Lumber prices are cooling after rallying over 400% in 12 months. Here is where 4 experts say the red-hot commodity goes from here.

Tree trunks lie on a pile in a forest on a ridge in the Ore Mountains. Skies are blue. — Jan Woitas/picture alliance via Getty Images

The price of US lumber futures has pulled back from May's peak, falling roughly 43% as of mid-June.
Experts told Insider that it could go down to $600 in the next six months.
Still, the lumber shortage will not be easily remedied, and inflationary pressures remain a concern.
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The price of US lumber futures has pulled back since it peaked at $1,700 per thousand board feet in late May, falling roughly 43% as of mid-June.

The red-hot commodity has been on a rapid decline the past few days, although prices remain elevated, up by 139% over the last year, making it one of the best-performing commodities in that period. Cash lumber prices are also tumbling.

Experts, such as Drew Horter, president and CIO of Tactical Fund Advisors, welcomed the downturn. He said lumber may tumble to $600 per thousand board feet in the next six months.

"You can't keep building at this pace," he said. "There is also a domino effect to a certain extent."

Chip Setzer, director of trading and growth for Mickey Group, a commodity trading platform, agreed. He said $600 is likely a fair valuation. In fact, he doesn't believe that lumber's price should return to its pre-pandemic level.

"Everybody kind of wins if we stay in that range," he said, adding that lumber's price can even go as high as $900. "I think that is a range for a very sustainable and healthy construction market, producing lumber market, exporting market. You kind of want all those things in harmony."

Setzer, who has been in the lumber industry for 12 years, said this will give sawmill operators, truck drivers, and other players in the industry more cushion for capital upgrades and operational improvements.

Among the drivers of the lumber's recent slump is the decline in both new home construction and home-improvement sales from their record-highs earlier this year. Producers also seem to be catching up to a certain extent, largely incentivized by the sky-high prices of the commodity.

"The purchasing is kind of inelastic, in which people are unwilling or unable to continue to buy. So we seem to have topped out, and I think that's related to why lumber has now declined," Mace McCain, president and managing director at Frost Investment Advisors, told Insider.

But for the time being, experts seem to agree that lumber prices will remain elevated from historic norms.

The upsurge in lumber's prices was triggered by a confluence of factors: a pandemic, concerns over a looming housing crash, and millennials reaching home-buying age. Lumber at the start of 2020 was hovering just around the $400-level.

Even Devin Stockfish, the CEO of Weyerhaeuser, the largest lumber producer in the US, said the price of the commodity will not be the "new normal."

However, there was already a shortage of lumber supply before the pandemic.

"Inventories were down 33%," McCain said. "And then the surge of the housing production, which increased demand by 14%. So we got two big imbalance happened very quickly."

Horter explained that the root of the issue is in the industry's infrastructure, or the lack thereof.

"You don't just start up a mill at the snap of a finger," he said, adding that building a new sawmill takes at least two years. "This is a supply chain problem."

Looking at the bigger picture, commodities in general typically spike when inflation is accelerating, though concerns eased as commodity futures from copper to nickel cooled. Commodity prices are often taken as a barometer of wider forces in the economy.

Federal Reserve chair Jerome Powell on Wednesday pointed to lumber's falling prices to back up the central bank's claim that inflation will be temporary.

Still, Ed Egilinsky, managing director at Direxion, told Insider that the economy is just in the "early innings in the supercycle of the commodities."

"We are going to have volatility," he said. "We haven't had inflation in a long time. Commodities are cyclical. We are coming from a 10-year cycle that has been a malaise."

Despite most of the commodities rising alongside lumber, Horter said it makes sense why special attention is being paid to lumber.

"Lumber is so prevalent in everybody's life. That's why people care more about it than any other commodity other than probably gas or a new car used car or a new car."

Read the original article on Business Insider