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- CRB Fundamentals - 2008 Commodity Articles

Lumber and Plywood

Humans have utilized lumber for construction for thousands of years, but due to the heaviness of timber and the manual methods of harvesting, large-scale lumbering didn't occur until the mechanical advances of the Industrial Revolution. Lumber is produced from both hardwood and softwood. Hardwood lumber comes from deciduous trees that have broad leaves. Most hardwood lumber is used for miscellaneous industrial applications, primarily wood pallets, and includes oak, gum, maple, and ash. Hardwood species with beautiful colors and patterns are used for such high-grade products as furniture, flooring, paneling, and cabinets and include black walnut, black cherry, and red oak. Wood from cone-bearing trees is called softwood, regardless of its actual hardness. Most lumber from the U.S. is softwood. Softwoods, such as southern yellow pine, Douglas fir, ponderosa pine, and true firs, are primarily used as structural lumber such as 2x4s and 2x6s, poles, paper and cardboard.

Plywood consists of several thin layers of veneer bonded together with adhesives. The veneer sheets are layered so that the grain of one sheet is perpendicular to that of the next, which makes plywood exceptionally strong for its weight. Most plywood has from three to nine layers of wood. Plywood manufacturers use both hard and soft woods, although hardwoods serve primarily for appearance and are not as strong as those made from softwoods. Plywood is primarily used in construction, particularly for floors, roofs, walls, and doors. Homebuilding and remodeling account for two-thirds of U.S. lumber consumption. The price of lumber and plywood is highly correlated with the strength of the U.S. home-building market.

The forest and wood products industry is dominated by Weyerhaeuser Company (ticker symbol WY), which has about $20 billion in annual sales. Weyerhaeuser is a forest products conglomerate that engages not only in growing and harvesting timber, but also in the production and distribution of forest products, real estate development, and construction of single-family homes. Forest products include wood products, pulp and paper, and containerboard. The timberland segment of the business manages 7.2 million acres of company-owned land and 800,000 acres of leased commercial forestlands in North America. The company's Canadian division has renewable, long-term licenses on about 35 million acres of forestland in five Canadian provinces. In order to maximize its long-term yield from its acreage, Weyerhaeuser engages in a number of forest management activities such as extensive planting, suppression of non-merchantable species, thinning, fertilization, and operational pruning.

Lumber futures and options are traded on the Chicago Mercantile Exchange (CME). The CME's lumber futures contract calls for the delivery of 111,000 board feet (one 73 foot rail car) of random length 8 to 12 foot 2 x 4s, the type used in construction. The contract is priced in terms of dollars per thousand board feet.

Prices - CME lumber futures prices fell during the first third of 2007, rallied in mid year and then moved lower to close lower on the year. The price started at about $276, hit a low of about $227 at the end of April and then rallied to a high of $307 in July. The price then moved down to a low of $226 in Oct, and after a brief rally closed the year at about $228.

Supply - The U.S. led the world in the production of industrial round wood with an increase of +2.4% yr/yr to 427.971 million cubic meters of production in 2005 (latest data available), followed by Canada with 196.442 million cubic meters ( 4.5% yr/yr), and Russia with 139.500 million cubic meters (+6.8% yr/yr). The U.S. also led the world in the production of plywood with 14.537 million cubic meters of production in 2005 (-2.0% yr/yr), followed by Russia with 2.551 million cubic meters (+13.6% yr/yr) and then Canada with 2.323 million cubic meters ( 0.9% yr/yr). U.S. softwood lumber production in 2006 (through November, annualized) fell 4.4% yr/yr to 38.503 billion board feet.

Demand - U.S. consumption of softwood lumber in 2006, the last full reporting year, fell by -1.9% yr/yr to 63.080 billion board feet.

Trade - U.S. total lumber imports in 2006, the last full reporting year, fell -1.8% to 25.285 billion board feet, down from last year's record high. U.S. imports of hardwood in 2006 fell by -3.1% to 1,042 million board feet. U.S. imports of softwood in 2006 fell by -1.7% to 24.214 billion board feet. The leading softwood import was spruce with 1.730 billion board feet of imports in 20065, followed by cedar at 721 million board feet.

Total U.S. exports of lumber in 2006 rose +3.6% yr/yr to 2.779 billion board feet, which is a 6-year high. The record high was 4.528 billion board feet in 1988. U.S. exports of hardwood in 2005 fell by -1.3% yr/yr to 1.477 billion board feet. U.S. exports of softwood in 2006 rose by 9.5% yr/yr to 982 million board feet. The largest types of U.S. softwood exports were southern pine with 232 million board feet of exports, Ponderosa white pine (114 million board feet), and Douglas Fir (76 million board feet). The world's largest exporter of plywood in 2004 (latest data available) was Russia with 1.438 million cubic meters of exports, followed by Finland with 1.234 million cubic meters, and Canada with 1.027 million cubic meters.

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