Over just the last few weeks, we’ve seen record highs in a number of places: stocks, cryptocurrencies, IPOs.
But there’s one record high that no one is seemingly covering. And it could be just the start.
Production of lumber completely halted in many places early last year, causing this odd-man-out commodity to spike overnight.
But after that initial surge, something interesting happened; it did it again.
Just this morning, lumber prices reached a new all-time high.
One of the main drivers for this remarkable trend has been the resilience and even aggressive demand for new homebuilding throughout the last year.
But even as new home starts seem to be plateauing due to rising long-term interest rates, lumber still looks unstoppable.
Part of the reason why this small segment of the commodities market can find success even when its main customers slow down is its dexterity.
With only a handful of players competing in this space, some hold near-monopolies on types of wood, sizes of cut lumber and byproducts like wood chips and pulp products.
When one area of demand slows down, another picks up. When homebuilding grinds to a halt, home renovations uptick.
This has, over centuries, produced one of the most stable industries in the world. In fact, it has helped the industry become one of the best performers over the last several decades:
It beats out stocks, bonds and real estate in long-term performance. The issue many investors have with it is it just doesn’t do much year-to-year.
Just as it takes many years for trees to grow, the year-to-year change in timberland and lumber prices can be painstakingly unremarkable.
This latest spike is unique in that it came so suddenly. And because of the massive rallies in everything from emerging technologies to digital currencies, even this climb has been under-reported.
But there’s another trick this relatively boring, slow-grow industry has up its sleeve that could keep these high prices here to stay.
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On Friday, I noted that oil and gas giants were diving head-first into building out the new EV infrastructure of charging stations. One side effect of that is to capture carbon credits to either sell or use for their dirtier operations.
Those credits are only a pittance compared to the carbon capture these timberland companies get every year. They are, after all, paid to just plant trees. That’s what they do anyway.
Meaning, if they cut more of their acreage right now, they see their largest returns in history. If they don’t, they still get paid to just sit on what they have.
Companies adding to their portfolios of timberland are the biggest winners here. The more you have right now, the better.
And after a major deal that finally closed last year, one company is taking advantage of this strange win-win situation.
Rayonier Inc. (NYSE: RYN) completed its merger with Pope Resources in May last year to become one of the largest timberland owners and lumber producers in the world.
It has the largest amount of acreage in the U.S. Southeast. But it also has significant assets in the Pacific Northwest and New Zealand, both of which take advantage of huge demand in China for its products.
With aggressive shutdown restrictions in New Zealand last year, about 16% of Rayonier’s acreage and 28% of its annual earnings came offline completely. Its significant acreage in Washington state was also greatly affected as one of the earliest and hardest hit areas of shutdowns.
Still, pro-forma revenue climbed a sizable 10% during 2020 despite these shutdowns. And that’s mostly from before its merger.
Now, the combined company leads the industry with a diverse offering of hard and softwoods, pulp products and those lucrative carbon credits.
Its stock has gone up, as some investors did watch lumber’s rise.
But considering the size of that spike and the bright future ahead of this massive niche play, there’s potential for room to run.
I’ll definitely be watching this space, even if it may seem boring at times compared to more exciting technologies and market swings. I recommend you do too.
To your prosperity and health,
Joshua M. Belanger