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Lumber Prices Rise To Help Slumping Industry
Subject Reduction in supply and increased demand increase price of lumber
Topic Supply and demand
Key Words Price, Supply, Demand, Profit, Production, Loss Minimization
News Story

The price of lumber has been rising lately, from as low as $268 per 1,000 board feet to $302 per 1,000 board feet, according to consulting firm Random Lengths. The price had been low for some time, owing to an excess supply of timber resulting from a strong US dollar that made it more attractive to export lumber to the US, as well as to a recently imposed tariff on Canadian timber. This had the adverse affect of increasing Canadian timber exports to the US, as Canadian firms produced to capacity to make up for increased costs of importation to the US.

The recent price increase is the result of a number of factors. First, US firms have been busy reducing costs by shuttering firms and mills. This reduction in capacity has reduced supply from US firms. Second, the US dollar has been depreciating against the Canadian dollar, making it less attractive to import Canadian timber. Finally, interest rates at their lowest point in a generation have made the housing market increase significantly, raising demand for lumber for new construction.

Most people assume this increase in price will be short-lived, however. Eventually, interest rates must begin to rise again, dampening the demand for lumber. Also, the US dollar will begin to appreciate again, making it more attractive to import Canadian timber.

(Updated August 27, 2003)

Questions
1.

What impact should the tariff of Canadian timber have had on the volume of imports of lumber to the US? What effect did it have? Why? Illustrate both situations using supply and demand curves.

2. What effect would (permanently) shuttering plants and timber mills have on a firm's profits? Is this a decision firms would make in the short-run or long-run? Why?.
3. What effect will this increase in price have on the market for new homes? Illustrate this using supply and demand curves.
Source Jim Carlton. "Prices of Lumber Rise, Signaling Turnaround." The Wall Street Journal. June 19, 2003.

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