Knock on Wood (September 2026)

At a Glance

Lumber supply has fallen to a ten-year low, marking the fourth consecutive year of decline. Data from West Fraser, North America's largest lumber producer, shows net lumber supply has decreased by 1.6% annually over the past two decades. On the demand side, the U.S. housing market remains weak, with existing home sales this year at just 4 million units—near a thirty-year low—and new housing starts at 1.2 million units. Freddie Mac estimates that since the financial crisis, the U.S. has underbuilt 3.7 million homes. Industry analysts expect no significant recovery in construction activity in the near term. The report argues that if new housing starts recover to the 1.5–1.6 million units needed to meet demand, it would require more lumber than is currently available, and the industry has spent four years cutting supply capacity. Lumber accounts for only 3% of the average home construction cost and 2% of the sale price, creating an asymmetric dynamic where a critical input represents a minimal share of the customer's budget.

Three Structural Factors on the Supply Side Suppressing Output

Canada's supply share has dropped from 45% to 32%, and the cost of building a new sawmill has risen to approximately $200 million. First, British Columbia has seen a sharp decline in harvest volumes due to the mountain pine beetle infestation, mill closures, and tariffs. Second, the construction cost for a sawmill with an annual capacity of 250 million board feet is about $200 million—75% higher than pre-pandemic levels—and requires a supply of 1 million tons of sawlogs (2–4 million trees) per year, with a three-year build time and only two major equipment suppliers remaining. Third, revenue from byproducts such as wood chips and sawdust (accounting for 10–20% of mill revenue) has been in long-term decline due to the disappearance of paper demand, disproportionately impacting profit margins. The author concludes: "Marathon is long-term bullish on lumber."

Timberland Asset Values Are Undervalued, at Approximately $2,000 per Acre

Rayonier and Weyerhaeuser together have an enterprise value of $28 billion, with per-acre valuations only slightly above $2,000. Southern U.S. pine timberland costs about $2,000 per acre (with a rotation cycle of over 25 years), while Douglas fir timberland in the Pacific Northwest can cost twice as much (with a 40-year rotation cycle). Southern log prices have remained in the $20-per-ton range for over a decade due to oversupply from overplanting in the 1990s. The author believes that even bare "cutover" land, without trees, could be worth $1,500 per acre. Returns from timberland come from harvest income, improvements in forestry productivity, higher-value land uses (real estate, solar leases, carbon capture—which can increase land values by 5–15 times), and land appreciation. The NCREIF Timberland Property Index posted an annualized return of 10.2% from 1989 to 2023, outperforming the MSCI World Index's 8.8%, with lower volatility (9.6% vs. 17.4%). Currently, one ounce of gold can buy 2.5 acres of Southern timberland, compared to a historical average of 0.7 acres, indicating capital is flowing toward gold rather than timberland.

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