Southern loggers are pushing wood production to a 13-year high. So why is the price of lumber up 288%?

Exorbitant lumber prices mean money, in a sense, does grow on trees. It’s why loggers are racing to cut down more Southern yellow pine—a plentiful species that dots the Deep South. On Tuesday, British Columbia–based lumber giant Canfor announced its plan to invest $160 million to build its first-ever sawmill in Louisiana. That comes after BC-based West Fraser Timber announced in May that it will spend $150 million to expand five sawmills in the South. Interfor, another BC-based lumber producer, is also in the midst of expanding some of its Georgia sawmills.

While new sawmills won’t churn out two-by-fours anytime soon, increased production at existing mills is already pushing wood production in the U.S. to a 13-year high. In April, the U.S. industrial wood production index hit 134.2, its highest level since the 135.3 struck in December 2007—the first month of the Great Recession, after which homebuilding and lumber production screeched to a halt.

This increase in wood production looks like simple economics at work: With lumber at historic prices, producers should be incentivized to boost supply while buyers presumably would rethink purchasing at those levels. Except this uptick in wood production hasn’t coincided with a reversal to pre-pandemic lumber prices. On Tuesday, the cash price per thousand board feet of lumber was at $1,391, according to industry trade publication Random Lengths. While that’s down a bit from its $1,515 all-time high set on May 28, it’s up a staggering 288% since April 2020. Prior to the pandemic, the price usually floated between $350 and $500.

So if wood production is at a 13-year high, why aren’t lumber prices falling faster? Simply put, demand is still through the roof. In April, new housing starts backed off 8% from a 14-year high set in March 2021; however, that level of construction is up 67% from its bottom in April 2020 and up 22% from April 2019. Home construction remains red-hot. Additionally, do-it-yourselfers aren’t slowing down: In April, home improvement sales hit an all-time high—up 31% from pre-pandemic levels.

“The backlog is just too strong. There are too many places to put wood,” says Chip Setzer, director of trading and growth for Mickey Group, a commodity trading platform. “I got customers in the Caribbean screaming for more; I got China customers screaming for more. Everybody is under a squeeze.”

As Fortune has previously explained, this historic lumber shortage was spurred by a perfect storm of factors set off during the pandemic. When COVID-19 broke out in spring 2020, sawmills cut production and unloaded inventory in fears of a looming housing crash. The crash didn’t happen—instead, the opposite occurred. Americans rushed to Home Depot and Lowe’s to buy up materials for do-it-yourself projects, while recession-induced interest rates helped spur a housing boom. That boom, which was exacerbated by a large cohort of millennials starting to hit their peak homebuying years, dried up housing inventory and sent buyers in search of new construction. Home improvements and construction require a lot of lumber, and mills couldn’t keep up.

While the shortage has improved in recent weeks, the bigger macro dynamic still remains. That high demand means that lumberyards still can’t build up inventory, and the entire supply chain remains under stress.

“That inventory correction is going to take time to sort out: Mills are not only producing to meet existing demand from construction and manufacturing, but also to fill that inventory hole that we dug in 2020 as demand outpaced production,” Dustin Jalbert, a senior economist at Fastmarkets RISI, where he covers the lumber market, tells Fortune. “So even though buyers sense the market turning in their favor, they cannot throttle buying as much as they’d like to, as demand from builders and contractors is still there, even if slowing a bit, and so it forces them to keep placing orders to meet immediate needs.”

Rising domestic wood production alone can’t dig the country out of the lumber shortage. According to Fastmarkets, around 30% of lumber consumed in the U.S. comes from Canada. Supply of Canadian softwood, a favorite among U.S. homebuilders, hasn’t recovered as quickly. Canadian timber supply is limited by its own perfect storm: British Columbia’s forest fires, beetle infestations, and the slow growth rate of spruce trees. 

That limited Canadian timber supply is also why Canadian forestry giants like Canfor, Interfor, and West Fraser Timber are upping production in the U.S. South.

“The North American lumber supply chain is in the middle of a rebalancing act, with Canadian supply declining and U.S. supply increasing,” Andy Goodman, CEO of Sherwood Lumber, tells Fortune. “For the last 50 years, the majority of the lumber that has been used to build a home in the U.S. was shipped from the U.S. Pacific Northwest or Canada, not from the U.S. South, where the most bountiful forests and the cheapest fiber in the world is located. Lumber produced in the U.S. South has been heavily used to supply the treated lumber markets for the Eastern, Southeastern, and Gulf Coast markets and not expansively used for residential construction. With demand increasing, and legacy supply static or decreasing, Southern yellow pine from the U.S. South has to fill that supply gap.”

This expansion in the U.S. South, industry insiders say, is a bullish sign for the lumber industry. Unfortunately for DIYers, it suggests we aren’t going back to pre-coronavirus lumber prices. Setzer says the price per thousand board feet is more likely to hover in the $600 to $1,000 range long term. It boils down to the fact that demographics and the lack of available homes for sale should keep builders busy.

The 2008 housing crash and subsequent foreclosure crisis dealt homebuilders and sawmills a blow. That’s putting it mildly. The financial and psychological damage caused by those rough years is why even as housing demand rebounded, builders and sawmills were careful to not overextend themselves. That decade-long period of conservative building explains our current nationwide housing shortage—something sawmills don’t see going away anytime soon. It’s why they’re expanding.

“Low mortgage rates, low volumes of homes available for resale, favorable demographics, increasing acceptance of remote working, and the underlying housing construction deficit due to several years of under-building appear to be positively influencing the demand for new housing in North America,” West Fraser Timber wrote in its latest earnings report soon after announcing its U.S. sawmill expansion. “An aging housing stock and increased repair and renovation spending should also continue to drive strong lumber, plywood, and OSB demand.”

More must-read finance coverage from Fortune:

Our mission to make business better is fueled by readers like you. To enjoy unlimited access to our journalism, subscribe today.

Read More

CryptocurrencyInvestingBanksReal Estate