LEONARD LUMBER REPORT: “Canadian producers get bailed out.”

The Lumber Market:

“Canadian producers get bailed out.” That should be the feature of the week. It nullified the reason for the upside premium futures were carrying by eliminating the shutdown risk. It also brought to light the amount of extra wood that is out there. Now I will say the industry has done a good job hedging it. The commercial shorts jumped 1088 last week to 7227. There was more added from Tuesday on. We could be sitting at 1800 to 2000 cars hedged today. That’s high. It also will limit the downside at some point. Those hedges take the cash wood off the market. Theoretically, once futures close into par levels those hedges will unwind.

This week we will see a different trade focus. After losing $43 in futures last week, we will start to look for either bottoming indicators or a flush. I would have bet last Monday that neither would have been in today’s comments. The problem with this run up has been all speculative at a time when OSB and SYP could find support. This week we have to look at the macro market for the next move. I’m just not seeing the appetite to add to the pile. We expected a two- or three-week downturn going into fall. That could have just started.

The mills have looked to print to cover the duties, any tariffs with an added profit on top. With the current demand, I’m not sure print can continue to be so far off. The question becomes if the market makes them give it back?

Technical:

The chart pattern is closing in on a trendline, the 200-day moving average and a gap. With a 31% RSI, I can’t look for this to act as any real support. A flush is defined as “emptying something out.” That is how the lumber market recalibrates itself, which never gives the common trader a chance to participate. The major support area is 620.10. That is the flush. Without outside help it will be tough to get there.

What could be changing is… The spread normally goes out towards expiration as the longs are the ones exiting. With the now large number of shorts, we have to watch how that liquidates. If we are sitting on September 1^st with heavy open interest, the front spread may actually go in.