Why dry lumber?
Live green tress and fresh cut lumber vary in moisture content (MC) from 30% to 150%! And the sapwood is usually higher...
Above ~22%MC wood is highly susceptible to fungi, stain, and decay (rot)
Dried lumber allows shrinking associated with moisture loss to occur prior to use of the wood
Strength of wood increases as it dries
The holding power of nails and screws increases in dry wood
Wood must be relatively dry before being glued or treated with preservatives
Machinability improves as wood drys. Wet wood tends to leave a fuzzy surface
Below 20%MC, wood is unlikely to form new warping, splitting, or other drying defects
For reference, outdoor and house framing lumber is typically dried to 12-19%MC. Lumber used indoors for furniture, paneling, flooring, and trim is dried to 6-8%MC in the Pacific Northwest. Wood acts like a sponge, always absorbing or desorbing moisture to maintain equilibrium with its surrounds. Finished indoor lumber must be drier because heated indoor air has lower relative humidity. If not dried sufficiently, the wood will shrink further as it equalizes to the equilibrium moisture content (EMC) in the room, which can cause gaps and cracks, including broken glue joints.
Cost effective and time proven, air drying lumber is a great way to dry wood. Air drying involves stacking and stickering the wood in a well ventilated area, out of the sun and rain. Check out this great link from Woodcraft Magazine for information on how to stack and sticker your lumber, as well as other great info on drying wood. And another great article from Oregon State University Extension Service.
Note that it is critical to stack your lumber as soon as possible after it is milled to minimize stain or growth of fungi and/or mold, especially during warmer seasons.
When air drying lumber, leaving extra tim allowance or applying an end coat sealant such as Anchorseal or Latex paint can help to minimize end checking and cracking. As wood dries, it dries ~10x faster through the end grain than the sides of the board. This can cause the end to shrink up and open splits (checks). Applying sealant helps to slow moisture loss from the ends so that it can dry more evenly with the rest of the board.
When air drying lumber, expect ~1 year per inch of thickness to dry.
Advantages of air drying:
Well suited for outdoor or framing lumber
Disadvantages of air drying:
Requires a long time to dry
Requires space to dry
If dried outdoors, can only achieve ~12-15% MC. However, you can then move it indoors to a heated or humidity controlled space to achieve 6-8% MC.
Kiln drying allows you to use your lumber sooner than waiting for it to air dry. It helps to minimize checks stains and defects by drying in a more controlled environment. And it can rapidly and safely reduce the moisture content for indoor applications.
Additional advantages of kiln drying are the ability to sterilize the wood of pests (i.e. powder post beetle), condition the wood to relieve internal stresses, and set the pitch.
Conditioning is important if you intend to have your dried wood resawn into beveled siding, or for creating fine joint work. If the wood is not properly conditioned, stresses in the shell of the board can lead to cupping and pinch. See this article here for a nice overivew.
By setting the pitch, the wood is less likely to bleed through sap in finished product (i.e. stain through paint), and reduces gumming of sanding and finishing equipment.