THE LEONARD LUMBER REPORT: The lumber industry is very efficient

The Lumber Market:

The lumber industry is very efficient. Supply can be added or reduce in days or weeks. That is why it is so difficult to gauge a supply driven market in lumber. The good news is that the cycles have definition. At the beginning of the year, it was a panic element throughout the industry with the pending duties and a tariff. The current rally is driven by a possible supply disruption. The next phases of the cycle are:

• Sharp price increases

• Price Failure

• Shutdowns

In these circumstances the market historically fails because of market efficiencies. It finds enough wood because demand is flat. I would caution anyone who believes the market is going back to the lows on this one. We’ve been saying for a few years that value is somewhat higher than the norm.

The duty numbers run from 10% to 35%. Today we heard the deal with European will add 15% to their costs. Prices are going up. The issue in futures is continuing to hold a $50 or more premium you may have to be in the $700’s by Friday. I’m not seeing the appetite to run it up. We did see a big increase in the industry shorts last week. Having less wood sitting at the mills and industry inventories hedged are bullish dynamics.

Technical:

The futures market consistently traded near $675. This is an established value area. What has been a significant red flag is the fact that with some much-forced price appreciation in front of us we continue to fail closing the gap. Each day we expect that area to find trading only to see the futures market take 10 minutes just to open. The lack of “volatility created” will be a factor in any run. That’s why you hedge.

Daily Bulletin:

https://www.cmegroup.com/daily_bulletin/current/Section23_Lumber_Options.pdf

Southern Yellow Pine:

https://www.cmegroup.com/markets/agriculture/lumber-and-softs/southern-yellow-pine.volume.html

The Commitment of Traders:

https://www.cftc.gov/dea/futures/other_lf.htm