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August 24,1973 Lumber prices, which defied gov ernmental stabilization efforts during earlier phases of the pricecontrol program, are less likely to pose a problem for Administration inflation fighters during the Phase IV period. Prices for key construc tion items were already dropping from record levels when the Presi dent imposed the 60-day freeze on June 13, and their continued de cline has led the Cost of Living Council to exempt the lumber in dustry from wage and price controls under Phase IV. The welcome im provement in prices largely re flected a substantial decline in housing demand and a gradual dis appearance of supply bottlenecks. Continued softening of the housing market should lead to further easing of lumber and plywood prices, despite occasional price flurries— such as occurred in late July and early August, when whole salers and retailers sought to re build their depleted inventories. The recent decline reversed an almost-uninterrupted 2 1/2-year pat tern of price increases, which made the lumber and wood-products cat egory by far the fastest-rising cate gory in the industrial price index. Between January 1971 and January 1973, wholesale prices of softwood lumber increased at a 28-percent annual rate, while the softwoodplywood index rose at a 24-percent rate, reflecting in part the incom plete coverage of the price-control program, which was geared mostly to final products and to large-firm operations. Throughout Phase II, there were no controls on raw timber prices, and during at least part of that period, there were no wage and price controls for the 62,000 small producers that domi nate the industry. The price advance accelerated under the quasi-voluntary Phase III program; between January and May, lumber prices rose at an 87percent annual rate, while plywood prices shot upward at a 168-percent rate. In January, U.S. mills adjusted their prices to the free-market levels being charged by Canadian mills, and thereafter prices in both coun tries moved upward in tandem. Why the spiral? The spiral in lumber and plywood prices was induced by a sharp in crease in demand imposed upon limited current supplies. The de mand pressures stemmed from the increased requirements of the housing industry—the outlet for almost one-half of the entire do mestic consumption of lumber and plywood. Housing starts jumped from 1.5 million units in 1970 to 2.5 million (annual rate) in JanuaryFebruary 1973, and lumber require ments went up accordingly. In an effort to meet these heavy demands, domestic mills raised their softwood-lumber production over the entire 1971-72 period by 17 percent, to 32 billion board feet, and their plywood production 27 percent, to 18.5 billion square feet. Despite these record increases, production still lagged far behind (continued on page 2) F e d le m l R e se rv e B&m k ®ff Opinions expressed in this newsletter do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco, nor of the Board of Governors of the Federal Reserve System. the heavy inflow of orders. Unfilled orders for softwood lumber jumped one-third over the 1971-72 period, while stocks reached the lowest level since World War II. Lumber imports from Canada and other for eign sources filled only part of the gap, although rising from 6 to 9 billion board feet over the two-year period. This unbalanced supply-demand situation was aggravated by the impact of the price-control program on a notably unconcentrated in dustry. Approximately 81,000 firms harvest, manufacture and market the various products of the indus try, and less than 900 of them have annual sales of over $5 million. The largest producers (that is, those subject to controls) thus do not have a significant influence on pre vailing market prices, so it is little wonder that attempts to maintain prices at artificially low levels not only created market distortions but also acted to discourage produc tion. Price controls and... Ceiling prices for identical grades of lumber varied from mill to mill, and thus confronted buyers with dif ferent prices for the same item. In addition, specialty items carried higher ceiling prices than basic grades, causing producers to shift production to those lines, and thereby worsening the shortage of key construction items. The profit-margin limitation provi sion of the Phase II program mean while tended to act as a productionlimitation program; as large produ cers began to bump against their profit-margin limits in late 1972, they began to cut back, so that softwood-lumber output fell 9 per cent below year-earlier levels. In this situation, according to certain buyers' allegations, some producers downgraded product quality, al tered specifications to obtain pre mium prices on basic items, and sold products back and forth through various distribution chan nels to obtain inflated markups. .. .production bottlenecks Domestic mills were hampered in raising production by the soaring costs and limited supplies of their basic raw material, logs. Prices of stumpage from the National Forests of Western Washington and Or egon more than doubled over the 1971-72 period, with about half of that increase occuring in the second half of 1972 alone. (These and other National Forests provide about 27 percent of the nation's softwoodtimber harvest.) Shortages devel oped in this period mostly because budgetary cutbacks, manpower shortages and environmental con troversies prevented the Forest Ser vice from preparing much of its allowable cut for sale. Thus, sales of public sawtimber declined from 11.7 to 8.8 billion board feet be tween fiscal 1970 and fiscal 1973. To aggravate the situation, an in creasing volume of unprocessed logs was exported overseas, mainly to Japan. Exports of softwood logs reached a record 3 billion board feet in 1972—about 14 percent above the earlier (1970) peak. In Washington and Oregon, the source of the vast bulk of this trade, exports rose to about 17 percent of the entire log supply. (A decade earlier, the Northwest's export trade in logs had been virtually nil.) Smaller, non-integrated producers, who do not own their own stands of timber and thus must rely on logs from Federal lands, were vocal in their criticism of this trade, claiming that it permitted them only limited supplies at astronomical prices. Turnaround Market conditions eased this spring and summer, as housing demand declined and lumber supplies in creased, and price declines in some cases were nothing short of spec tacular. Between the early April peak and early August, the price of Douglas fir 2 by 4's dropped 16 percent, while the price of quarterinch interior-grade sanded plywood plummeted 44 percent. On the demand side, housing starts dropped 16 percent between Jan uary and June of this year. The decline was attributed to rising mortgage costs as well as earlier overbuilding by some contractors, and in addition to sharp increases in construction costs. (Between last summer and this spring's peak, the increase in lumber and plywood prices alone added almost $1,500 to the cost of the average house.) Meanwhile, under Administration pressure, Japanese buyers agreed to reduce their softwood log imports in the current half-year by 15 per cent from the comparable period of 1972. On the supply side, lumber mills boosted their production to full capacity, confident that increased supplies of Federal timber would be forthcoming. To implement this, the Administration developed plans to boost Federal timber sales 18 percent this year, and to assure even higher levels of available sup plies in the next two years. Lumber and plywood prices may well continue to decline, especially in view of the projected drop in housing starts over the next year or so. But what happens when housing demand rebounds, as it undoubt edly will later in the decade? Ac cording to the latest Forest Service appraisal of the outlook, "Demands and supplies of softwood sawtimber can be expected to balance in the future only with rather substantial increases in prices of lumber and other wood products relative to other materials." This source suggests that demand for industrial wood will rise at least 60 percent by the turn of the cen tury, but that with current levels of forest management, only modest increases in timber supplies will be available. Indeed, the most serious prospective shortfall will involve the larger sizes of softwood now uti lized in home construction. Yvonne Levy UOj8U|ljSB/V\ • LjBJfl ♦ UOSaJQ • BpEAafsl . OLjepj IjEMBH • BIUJO^IJB3 • BUOZUV • B>jSB jy BANKING DATA—TWELFTH FEDERAL RESERVE DISTRICT (Dollar amounts in m illions) Selected Assets and Liabilities Large Commercial Banks Loans adjusted and investments * Loans adjusted— total* Com m ercial and industrial Real estate Consum er instalment U.S. Treasury securities O ther securities Deposits (less cash items)— total* Demand deposits adjusted U.S. Governm ent deposits Time deposits— total* Savings O ther time I.P.C . State and political subdivisions (Large negotiable CD 's) Weekly Averages of Daily Figures Member Bank Reserve Position Excess reserves Borrowings Net free (+ ) / Net borrowed ( - ) Federal Funds— Seven Large Banks Interbank Federal funds transactions Net purchases (+ ) / Net sales ( - ) Transactions: U.S. securities dealers Net loans (+ ) / Net borrowings ( - ) Am ount O utstanding 8 / 8 / 73 Change from 8 / 1/ 73 75,087 58,276 20,319 16,849 8,508 5,141 11,670 71,380 21,317 301 48,572 17,692 22,020 6,057 11,286 + 1,089 + 1,128 + 63 + 22 + 16 78 + 39 409 + 3 - 2% + 207 86 + 389 124 + 466 W eek ended 8 / 8 / 73 Change from year ago Dollar Percent + 11,510 + 11,756 + 3,626 + 2,858 + 1,334 983 + 737 + 8,585 + 1,505 377 + 7,341 509 + 6,122 + 808 + 5,726 W eek ended 8 / 1/ 73 + + + + + 18.10 25.27 21.72 20.43 18.59 16.05 6.74 13.67 7.60 55.60 17.80 2.80 38.51 15.39 102.99 - + + + + - + + + Com parable year-ago period 34 6 28 20 239 - 219 71 199 -1 2 8 + + 109 + 167 -1,001 + 267 - - + 75 324 in c lu d e s items not shown separately. Inform ation on this and other publications can be obtained by callin g or w riting the Adm inistrative Services Departm ent. Federal Reserve Bank of San Francisco, P.O . Box 7702, Digitized for F R A S E R ra n c is c o , C alifo rn ia 94120. Phone (415) 397-1137.
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