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Za • VVCUIMLOl^^ 



COVER STORY 



Lumber prices stir panic 



Continued from IB 



homeowners out of the market, says Colton. 

 That would mean fewer high-paying construc- 

 tion jobs and fewer furniture- and carpet-buying 

 sprees by home buyers. Without the economic 

 drive provided by new homes, you can kiss the 

 economic recovery goodbye, Colton says. It is a 

 problem worthy of federal intervention, he adds. 



President Clinton is about to step into the vola- 

 tile debate about how lumber costs got so high, 

 who's at fault and what should be done about it 

 He has scheduled a timber conference April 2 in 

 Portland, Ore. Every group involved — and 

 there are many — thinks it knows the reason 

 why lumber prices have gotten so high. 



"The president said with a smile that after he 

 leaves this conference, he's got to meet with 

 (Russian President Boris) Yeltsin and that will 

 be easy," says Rep. Jim McDermott, I>Wash. 



Politics aside, the price of lumber is up be- 

 cause demand is growing but supply is not. How 

 did we get here? Opinions vary: 



► Home builders and the timber industry 

 blame environmentalists. Federally owned land 

 used to supply more than one-third of U.S. soft- 

 wood. Legislation and court battles to protect the 

 endangered northern spotted owl — which nests 

 in timber country in Washington, Oregon and 

 northern California — _h^as slashed available 



^Federal harvest land.' Last year. Federal land 

 r supplied 22'3n)f-fcr.S. softwood. This year, that is 

 ' expected to fall again. Mark Rey of the Ameri- 

 can Forest and Paper Association says much of 

 I the timberland is tied up in legal gridlock 

 ^ brought on by lawsuits by environmental groups. 

 But Congressional Research Service, an arm 

 of the Library of Congress, said late last week 

 that protecting owls has reduced available tim- 

 berland only 5%. A report by CRS found that in- 

 creased demand for lumt)er, brought on by the 

 improving economy, is the prime culprit for ris- 

 ing prices. To blame the owl alone is misleading, 

 it concludes. 



► Industry observers blame a drop in the 

 number of sawmills. In the Northwest, 132 saw- 

 mills and plywood mills have closed since 1990. 

 East of the Mississippi, where most sawmills cut 

 hardwood for furniture and floors, there has 

 been a 25% drop in sawmills, says George Bar- 

 rett, editor of Weekly Hardwood Review. "The 

 lumber business is made up of many small pro- 

 ducers. They were not able to get capital during 

 the credit<runch f)eriod in the late '80s and ear- 

 ly '90s." Demand is rising for all kinds of wood, 

 and fewer sawmills are turning logs into boards. 



Surviving sawmill owners say they are leery 

 of investing and expanding even though demand 

 for wood is up. Galen Weaber, who runs a saw- 

 mill in Lebanon, Pa., says the future of his indus- 

 try is too uncertain. "Only a fool would invest 

 now." he says. "You don't know where it's going. 

 All the timberland could be locked up. Every- 

 thing goes to court these days. You can't know 

 how it's going to turn out" 



► Worse-than-usual weather this winter in 

 timber country has added to production prob- 

 lems. Snowstorms have hit the Northwest. Rain 

 and snow have fallen in the forests of Southeast- 



em states. Conditions in Canada have not been 

 much better. "You can bet 40 below in British 

 Columbia will slow the harvest," says Modansky. 

 "When you get wet and muddy weather, as we 

 got early this year, that means even fewer logs 

 coming out of the woods. The weather just add- 

 ed to everything else." 



► Some wood is exported. The National Wild- 

 life Federation says wood prices are high partly 

 because 8% of the U.S. harvest was exported last 

 year. "If (timber producers) are so concerned 

 about the American home buyer, why don't they 

 plug that supply back into the U.S. market and 

 help bring lumber prices down?" says National 

 Wildlife spokesman Michael Crook. 



But exports actually are down. Last year, the 

 U.S exported 2.8 billion board feet — mostly to 

 Pacific Rim countries — vs. more than 3.4 bil- 

 lion board feet in 1991. The NAHB calls exports 

 "a fringe issue" in the rising cost of lumber. 



Despite all the finger pointing, probably the 

 biggest reason lumber prices are rising is an in- 

 crease in demand — especially for pine and oth- 

 er softwood used to build houses. Last year, de- 

 mand for lumber was 45.3 billion board feet. 

 This year, demand is projected at 48 billion 

 t)oard feet. 



Low interest rates and a strengthening econo- 

 my combined to start a rebound in home build- 

 ing. Despite winter weather bad enough to stall 

 many building projects, housing starts in Febru- 

 ary were a seasonally adjusted annual rate of 

 1.21 million. That was low enough to cause Tues- 

 day's drop in lumber prices. But it's well above 

 199rs 1.01 million housing starts. 



The shift in supply and demand for lumber 

 got the attention of commodities traders who 

 buy and sell lumber. In recent months, the price 

 of lumber futures contracts — which gives the 

 holder the right to buy or sell lumber at a certain 

 price up to a year in the future — has been soar- 

 ing. Tuesday, a contract for May delivery of 

 1,000 feet of softwood board sold for $448. When 

 the contract first started trading in May last 

 year, the same contract sold for $225. 



For days in December, trading was so intense 

 that lumber futures opened limit up — when the 

 futures exchange halts all trading because a con- 

 tract has risen the maximum allowed for one 

 day. 



Part of that is financial speculation. "We have 

 never seen lumber do this," says Scott Ramsey, 

 managing director of Index Futures Group. 

 "This market started to show signs of strength, 

 and that attracted capital, and that created more 

 activity and higher prices and more higher 

 prices. If I were short in this market (betting that 

 prices are going down), I'd be very concerned. 

 Actually, I'd probably be broke." 



Despite the surge in prices, the economy 

 hasn't shut down. Home Depot's Modansky says 

 demand for lumber remains strong. His compa- 

 ny sells to home builders and do-it-yourselfers 

 building decks and remodeling game rooms. 



"Lumber is a commodity, not a luxury. Unless 

 they find an alternative product to build a home, 

 lumber will be used and lumber will be pur- 

 chased," he says. "These prices have not led to a 

 falloff in demand. And I don't think they will." 



