The wild swings taken by lumber prices in the first half of the year are a textbook case of supply and demand, according to a TD Economics analysis of the situation.

The price of lumber rose 50 per cent in the first four months of the year -reaching a four-year high of $367 U.S. at one point -before dropping more than 30 per cent to $247 U.S. by the end of June, says economist Dina Cover.

The bank has downgraded its lumber price forecast for the rest of 2010, and says prices will trend upward to $340 U.S. by the end of 2011.

The "supply-side story" had its beginnings in the recession last year.

"North American producers had been slashing production so much throughout 2009 that output was at or below final demand levels," Cover says, adding that stockpiles were also drastically reduced. "So at the start of the year when year-over-year demand did turn positive, as the U.S. housing market began to show some signs of life and buyers began to restock inventory, production fell short of consumption."

When supply finally met demand at the end of April and started outpacing it in May and June, it was expected that prices would fall -but not by as much as they did, Cover said.

While prices have stabilized at around $250 U.S. in the last two weeks, lack of demand in the U.S. and overseas will keep them low in the near term, Cover said.

"Demand from Canada isn't likely to provide much offset, as we expect the housing market to cool significantly in the coming months after growing at an unsustainable pace over the past year."

Prices will continue to be affected by supply, she said.

"As long as producers don't get too excited about the seasonal bounce in prices and are disciplined enough to keep output in line with demand, prices -which may lose some steam following the seasonal uptick (in the third quarter) -are not likely to fall below current levels."