million units in 1983 - an increase of 70
percent. As a result, the nation's homeb Uilding industry boosted its consumption
of lumber by 60 percent, raising its share of
total consumption from 3:lpercent in 1982
to 42 percent in 1983. Meanwhile, the
pickup in economic activity also raisedihe
consumption of lumber in building repair
and remodeling, materials handling
(containers), and a composite category
including military, furniture and consumer
products. Surprisingly, exports - one of the
smaller outlets - increased by about 7
percent, despite the rising foreign exchange
value of the dollar. Lumber used in construction of new non-residential buildings
and public works projects was the only
category to decline.
To accommodate increased demand, the
nation's lumber producers raised production by about 23 percent. Pacific Coast mills
(Oregon, Washington, California) increased
their production at an even faster rate of 29
percent. In part, this faster rate reflected an
accumulation of inventory, but western
homebuilding activity also picked up mOfe
sharply than homebuilding elsewhere and
enabled Pacific Coast mills to increase their
share of total U.s. production relative to
Southern mills. In the Pacific Northwest, the
industry's operating rate reachedan average
of 83 percent of capacity in 1983, compared
with only 64 percent in 1982.
Improveddemand
Last year, U.S. softwood lumber
consumption rose about 25 percent above
the 1982 trough (Chart 1). Nearly all of the
industry's major markets contributed to this
increase. But the homebuilding industry,
which constitutes the single most important
outlet for lumber, registered by farthe largest
increase in lumber usage. Buoyed by a
decline in mortgage interest rates, private
housing starts soared upward from a low of
While production accelerated, both
national and Pacific Coast lumber employment rose much less sharply. Pacific Coast
firms increased the average number of
workers on their payrolls by only 8 percent
as they attempted to raise productivity and
hold down unit labor costs. They were aided
in the latter effort by the signing of a new
three-year labor agreement in June which
called for relative stability in wages.
Opinions !2);:prl's',.;{;d in thi':, nt'\vsletter do not
necf:ssariiv renee! the Vil;;;I;V-'; ot thE.' rnan,:\gemenl'
of the Federal f<eSE:rVl'Bank of San Francisco,
or of the Beard of (:';overnOiS crt the Federdl
Reserve Svstern.
•
Meanwh i Ie, producers were able to real ize a
sharply higher level of prices. Softwood
lumber prices in general rose on average by
15 percent for the year, whi Ie prices for
Douglas fir - the key homebu i1ding species
- jumped upward by 37 percent. The
upsurge in prices was attained during the
first half of the year. During the second half,
after housing starts peaked at an annual rate
of nearly 1.9 million units in August, prices
moved sharply lower.
the decline in housing starts would suggest
because of the dramatic change in the types
of homes builtoverthe 1978-83 period.
Single-family homes generally require
nearly twice as much lumber as multi-family
units, but the construction of single-family
units weakened even earlierthan multifamily units, dropping from 71 to 62 percent
of total 4nits started over that period. This
shift away from single-family toward multifamily units reflected the efforts of builders
to construct smaller, more affordable homes
in a high interest rate environment. In 1983,
builders reversed this pattern only slightly.
The second-half price decline, combined
with raw material cost pressures, resulted in
disappointing profits. The nation's ten
largest forest products firms, ranked
according to sales in peak year 1979,
experienced a near doubling of net income
in 1983 from the extremely depressed lev,,; .
of 1982, but their combined net income still
amounted to only 2.9 percent of sales
(compared with 3.9 percent for all
manufacturing). Smaller, non-integrated
producers who were forced to rely heavily
on timber from publicly-owned lands
performed less well than large integrated
producers who own forestlands.
During the 1978-83 period, domestic
lumber producers also faced greater
competition by Canadian mills. Although
Canadian lumberimports fell somewhat
during the weak market period from 1978.10
1982, the share of total U.S. consumption
supplied by imports rose from 28 to 32
percent (Chart 1). Moreover, in 1983,
Canadian imports soared upward, rising to
34 percent of total U.s. consumption. Thus,
while U.S. lumber consumption in 1983
remained about 14 percent below its 1978
peak, domestic production remained about
23 percent below its prior peak due to the
loss of market share to Canadian mills.
Lingering problems
On an industry-wide basis, all significant
indicators of performance in 1983 remained
below peak levels reached in the late 1970s.
For example, during the 1977-79 period,
softwood lumber consumption averaged
about 40 billion board feet, with the peak of
41 billion board feet reached in 1978. In
1983, despite a sharp increase, softwood
lumber consumption was still about 14
percent less than in 1978. In part, this
reflected the severity of the decline in the
annual number of new homes bu ilt between
1978 and 1982. During that period, private
housing starts plunged downward from an
annual rate of just over 2.0 million units to
about 1 .0 ' Dillion units. Thus, although starts
rebounded to 1.7 million units in 1983,
homebuilding activity still remained 15
percent below its prior 1978 peak.
Canadian mills have benefited from factors
such as the steady decline in the value of the
Canadian dollar relative to the U.S. dollar
over the 1977-83 period, and lowertransportation costs in shipping lumber both by
rail and water to the eastern United States.
In addition to import penetration, U.S.
lumber producers have suffered from the
high cost of their basic raw material, timber.
Producers dependent upon timber from
National Forests and other publ icly-owned
lands located mainly in the West have been
especially hard hit. The origins of the recent
cost pressures lie in the residential construction boom of the late 1970s, when
lumber prices were soaring and public
timber was forecast to be in tight supply. In
that environment, timber buyers bid
The volume of lumber used in residential
construction, however, dropped more than
2
Chart 1
Chart 2
Ratio Scale
Billions 01 Board Feet
MIllions 01 Units
1970=100
50
10
1000
U.S. Softwood Lumber Consumption
100
w
0
1970
1972
1974
1976
1978
1980
1982
1984
·Western Oregon and Washington(bid prices lor Douglas·Flr lor future harvest)
---,,:19.l..76-.,.,J197!,.,-8-1,-,198"':""0
---"'19,1,-82""'-"""1984
Outlook for 1 984
This year, softwood lumber orders and
prices have resumed their upward movement. In January, production was running 13
percent ahead of the year-earlier level,
while prices were up by 6 percent. Part of
the stimulus has come from a renewed
pickup in housing starts which, by January,
had rebounded to an annual rate of just over
1.9 million units - the highest level since
late 1978. Analysts attribute this greaterthan-expected strength to the rapid growth
of personal income and to financial institutions' promotion of adjustable rate mortgage
packages. Assuming the increased use of
this type of financing prevents any significant increase in the overall level of mortgage
rates through mid-year, most analysts expect
housing starts in 1984 to total 1.75 to 1.8
million units. This could mean a gain in
starts of as much as 6 percent from 1983 and
could result in a modest increase in the
volume of lumber consumed in residential
construction.
frantically for available supplies which the
Forest Service offered under futures
contracts. These contracts called for the
winning bidder to remove the timber within
the contract period, which averaged 3 years
in length but was as long as 7 years in some
sales. In the case of saleson National Forests
in western Oregon and western
Washington, the purchasers were to pay the
original winning bid price whenthe timber
was harvested several years later, a
provision which is still in effeCtfor sales
conducted prior to August 1, 1983.
In formulating their bid prices for raw
material, lumber companies thus were
req u i red to forecastthe prices they expected
to prevai I for lumber and other wood
products manufactured from that timber at
the time of harvest. In the late 1970s, they
expected the price of lumber and wood
products to continue to rise at a rapid rate
and, thus, they were willing to bid record
prices for timber. For example, after rising at
an average annual rate of 16 percent over
the 1 975-78 period, the bid price of Douglas
fir sawtimber sold on National Forestsin
western Oregon and Washington rose at an
accelerated annual rate of 36-percent over
the 1 978-80 period (Chart 2). When the
price of softwood lumber dropped 15
percent between 1979 and 1982 instead
of rising as lumbermen had expected,
producers were caught with-timber under
contract which was unprofitable to
manufacture at current lumber prices.
Although the federal and state governments
extended their contract termination dates,
processors in 1 983 sti II were forced to blend
some of this high-cost timber with lowercost timber purchased after 1981, when bid
prices finally began to decline sharply in
response to reduced finished lumber prices.
Total U.S. softwood lumber consumption
cou Id rise moderately th is year - perhaps as
much as 8 percent. In addition to the prospect that thevolume of lumber consumed in
new homes will rise a few percentage
points, the growth expected in personal
income and business capital spending
should increase the use of lumber in all types
of repair and remodeling and in new nonresidential strl!ctures. Exports also should
rise as overseas economies improve. But
production may rise less rapidly than
consumption as Canadian producers further
increase their penetration of the U.S.
market. Moreover, further improvement in
profits once again will be restrained by
producers' need to work-off some existing
high-cost public timber contracts.
Yvonne Levy
3
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{1
.BANKINGDATA-TWELFTHFEDERAL
RESERVE
DISTRICT
. (Dollar amounts in millions)
SelectedAsSetsand Liabilities
LargeCommercialBanks
Loans, Leases and Investments 1 2
Loans and Leases1 6
Commercial and Industrial
Real estate
Loans to Individuals
Leases
U.S. Treasury and Agency Securities2
Other Securities 2
Total Deposits
Demand Deposits
Demand Deposits Adjusted 3
Other Transaction Balances4
Total Non-Transaction Balances6
Money Market Deposit
Accounts-Total
Time Deposits in Amounts of
$100,000 or more
Other liabilities for Borrowed MoneyS
WeeklyAverages
of Daily Figures
ReservePosition,All ReportingBanks
Excess Reserves ( +)/Deficiency (- )
Borrowings
Net free reserves (+ )/Net borrowed( - )
Amount
Outstanding
3/21/84
177,040
156,864
46,687
59,402
26,998
4,995
12,268
7,907
184,862
42,71 7
29,048
12,189
129,955
Change
from
3/1 4/84
-
-
40,51 0
37,971
18,128
Weekended
3/21/84
824
931
176
53
8
10
77
185
883
791
245
88
2
Change from 12/28/83
Percent
Dollar
Annualized
-
-
-
1,014
1,509
724
503
347
67
238
256
6,134
6,51 9
2,283
585
970
15
-
33
642
-
-
913
-
-
192
4,877
Weekended
3/1 4/84
NA
NA
NA
-
NA
NA
NA
2.5
4.2
6.8
3.7
5.7
5.8
8.3
13.6
14.0
57.5
31.7
19.9
3.3
10.0
-
2.2
92.1
Comparable
year-ago period
NA
NA
NA
1 Includes loss reserves, unearned income, excludes interbank loans
2 Excludes trading account securities
3 Excludes U. S. government and depository institution deposits and cash items
4 ATS, N OW, Super N O W and savings accounts with telephone transfers
5 Includes borrowing via FRB, I T &L notes, Fed Funds, RPsand other sources
6 Includes items not shown separately
Editorialcommentsmaybeaddressed
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Bankof SanFrancisco,P.O. BOJ!:
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