2025 Forest Products Outlook: Softwood markets remain weak

Volume 19, Issue 3
March 2025

Contributed by Paul Jannke, Forest Economic Advisors, LLC

Author’s Note: This forecast was done prior to President Trump imposing a 25% tariff on U.S. imports of Canadian goods. While the tariff was imposed and quickly paused, there is still a great deal of uncertainty around U.S. trade policy. While many assume a resumption of the tariff is imminent, it is not guaranteed. It is possible President Trump is using the threat of tariffs as a negotiating tool to get Canada to increase border security, and potentially to renegotiate the U.S.-Mexico-Canada Trade Agreement (USMCA) before its scheduled 2026 review. If the tariff is resumed, how long is it likely to be in place? Because of the devastating effect a 25% tariff on shipments to the U.S. will have on the Canadian economy, the hope is Canada will quickly work to meet Trump’s demands and get the tariff removed. This tariff will also have a negative impact on U.S. inflation, and therefore Fed policy, so the U.S. will have a strong incentive to remove it quickly as well. 

The underlying assumption is that if the tariff is reimposed, it will be short-lived. The factors underlying this assumption are playing out currently: Canada immediately began to increase border security and reduce fentanyl production, precipitating the pause in tariffs.

It is important to note that if the tariff is resumed, it will be on top of the 14.4% antidumping and countervailing duties that are currently in place. Two forecasts are provided under the price section: one with the tariff and one without.

Softwood markets remain weak

Following a three-year decline, North American housing and softwood markets are showing signs of recovery in early 2025. However, the imposition of 25% tariffs on all or most goods from Canada and Mexico into the U.S. (if they are resumed) will raise prices for U.S. consumers, leading to a rise in inflation and a slowing economy.

With mortgage rates in 2023–24 roughly double what they were in 2020–21, lack of affordability sidelined many potential homebuyers. However, inflation levels have now returned closer to targeted levels, and mortgages, though still lofty, have edged down from their highest levels in more than 20 years. 

Massachusetts-based Forest Economic Advisors, LLC (FEA) forecasts that housing starts will rise by 1.3% to 1.38 million units in 2025 and by another 8.6% to 1.50 million units in 2026. U.S. softwood lumber consumption in new housing is expected to grow by 4.5% to 17.3 BBF in 2025, and by 8.4% to 18.8 BBF in 2026.

Expenditures on residential improvements (repairs and renovations, also known as R&R) will slow by 4.5% in 2025 before recovering 2.1% in 2026. One main driving force for R&R demand is the relatively high cost to borrow money. 

This has caused many homeowners to fix up their older homes rather than trade up for a larger or newer home, which would require exiting their lower mortgage for a more expensive one. However, the bulge in R&R spending in early 2024 turned out to have been “borrowed from the future,” and by Q3 of that year, spending stalled. U.S. softwood lumber consumption for R&R is expected to dip 0.2% to 19.4 BBF in 2025; it will move up 5.0% to 20.4 BBF in 2026. 

With slow industrial production growth forecast for 2025, lumber used in industrial applications (such as shipping pallets) will stall this year, rising only 0.7% to 11.2 BBF. In 2026, it will grow by 1.7% to 11.5 BBF.

Housing demand

In 2024, housing starts dropped 4.0% to a four-year low as steep borrowing rates and high inflation continued to put home purchasing out of reach for many potential buyers. These factors also discouraged homeowners from placing their houses on the market, creating low inventories of existing homes for sale.

Housing starts provide a key economic indicator that represents the number of residential units and houses that have begun construction on a seasonally adjusted annual rate. This measure of new residential construction is closely watched by financial-market participants as well as the banking, construction and real estate industries. The purchase of a new home represents a major capital good that triggers other consumer spending, while housing demand impacts commodity prices such as lumber and copper. Home-construction rates also play an important role in employment levels.

After falling for most of the past year, housing starts stabilized in the final quarter of 2024 (Chart 1). This put housing starts at 1.365 million for the year. With mortgage interest rates edging lower and the U.S. economy beginning to pick back up, FEA expects starts to grow just 1.3% to 1.38 million in 2025. Housing starts are then expected to grow 8.6% in 2026 to 1.50 million units as the economic recovery builds momentum.

This increase will come from strong fundamentals such as extremely high pent-up demand and demographic tailwinds due to the large population of the millennial generation that are now at the age when many are ready to buy their first home. Additionally, the inventories of homes for sale are historically low. This means the number of homes that need to be built will exceed pre-pandemic levels.

However, there is a risk to that forecast due to supply-side constraints that will limit the number of homes builders will be able to construct within a short time frame. A lack of skilled labor will hamper home builders’ ability to produce additional units. Furthermore, onerous regulations that continue to slow construction will take time to change.

Single-family houses utilize roughly three times more lumber and wood panels than individual units in multifamily structures such as a condominium. FEA forecasts that overall U.S. residential construction, which includes both single-family and multifamily structures, will consume roughly 17.3 BBF of softwood lumber this year. This will mark a 4.5% increase above 2024, which saw a 7.2% decline below 2023. Another 8.4% rise is expected in 2026 as the economy improves and interest rates are on track to fall, which will increase homebuyers’ spending power.

Softwood lumber demand and prices

While FEA remains cautiously optimistic about new residential construction, lumber demand continues to show signs of weakness, with North American consumption estimated to have declined by 0.9% in 2024. In 2025, growth in housing starts is projected to be mostly offset by declines in residential-improvement expenditures, resulting in a modest 1.2% increase in North American lumber consumption. By 2026, however, a recovering U.S. economy and strengthening end-use markets are forecast to drive a more robust 4.8% increase in consumption.

Offshore imports remain constrained by weak demand, pricing pressures and rising European production costs tied to higher timber prices, while offshore exports are forecast to increase this year.

Putting it all together, demand on North American mills (calculated as consumption plus exports minus imports) is expected to grow by 1.6% in 2025, followed by an average annual increase of 4.9% in 2026 (Chart 2). 

FEA's base forecast assumes the tariff is not resumed after its 30-day pause. The Framing Lumber Composite Index (FLCI) fell 5% in 2024. While the composite index declined for the year, Western SPF and hem-fir 2x4 prices increased, and Douglas-fir prices were mostly flat. This discrepancy is due to a 15% drop in SYP prices, which drove the overall decline in the composite index.

FEA expects lumber prices will begin to recover in 2025, with the FLCI moving 8% higher. Demand on North American mills is expected to grow 1.0 BBF for the year. With mills leery of overproducing the market, production will be slow to match the growth in demand. Production increases will be further hampered by growing fiber-supply constraints in British Columbia, the Western U.S. and Europe. 

FEA expects the recovery in U.S. end-use markets will gather momentum in 2026, with demand increasing more than 2.5 BBF. Supply will have difficulty keeping up with demand growth of this magnitude. The improvement in operating rates will drive prices 16% higher for the year (Chart 3).

Trade uncertainty, weak demand, low dealer inventory levels and low mill production will likely contribute to market volatility throughout the forecast period.

Lumber prices will be higher than our base case if the tariff on Canadian shipments is resumed. Under the tariff scenario, prices are expected to jump 21% in 2025. If the tariff is resumed, our scenario assumes it will be removed in March 2026. The removal of the tariff will partially offset improving end-use markets and limit the increase in prices to just 6% for the year.

It is important to reiterate that FEA believes the most likely outcome is no tariff on Canadian lumber after the 30-day pause. The second most likely outcome would be a short tariff while the U.S. and Canada negotiate a solution to get it removed. The least likely outcome is a protracted tariff. However, given the risk, the tariff scenario provides an additional planning tool.

Pulp outlook

The structural shift away from graphic paper to electronic media will continue to reduce U.S. paper consumption over the next five years. Paper demand is expected to average 21.0 million tons, which is 12% below the average of the past five years. The demand outlook for paper packaging is more positive. The substitution of paper packaging for plastic and the continued growth of e-commerce will support increasing demand in the coming years. As a result, U.S. paperboard and packaging consumption is expected to reach 49.5 million tons by 2028. This would represent a 13% increase relative to 2024 and would be 4% higher than the previous peak reached in 2021.

The U.S. pulp sector is beginning to emerge from a cyclical low. A global slowdown in pulp consumption, coupled with the startup of new low-cost capacity in the Southern Hemisphere, led to a sharp downward correction in pulp prices. This resulted in the permanent complete closure of seven pulp mills in the U.S., including the Nine Dragons mill in Old Town, Maine. In 2024, firming pulp markets helped stabilize U.S. pulp production, which is estimated at 42.8 million tons, a 2.5% improvement from the previous year’s low. Pulp markets are forecast to edge slightly higher, reaching a peak of 44.8 million tons by 2028. However, despite this improvement, total U.S. pulp production will remain over 3.0 million tons, or 8%, below 2021 levels.

In the Northeast, demand for pulpwood is expected to improve. The completion of an expansion project at Sappi’s Somerset mill in Skowhegan, Maine, and plans to build a new greenfield OSB mill by Godfrey Forest Products at the site of the shuttered pulp mill in Jay, Maine, should bolster pulpwood consumption. From a pricing perspective, despite weaker demand in recent years, delivered pulpwood prices have remained elevated in the region, largely due to higher costs associated with logging and trucking. Looking ahead, this is likely to remain a persistent concern for the region’s forest products sector.

Editor: Chris Laughton
Contributors: Paul Jannke and Chris Laughton

View previous editions of the KEP

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WEBINAR: 2024 Forest Products Industry Outlook Webinar

Tuesday, March 25, 2025, from 12:00-1:00 PM EDT

Join Farm Credit East, Horizon Farm Credit and Presenter Paul Jannke of Forest Economic Advisors for insights for a webinar on March 25 that will dive deeper into the 2025 forest products industry and allow attendees to ask questions. 

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