Category: CME

Lumber Weekly

Last Week:

The week was mixed as the futures market gave back half of its rally while cash continued higher. The futures market is in the middle of a rebalancing for the month’s end, so their dynamics are different. What is troublesome in this environment is that while the spread works, the second month gets clobbered. The risk management selling is in the next month. Also, the futures correctly projected a slowing cash market. Today, a slowing cash market doesn’t indicate lower prices. The futures will be the one making the new lows if all remains the same.

Factors:

The current trade is all about economic outlooks. No one is complaining about sales. The problem lies in the fact that there is no follow-through. The industry will not add to inventories and that is based on their projects. That won’t change anytime soon. The buy side will only step in when forced. The sell side is always $20 too high. There are bands established, but that isn’t anyone’s focus at this time.

Thought:

As we finish the third quarter many are starting to realize that covid aberration is behind us and we are back to a grind market fighting for dollars. The difference, I believe, is the ability for the market to go up. Just last 8 months ago the futures were trading at $627 mill. A complacent marketplace will cause strong rallies. My fear today is that we have to make a new low to make a new high…

Technical:

Where did the bull market go? Now that we are back in the $35/$70 mode again the 100-day moving average is the focal point. It traded back and forth on it only to fall apart by Friday. Thursday, the stochastics started to turn, as did the longs wishful thinking. The psychology of the market is not to get caught long and last week’s trade highlights that concept. Exiting and rolling could weigh on November next week.

Daily Bulletin:

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

Commitment of Traders:

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

About the Leonard Report:

The Leonard Lumber Report is a 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.

Brian Leonard

bleonard@rcmam.com

312-761-2636

Lumber Weekly

Last Week:

The futures market had a $39 trading range last week, all up. Once we crossed the halfway point in August, the short side had to start rolling or exiting. It is usually a two-week process that works well for the spread but does little for the out rights. The difference this time is that the futures market has been sitting near the bottom for a long time. The next move was up, and the exiting got it started. I have noticed the extreme level of scrutiny held by the industry. Few views this as a supply and demand rally. The focus is on the futures and the typical positioning volatility, me included. This reluctance could keep upward pressure on the market.

Factors:

The trade is reverting back to its historical norm. A $35 move is good, and a $70 move is great. This type of trade allows the industry to make money, or at least it should. Today we face a tremendous cost of doing business throughout the industry. In the past five years, small companies have morphed into significant players with all the costs associated with playing in the big leagues. They now either need higher prices to allow for better revenues, or they need to par costs. If the outlook for 2024 is of steady starts and steady supply, then the $35/$70 model is here for a while.

Thought:

I’m still in the camp that this commodity should trade higher. All commodities have run up and settled higher than their norm. Lumber trading sub $400 is too close to the norm. There have been steadily added costs to subscribe to a higher norm. There is an issue. The higher price of the finished product in most other commodities was due to the higher cost of production. None of the finished products faced a 30% Federal regulation charge. Salad dressing is not higher because of the Federal regulations put on soybeans. You cannot expect the commodity to carry that added cost. And that is most likely why the price is in the $400’s and not $600.

Makeup:

It looks like the industry is going for the Texas hedge while the funds continued to add. That should mean the spread goes $10 over to $20 under again.

Technical:

The chart formation calls for trade through the $550 area. This is a grind and most likely will take work to get there. The wildcard is if the funds liquidate outright. For now, the points are:

• 542.80
• 547.20
• 555.30

RSI 65%

Daily Bulletin:

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

Commitment of Traders:

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

About the Leonard Report:

The Leonard Lumber Report is a 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.

Brian Leonard

bleonard@rcmam.com

312-761-2636

Lumber Weekly

• The quest for today’s value remains elusive.

Last Week:

The futures markets fell another $19.50 as a weak cash market dominated. The makeup of the trade was the funds selling while the industry bought back shorts or got long. In this part of the cycle, all the focus is on the cash market. I am surprised at the extent of the erosion. In a hurry to raise prices, the mills did not establish a base level. The chase is on to find that level. The futures guys are hoping for a lessening of the fund selling next week could bottom futures. While I agree, it could be a tough week ahead.

Factors:

The struggle continues to determine the value of this commodity. The factors affecting the price are less production out of Canada—the slowing of Euro shipments, and the JIT inventory management strategy. The demand data shows a steady pace of construction, and reports from the field are of a good wood flow. Under these conditions, the commodity’s price will remain at or above breakeven. The reality is that the price continues to drift into the red for the mills. The lower price is also digging into the margins of most of the industry. The Milton Freeman School of Economics says that inflated profits are met with long-term deflation. That may be the easy answer here.

We have to go back to the actual supply and demand factors. The supply gap in housing continues to widen as family formation outpaces construction. There are limits to construction. Labor and government regulations are extending the timeline of all buildings. That lag is very positive long-term for housing. I did see something thought-provoking for the first-time home buyer. Here goes…

The first-time home buyer has roughly $100,000 saved for a down payment on a $350,000 home. These are estimates based on today’s data. If the buyer does an analysis, they see that they are earning 6% on $100,000 today. Buying a home, they would have $250,000 debt at roughly 8%. That is the 7.5% mortgage and the additional home expenses. Now the appreciation of a home averages 5% historically. At 8% the buyer loses 3% a year. If they do not buy a home, they make 6% on $100,000 with potential saving increases.

Summary:

This year’s actions of the lumber market highlight an industry preparing for less demand. While there isn’t data confirming a downturn, the marketplace stays guarded. I did look for less demand by the third quarter. I also looked for less supply to offset the decrease. This market doesn’t react that smoothly. At some point, the multifamily sector will show a slowing. Then the single-family sector will see a pause. In a JIT environment, prices will remain under pressure. That could be around for a long time. The good news is the market will continue to get caught short. The middle of the market can continue to benefit from those spikes.

Daily Bulletin:

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

Commitment of Traders:

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

About the Leonard Report:

The Leonard Lumber Report is a 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.

Brian Leonard

bleonard@rcmam.com

312-761-2636

• After a six-week run, the cash market shows signs of fatigue.
• The futures market had a $52 range from high to low, confirming that the volatility is returning.
• Reports from the field are of home builders putting on the full-court press for yearend while data shows a potential future slowdown.

Cash

At six weeks, this cash round has been longer than most. Inventory management plans are causing small bottlenecks every few months. If this mechanism stays in place, it may be a while before the cash market recovers. The catalysis of these last two buys in January and June was from a supply issue and commodity funds covering. Once that energy is gone, the market tends to settle back down. The cash market back below breakeven isn’t sustainable but the fact.

Economists are talking about a potential period of commodity deflation coming. Historically, the lumber commodity enters that disinflationary period earlier than most other commodities. It also exits earlier. Hovering under breakeven for as long as it has, lumber is probably in the middle of the cycle.

Volatility

Lumber is not a volatile trade. The normal ranges are small and defined. That all changed when covid hit. This typically controlled commodity was hit with numerous issues. That created many wide swings, and volatility went off the charts. It took the last 14 months of sideways trading to bring the volatility down and, as usual, took it to record lows. That is why last week’s $52 move is essential. Today we look at it as bringing vol back to historic levels. If the swings continue and get more comprehensive, it should be a red flag to the part of this industry that is affected most by higher prices.

Demand

“Heat is not a factor this year.” There has been an uptick in the building since spring that hasn’t let up. The typical heat-caused slowdowns have not come into play. The push for completions is on. The starts number has always been a lagging indicator, but this time we could see a more dramatic drop going into the fall because of today’s rapid pace. We are entering a time of year when production capacity moves back up. It could be a struggle for the industry to digest more wood and less demand.

*This industry has yet to experience the effects of the higher rates. We could have already landed, but the industry is trading as if there is more negative to come. The lack of any honest follow-through is an industry on the defensive.

Technical: 

Today the focal technical points are the 200- and 100-day moving averages. The 200 sits at 557.40, and the 100 sits at 540.30. This market is in a downtrend which highlights the 100-day average. I will look for some added momentum if the market closes under it. A few weeks back, the call was if the market rallied through the $600 mark, it would gain upside momentum. The features of the trade are the same. The close on Friday was a bit friendly, so it may pay to practice patience before committing to the short side

Daily Bulletin:

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

Commitment of Traders:

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

About the Leonard Report:

The Leonard Lumber Report is a 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.

Brian Leonard

bleonard@rcmam.com

312-761-2636