Lots More With Stinson Dean on Crashing Lumber Prices

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1:09bloomberg audio studios podcasts radio news are you guys doing anything interesting for fourth of july nope well it was nice talking to you you know uh out in east hampton they don't do fireworks on the fourth it's a good thing we're not having a conversational podcast or anything tom says you've got to watch the puck when you're on the bench tom keen and i'm not is that an insult what does that mean i don't understand hockey when you're not playing you have to watch the game is this about your face cut i don't know why i use on the bench but yeah why am i on the bench yeah well maybe if you're on the oh yeah the ice you would have been paying closer attention yeah you can't in hockey when you're on the bench you're exposed so if you're not paying attention you could get hit in the face with a puck Why don't they just build like a little protection thing, like in baseball, like a dugout?

2:04Because they get on and off the ice by jumping over the wall. Oh.

2:10Man, I hate sports. I did a deadlift. One, two, three. Hegemony. Hegemony. Okay, good. Hegemony. Barges. This is an after school special, except. I've decided I'm going to base my entire personality going forward on campaigning for a strategic pork reserve in the U.S. Where's the best squid ink pasta? These are the important questions. Is it robots taking over the world? No, I think that like in a couple of years, the AI will do a really good job of making the Outlaws podcast. And people will say, I don't really need to listen to Joe and Tracy anymore. We do have... Cha-ching. The perfect guest.

2:49Welcome to Lots More, where we catch up with friends about what's going on right now. Because even when Odd Lots is over, there's always lots more. And we really do have the perfect guest. So for those who don't follow Tracy on Twitter, which you should all be, she posted this freaky photo at two in the morning that everyone thought was like Halloween or like costume makeup because you have this big gash on your face. What's the story there? someone said the Dow was a better index than the S &P 500 and so I had to fight them that's me yeah that's right you should see the other guy everyone look at Joe no uh you know someone threw a large platinum coin at my head and then ran off and I heard them say something about a trillion dollars not sure what that was about because that's interesting because I thought it sort of looked like you got hit by a two by four I thought you got hit by like someone like slammed a big piece of lumber in your face.

3:43Actually, you know, I think that's what it was. So unfortunately, I wish I had a dramatic story to tell about how I ended up with this like four inch gash on my forehead. But basically, I was trying to hang a frame while standing on my bed and I fell off the bed and I'm pretty sure my face hit the frame. So like kind of a two by four. Yeah, sure. It's a cool photo. I think you should make it your Twitter profile. Yeah, I might actually. It's actually pretty bad. Thank you. The stitches themselves aren't quite as glamorous, but I'm willing to live with them. But anyway, I'm glad you mentioned two by fours because there are some interesting things going on in the lumber market at the moment.

4:24And we really do have the perfect person to talk to, Stinson Dean, president and owner of Deakin Lumber Company. We've spoken to him many times before about what happens in lumber. Yeah, the one piece of advice I've gotten in lumber trading is don't try to catch a falling two by four. classic classic yes yeah we're we're in that now and tracy's living proof of that no you know how i know lumber prices are falling it's because i just bought like all the lumber that we need for that giant shed it's because i finished my acquisition and so inevitably prices start coming down you bought the top yeah it's always the case wait okay so prices are falling what's going on Because, you know, wood, lumber, it's not exactly a monolith.

5:13There's different types of it, as we've learned a number of times at this point. But like how bad has the price action been? It's been pretty bad, like lower than I thought we would go. There's this kind of age old philosophy in lumber trading that we won't trade below the breakeven, specifically the breakeven of British Columbia two by four producers. And coming out of COVID, there's so much issues getting product that folks switched species to cheaper, more available species from the U.S. South. And I started to think maybe British Columbia lost what I call its peg. Like everyone would peg like to the B.C.

5:58break even. Well, we've been well below that. It's kind of a mystery what it actually is. Maybe it's a little bit lower than we all thought. And we've been trading well below it. now we're trading below even the Southern Yellow Pine, the cheap species, break even. So we're just way cheaper than anyone thought we could go because, hey, you can't trade below the break even for too long. But here we are, I don't know, six plus months, probably trading below that number. So just to be clear, when we talk about the break even price, this is the cost basically of the various mills to acquire raw timber and then process it into usable wood.

6:42Exactly. Cost of the log, the labor, inflation plays a big part of that. So, you know, break-evens have taken a step up since pre-COVID. And I assume, okay, so no one wants to lose money. Have we seen a supply response yet? Have any of the mills been idled or anything like that in response to lower prices? Yeah. So slowly but surely, we call them curtailments. Those curtailments have started to add up. I think we're over a billion board feet in British Columbia. Again, everyone's looking towards them as that peg. but now we're looking at like do we need to to curtail which is different than closing and i think personally we need to close uh a lot of like permanently shut mills in burris columbia and and then now there's talk of like what do we need to do to reduce supply coming out of the southeast united states with the southern yellow pine so there is an accumulative effect happening but it's not all at once so it's not really headline grabbing it's kind of onesie twosies this is happening and then people don't believe it and is it a curtailment meaning they're going to turn it back on later if prices respond is it a closure when you close these mills and you're not opening them back up but there's a fear when you curtail whether that's reducing from three shifts to two shifts or something like that you you're going to lose your workforce in In the U.S.

8:14South, that's the biggest fear. If you cut shifts, they're going to go work for Amazon. And there's a lot of investment in the U.S. South. So there's a very tough decision to be made. Do we curtail and risk losing our workforce that we worked so hard to get over the last several years? It's kind of a race to the bottom at the moment. That's really interesting. It also just seems bad to curtail a bunch of mills and lumber supply at a time when we're still talking about structural undersupply in the housing market. No, this is really interesting because we've talked about labor hoarding in the past and all these companies, they're anxious about losing workers.

8:49And maybe it's the first time for many of these managers and CEOs where they had a hard time working or they had a hard time hiring. But it's an interesting dynamic to say, well, maybe there are aspects of that that are disinflationary or deflationary for certain prices because it implicitly means continuing to run the operation at a loss, contributing to oversupply of the key commodity because the alternative is that labor loss. I hadn't really thought about that aspect. No. Wait, Stinson, is the market – so normally lumber futures are in contango. So the spot prices are lower than prices further out.

9:27Is that still the case? I'm starting to wonder whether or not I should be stockpiling lumber and, you know, just wait a year or two. Yes. Yeah, it is. I don't know what the definition of a super contango is, but I think we're in it or approaching it, meaning the futures market is paying you above and beyond what it actually costs the store for 60 days or 60 days in between each of our contracts. And we have a deep carry. I always like to say the futures, they don't have to be right until you get into expiration, which is where we're in July 2nd. Our July contract expires July 15th. Typically, all the speculators and outside money is long gone before the spot month comes into the calendar month.

10:13and we're seeing the spread, the July losing a tremendous amount of value relative to the next month in September. So yeah, huge carries in the market. The market is begging participants to store lumber. Don't put it on the market. Don't put it up for sale. The market will pay you above and beyond your interest, insurance, and storage costs to keep it till September 15th. And at this pace, January, we'll probably pay you to not sell it until January 15th. And we'll kind of go from there. You have storage, right? So you're a lumber trader, but you're not just like one of these guys who looks at his computer screen all day.

10:54You actually have capacity, right? Yeah. Yeah. That's one of the things we invested in coming out of kind of the windfall of COVID volatility is storage, indoor storage specifically. You have to be able to keep lumber out of the weather and dry. And so we invested in a lot of storage options for us so we can take advantage of these carries in the market. And yeah, my day job is buying physical rail cars of lumber, shipping it right now, shipping it into storage facilities and putting a hedge on it and then going fishing, waiting for the market to come back to us. The Stinson Lumber Reserve is what It's basically it.

11:34Strategic stints in lumber reserve. Strategic stints in lumber reserve. I like that. SSLR. So you touched on the unemployment aspect just then. But of course, when people think about lumber prices, I think the first thing they think is that this is a traditional arbiter of economic activity. So if lumber prices are going down, it's probably because people aren't building that much. And that suggests that something bad is happening to economic growth, or at the very least, it's starting to slow. So is that the basic read through here? I think so. I think you look at lumber was kind of the first thing to hit headlines and set new all time highs back in 2020 and then really became a popular thing to talk about in 2021.

12:21You know, at the time, I'm like, hey, this is fundamental. And we got COVID supply chain shutdowns and they can't get their workforce back. And, you know, if you get test positive, you got to sit down, stay away from work. and we couldn't get caught up. All that's fixed. And so we have very efficient supply lines now. And at the same time, we're looking at housing starts, really showing what the lumber industry has seen since January, which is really weak demand. As a lumber trader, I would say lumber supply chain is too fixed. It is very smooth. Rail cars are getting from British Columbia to Atlanta on record time record speeds and lumber is getting produced as much as you could ever want everyone has it there's no fear of a shortage the end user lumber yard is is able to run kind of a lean just in time inventory model again and it's so the supply chain side is very fixed but then now we We have kind of a broken housing starts world where the number one demand of lumber is repair and remodel.

13:32And just behind that is single family. And then way down the list is multifamily. Multifamily is less than 10 % of lumber demand. Wait, sorry. What's first again? Single family or repair? Oh, okay. Okay. This is interesting. Repair and renovation. Yes. Repair and remodel. This is R &R. Yes. Wait. So on that note, is it possible that like in the post, the immediate post 2020 period, we just had everyone remodeling their homes? And so, you know, that sort of took care of demand further out? Or that maybe because lumber prices went up so much, you have this huge supply response from the mills. And so there's just oversupply.

14:15Is it possible that this is something that's still very pandemic-specific versus something that's about slowing growth? Well, Tracy, it's a good way to frame it because I'm thinking my initial thought is like, oh, this is an economic indicator of slowing growth. But also, I want to say we clearly now, I think undisputed, can say we had pull-forward demand of repair and remodel. so projects that would have been spread out over five years got crunched into 24 months and now we're on the back half of that five years and there's not much business to kind of float and handle the supply that we have so i i don't know is that the definition of slowing economic growth is pull forward i don't know that's over my my my pay grade but i think it's clearly what what happened is there was a repair and remodel boom that has really and one of your housing and lumber guests, Dustin Jalbert has tweeted about it.

15:10Repair and remodels kind of flat to down and dead in the water. That's a lot of big box Home Depot, Lowe's, Menards business. And that's 50 % of lumber that's produced goes to that sector. And it's down. And we all know single families down just in time for supply to be as efficient as it's ever been. And lastly, I haven't been able to mention pre-COVID, 1819, there's a ton of CapEx to invest in the U.S. South. Sorry, 1819 or 19, wait, 1819? 2018. Oh, sorry. Sorry, I was like - Pre-COVID in the year 1819. 1800 and - Oh, wow. That's technically pre-COVID. Sorry. I'll restate it. No, no, no, it's fine.

15:56No, no, no, it's fine. Did I mention I've bumped my head, so my numerical understanding? The landing is not as great as it might normally be. Well, in 2018 and 2019, there are plans announced and enacted to build new production sawmills in the U.S. South to take advantage of the larger fiber basket forest logs down there versus the Canadian fiber basket. And it was and is the Canadians who are doing that investment. They own over 50 percent of the U.S. South production. And a lot of those projects got delayed and for COVID reasons, they couldn't get their sawmills built. They couldn't get them staffed, but now they can't.

16:39So a lot of those projects are now online and they're not going to get shut down. There's debt to service, there's cashflow motivations to just run. Who cares what the break even is? So we have that. We have repaired supply chains and we have the hangover of the pull forward demand of repair on the model. And then, you know, the single family stories. well known at this point. So when Stinson first mentioned, when he said repair and remodel is actually the biggest category, like at first I was kind of surprised by that, but I would have thought single family was a bigger source of demand. But it occurred to me that there is a connection here between what we've talked about in our recent conversation with Brad Jacobs, where he made the point that the US housing stock is really old right now.

17:23And houses have to be repaired. They're like any other asset, especially the moment you buy a house, it starts to fall apart. And so if we have this historically old housing market, that is just a big source of ongoing structural demand, right? Just to keep those homes in existence for all kinds of materials they might need. So that actually sort of makes sense to me. I feel like this is something you internalize as soon as you actually buy your first house. No, no, no, for real. I bought my apartment in Manhattan and it never had any issues and then literally like a window started leaking like literally that week it was so perfect

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19:27Go to public.com slash market and earn an uncapped 1 % bonus when you transfer your portfolio. That's public.com slash market. Paid for by Public Investing. All investing involves the risk of loss, including loss of principal. Brokered services for U.S.-listed registered securities, options, and bonds in a self-directed account are offered by Public Investing, Inc., member FINRA, and SIPC. Crypto trading provided by XeroHash. Complete disclosures available at public.com slash disclosures. Wait, so Stinson, you mentioned something interesting, which is this idea of the mills kind of hoarding workers, first of all, but then also just trying to withstand the lower prices and maybe operating at a loss for as long as they can and just sort of waiting to see if they can beat out others who are forced to shut down.

20:15What's the sort of differentiating factor in survival for some of these mills? Is it just whoever has access to like extra cash laying around for a rainy day? Or is it mills that maybe have supply agreements with like big builders and big box companies and that sort of thing? you know i would say and i'm not honestly the best to speak to this but i would guess it's these newer steady dart mills have the advantage they're going to have been located strategically closer to a fiber supply for trees and logs they are going to have a lot of investment they're largely public companies that have built these so they have access to to the cash to kind to see to get to the other side.

21:02In the South, it's still, it's much more fragmented as far as their smaller single location, mom and pop type locations. Those folks are going to struggle, but then those folks have probably more discipline and have saved some cash over the last several years. And there's no way to know, but you would think they've made it this far. They knew 21, 22 wasn't going to be around forever. So they saved some cash where the publics, you know, have to disperse their cash. They pay down debt and then pay dividends, yada, yada, yada. So, you know, I think the advantage is just the newness of the mill because of the state-of-the-art, less manpower, higher yields out of logs, and then a strategic location where the older mills are naturally going to be further away.

21:50They're going to have logged everything within their radius and they're having to go further and further away to get their logs. That's the only thing I can think of. And this, the structural housing shortage that we all know by evidence by home prices have not crashed in the face of 8 % mortgages. We know that the mills know that. And it's just like, well, it's just going to turn and rate cuts. We got to wait for rate cuts. And here we are. And I don't know. And I haven't heard like, how long is this runway? Like how long can they bleed? And I don't know, but it's clearly been longer than most traders had anticipated.

22:29Wait, I have a total curveball question, actually. And if you don't want to answer, that's fine. But we actually, this week, we did publish that interview with Brad Jacobs, who is trying to do a roll-up of what he calls a highly fragmented building supply industry. And lumber is a building supply, though. I don't know if he's going to get into lumber, though maybe he will. A, from your perspective, does it seem very fragmented to you? And B, let's say Brad listens to OddLaws and he hears this smart Stinson fellow and he calls you up. What kind of asset would you buy to create a platform for consolidating this industry?

23:07If you had billions of dollars,$4.5 billion. Yeah, storage. Storage. Yeah, I think the sawmill production business, I learned this when I started out in grains. Yeah. It's just so tough. And you'd just rather have someone else fool with that. And when they're overproduced, you become their liquidity provider. You give them cash. They give you lumber. And you store it and wait for the supply response to cry. And oil traders taught me this, I think, when I started in commodities in 14, 15. There's a big contango on the boats, the oil barges. they just float around with no destination because they were getting paid to store it and if you have the balance sheet to store your material when no one else needs it then you're the only one who has it when when things change and there's inevitably going to be a supply response and the lower we go the more violent it'll be but but for me it in my niche it's it's all about storage i i wouldn't be interested in owning a producer it's just a very very tough business But if you can store, and the balance sheet has a lot to do with that because your liquidity is tied up in inventory, that's what I would be doing.

24:25But I'm a, and we are doing it, but the pressures that public companies have with their lean balance sheets and their lean inventory models and turning inventory turns, it's hard to execute. So that's why folks like me exist where they can't execute. I can. So I'll take on that risk. I'll warehouse it. I'll hedge it and wait for things to shake out. And it's not uncommon for me to sell the lumber right back to the same people I bought it from. And I'm just able to navigate slower inventory turns than anyone else. Huh. I remember one of the first times we talked to you ever, you spoke about how the industry was slow to build out inventory because of the reasons that you just explained.

25:10You know, the tendency towards efficiency and the desire to be as streamlined as possible. And so when demand starts picking up, it really takes people a lot of time to get hold of the wood, the lumber that they need to actually match it. Is there any sign that that behavior is kind of changing? So I take the point that people like you exist to bridge that gap. But do you see more and more industry participants start to build out additional inventory or additional supply just in case? Or is it still not really a reality? I think they tried. And that was kind of the top of the market. And it was kind of this whipsaw.

25:53Like, oh, we need to build inventory. Everyone builds inventory. Price goes up. and then it crashes because they bought three months worth of inventory. It's almost the same concept of pull forward demand. Instead of spreading it out over three months, they rushed in and bought it all within a few weeks. I think folks are back to just-in-time lean inventories. I don't think they have an interest in building inventory. The cost to do so is expensive with where interest rates are. And everyone's very uncomfortable with having low inventory turns. So no, I don't think there's been a lesson learned to have more inventory just in case.

26:29I think they tried to learn it in real time and didn't work out. And more than anything, the interest rates are painful to store inventory. Now, if they ran a grain elevator hedging model, they would know the futures contract is compensating you for the cost of interest, but not everyone is able to execute on that. Yeah, this is an important point, actually, because just on this point specifically. So, right, it's easy enough to say, OK, you're going to buy when it's low and the futures curve and there's a higher price out there that you'll theoretically be able to sell it at. But you do have to match that against the interest rate.

27:09So it needs to be sufficiently steep, I guess, that curve such that it makes sense for you to hold rather than just like buy treasuries or whatever. Yes, yes, exactly. and there's a level of sophistication yeah that is needed for that and then you know the futures market's small so the bigger players kind of like we can't really have a material impact on our risk because we can't put on a big enough position all our little futures contract that we adjusted last year is is doing much better but we still have some room to grow but you know there's a reason well I'm way over my skis here but I think a Cargill there's a reason they're they're private you know and I think one of them is they can execute on these fairly sophisticated storage strategies and not really have to explain to everyone like this is a six month plus arb and we're going to pay a bunch of market call and pay a bunch of interest but we're making it up because our cost basis goes lower and lower every time we roll into the next contract that's just a really hard thing to explain to public investors.

28:17And public commodity companies often tell me when I was a consultant, our investors pay us to have pretty naked exposure to the underlying commodity. And that was as an uphill battle as a consultant. So I said, I'll do it. And if you're not hedging, someone's going to hedge for you. And that's me, that's your investors. And there's a level of you know, just realities of hedging that not everyone can take advantage of. The secret to success is storage. I love it. Wait, just real quickly, 30 second question. You have some other businesses. I know you have your hands all things in other pods. You're out in the real world and not like in Manhattan.

28:56You're like out in the real economy. Do you think you see a slowdown day to day? Gosh, I'm so concentrated in lumber. I thought you're aware of what's going on. I do. I do. Yeah. It's just like it's so front and center because it's a reason on the show today. But yeah, there's some other service businesses that are unrelated and uncorrelated that I was in the middle of the hiring when it was so tough to hire quality people. We were just having to raise the wage to find a clearing wage. That has significantly cooled. We're able to hire whenever we want and frankly let go of folks without fear of being able to replace them.

29:36yes that aspect it's like is it is it too easy i don't know this is kind of feels like it used to be where the employer had such an advantage over the employee like the employee really needed the job and that's kind of what we're getting like more professional follow-ups and and there's they're like they are vying for the job versus us vying for them like i think that dynamic has certainly changed. But I wouldn't say there's a material drop off and activity in these businesses that I see outside of Lumber.