The Derivative - Wood is Good! With the Lords of Lumber: Stinson Dean and Kyle Little

Episode Date: February 3, 2022

Timmberrrrr...welcome to the world of lumber! We’re laying the lumber in this episode talking through an exciting world some know as timber; others as fiber or wood, and the futures world as Lumber. Whatever you call it, it is impacting today's market with its wild swings, and in this episode, we're getting down to the nitty-gritty with two wood wizards, Stinson Dean of Deacon Lumber and Kyle Little of Sherwood Lumber — who both have interesting stories behind their names. One for having a challenging time with two first names and the other whose company was named after Sherwood Forest of Robin Hood lore (we'll get more into that in the episode)! We're chopping it up with Stinson and Kyle and asking those must-know lumber questions that may leave you stumped (have we used enough wood puns yet?) like; why lumber is such a big deal? Why do lumber prices speak to everyone, from your family members to Bloomberg? What's fundamentally wrong with a market that it can roundtrip 300% to 400% in a little over a year (TWICE)? Is this market broken? Can the world handle these high prices, is it a supply chain issue, global warming, inflation? Work from home? And more! Highlights from this episode include: How lumber tends to be one of the leading indicators of what's going to happen in many different markets Why lumber prices spiked so dramatically during the pandemic Logistics and what the lumber journey looks like from the forest to the Home Depot Why lumber has been volatile for a long time, and where the next 100yrs of supply can come from? Why there isn’t any wood in sci fi movies And, we discuss how Kyle and Stinson are competitors, vendors, customers all wrapped up into one, plus more! Chapters: 01:50-16:20 = Why is Lumber such a Big Deal?  High prices, Volatility, and the Raw Commodity 16:21-35:23 = Roundtripping 400%...Is the Lumber market broken? 35:24-58:17 = Fewer Offers & Fewer Bids in the Cash Wood Market 58:16-01:10:40 = Lumber as the Remote Work/Climate Change/Supply Chain/Inflation Proxy 01:10:41-01:20:40 = There’s no wood in sci fi movies. What’s the Future for Lumber? 01:20:41-01:27:24 = Hottest Take: Inflation is Good, Wood is Good Follow along with Stinson on Twitter @LumberTrading and Kyle Little on Twitter @lumberlittle Don't forget to subscribe to The Derivative, and follow us on Twitter at @rcmAlts and our host Jeff at @AttainCap2, or LinkedIn , and Facebook, and sign-up for our blog digest. Disclaimer: This podcast is provided for informational purposes only and should not be relied upon as legal, business, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM Alternatives, their affiliates, or companies featured. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations, nor reference past or potential profits. And listeners are reminded that managed futures, commodity trading, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors. For more information, visit www.rcmalternatives.com/disclaimer

Happy Day After Groundhog Day, everyone. One of my favorite movies, to be sure. This episode is brought to you by RCM Ag, that's A-G as in agriculture, and RCM Ag helps all sides of the ag business, from the farmers growing the crops, to the commercials purchasing and moving them in bulk, to the end users who are worried the million pounds of bacon they're buying each year is up 50%. That's a lot of bacon. RCM Ag Services construct hedges, facilitate swaps and other OTC trading and work day in day out to protect revenues or costs depending which side of the fence you're on. Oh, and if that fence is made of wood, like we're going to talk about in this

pod, the Ag Group has a dedicated lumber specialist. Go to the website and sign up for Brian Leonard's lumber commentary to get weekly updates on how the big cash market players are handling that market. To learn more, visit rcmagservices.com. R-C-M-A-G-S-E-R-B-I-C-E-S dot com. rcmagservices.com. Oh yeah, and while you're there, check out the new infographic they just put out on what it takes to feed the world.

Super cool. Okay, on to this pod, which was great. I am enamored by the lumber story. I can't get enough of it, as it appears much of the world is. We were able to get not one, but two of the best in the business. Enjoy as we talk about growing it, cutting it, shipping it, replacing it, hedging it, buying it, selling it. A lot of it.

So send it here we go with the lords of lumber wizards of wood philosophers of fiber what else you guys got any good nicknames oh no no not at all. I love hearing and talking about this stuff. Everyone has a different word. Timber, fiber, wood, lumber. It's all synonymous, I guess. We'll dig into it, but it gets pretty interesting. But anyway, welcome to Stinson Dean of Deakin Lumber and Kyle Little of Sherwood Lumber. Stinson, I think, has the best email signature

and LinkedIn profile I've ever seen, putting in parentheses first name behind Stinson and last name behind Dean. How many times was that done incorrectly where you had to go resort to that? Ever since I was a little kid, one time I couldn't get on an airplane because they kept transposing my names. And so, you know, it happens often enough to put it in my email signature. I don't blame anyone. But, yeah, every time I meet someone new, pretty much. It's a derivative of the never trust someone with two first names, never flip someone's first and last name.

There you go. And, Kyle, Sherwood Lumber, is that a not so subtle play on Sherwood Forest? Absolutely is a play. We're a family owned and operated business, second generation or third generation taking over for second generation. And the first generation, the wife of our founder actually named the organization Sherwood based off of Sherwood Forest because Sherwood was kind of founded of you know basically buying from the big guy to help the little guy very similar to what we had to deal with with Nottingham Forest and the Robin Hood days so yeah absolutely came from that background. What kind of species they have in Nottingham Forest? Anyone know?

Mlock something? So big picture, I want to sort of start philosophically before getting into the nitty gritty and ask why do you think lumber is such a big deal, right? Like the euro dollar market is 100x the lumber market, but there's nothing like lumber Twitter talking about euro dollars. Kyle, you go on CNBC. Stinson, you were on Bloomberg's Oddlot podcast, most listened to episode. So just throw it out there. Why do lumber prices speak to everyone from my retired father-in-law to Fed economist? Why is it such a big deal for people? Stinson, do you want to take it away? Lead us off. Yeah, well, I kind of

live in a bubble where Lumber Futures means everything to me, but I think really the reason it gets a lot of pub and folks are talking about it from your uncle to Bloomberg is because it's one of the rare commodities that get to the end user unchanged. It isn't an ingredient that is part of a larger widget. And I'd say that out loud, I'm thinking about a house, but like you get that price or you can walk into Home Depot and see a two by four. It's the same thing that, that was priced at the mill, you know, a month earlier where other commodities are true raw materials that get mixed into widgets. So you don't really see one for one what you're buying.

So I just feel like maybe it's because we all have access to the untouched raw commodity to feel the action. I love it. I talk, we have in Chicago here, people steal the catalytic converters for the palladium. And I'm like, there was an incident a couple of weeks ago. I'm like, palladium's down 40%. What are they doing? Like, they're not tying it. They don't see the raw input as you're saying. Kyle, what are your thoughts? Why is it such a big deal for people? I mean, I think that's definitely part of it. It is an ingredient into a home. But in the purest form, it's about one of the simplest commodities traded in North America, let alone the world. And the one interesting thing about lumber, I think, is that it tends to be a leading indicator of what's going to happen in a lot of different markets. And I think that's why there's so much interest in it outside of the lumber industry. But what we inside the lumber industry call it, it's a really, really big, small business,

huge industry, a lot of touch across the North America and obviously the world. But it's really a very uniquely traded, uniquely distributed product. And there's a lot of, prior to 2020 or 2019, there was very little talk about lumber in the sense, in the grand scheme of things. And when people used to talk about, I'd go down the street and ask me, what did I do? And I'm over 25 years in the business. I'm like, I'm in the wholesale lumber business. And they're like, well, I have 20 acres behind my house. I'd like to timber that. I'm like, no, no, that's not exactly what we do. We're actually selling the finished commodity for home building. But I understand why you would do that. And they're like broker lumber, but it was a very, what do I say, an industry that very many

people didn't know about was very much flying under the radar and not until the pandemic and prices moving 300, 400, 500% did lumber become more of a mainstream topic because it really changed the way that people ultimately had to spend and possibly build shelters. So it's been pretty cool to be part of that conversation over the last few years and or last couple of years and to allow people kind of get more insight in our business, which I think is really, really good. But that being said, it took, you know, some serious hyper volatility to get us in the news, so to speak. So going back to why do I think people talk about lumber, even in 2020, when we were in the beginning of the pandemic, and ultimately, we talked about inflation, lumber was really the first commodity to go do that. But let's go back 10 years prior

or 12 years prior when we went into the financial collapse, when there was high speculation in housing and what have you, lumber was trading half of what it is today or almost two and a half times below what it is today. But when lumber ultimately rolled over in that environment, it was well before we saw the problems on Wall Street with Lehman and everything else. The housing industry and what was happening inside of that commodity was a key indicator of what was about to come, which ultimately was, you know, you know, a major sell off across the broad economy. And lumber was like a reflection and really provided a lot of insight of what was about to come back then, as it did just previously here in the last two years. That tells me this little market sell-off we're having this week, what are we, third week of January here, maybe in the S&P isn't quite, because lumber didn't sell off until

stocks led lumber this time. And I was going to touch this later, but Stinson, maybe if you can just take us through the whole journey from the forest to the Home Depot lot, how's it, how's it start out? How's it get there? Where do you get involved? Right. So depending on what type of tree it is, what species of tree produces a different type of lumber. And we largely trade and traffic in Canadian spruce trees, uh, the lumber that comes from Canadian spruce. So, uh, and there's a lot more going on, but it's soft, it's softwood framing lumber. It's the stuff behind the drywall. There's no hardwood, there's no decorative.

It's, it's a commodity two by four that largely comes from Canada. It gets logged by logging companies that then sell the logs to the sawmills. The sawmills process the log. The technology is really advanced these days. They throw a laser on it to figure out what's the most efficient yield out of that log. And they just go on production runs. And they don't generally know exactly what they're going to produce because the logs are all different shapes and sizes, but they can get pretty close. And they try, the producers then try to market on a three, two to four week forward sale.

They try to pre-sell their production as close to that production estimate as they can. So once they produce the lumber, they sell it either in the open market, which is becoming harder and harder to find, or they're just on contract, volume contracts, price, time of shipment to a Home Depot or Lowe's or a big contractor, a lumberyard. And then what's left goes to the open market and kind of sets the price. From there, it's railed almost exclusively on rail to different locations in the U.S.

and unloaded and either trucked to its final destination, a lumber yard, which then trucks it to a job site or it can rail directly to a lumber yard. So that's the physical journey. And a couple of important points as we trade lumber is we're so dependent on Canadian lumber, that whole process, if they're selling forward four weeks and then they got to ship it from Prince George to Atlanta, it's eight weeks of when you buy it to when you actually receive it. And that's becoming more and more common. And that transit time, depending on weather and rail efficiency changes all the time. So we're, we're heavily influenced by railroad efficiencies and then the ability for mills to meet their

commitment, like, okay, Hey, in three weeks, this is going to ship, but then they have a COVID outbreak and they're brought behind their production schedule. So now it's going to ship at six weeks and then there's a rail delay for whatever weather COVID release and reason. So it's six weeks. So, so all of a sudden you're not getting it for 12 weeks. And like, that's, that's where a lot of our volatility comes from. So it's important to understand the life of a piece of lumber starts out as a tree gets processed to a two by four, and then it doesn't get touched. It goes all the way to the builder in that form. But it's, it's that logistics piece that that that really causes a lot of the volatility. Anything to add there, Kyle? Yeah, I would just add that, you know, a lot of what Simpson said is absolutely correct.

The only thing I would say is differences that the volumes that get bought from the mill and then down to the consumer, it continues to get broken down into smaller pieces. And that adds into that logistics challenge, right? It's specifically what we've been dealing with. The previous time that we had the most challenging logistics prior to COVID was back in 2018. That was when the federal government finally instituted the electronic e-logs for trucking, which took for a short period of time about 20 to 30% of the capacity out of the marketplace. On top of that, we had Canadian issues with rail traffic. It was a historically cold, cold, cold, cold winter and traffic speed slowed across all of Canada and all of the Northern tier of the United States, which added into what was historically a two, four and six week lead time to eight, 10, 12, 14 week lead time,

which ultimately spiked lumber in that instance, roughly about, you know, two times to prior to that, you know, prior to 2020. Yeah. We thought that was a pretty good deal. Pretty big deal at the time, Kyle. $600 lumber, this is crazy. Yeah, $600 lumber. Now, we essentially tripled that in during the pandemic. But that being said, that, that supply chain and the way that lumber is produced in large quantities and broken down into smaller quantities takes time. And whenever you see a disruption of that supply chain, it's going to inflate the value of that commodity. And multiple times. It wasn't just in 2018. We saw it in 1993 and years before when we had spotted out disruptions and other things that challenged supply. It just so happens that that's the most recent one in Dean and I's career to go and reference. And who, this just popped in my mind a little off topic, but who pays or earns that carry for that 12 weeks, right?

Is someone has paid out and then their interest rates are zero, so it doesn't matter too much. But is someone on the hook for that money sitting somewhere for 12 weeks until the delivery? Yeah, I mean, look, it's from a cash convergence perspective. It's one thing to deal with it in times when lumber is sitting at its 10-year and 15-year means. But when you're trading at three, four, five times above that, obviously, it's challenging from a cash flow perspective. So in most cases, the buyer is out that until they receive the material can turn it into cash. So Mr. Dean and I sitting in the middle of the chain and in the wholesale brokerage or wholesale distribution, we could see what would normally be a cash conversion cycle of 50 to 70 days, double or triple. And that definitely

happened. And that's what, you know, kind of fed into the volatility, both on the upside and the downside, over the last three to five, three to five years when we've had these enormous swings with lumber. We've touched on the price, you touched on the swing. So next, I just want to get to, basically, how did lumber go up like this again after the huge sell-off last year and just ask is there something fundamentally wrong with a market that can round trip 300 to 400 percent in just a little over a year right we were at right uh 400 up to what was it 1800 back into the 400s back up to 1300 and just a little, what is it? 13, 14 months. Yeah. So Stinson, I'll take this just to lead off. Like, so one of the things that we identified

roughly 16 months ago was that the question was, well, what was happening in the initial parts of the pandemic and when lumber started this hellacious run higher. And the question at that time was, is this the new norm? Is this going to continue to be like this and what have you? Tell me why this can or cannot happen, or we're just going to essentially have a reversion to the mean, go back to the old norm or lumber has always traded. What we found in our analysis was that lumber over the last 30 years, what happened, there were two key metrics that we were measuring. And in that circumstance, that happened seven times prior to the 2019-2020 pandemic. And it basically was an inflection point to tell you that we were going to create a new cycle. And that cycle could last in those seven times, anywhere from as short as nine months and as long as 40 months. And the average time of those seven times was 24.7 months.

So you might have seen me talk in a variety of different medias and said that I believe we're in somewhere in an 18 to 24 month cycle in this new cycle. And that's where we are. And right now we're in month 19 of the cycle that we identified. Does that mean we're closer to the end in the beginning? I would have to say, yes, that's where we're leaning towards. But it could go longer because the longest period of time ended up being 40 months. And that was back in the early 2000s. But in all of those circumstances of those seven times, we had a price appreciation that was outside of the normal range only to sell off to where it began from, to only go back and retest a number at least 50% of the previous move. Five of those seven times, the move went 60% of the previous move. We just hit in the lumber market 60% of this most recent one, which in my mind always has been, I think, about as far as we could go. It doesn't mean that we can't go higher because we've already have been higher, but we're not necessarily

holding out for an 80 or 90 or 100% retest of the highs. So that being said, once you have that retest of the 60% number, the market tends to fall off in the next, the following 12 to 18 months. So I believe that since now we've hit that second move or that second retest of the most recent highs, we're moving into see more of a pullback and a reversion to historical means, meaning that we'll probably have to go back to the one year, two year means and we'll be rolling back could possibly see five and 10 at some point. interest rate environment in an environment where the Fed clearly has to put in some extraordinary measures to slow down the growth of this current economy because of the inflationary factors that we have would lead me to think that that's sooner than later. That new normalization. Got it. Yeah. Stinton, I'll twist it unless you got immediate thoughts. I'll twist a little bit for you in terms of like, is the market broken with those swings? Twist it a little. Like, does it break people or firms with those wild swings? Right. Is it unhealthy to have such wild swings? Yeah. And I first want to talk about the futures market, which gets dogged on a lot for being, you know, illiquid and

thinly traded. And my argument is, and I'm a big lumber futures trader, so my bias and my angle here is to promote lumber futures. It really, in my opinion, represents the cash market really well um you know if you looked at cash print prices kind of third-party publication prices or or if you're in the market you can see what's actually traded uh it's wilder than lumber futures like lumber futures have limits then the cash market doesn't have limits and it's, it's thin in the cash markets. And that's from the consolidation of buyers that can dollar consolidation sellers, the sawmills.

There's just not a lot of folks in the middle that can make markets. And there's not a lot of independent buyers and independent sellers that create a, an efficient marketplace. So in that respect, it really represents the cash market fairly well. And the fact that so much business is done on contract, cash contracts, very little sees the open market than used to be in previous cycles. So, you know, open market bid and ask cash lumber, there's less of that to begin with. So the extreme volatility, like volatility is good. I think extreme volatility breaks markets. I've been shocked that we really haven't seen a lumber firm blow up, like be a real public, well-known explosion.

I really, a testament to the industry, I guess, that they've all navigated it well enough not to blow up. The reality is, much like home builders. And I've talked about this in the past, the firms like Sherwood and all the folks who've made it from 2008 on know what's possible. I mean, they were at the forefront of the great recession, like housing and lumber was the ground zero. Yeah.

And if you live through that, you're just going to be conservative and you're going to have more cash and you're going to have more cushion and you're going to, you're going to have more parameters in place. You're not going to take as much risk. Also your bankers aren't willing to lend you as much, aren't willing to lever you as much. Right. Yeah. You'll find in our industry, very little leverage on inventory, a lot of leverage on AR like most folks, but like, I don't even think that's the bank's decision. I just think that's the type of personality that's still in the lumber business today.

They just, they don't want to be levered because things get weird. So I think that goes to why we didn't have any blow-ups. Go ahead. Just what was that 08 drawdown like? What was that decline in price in lumber? Well, the decline in price, this is a little bit for Stinson. You started after that, right? So I was trading in the trenches during that time.

I started in 97 and was going through that. And we essentially went from 2 million housing starts to 400,000 down in the way that it did, how much excess capacity was sitting all over the country. So every time you bought something, you had to make sure that it was sold immediately because the next day, maybe that afternoon, I think it likely could be worth less. So I was just going to comment, you know, talking about a bank and financing inventory and lumber in an environment with the hyper volatility that we had, think about the balance

sheet expansion that we've had the last two years versus what it was prior and what it's going to be when the cycle ultimately does roll over. It's going to be challenging. I mean, think about, you have $10 million of on-order inventory. And if you just look at what happened in May or June of this past year to August, that $10 million all of a sudden is worth, you know, $4 million, if you really think about it, if you mark to market it at that period of time. And, you know, so a bank's not going to necessarily have a lot of appetite to go and help you through that process. So you're going to have to really work through that and making sure that you have the proper cash behind, you know, all that to be able to weather that storm. So it wasn't fun or hedging. Yeah. And the funny thing is that, you know, the lack of liquidity in lumber and the volatility in lumber really

has to do with the majority of the industry not using the tools that are available to them. Stinson and I talk about that a lot. I just don't understand. I can't imagine how organizations that buy as much lumber as they do, do it on pure speculation, just thinking that they're going to buy it or they operate their business on this cost plus, only to see that cost plus become cost minus triple what they, you know, what they had to go out there and do an ultimate market. Cost minus.

Let me unpack that for a minute. So I'm buying, I'm a lumber dealer. I'm buying from the mill $10 million worth of inventory. And now I've got that 10 million of risk. If it halves in price, I can only sell it for five. If it doubles, I'm going to sell it for 20. I'm looking great. So it seems like they're more wildcatters of just, hey, I'm taking this risk. I want to go out there and do that. We're big proponents of hedging, obviously,

and futures and the derivative here. So how do we get them convinced? How do we convince those guys that yeah it's better to make less of more than yeah i i used to consult i used to be a lumber futures risk management consultant and i've been in the rooms i've been in the war rooms with these folks trying to convince them you should probably hedge. And you get answers like, well, why would I hedge if I know it's going to go higher? Yeah. What? Good point.

But how do you know? And so it's hard to argue with a feeling. You can't argue with people's feelings. And people have been able to get away with it for so long because volatility has been, after what we're experiencing now, I guess somewhat measured. I would argue lumber has been volatile for a long time on just the percentage basis of moves. But again, these lumber yards are, have a lot of cash, not very levered. And Hey, if you missed a move and any previous lumber trading paradigm,

you'd be out a hundred bucks, a thousand, it would sting, but you'd be all right. You just kind of wait long enough. It'll come back to you. We're now, if, if, if you make a mistake, it's $500 plus and folks are getting exposed left and right on their lack of risk management and their ability to, you know, if I know it's going higher type mentality. So I know I'm sure Kyle, same thing, like just tons of folks, because we talk about futures so much, reach out and like, how do I use this? A ton of end users. You're finding out that folks in the supply chain weren't managing their risk. And if they were blown up or they got offsides, they would just go to their customer and be like, hey, I need more money. This didn't work out. And so those folks that the true end users

are trying to figure out how they can protect themselves, which has been good. For me, the simplest way to think about it and to answer your question, how do we get more people involved? You need to think about it as a substitute sawmill or a substitute customer, depending on if you're long or short. That's it. It's a rail car two by four. And if you're looking at your book and you've got a bunch of commitments, you need to get long two by fours. So buy the futures contract. It does not mean you're taking delivery doesn't mean, you know, you're going to have a rail car showing up at your house. It's a derivative instrument, 99% financially settled to protect yourself against higher lumber prices. We're focusing to get comfortable with is if you're

long and you did it for budget reasons and you're comfortable with that and then the prices go down you are no longer participating on the downside and you feel that pain every day uh through margin call uh and so wrapping your mind around the philosophy of risk management what the margin calls mean to your book and why you put the hedge on in the first place so a little bit of education but for me it's it's just like, if I need to get long, I could buy a futures contract and I'm good. Or, you know, I could go buy rail cars or lumber from a sawmill that there's five or six people in between me and the sawmill. So it's way more efficient just to, to use the board to protect your risk. And what does storage look like in the grains, right? If people aren't happy with

the price, they'll throw it in storage and wait a year or two um oil's notorious right of like hey i can make more money keeping it in the tanker in the gulf of mexico than bringing it on shore and selling it um what what does storage look like and is that a play to just hold on to it until prices return or the demand too high uh yes so the carry in our markets because it's illiquid and inefficiency gets ridiculously lucrative if you have a place to store it uh we ran into a place this summer into the fall where places that there are lumber storage facilities like ran out of room they were embargoed you couldn't send rail cars there because there was wood everywhere. And the Futures, again, to bolster my argument that it represents the cash market really well, had this huge contango that just kept getting wider and wider and wider because you couldn't

put the wood anywhere. Similar to negative oil in a way, but you can find a place to put lumber, but all the traditional places you would store it were completely full and they wouldn't accept rail cars. So there's a great contango trade in lumber. And then conversely, when things get tight, they invert in a big way and you get penalized for storing it. So if you have access to the physical inventory, the carry trade is unbelievably profitable. You just got to stand in there and pay the margin call to carry it. And then we mentioned rail cars. So the futures contract is 110,000 board feet.

That's about what fits on one rail car. Is that correct? That's correct. And what's a board feet? Just a six foot long two by four is six so a two by four eight footer is 5.333 board feet so that's basically two two inches by four inches by eight feet long divided by 12 feet that gives you a board foot yeah it's more of a it's it's made my brain hurt yeah it's made my brain hurt when I got introduced to lumber math.

But I think it's like a volume measurement of the wood. Correct. You know, the weight that comes with that. And then I've heard you at Sherwood, you guys do a billion board feet a year? Yeah, we're approaching a billion board feet a year. So that's roughly 10,000 rail cars of material. I'm rounding up. But 10,000 rail cars of material or 40,000 truckloads

on an annual basis. How many trees is that for our environmentalist friends? How many trees die? That I don't know. Sorry. No, no, no. You're asking the wrong question. How much carbon has been permanently captured inside that two by four. The interesting thing is though, to answer your question in regard to trees, if you go look at any, any tree cut down in North America, there's anywhere from three to five trees planted for every tree that's cut down. So like it's very well managed resource in, inside of North America and Europe for that matter.

I think South America in least in the managed properties are, are moving that way. It's, it's just a, it's a 40 year plantation process as opposed to, you know, what, you know, I think unfortunately my kids get thrown at a couple of times if they go and read the Lorax or what have you. It's not, it's not, it's not like that. But it's also, That is not the one slur it's not like that. But it's also that isn't that is not the one floor. He's going out there. And you look at the forest industry in general for the last hundred years inside of North America in particular has been a very, very well managed resource. And, you know, they're like a time mismatch there, even with the carbon capture, right?

Like, OK, I planted a tree like some of these guys plant trees to offset one year of carbon but that tree might take 80 years to grow to offset actually that carbon so it doesn't really count and like what how does that time mismatch work so they're planting three for every one but then you have to wait 40 80 years it depends on what species and what mark you know what climate that it's in. I mean, in the Southern Yellow, in the Pacific South, I mean, in the US South, that lifespan is 20 to 30 years, whereas in the Pacific Northwest, your point, it might be more like 50 or 60 years. And then you go into Northern Canada, it might be 80 years. It really just depends on the climate that it's in.

But the interesting thing is, you look at where look at where we're, where we're timbering today, versus where we were, you know, just 10 years ago, and then 20 years ago is totally different. Like what Stinson's talked about, you know, Canadian markets really ruled the US. Well, that's changing. And that's part of the volatility that we're dealing with right now, is that the US South is the largest resource, not only in the U.S., but really the world. It's the cheapest fiber in the world right now. And it's underutilized here in North America. So we're not building houses with just Southern Yellow Pine. It's still predominantly, you know, managed through Pacific Northwest species or Canadian SPF. So, you know, there's going to have to be a change in evolution in the way that we build here in the United States to meet the fiber basket that can support it. Back to that fiber, fiber word. You can't put this fiber in your diet though, right?

It depends how you spell it moving on so i kind of have this thought of you guys as competitors as vendors as customers all wrapped up in one stinson i've heard you note on other pods you mentioned at the top of this that there used to be pricing via hundreds of lumber yards now it's really only five big suppliers that have rolled up those yards kyle I think you're one of those five, correct? So how does that dynamic work? I'm kind of going to sit back for a minute and let you two ask each other questions in terms of your own businesses and how you look at it and what you want to know from each other. Yeah, we talked about how there's fewer offers and fewer bids. And so there's a lot of inefficiency between there. And Kyle and I's companies sit in between there.

Sherwood's much larger and has a more diverse product offering. But the lack of liquidity in the cash markets has created a big opportunity. If you're able to stand in the middle and make markets provide liquidity to the sell side, that's desperate to sell while the buy sides, you know, they're not answering their phones. You can, you can be the one to step in there. You just can't be small anymore. As things have consolidated, it's made it harder and harder for new entrants to come in and be a onesie twosie trader in physical markets and get anyone to open an account with you on the buy side or the sell side. So we really stand in the middle and try to smooth out the markets and provide buyers and sellers a place to lay off risk effectively, whether that's they're desperate

to buy and the main sellers in the market are nowhere to be found and vice versa. So it, you know, for me, my only business line is commodity two by fours and two by sixes. And I don't touch it. I don't see it. I mean, it's like in other States. And it's just, it's just price. I gotta certainly perform and deliver on time and do the things I'm saying I'm going to do. But at the end of the day, my two by fours are the same as everybody else's, which is the nature of the commodity. But, you know, this volatility is your phone rings and there's all sorts of people on the other end who need stuff. So it's been a really wild time. But I mean, that's at least where I fit. Kyle can certainly walk you through Sherwood. But I just consider myself a liquidity provider for the buy

and the sell side when liquidity is tight. Yeah. So just to add, Stinson and I, we sit in the middle of the market. And we are, for lack of better terms, market makers in our own right in a variety of different things. But each of us has a distinct value proposition to the sawmill producer and to the end user or customer that we're distributing the product to. So he's heavier leaning towards the risk management tools and the brokerage opportunities that he fits in providing that liquidity or market movement inside of what he does. Sherwood, historically, we're almost a 70-year-old company. So we've been around for a long time, like I said, third generation taking over. We were founded based off of

buying large quantities of lumber, actually taking delivery of that lumber into our locations in the metro New York, New Jersey markets and distributing it to the local lumber yards. Now, with consolidation and the things that are changing that Stinson noted, we've had to go out there and evolve accordingly with the market, but of the billion of board feet that we're talking about that we're trading, 70% would be something that we physically take into one of our distribution centers and, and break down into smaller quantities and sell to our customers. So we're, yes, we sell straight truckloads to the biggest customers on the planet,

whether they be, you know, builders for First Source or Home Depot or Lowe's, 84 Lumber, USLBM. But the majority of what we do is sell the guys below them of smaller quantities, like mixed truckloads of 2x4 through 2x12 or with plywood and OSB on the same truckload. And they might not even be full units of the material. It might be broken down to even smaller quantities than that. And that's the value proposition that we provide to that group. And for some of those guys, we're their primary supplier. For others, like the biggest guys on the planet, Builders First Source or 84 Lumber Lowe's Home Depot, we're like their primary or one of their

primary secondary suppliers because they're buying deeper into the chain. They're buying higher up in the chain and buying maybe direct from the sawmill and doing a variety of different things there. So the value propositions are distinctly different, but what we do in the marketplace and a lot of different things are very, very much the same. Because we still do 30% of what we do as a direct ship where we buy it from the mill and drop ship it to one of our customers. We do a lot of business on the forward pricing side where we're working with a variety of different entities to help them price lumber at a fixed price for a period of time to cover a job, you know, throughout the year, that business is

growing. And, you know, I think it's mainly growing because of the volatility that we had over the last, you know, two or three years. It's provided us the opportunity to educate people, take the risk off of their table and provide them, you know, a value added product that not so many different people can do. And, you know, you look like an, like an elevator or something in that regard, like can become a offer some products that set the price, then you manage the risk around it. Absolutely. And then we'll deliver it to them in the said period of time, in the quantities that we've committed to over, you know, like I said, you know, upwards of a year or two. And that's provided some good opportunity.

The challenge we have is getting more and more people to kind of plan accordingly. I think that's part of why Lumber historically has not been a big user of the derivative because it's been a good old boys network where a lot of guys have just managed their inventory and their risk based off of, you know, where they felt they could buy at any given time in the said range. Now that we're trading in ranges that are, that nobody really understands or a thousand points, right. Yeah. That, that has kind of, you know, maybe even thrown out, thrown out the window sort of a little bit. that has, you know, maybe even thrown out, thrown out the window sort of a little bit and because, you know,

people have been caught. I don't think it has, you know, hurt enough people to the upside because they've been able to one, you know, because the volatility has been so sharp and so quick, there's been opportunities to kind of get back in and cover up a lot of mistakes. The backside of this cycle, when things start to move in a steadily session down, that's I think when ultimately, some of the skeletons in the closet, so to speak,

really come to fruition and probably blow up some of those organizations that Stenson was talking about earlier. Got it. And you guys sort of blew that question. I wanted you to podcast each other there for a minute, right? Ask each other a couple of questions of what are you seeing in this area? What are you seeing in that area?

Yeah. I was going to ask like on the forward price stuff, Kyle, when I was a consultant, that was always a big question. Like how can we commit to a price for 12 months? And how do we honor that? And there's ways to do it. Just going along futures contracts against your sale price. But what I saw was this unbelievable good old boys network handshake type deal where if price went against someone down the road like they would just kind of walk from these contracts or delay and make kind of wait until the market came back into

their favor i'm like do these contracts not have any like these cash contracts between a builder and a developer or a lumber yard and a framer do they not have teeth in them? And so I like, cause when you your long futures or you buy inventory for a commitment to cover your short, it's like, are they going to perform on this contract? Have you seen the same thing? And I don't know how much that goes into your. Yeah, no, it definitely goes. I mean, the people that understand it and get it that have done it over a period of

time, did it well, well before we saw the volatility in 2018, for that matter. Our largest customers saw benefit in offsetting a portion of their risk. They would, you know, everybody has a different risk tolerance, so they're not necessarily going to go out there and cover 100% on a forward price commitment, but they will say, okay, I was able to get this job based off putting a margin on top of it. Where we are today in what you want to say in the price range, I feel comfortable covering 50%. I already feel comfortable covering 80%. And then I'm going to go play the market on the balance. So that's what they have done and have found, you know, they're all out of success. The customers that we have today are, for the most part, not new customers. They're the guys that really understood the benefit of, you know, offsetting that risk, getting it off the table so they can just go out there and go out and get the next sale. I don't need to worry about, you know, going and buying the lumber and sitting on it in a third-party reload. I don't have to worry about staging and setting up delivery of that product. Sherwood Lumber is going to do that for me. My partner is going to take care. He's taking care of all the risk. All he gave me was a price and a period of time that I'm going to go do that. Now, we all know with job site activity,

specifically today with the labor situation, there's always delays. So what we do is just try to make sure that we communicate with our customer base on a consistent basis and know well in advance what the schedule is going to look like. And if there are delays, if there are, it is going to cost us X amount of money to carry, you know, we'll, we'll work that through and deal with that with those, those, those accounts. So but that being said, we do have some new guys that just don't get it. They're like, oh, if the market goes down, you know, can I back out of this transaction? We're like, absolutely not. And if we feel like a customer- Ask the CME if they'll let you. Yeah. We're like, no, it's a direct correlation trade. We are offsetting our risk via the derivative or buying extra cash to hold

and carry it through that transaction. So we take the liberty of doing, you know, taking either or, I mean, we're a long distribution company, so we always have cash inventory. So we can always say we're going to buy extra amount of days and, you know, roll with that basis that would allow us if it allowed us on that, you know, on that specific item. So, but anyways, has there been discussion of people trying to get out? Absolutely. Specifically last year and, you know, the years of this high volatility, have we had anybody, you know, get out of a transaction? No, because they've known upfront that they have to go out there and follow through with this.

Yeah. And that's been a detriment to me, from what I've seen a detriment to futures participation, because you're long futures on a commitment. And if you're nervous, that commitment's not going to honor it. Like, do you stay long? Do you buy the physical or like, are you buying options to hedge, you know, credit risk, I guess, default risk. So that, that doesn't help. And what's interesting to me, unlike grains, Kyle, you guys have a big stick there at Sherwood, other commodities, there's like standardized, and I don't know a lot about it,

but there's standardized cash contracts and a standardized like terms that everyone's held to because they're, you know, part of an association. Can we do something like that in lumber? That's a good idea. I don't know. I would like to look into that. Let's do it. Yeah. I just like NALA or like some kind of industry standard that we all subscribe to so uh the big boys and the little guys aren't so mismatched in their contracts because if the big guy wants to change the rules suddenly the little guy kind of just has to go with it yeah

and that's you got to pick your business partners very carefully because of that stuff and it it's you know typically not a problem and if you're like sherwood or these other legacy companies uh that have been around you know you have a reputation for for handling stuff and that's generally the vibe and lumber. But mistakes are so big nowadays. Like one mistake over a $500 to $700 per thousand. It's just like that used to be a $20 mistake times 30 trucks. Now it's just one truck and one move losing $700. That needs to be some kind of standardization in cash markets.

Yeah. I think generally speaking speaking the reason people one don't trade our derivative as much as well is it's only tied to one item right it's two before two and better western canadian spruce produced in prince george canada right or origin there and um that hopefully will change if we move to the delivery, you know, to the gateway of Chicago and get to get the Eastern Canadian spruce guys in play. I'd love to see the Southern Yellow Pine guys come in, but I don't think they're going to because I don't believe it's a tight enough correlation to those species. So maybe at some point we can write a contract and create a Southern Yellow Pine derivative, but we'll see. But the biggest thing I think in lumber in general is the old generation continues to not look at as a hedge. They look at it as a speculative tool.

And the term we used to talk about 10 years ago here at Sherwood is hedgulation. That's like everybody thinks that they're hedging, but they're really trying to make money on both sides of the equation. And they don't understand how to manage basis. And they don't understand that from a margin perspective, if you have to pay a call or have to fund a call, it's not the end of the world because it's not a realized loss or a realized gain until you buy or sell the stock, right? That's what I always told my owners. It's not just because of this mark to market number looks the way it does today. In particular, I'll go back to early 2020 or late 2020 when we always offset our forward price hedges with a long contract in the future.

And you had an inverted market where it was $300, $400, $500 a thousand below the current cash market. So you're able to sell cash up here and you're long a futures contract for later in time and that futures contract continues to lose. But you're forced to buy the current cash market to cover your commitment. Right. And we're, so the basis was so out of whack. And so, you know, we were like looking at it and we're like, oh man, like our mark to market today, we're like X million dollars in the hole. Like, yeah, we are today. If we had to go out there and deliver the material to the

customer all today, but we don't have to deliver the material. We only have to deliver a portion of it today. And the rest is spread out over time. That disparity will come back into play into some normalized range. We might not make as much money as we thought when we put together the correlation. We might not lose as much money as it looks like today, but the fact is it's likely going to come together over a said period of time because we we all know that in, in the prop, in regard guard to reversion to the mean, everything moves back into some level of that correlation over time. So things can be overvalued or undervalued for extended periods of periods of time. But if you have more time,

they'll likely come back together into that, into that mean. So you just have to allow those things to come together. And I think what happens in our industry in particular, people don't understand that they don't have the patience from a long-term mechanism to go out there and plan. And they get major pressure from their CFO or from upper management, what have you, because all they see is this off this, this one part of the trade, either on the cash side or on the future side, that's what would be perceived as a huge loss.

That is saying, oh, this is- They need a single line item, combined line item, and it would all go wrong. This is catastrophic. How are we going to go out there and do this? That's so interesting because two things, folks take flat price risk and they don't even know it. And the argument is you should take basis risk, which is still risk,

which also means there's still reward. Like folks going, sometimes I go into it like it's a one-to-one hedge and how am I supposed to make any money? It's like, you wouldn't, if it is a one-to-one hedge, it's not. There's basis risk still. And then secondly,

the accounting for hedges it just folks think they to kyle's point they look at these two different silos instead of combining them and i i tweeted out the other day like increased futures for i'm always short futures uh you know i have these big margin calls but that just goes into my cost of goods sold. And it goes into my purchases account effectively and raises my break even. If I wasn't hedged and I knew where prices were going to go, I would have a lower break even. But you are not losing money to Kyle's point. You're not realizing that loss until you blow out the inventory. And then you roll it all up and you got to make sure your salespeople

understand what their basis is, their ownership is. And then conversely, when you're short basis, but that whole concept has prevented many companies who have smart people who want to hedge from diving in

because they don't understand how margin calls flow through the balance sheet. And so, I mean, I don't know, maybe there's some education that needs to be done in hedge accounting. Cause it's really easy. It's not complicated. Yeah. But it, you know, it throws people for a loop. In the alternative investment world, my day job, the,

a lot of these hedge funds have moved to combining stocks and their hedge right in the same account. they give the customer here's one line item so they don't see this negative all the time in there they just say here's this one investment oh my god it's up six percent the market's up eight percent they don't care it all looks good instead of this was up eight this was down two i'm mad at the down two right um so yeah that's that's exactly it i really. It's just it's just your inventory account captures all the things that go into the inventory, the purchase of the inventory, the hedge of the inventory, cost carry, all those things. And then if you're with every trade in particular, whether you're long, a futures contract or short, a future contract has a specific reason for in the way that we look

at it. Right. Cause we're, we're not looking at it from a speculative basis or, or to Stinson's analogy of like, you have to look at it as a producer or as a customer. Right. So like, what do you want to go out there and man? So if we are long the board, it's usually offsetting a sale that we took in the future time, or we're long the board because we are adding extra days of inventory to our distribution footprint. And then we would be

short the board based off because we want to go and increase our sales base on our current inventory that we have on the ground and vice versa. So we as an organization have eight different accounts in ours, so we can account for and reconcile for the transactions that are in place, whether they're an EFP, whether they're a forward sale, whether they're a hedge against inventory, or they're a basis trade on just a specific set item that we want to go out there and reconcile. So it's just a different way of approach. And it is complicated, but it isn't if you go out there and just really take a step back and try to put it in its simplest form. And I think the problem, the challenge our industry has had, they really have a hard time in understanding the difference

between a risk offset as opposed to a speculative opportunity. And where are the big commodity trader like Glencore's? Why aren't they coming in when you said it was 500 wide, the basis there? Like in oil, right? If it's $3 wide, these groups are coming in and selling cash and buying futures or vice versa. So does that happen in the lumber space or no? Like just based on the volumes, I want to say no. Yeah, our market's too small. Like the cash market's too small. And Glencore, they couldn't deploy enough capital to make it worth it.

And it's too niche. And Kyle and I have been working with the CME to change the language on the futures contract that will allow just normal market participants to arb away these ridiculous inverts, carries, and basis swings. Basis is way more volatile and lumber than any other commodity I've seen. And we're going to fix some of that by including more self-taught language into this futures contract. But to answer your question, because I get that a lot, you know, you kind of roll out this concept and folks look at you like, well, why isn't everyone doing this? And, you know, it's like, oh, it's too small. It's very niche. It's a U.Ss only traded commodity largely like there's certain lumber goes to canada goes to china but it's it's it's just the u.s marketed commodity and the it gets out of control

to the upside because the producers don't participate enough um and that seems to be the problem with most they're not selling to cover their yeah yeah and so basis is 500 over the futures contract when it should be 20 over like come on but so you got to get sell side participation and you know i i want them to open the contract up so guys like me and kyle can deliver against it and we'll take care of that invert real quick. But so some of the reason that gets really stressed like that is just the structural language of our futures contract needs some modernization. Yep. And what you're saying include more, more product, like don't have it be that slim sliver of a, of a product.

Right. I love it. Well, we know some people there, so we'll, we'll put you in touch, but you guys are already on the committee and already talking. Moving on. I want to talk a little bit, the more I think about everything happening in the world, thinking through lumber, it seems like it's a big proxy for some of the main storylines of the 2020s, which I had to include now that we're in 22, right? It's crazy. So in the 2020s which i had to include now that we're in 22 right it's crazy right yeah so in the 2020s uh we've got the kobe accelerated move to remote work which has been increased housing demand we've got commodity inflation we've got supply chain issues and we've got global warming um right i feel like lumber is touching on each of those four things. So Stinson, you were just

interviewed for a piece in The Atlantic talking global warming. So let's start there with you and kind of get your general thoughts on what that's doing to the market and what it could continue to do for the next five, 10 years. Yeah, I think it's a great question because it ties in a lot of what Kyle said early on. And if you read the article, it's just, there's such a direct link to the availability of Canadian spruce trees that are available in this housing cycle versus the last one. And you start asking, why is that? And the forests were devastated up there

by mountain pine beetle pests that destroyed an incredible amount of trees that they tried to harvest as quickly as they could. But you couldn't get them all. Then they make fires worse because these trees die. And if you can't cut them and process them before they they completely rot then they just become a huge fire risk um so to me like damage is done and lumber and if we're going to continue to build homes with the same lumber that we do now which kyle said we've always done it with can lumber, we're going to continue to have a lumber boom and bust, and we're going to have limited capacity. There is an unbelievable amount of suddenly yellow pine trees that produce suddenly yellow pine lumber, which is very loosely, if at all, correlated lumber futures. But it's darn near

hardwood, and that's why it's not used, uh, to just frame a house. It's in a house. There's uses for it. It's incredibly dense and heavy, but you basically can't do stud walls. You can't go vertical with it. They twist and they're not very efficient on the job site. So what does that mean?

Hardwood versus like you, it's harder to actually put a nail into it. Things like that. Yeah. Yeah. Like, like the, the, I'm way over my depth here, but the science behind it, like that yeah yeah like like the the i'm way over my depth here but the science behind it like it's really close to just being considered a hardwood which you know is flooring and super strong and so it's still considered a softwood but when you throw a nail into it the nail doesn't sink all the way and it's heavy and wet and you can't dry it completely so it dries

while it's behind your drywall and it'll twist these are the risks we were getting better at processing southern yellow pine so maybe it's a little bit more dry but also it chews up your saw blades it just makes uh job sites less efficient when you're a production builder you gotta blow and go um things we can't overcome but there has to be a sea change and and how builders, what materials they use to build wood. So there's just not going to be, this is the easiest way to put it, an increase of Canadian lumber that's not there. If it was there, we would have seen it at $700 a thousand. And there's going to be mill shutdowns in 2022.

And they have environmental controls there too, of like you can only cut so many trees. Yeah, the Canadian government owns 99% of the forest land and they've reduced the annual allowable cut, which I'm speaking for Canadians. Maybe this isn't right, but most Canadians I've talked to don't disagree. Like the math is like, we got to slow down.

Like we had to overlock to get these beetle kill trees out of there. I really got to pull it back while we let the forest recuperate. And in the meantime, The beetles, sorry, the beetles were because it got warmer and they could move further North. They, they didn't, the winters weren't cold enough for long enough for enough years in a row. So they didn't die off in those winter months so they would just kind of uh exponentially grow because they started each

year of more and more would survive and they just overwhelm the forest and then i've heard i was talking with brian leonard reading his uh annual update in our office saying that is it the timber's done in the winter when the when the ground's harder so if the ground if it doesn't freeze as much they can't even get in there the trucks are stuck in the mud essentially yeah yeah you got to have hard thick ice over forced to get to get your big equipment back there so when it's rainy and warmer and it's not frozen over, you have problems with logging. So there's a logging season, which we all watch really closely.

And then it's the opposite in the South, or at least the seasonality is, I think. Is that right, Kyle? Like the seasonality of logging is opposite in the US South? Yep. Yeah, it's true. So I mean, yeah, typically you'll see

the largest logs and the largest quantity of fiber is harvested now like when everything's frozen in in the canadian north and and for the u.s north for that matter um um but in the south it's the opposite when it's right because it's rainy in the spring it's rainy this time of year it's hard for them to get into the forest so they'll be logging in the summer and the fall. So when you see hurricanes happen in the fall, that usually hampers southern yellow pine production for a period of time because that's typically one of their best times or windows

to go out there and harvest the largest amount of timber. And then Kyle, while you're there, your company's got a bunch of distribution centers and the rest. So talk to us a little bit about the supply chain issues. Is it temporary? Is it semi-permanent? I think the supply chain issues overall are probably past their peak of peak challenges. Trucking is very difficult across most of North America, but it's slowly but surely getting better. The rates you have to pay to move the move material is very high. Probably will stay elevated here for the first half of this year, but as we start to see some demand wane, you'll see that be able to be alleviated. So,

we expect logistics to be still very, very difficult, but slowly improving in the coming months. As far as lumber, or I should say housing in general, I think we can all say, and with a high level of confidence, we underbuilt from 2010 through 2020. So there has to be a catch up. And part of the catch up that we have right now is, I believe, pandemic related, where we've sold some of that future demand, we pulled that forward. And we're dealing with some of those challenges that we have right now. And now, as we kind of reset in a higher interest rate environment, a supply chain that's slowly but surely improving, you should see prices normalized at a level. They might be still historically high overall for lumber, but they obviously don't need to be at three, four, five times above the 20 and 30-year averages. So we as middlemen and

market makers, from a volume perspective, Stinson and I, and anybody else that sits in this segment, and then you look at the retail lumber yards and the largest home centers, they're likely going to sell more volume of lumber to the all of 2022 and into 2023. Because it's, it's there, it's the demand overall is there. It's just it's going to be different, a little different from a pricing perspective, because supply chain has been will be slowly but surely improving to meet that demand requirement. So I think from a volume perspective, we all should be very bullish in forest products. The question is this price volatility and what we're dealing with right now, the hyperinflation, that's going to ultimately work itself out as we move into the second half of 22 and into 23. And what are both your thoughts of this price spike is because of inflation?

Inflation is pricing in this or is just a byproduct? Where do you see inflation in your seeds? Well, I mean, I think overall, I think a lot of the questions I had early days in the national media and a variety of different podcasts and what have you was, is inflation for real and is it transitory? Because that was the early word, right? And I was, because I felt that we were in a cycle of lumber price and high demand and challenge supply, that this was not transitory. It was, in fact, a part of the new cycle.

I think we're moving to the latter innings of that cycle in regard to lumber, which will probably be a leading indicator that we're moving into the latter stage of the cycle in a lot of different things, because supply chains overall will start to improve as we move from a pandemic into an endemic and start to see a normalization of the workforce and people, not the stop and go economy that we've been dealing with. That's, I think, the biggest part of why we have this problem right now is that things, it's just been very, very hard for things to move along at any steady speed. I think as we move forward, that becomes more and more steady. And therefore, the price, what we deal with is price peaks and troughs.

They should start to smooth out into whatever that new equilibrium is. Stinson, how about you? Inflation thoughts? Yeah, I mean, by the definition of inflation of higher prices, yeah, it showed up in lumber my argument has been it's structural from the supply side um and the lack of canadian lumber um i don't think that's because of low interest rates uh we are just unable to complete uh we're at a pace of 1.3 million home completions we have all these big start numbers which still have not eclipsed pre-cycle highs. And yet at the pre-cycle 2005 and six, the price of lumber never or barely got above 500 bucks. And I'm like, what, where's the disconnect? And we're like 4X. So we're just, there's just a

structural shortage of lumber. And I don't think that has anything to do with money printing in Washington, DC. I think home price inflation is a thing from low interest rates and a lot of money. But the lumber part, I don't think is, it fits in the same bucket as the why the price is higher as much as the price of a home. You could argue the mills or the producers, right? They have to pay the people more, the trucks cost more, the equipment costs more, all of it costs more to get. Not that much more. Yeah, right.

Not that much more. Not 400% more. And yeah, I think the floors, I think the floor is higher to be raised. I think Kyle largely agrees with that. What is the cost of production while we're talking about that? I think, yeah, I'd say it's closer to 600 mil, specifically out of BC.

I think obviously lower, a little bit lower in Eastern Canada. It's lower in the US South, but the US South is not as low as I think what a lot of people think it is. We're seeing timber prices now start to come up there. You have higher fuel costs. You obviously have higher labor costs. So there's a lot of things challenged there. Europe was very cheap for a period of time, but that now has moved back up more to what the Western Canadian number is.

So the floor is definitely higher. So going back to 30-year, you know, reversion to the 30-year mean, probably not something that we'll see. But, you know, going back to the 5 or 10, I think it's probably more realistic. And then wanted to talk real quick, touched on this a few times on this part of tech is highly deflationary for commodities, right? In food, we invent new methods and genetics and chemicals. In oil, we can drill under the Gulf of Mexico, 2,000 feet and then sideways 1,000 feet. What does it look like in lumber? Does this same dynamic work in lumber?

Is it so old school, I'm just cutting down a tree and cutting it that there's not that much tech there um i think i think you know processing lumber is a big manufacturing operation so yeah you'll you'll see a lot of efficiencies from autumn automating lumber um production uh not being an expert at all in lumber ops but you'll see you'll continue to see pressure especially as wages are up to to automate and make processing more efficient yeah and you said what did you say before it's laser guided now so it used to be i'd get a log and i'd see basically eyeball how many yeah now i got a laser that you know measures the volume and it's like this is what you should you should cut two by fours instead of two by sixes out of this one. You know, so they're using logs more efficiently.

And that technology is moving its way from Canada to the U.S. South. As the U.S. South, these mom and pop mills get bought by more sophisticated companies. And I'm sure there's like satellite imagery and all sorts of that stuff for the forest management or no? Yeah. Yeah, there is that. And I think, you you know from a production

perspective if you go to a salt if you went and poured a sawmill a planer mill anything you know 10 20 years ago looks vastly different than something that you would see today and particularly the ones that are being built today um because there's there are these mega operations where you know you had just like we had lumber yards, you know, you know, kind of like a Starbucks on every corner here in the Northeast. And now I've gotten consolidated into these mega centers, um, across the country, the sawmill, the production side has been the same. Um, the U S South was largely, um, owned and operated by independent sawmills, like hundreds of them across it. Now it's being ruled by like five and they're basically Weyerhaeuser, Georgia Pacific,

West Frazier, Canfor, Interfor. So like that's your guys that are running it and they have a tremendous amount of capital that they've made over the recent years that's going to go out there and put to retrofit the current operations and build new operations that are going to go out there and put to retrofit the current operations and build new operations that are going to be highly technologically advanced to the point where there's a few sawmill manufacturers now that you can run a whole operation with two employees, two guys running a

whole line of product. And that's pumping out a million board feet a day. So, I mean, these things are highly sophisticated operations, very technologically advanced that only are going to get better at what they do. I think the challenge we have right now specifically and why we have this, the biggest price moves is not necessarily the amount of supply that we have in general from a production standpoint, but how do we get it to the market in an efficient manner when the marketplace needs it? That's when you have big price spikes. It's not like back in 2018, for example, when we went to 640 mil that Stinson talked about, there was plenty of production. There

was plenty of production to supply the market needs. And then we were sitting at 1.3 million housing starts then. And yes, you could say arguably we've seen a little bit of a decline from that into 2020, but now sitting at 22 and 23, our production is going to be more than what it was back in 2018, like North American production, world production overall. The inefficiency of being there when the marketplace needs it is why prices spike. And today, the reason we can't supply what we need is because we have extraordinary demand today. But that demand, you'll at a certain point because of the price, whatever the price or, or because things change, what have you, you'll start to see demand destruction. So it will get spread out over time. The challenge you have now with the stay at home

and the millennials that want to do it and where we are at the interest rate level that is rising, everybody's trying to get in at the same time. But there's going to be a portion of that that says, okay, maybe even though I really want to buy a house or I really want to go do this project, well, it's going to cost me 30, 40, 50% more to go do that today. Maybe I should wait so that what's that what's what's the cost of the average u.s house how much more expensive is it with lumber at 1500 versus 500 i think it's what is it roughly 55 or 60 000 on a framing

package is that right something kind of yeah it yes and it's uh the nih NIHB, they'll release kind of the price of lumber has added $50,000 to what it costs to build a house. But what I always caution folks against, or at least bring light to, is the fact that home builder margins are expanding. Now, the caveat is that publicly traded large home builders, we don't see smaller regional or custom home builder margins who are probably more susceptible to price fluctuation. But the builders, speaking about the publics, have been able to pass on the price of lumber and then some. They're making more money from a gross margin perspective. That to me is there's an interest rate problem there driving up the price of a home. But I think what's going to give, as Kyle says, as things normalize and high prices cure high prices

is not the price of lumber, but the margin the builder has. They have points to give to just get back to where they were operating a few years ago. So if housing cools and if mortgage rates are jumping currently, it's okay if it cools off some. And if we can get some of this home supply on the market, uh, existing home, I, you know, cause it's always this paradigm. Okay. I want to sell my home, but how do I get into the next one? And this is all well covered and we're not a housing economist, but you know, the whole thesis is demand is there's a very strong bid and homes for the next five years. Um, and I don't think there's enough lumber to meet it in the time period that we're used to. Eventually we can meet it, but we just can't produce enough homes in a short amount of time to meet the demand that we're seeing. My brother was out in Colorado, lost his home in that fire. So right, what's there, a thousand homes that need to be rebuilt? Oh my goodness. Yeah, that was so sad. That was so sad.

Yeah, just hours. He literally was at the grocery store. He smelled some smoke. He went home, power went out. He came at open his garage manually and the fire trucks coming down the street saying mandatory evacuation. So he grabbed a few things. He lost all his fly fishing gear, which I know you're a fly fisherman. So yeah, devastating, but that's not enough. I was thinking of that like a thousand homes isn't really enough to move the needle like in that area. That's going to cause some some supply demand issues. Right.

Yeah, it won't move the needle for someone who's buying lumber in Dallas. Yeah. And then real quick, back on the technology, like I don't watch sci-fi movies and there's wood framing so like what price does it need to get if it's at 5 000 a mil 10 000 when do they switch over to like composites or some other material or 3d home building like think 10 20 years out in the future are we still using wood yeah i i haven't thought i don't think that's far ahead kyle i'm sure you guys have gotten your brains together yeah we've talked we've talked about it and I've had a few Canadian producers ask me like, when do steel studs come into play as an offset to, you know, lumber? The challenge you have right now is steel and all the alternatives have gone up now

and met the same type of, or maybe not the exact same type of increases, but they've increased substantially from where they were. So lumber is not unique in the sense of a building material rising in price, right? So everything now has kind of like followed suit from what lumber already did. So, you know, I don't think there's one number because there's multiple levers that have to happen to go out there and do that. The fact is, is that we don't produce enough steel to

supply the housing business. We have to build 1.4 to 1.5 million houses a year. So if you look at that as far as building materials in general, there's not probably not enough overall to go out there and meet, meet the needs of the market. So we still could be, you know, you know, it might be me be wrong in the sense that I'm the latter endings of the cycle. And we could see a continuation of this for, for a period of time longer. But we have to, you know, recognize that, you know, things are changing. We did get here for a reason and it was mainly because of a stop and go economy.

And now you're going to see products, not just lumber, products in general, start to move to the marketplace in a much more normalized pattern as we get into the latter half of this year and into 2023. And what does that do? What does that do to car purchasing? what does that do? I mean, what does that do to car purchasing? What does that do to anything that you're going out there and buying? I would think it's going to become easier as opposed to harder as we move forward. Hopefully I stopped hearing stories of friends who made 10 grand on their

truck they bought two weeks ago. let's finish with our hottest take segment uh give me something either nobody else is talking about something that'll make uh either one of you a little uncomfortable or something off topic like lumberjack should go to therapy i've seen you on Twitter talking about that since. And so, yeah, what do you got? Yeah. Big proponent of therapy. It's not really my take, but certainly, you know, take care of your mental health. Big advocate for that. Man, my take is inflation is good and overdue. And if we're, if businesses are getting squeezed to figure out how to manage higher wages versus employees getting squeezed to figure out how to manage lower wages, that's a problem that I'd rather have that problem for to close an income inequality gap. So inflation, inflation is scarring to baby boomers having you know their interest rate at 20 in 1981

um yeah which which i hear endlessly about but the reality is uh inflation is long overdue you know have having it happen in a shorter time period it's kind of painful but but wages are are sticky so as as me, COVID and supply chain inefficiency things get sorted out. Wages are going to stay there. I think folks are going to see that, hey, inflation was actually a good thing. And that's my controversial take. Inflation is good. Inflation is good. I like it. I like it. Kyle, what do you have? Well, I would kind of mirror those comments. I like the fact that, you know, we are doing what we're doing right now in regard to seeing things move up, particularly wages. The middle part of America has always talked about and talked about this wage inequality.

But there's never been a better time to be a working American than today right to go out there and do whatever you love to do um and uh work with your employer uh work with your your teams to go out there and uh fight for uh more it's it's a really really cool thing um you know the business, we've been blessed with some amazing opportunity. I think the majority of the industry never thought we would be doing what we're doing over the last two years, which has been a great blessing. And I'm so happy to be part of it. But to coincide with what Stinson talked about, inflation is the driver of growth, right? Like that means you're growing as an economy. So would you rather be growing or would you rather be decaying or declining?

And I say growth all the way. And so just because it costs me a little bit more to go out there and buy something today, well, hopefully I'm making a lot more and we continue to make a lot more as a society so we can go out there and overcome that. There does come a point of concern, but even where we are today, I don't think it's that much of a concern. All as long as we're, you know, allowing the working American to go out there and have the same opportunities that a lot of the other people are having right now.

So I'm excited about that. I'm also excited about our industry in general. Like we were, we talked about this earlier, lumber in general flew under the radar for the vast majority of all of our careers. And the fact that we were getting recognition in the national spotlight in regard to our craft and being able to go and see how this product is produced and then distributed and consumed in the marketplace is really, really cool thing. And our industry in particular is very green and probably does not get enough recognition for that offset. I mean, not only are we- Green being like environmentally green, not new. Environmentally green, yeah. I mean- Very old.

Very old, but being carbon neutral, we're carbon negative. We're taking carbon away from these other industries. And if you look at our competing building materials, whether it be steel or concrete, what have you, there's no comparison in what lumber does for the environment in that aspect. So, you know, wood is good. And, you know, we need to, you know, go out there and continue to be an advocate of that and how how we can really bring people together in this. What is what is that? I can do that. Wood is good, man. The W got it. Wood is good. Inflation is good. Wood is good. Before I go, Kyle, I'm a big Star Wars fan, so I have to ask you about your Yoda back then. If I'm ever in question of

making a buy or sell decision, that's who I go to. These are my AirPod case. Oh, that's awesome. Beautiful. Well, thanks so much, guys. It's been fun.

We'll talk to you soon, and keep up the good fight. Thanks for having us thank you so much you've been listening to The Derivative links from this episode will be in the episode description of this channel, follow us on twitter at rcmalts and visit our website to read our blog or subscribe to our newsletter

at rcmalts.com if you liked our show, introduce a friend and show them how to subscribe. And be sure to leave comments. We'd love to hear from you. This podcast is provided for informational purposes only and should not be relied upon as legal, business, investment, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM Alternatives, their affiliates, or companies featured. Due to industry regulations, participants

on this podcast are instructed not to make specific trade recommendations nor reference past or potential profits, and listeners are reminded that managed futures, commodity trading, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors.