North American lumber mills are operating at the fastest pace in four years as U.S. home building rebounds, just as the worst beetle infestation on record curbs supply.

About 52.5 billion board feet, the standard industry measure, will be sawed this year, 5.4 percent more than in 2011 and the most since 2008, CIBC World Markets estimates. Lumber traded on the Chicago Mercantile Exchange may rally 11 percent to $350 per 1,000 board feet by March, the highest since 2006, said Paul Jannke, an analyst at Forest Economic Advisors LLC, a Westford, Massachusetts-based industry consultant.

Sales expectations among U.S. homebuilders for the next six months turned positive in September for the first time since 2007 as record-low borrowing costs boosted new-home purchases and sent housing starts to a four-year high. CIBC estimates about 20 percent of North American capacity has been shut or idled by mills, including Federal Way, Washington-based Weyerhaeuser Co. and Plum Creek Timber Co., as lumber futures slumped to the lowest in at least a quarter century in 2009. “As demand continues to improve, more capacity will be added, but the market is going to need that capacity,” said Mark Kennedy, a CIBC analyst in Calgary whose recommendations on t he shares of forestry and paper companies returned 19 percent in the past six months. “We've already seen the lows for the year.”

Eoin Treacy's view The mountain pine beetle infestation continues to spread across Canada and the USA in an example of the effects of warmer winters. Very cold weather had previously kept beetle populations under control. In addition, the fact that so much capacity was idled following the credit crisis has created a supply inelasticity issue for the lumber market.

Lumber futures have trended higher in a volatile manner for more than a year and are currently somewhat overbought. However, a sustained move below $275 would be required to question medium-term scope for continued higher to lateral ranging.

Provided the US home building recovery remains intact the outlook for the lumber market is likely to remain bullish. A number of related shares also pay competitive dividends and have been structured as REITs. (Also see Comment of the day on June 25th).

Rayonier (3.59%) posted an upside weekly key reversal from the region of the previous peak and the 200-day MA last week. A sustained move below $46.25 would be required to begin to question medium-term uptrend consistency.

Plum Creek (3.8%) hit a new three-year peak in September and has been consolidating above $40 since. A sustained move below that level would be required to question medium-term scope for continued upside.

Weyerhaeuser (2.43%) is becoming increasingly overextended relative to the 200-day MA and is susceptible to mean reversion as it approaches the all time peak near $30. West Fraser Timber (0.8%) in Canada is not a REIT but has a similar pattern.

Potlatch (3.19%) has also rallied impressively of late and is approaching a potential area of resistance at the upper side of its 30-month range near $40.