The Leonard Lumber Report: The Commodity Index’s Hit Decades Highs

Last week the commodity funds saw a massive influx of capital as the investment community tried to take advantage of a booming commodity cycle. The commodity index’s hit decades highs. How will this affect lumber futures? I’ll try to navigate all the features of the industry today. I’m pretty sure you can take the word lumber out and insert a different commodity because the issues look the same. Keep that in mind.

Factors pressuring the lumber market:

First is transportation, especially rail. Not only does it cause the jobsite supply to be late, but it is also complicating the whole process from logging to production. This organic slowdown in production will create shortfalls.

Next is COVID and labor. A labor shortage has been the industry’s nemesis for years now. Now COVID has placed a limit on how many days an entire crew is in place. Add to that a shrinking labor pool and the fact that production now looks different, and you get a builder that can’t get the production curve past 70%. It has kept the completion numbers down and the backlogs growing. 

Another factor is the new 2-week pricing and the just-in-time inventory management. There was a major shift in inventory management after 2018’s run-up that has now grown to the number one choice of the distribution chain: contracts and VMI’s. A bullish demand cycle creates a large void in the chain, and many are forced into the market more often, creating bottlenecks.

These are the three dominant economic reasons for the lack of supply. A few others are:

• Current demand and a 1.9 building permit number
• The fact that another 700,000 workings were added to the economy
• A push to buy as rates begin to rise

If you alleviate any of those factors, you will not solve the shortage issue. Only the lessening of demand will turn the market. Again, only the lessening of demand will turn the market.

Today, the marketplace is micro-focused on each factor, and any change will lead to selling. The market saw the result of that selling back in late January. We expect transportation to get better, and that change will take it from a horrible situation to bad. This will add some relief but not solve the problem. So, the mess continues. 

An eventual pullback:

Where it can pull back to is a tough call. The first factor to look at is the new quarterly pricing. That will be a high number. This last quarter was manageable because the trade was able to mix in $600 cars with the new $1,200 cars making the number look good. This time the trade is paying the high of the year with nowhere to hide. Those same traders that were willing buyers on the last break at $800 are now at higher levels. It will create an artificial bottom again. The other issue is the trade refusing to pay up, thus sitting short in a rising market. That hasn’t been a good strategy and ends up bottoming any sell-off. 

Factors to watch:

The appalling devastation Russia is causing in Ukraine adds to the logistics mess throughout Asia and Europe. Those issues will continue to disrupt the flow of lumber, bullish in a tight market. It also could be the tipping point to turn consumer sentiment down. We are already fighting massive increases in the cost of a home and major inflation on a personal level. We know the Fed has to push the economy into a recession to slow it. They have been reluctant to do that, causing even more pressure. The stock market is losing some steam. Those buying the second home with a loan from their portfolio are starting to push back. Any one of these factors can change the demand picture drastically. But each one has its own very slow-moving dynamics. There is no flip of the switch item there.

What could be a “flip the switch cause” is the drastic rise in limits, and historically that stopped a market trend which was its purpose.

Final word: 

Only J. Powell and the old-timers think this market is going back to $300. It isn’t, and in fact, this market will be a tough go in the 1,000s for some time. Sell-offs will push the market lower, but buyers can’t wait on that today. If the funds start to show up down here, futures will hit $2,000. If they don’t, $400 up and $400 down will be the norm. Buy cash and buy a put… 

About The Leonard Report

The Leonard Lumber Report is a new column that focuses on the lumber futures market’s highs and lows and everything else in between. Our very own, Brian Leonard, risk analyst, will provide weekly commentary on the industry’s wood product sectors.

Before You Go…

A special guest joins us for this episode of The Hedged Edge, who is well known for his many titles, which include Doctor, Editor-in-Chief, Dean, and Chief Academic Officer, just to name a few. Dr. Channa S. Prakash, Dean of the College of Arts and Sciences (CAS) at Tuskegee University, has served as faculty since 1989 and is a professor of crop genetics, biotechnology, and genomics. He is also well recognized for mentoring underrepresented minority students.

Tune in as biotech guru Dr. Prakash discusses everything from Alabama football, genetics as one of the most extensive agricultural advancements, the most significant risk factors to feeding the world over the next 30-50 years, plus everything in between. And as a bonus, we find out what sport he would be interested in playing if he went professional.