Navigating Lumber Prices in 2023: The Role of Futures and Risk Management

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Both our guests today are from Sherwood Lumber — Steve Loebner is VP of Commodities and Risk Management and Josh Goodman is SVP of Forest Products, Sales and Supply Chain. They talk with Beth about lumber prices, futures and risk management.

Sherwood Lumber is a third-generation family-owned business that’s been around for almost 70 years. Sherwood boasts 20 distribution centers around the country, 40 lumber panel traders, three main office locations and multiple remote offices. About 90 percent of the business is focused on commodity sticks, lumber and panels. But, they’ve been growing their specialty exterior building lumber products business over the past several years, focusing on the Northeast for now.

Josh, in fact, is one of the third-generation family members at the company. Starting at Sherwood right after graduation, he’s been with the company for over 13 years. He’s done a little bit of everything, starting from unloading rail cars and loading trucks to accounting, logistics, marketing and IT, all on the back end. In 2017, he moved to the front end, where he focuses on buying and selling, managing all the buyers and inventory around the country.

Steve has been in the building industry for over 20 years, but he came to construction from a different path. He was a stock options floor trader in the Pacific Stock Exchange and then the Chicago Board Options Exchange. His background focuses on financial derivatives, which gives him a unique perspective on his current role in handling risk management and forward pricing.

Sherwood tries to “take the commodity out of commodity” according to Steve, in order to avoid a race to the bottom when it comes to pricing. “If you're solely competing on price, ultimately, you're not going to be in business that long,” he says.

Josh adds, “We're trying to provide the ultimate best service for our clients day in and day out.” Sherwood, a lumber dealer, brings in bulk material, facilitating from a logistics standpoint and servicing the customer, either direct to their yards or job sites. The goal is to make ordering and receiving lumber as easy as possible for them.

Sherwood also offers a myriad of services for their customers no matter their size. Customers can use Sherwood for small mixed loads as well as bulk shipment needs.

They also differentiate themselves through their risk management via long-term pricing. “We're essentially providing customized risk management solutions for customers all around the country to help them mitigate their market risk through all these crazy ups and downs that we've experienced certainly in the last couple of years,” says Steve.

“You know the old adage is, ‘If you don’t like the weather, just wait a week and it’ll be something different.’ I think you could really say the same thing about lumber pricing the past year,” says Steve

In 2022, the lumber industry slowly returned to pre-pandemic “normal” levels. Then, three to four weeks ago, there was a large rally followed by a big collapse. Now, once again, we’re starting to climb out of it. “I think what we're doing is we're trying to figure out a new kind of long-term sustainable range for lumber,” explains Steve.

A lot of aspects of the lumber industry have changed and evolved over the last few years, so lumber should and will continue to be higher than it used to be. However, neither Steve nor Josh expects a return to the pandemic prices, thankfully. Instead, Steve expects to even out where we are now, which is about 50 percent over historic prices, give or take.

Josh points out that any long-term considerations have to take in the extreme volatility we’ve seen over the past few years. “Right now, we're in the process of right-sizing the supply side. And that's just only a matter of time to right-size what we've heard and seen over the past 30, 60, 90, 120 days between permanent shutdowns, curtailments [and] reduce shifts,” says Josh.

When Steve has conversations with their customers about lumber futures and risk management, he makes sure to take into consideration that every business segment has its own unique risk profile. He tailors every conversation to whether their risk is to the downside, as it is for sawmills, or to the upside, as it is for a multifamily developer.

First, he analyzes where they sit in the space and what their risks are. Then, he helps them craft a risk management solution to mitigate those risks. The options can include fixed pricing, future physical delivery, financial swaps and more, but the big takeaway is that the solution is custom-tailored to the customer’s profile.

“It's about helping customers initiate the proper long-term plan to smooth out their earnings volatility,” says Steve.

During these conversations, Steve is constantly shocked by how underutilized risk management and futures are in the lumber industry. There are so many entities willing to take on risk when the solution to reduce or even remove that risk is available. While many people in lumber talk about futures, the number of them that are heavily involved in risk management is very low.

Another big thing Sherwood does is look at specific items to see if they are undervalued or overvalued based on both current market data and data from the past 30 years. Knowing this helps Steve advise customers on when it’s a good idea to bulk buy items that are at historically low prices or wait if possible on something that’s historically high. This analysis is “pretty instrumental in not only guiding our customers but certainly in guiding our inventory purchase decisions and how we run our own business as well,” explains Steve.

There are several reasons why companies are underutilizing risk management. For instance, keeping with the status quo. They may have had a lot of ups and downs and volatility along the way, but in the end, they’ve made money so they don’t see a reason to change their process. Another reason is fear of dealing with the cash flow and margin implications that come with futures. The swings in cash flow can be pretty significant, which many companies shy away from.

However, the companies that Sherwood helps understand the benefits of risk management can see much more consistent returns rather than crazy, unpredictable ups and downs.

Josh’s prediction for 2023 is that we’re going to see better returns than anyone originally thought at the end of 2022. There were a lot of doom and gloom predictions around a potential recession that doesn’t look as menacing now.

Steve agrees: “I think people could be surprised. It could be better than expected.”

At IBS 2023, held at the end of January, Beth heard the majority of people say that, while everyone is still naturally cautious, they all feel that the industry is doing fine. In essence, a consistent cadence of cautious optimism.

Josh agrees and mentions, “Business isn’t going to come as easy as it did the past two years. It’s going to be harder to conduct, but there’s plenty of business out there.”

Steve and Beth sum us up: It’s not like shooting fish in a barrel anymore, but it’s also not smoke and mirrors.

To learn more about lumber pricing and risk management, listen to the entire episode here. You can reach out to Josh at josh@sherwoodlumber.com and Steve at sloebner@sherwoodlumber.com.

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