Interview transcript:

1. Hundreds of Canadian sawmills hit by new U.S. tariffs imposed by the Trump Administration for fresh shipments of softwood lumber are feeling the burden. How do you see this impacting the Candian Lumber industry?

What many people don’t realize is that the US produces more lumber than Canada does, so the issue isn’t on the supply side of the equation it is enabling true price discovery. I am certainly not a trade agreement expert but in my opinion, the ultimate goal should be for a truly free market on both sides of the border. While in the short-run that could mean pain for all parties involved, the long-term result should be an overall positive for the lumber industry as well as US home builders. The Canadian’s are relatively business savvy, I have a feeling they will find a solution they can live with. The last time the US imposed tariffs on Canadian lumber was 2006 and from what we can tell the Canadian response was to dramatically increase exports to China. After and adjustment period, we believe everything will work itself out.

2. Although these tariffs have been directed to hurt Canada's Lumber Industry, according to the U.S. National Association of Home Builders, it is American's who are going to be the most affected with the association calculating the tariffs will increase the cost of a new house by $1,000 and would put home ownership beyond the reach of more than 150,000 American families and jeopardize American jobs in the industry. Taking this into consideration, do you think Trump will reverse the tariffs?

As mentioned, the US is a significant producer of lumber. The argument prior to the Canadian tariff was that subsidies were pricing US producers out of the market. In theory, a more level playing field will pad the price of lumber in the short-run but we don’t see it being enough to derail economic growth or home ownership. For instance, the median sales price of a new home in the US thus far in 2017 has been roughly $300,000. So if the NAHB’s estimates are correct, we are talking about an increase in the price of a new home by about .3% (point three percent). This likely won’t be enough to prevent properly capitalized home buyers from taking the plunge. I also doubt it will be a deterrent for the Trump administration to continue with its agenda.

3. If tensions escalate between the U.S. and Canada – particularly with NAFTA negotiations set to commence, how do you think this could impact the price of Lumber in the longer term?

We’ve noticed that the price of lumber has been in sharp decline since the Canadian tariff announcement. Looking at a price chart of Random Length Lumber on the Chicago Mercantile Exchange, it is obvious that the market anticipated the political move against Canadian lumber well before the public heard the news. Lumber futures traded limit up on four consecutive days leading to the announcement, but in the aftermath of the actual news, it has done the opposite. In fact, the July contract spent most of yesterday’s trading session limit down! In our opinion, this feels like a textbook “but the rumor, sell the fact” trade. Accordingly, the lumber market will likely get back to focusing on natural supply and demand fundamentals rather than politics, which have already been priced in. If so, we wouldn’t be surprised to see lumber futures make their way back down to the $310 to $300 per 1,000 board feet area.

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