Category: CME

24 Jul 2023

LEONARD LUMBER REPORT: After a six-week run, the cash market shows signs of fatigue

  • 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

[email protected]

312-761-2636

21 Jul 2023

AG MARKET UPDATE: JULY 7 – 20

Corn has seen a strong rally after falling following the USDA Report last Wednesday. The USDA estimated the US crop to have a 177.6 bu/ac yield this year following the rough start to growing season with drought conditions over most growing areas. While the rains have been beneficial in providing relief, this crop needs a lot more rain in the form of soaking rains and not storms with straight line winds. If the hot and dry pattern returns expect to see prices move higher. Russia has threatened that they will treat any ship entering the now closed grain corridor as a military vessel has tensions in the Black Sea region high again. The longer this new standoff drags out the more support it will provide grains. The collapse of the USD and inconsistent weather can help support this move higher after a bearish USDA report depending on the future forecasts and technical trading.

Via Barchart

Soybeans have enjoyed a great run over the last month and half as soybeans got back over $14 this week. After a low acreage number and not an ideal start to the summer beans have had a great last 2 months. The forecast hot dry stretch coming up is expected to put more stress on this crop as we head into the end of July and start of August. With tightening world balance sheets it will be hard for funds to get over extended short but every weekend provides the opportunity for surprise rains and new market surprises.

Via Barchart

The big news of the week was Russia threatening all vessels that enter the region as military vessels, escalating the tensions and ending the grain corridor for the time being. Russia keeps attacking Odessa which will damage the remaining infrastructure and could present even more challenges if/when the grain deal resumes. The Russian ambassador to the US has said that Russia is not preparing to attack civilian ships in the Black Sea, though previously the Russian Defense Ministry announced that all ships traveling to Ukrainian Black Sea ports would be considered potential carriers of military cargo, and the southeastern and northwestern parts of the Black Sea’s international waters should be considered unsafe for navigation.

Via Barchart

Equity Markets

The equity markets continued their strength the past couple of weeks with CPI coming in slightly lower than expected (by 0.1%) at 3%. While inflation is still above the target of 2% the slow decrease over time is helping it come down while core inflation, 4.8%, follows the same pattern. The Fed decision at the end of the month is likely to result in a ¼ point rate hike as we head into earnings season next week. Tech stocks took their largest losses that we have seen recently on Wednesday as earnings have begun being posted.

Via Barchart

US Dollar

The US Dollar hit its lowest level in a year this week as the greenback fell below the 100 level. This should help ag exports be competitive on the world stage but the sharp decline from the 103-level last week was surprising.

Drought Monitor

The drought monitors below show the change in drought conditions over the last 2 weeks.

Podcast

With every new year, there are new opportunities, and there’s no better time to dive deeply into the stock market and tax-saving strategies for 2023 than now. In our latest episode of the Hedged Edge, we’re joined by Tim Webb, Chief Investment Officer and Managing Partner from our sister company, RCM Wealth Advisors. Tim is no stranger to advising institutions and agribusinesses where he has been implementing no-nonsense financial planning strategies and market investment disciplines to help Clients build and maintain wealth and reach financial goals since

Inside this jam-packed session, we’re taking a break from commodities, and talking about the world of equities, interest rates, tax savings, and business planning strategies. Plus, Jeff and Tim delve into a variety of topics like:

  • The current state of the markets within the wealth management industry
  • Is there a beacon of hope, or is it all doom and gloom for the markets?
  • Other strategies to think about outside of the stock market and so much more!

 

Via Barchart.com

Contact an Ag Specialist Today

Whether you’re a producer, end-user, commercial operator, RCM AG Services helps protect revenues and control costs through its suite of hedging tools and network of buyers/sellers — Contact Ag Specialist Brady Lawrence today at 312-858-4049 or [email protected].

17 Jul 2023

LEONARD LUMBER REPORT: A FEW TAKEAWAYS FROM THE FUTURES TRADE LAST WEEK

Summary: Futures and Cash

There were a few takeaways from the futures trade last week. The first is the fact that July liquidated somewhat orderly, at least by lumber standards. That will lead to more confidence in using the new contract. The other feature was data that showed a lot of the Friday to Tuesday run-up was caused by short fund liquidation. It wasn’t the only reason but most likely was the catalyst for the sharp run-up Monday. The futures market hit fund stops. As of Tuesday, they were now carrying just 700 contracts and that number could be less. If you remember they were the catalyst last January of that sharp run-up. They liquidated most of their position and then a few weeks later were selling again with both hands. Let’s watch for a rerun.

This last rally was a short covering and fill-in run. They were no major data points to set it off. That said, there is only positive economic data coming out for housing. The starts are out on Wednesday. If the marketplace can hold the demand, prices are going higher. The mills are focused on three things, getting back to breakeven, making a profit, and then running it back up to $800. Let’s get it to breakeven first before we chat about the others.

Technical: 

The technical read hasn’t been an outright buy throughout this whole run. It showed a few positives but more signals not to be short. The rally started in early June. It now has a very healthy support line sitting at $552. To trade down there and hold would be expected. Now on the flip side, I have been a proponent of getting long over $600 expecting a sharp spike caused by fund buy stops. With their position much smaller, I would not expect to see that occur. Selling in front of $598.20 against inventory is now back in play. Everything else is neutral.

Lumber Futures Volume & Open Interest

https://www.cmegroup.com/markets/agriculture/lumber-and-softs/lumber.volume.html?itm_source=cmegroup&itm_medium=friendly&itm_campaign=lbr&redirect=/lbr

CFTC Commitments of Traders Long Report

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

Lumber & Wood Pulp Options

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

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

[email protected]

312-761-2636

 

03 Jul 2023

LEONARD LUMBER REPORT: THIS BUYING CYCLE HAS COME TO ITS COMPLETION

Summary: Futures and Cash

This buying cycle has come to its completion. The pipeline is back to normal. Wood is now parked throughout the system. The mills were able to walk the price back up to breakeven and the buy side now has a few months of inventory on its way. The cash and futures also hit par. It was typical and nothing special except for the fact that it took a few major fires and continual shutdowns to even get the needle to move. Without those issues, this market would be headed right back down. But those issues are still with us.

This cycle has seen futures run $86 and pull back almost $40. At the same time, the cash market rallied $85 and remains firm.  The mills have good files and the marketplace as a whole isn’t oversupplied. The market is sitting in a good area. The next issue becomes the expiration of July futures. Expirations have been mostly negative in the past given the housing dynamics. The makeup today shows possible pressure coming from the short mills. The market will need to go to value to offset the mills. At this point, it is hard to tell if that area is substantially lower or not. On Monday there won’t be any takers. They will step up if the news out there remains the same and futures are at a discount. The market is very inefficient going into expiration. Regardless, the fact is a firm cash market trades.

Technical: 

The numbers to watch are the 50% and 61.8% retracement points in July. At this point, I would be focusing on September but a sloppy July early in the week will hurt the market overall. The 50 number is $521 and the 61 number is $511. There is a lot of support from $523 to $525. Everything else is neutral. Moving to September, the formation is somewhat supportive. If July can hold in here, I think the September will rally.

With the market being open on Monday and then closed on Tuesday we could be in for a choppy week. Any firm conviction in either direction could tell the story.

Section23_Lumber_Options.pdf

Lumber Futures Volume & Open Interest

https://www.cmegroup.com/markets/agriculture/lumber-and-softs/lumber.volume.html?itm_source=cmegroup&itm_medium=friendly&itm_campaign=lbr&redirect=/lbr

CFTC Commitments of Traders Long Report

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

Lumber & Wood Pulp Options

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

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

[email protected]

312-761-2636

28 Jun 2023

RCM Ag Services’ Top 5 Takeaways from @ChiGrl Live Ag Talk on Place Your Trades

Recently, we had the opportunity to tune in to the captivating podcast episode of @ChiGrl Live Ag Talk on Place Your Trades. The discussion covered various topics impacting the agricultural industry, and we at RCM Ag Services were inspired by the valuable insights shared. Here are our top five takeaways and what they mean for you.

Takeaway 1: Conflict Between EU and Dutch Government: Implications for Farmers

The conflict between the European Union and the Dutch government has significant implications for farmers in the Netherlands. Dutch farmers are vital to the country’s economy and food production, but they face challenges due to the EU’s regulations aimed at environmental sustainability, food safety, and fair competition.

Farmers are concerned about the financial burden of complying with EU regulations, which can require investments in technology and training. This can increase costs and impact their profitability. Compliance may also restrict their autonomy and traditional farming methods.

The conflict raises questions about the competitiveness of Dutch farmers within the EU market. Protecting and supporting farmers could be seen as creating unfair advantages, while prioritizing EU compliance may risk their economic viability.

To address these concerns, constructive dialogue between the EU and the Dutch government is necessary. Government support through financial assistance, incentives, and technical guidance can help farmers transition to more sustainable practices. Finding a balance between sustainable farming and farmers’ economic well-being is crucial.

Takeaway 2: Germany’s Ambitious Organic Farming Goal: A Sustainable Approach

To truly comprehend the implications of Germany’s ambitious plan to reach 30% organic farming by 2030, it is essential to delve into the multifaceted elements contributing to its success. Central to this exploration is an understanding of the role played by government support, incentives, and infrastructure in realizing this transformative vision.

Government support is a crucial driver in facilitating the transition to organic farming.

By examining the effectiveness of existing programs, we can gain insights into the policies and initiatives put in place to encourage farmers to adopt organic practices. This analysis can shed light on the financial and technical assistance provided to farmers, such as grants, subsidies, and access to expertise and resources. Understanding the extent of government support allows us to gauge the magnitude of the commitment and the resources allocated to facilitate this transition.

Incentives are also pivotal in motivating farmers to embrace organic farming methods. By investigating the range of incentives available, such as premium pricing for organic produce, tax incentives, and preferential market access, we can assess their effectiveness in encouraging farmers to switch. Exploring the incentives landscape helps us gauge the level of support and recognition organic farmers receive, influencing their decision to adopt organic practices.

Infrastructure development is another critical aspect that underpins the successful implementation of Germany’s organic farming goal. Establishing robust markets and distribution networks for organic products is essential to ensure a steady demand and supply chain. Analyzing the development of these networks, including the involvement of retailers, processors, and certification bodies, provides insights into the growth potential of the organic market. Understanding how the infrastructure is evolving enables us to identify potential gaps or areas that require further development to support the expansion of organic farming.

By unraveling these key aspects—government support, incentives, and infrastructure—we gain valuable insights into Germany’s journey toward cultivating a greener and more sustainable agricultural landscape. This holistic examination allows us to appreciate the challenges, opportunities, and potential pathways for success in achieving the ambitious target of 30% organic farming. It also offers valuable lessons and inspiration for other countries and stakeholders looking to foster sustainable agricultural practices and contribute to a more environmentally conscious future.

Takeaway 3: Reducing Methane in Farming: Goals and Strategies

The United States is committed to addressing methane emissions in farming to fight climate change. However, there are challenges farmers face in adopting methane reduction technologies.

One challenge is the cost, as these technologies require significant investments in equipment and infrastructure. This can be particularly burdensome for smaller-scale and resource-constrained farms. Lack of financial resources makes it difficult for farmers to adopt these technologies, despite recognizing their environmental benefits.

Another challenge is the technical requirements and maintenance of methane reduction systems. Farmers need to understand the technology and its installation, operation, and upkeep. However, specialized knowledge and training may not always be accessible. Regular maintenance and troubleshooting can also be challenging for farmers with limited technical expertise or resources.

To overcome these challenges, it is crucial to explore the economic and environmental benefits of methane reduction in farming. Methane is a potent greenhouse gas that contributes to climate change and air pollution. By reducing methane emissions, farmers can improve air quality and save costs in the long run by improving operational efficiency.

Government policies and support are essential for widespread adoption of methane reduction practices. Financial incentives like grants or subsidies can assist farmers in implementing methane capture and mitigation systems. Technical assistance programs and knowledge-sharing platforms are vital in helping farmers navigate the complexities of adopting these technologies.

Evaluating existing policies and support mechanisms is important to identify successful strategies and areas for improvement. By studying the effectiveness of current initiatives, policymakers can refine their approaches and develop targeted solutions. Collaboration among government agencies, agricultural organizations, and researchers can foster innovation and develop best practices for methane reduction in farming.

Takeaway 4: Government Support for Biofuels: Impact on Agriculture and Energy Sectors

Governments in Canada and the United States are actively promoting biofuels as a sustainable alternative to fossil fuels. Let’s explore the benefits and drawbacks associated with these renewable fuels to gain a comprehensive understanding of this government push.

Biofuels offer environmental and energy security benefits. They can reduce greenhouse gas emissions since they are derived from renewable sources that absorb carbon dioxide during their growth. When biofuels are burned, they release roughly the same amount of carbon dioxide absorbed during production, resulting in a near-neutral impact on emissions. Replacing fossil fuels with biofuels can make significant progress in mitigating climate change.

Biofuels also have the potential to decrease dependence on imported fossil fuels. Producing biofuels domestically using local feedstocks enhances energy security by reducing reliance on foreign oil and gas. This can create jobs, stimulate economic growth, and benefit rural areas where feedstocks are produced.

However, it’s important to address potential drawbacks and challenges. Competition for agricultural land is a concern, as biofuel production requires significant land use. This can lead to conflicts between biofuel feedstock crops and food crops. Careful management is necessary to balance biofuel and food production, avoiding deforestation and biodiversity decline while ensuring food security.

Water usage is another consideration, as some biofuel feedstocks require substantial amounts of water. Expanding biofuel production could strain water resources and exacerbate water scarcity. Sustainable water management practices and water-efficient feedstocks are important to mitigate these concerns.

The potential impact on food prices is a valid concern as well. If biofuel feedstocks compete with food crops, it can affect food availability and affordability, especially for vulnerable populations. Policies should ensure that biofuel production doesn’t negatively impact food security.

To promote the biofuel industry’s growth and viability, innovation is crucial. Research and development efforts focus on improving feedstock development, including non-food crops and algae, to reduce competition with food crops and increase yields. Advancements in processing technologies can also contribute to sustainability and cost-effectiveness. Continued investment in research, along with supportive policies and incentives, can drive further innovation in the biofuel sector.

Takeaway 5: Technology’s Role in Future Farming: Precision, Automation, and Sustainability

The episode highlighted technology’s crucial role in shaping the future of farming. Integrating technology into farming practices comes with challenges and barriers that need to be understood.

One challenge is the cost of adopting farming technology. Precision agriculture tools and automated systems require significant upfront investments. Farmers must assess the long-term benefits against the initial costs and ensure the financial feasibility of implementing these technologies.

Accessibility is another consideration. Not all farmers have equal access to technology, especially in rural or developing areas. Addressing infrastructure, connectivity, and technological literacy issues is important to ensure inclusive technology adoption that benefits all farmers.

Proper training and support are crucial for successful technology integration. Farmers need to acquire the skills and knowledge to effectively use and maintain the technology they adopt. Training programs and workshops can bridge the knowledge gap and empower farmers in utilizing available technological tools.

Ongoing technical support is vital to address any implementation or operational challenges that may arise. Access to reliable assistance and troubleshooting resources ensures a smooth transition and minimizes disruptions to farming operations.

Precision agriculture techniques, automation, and artificial intelligence applications offer benefits such as optimized resource use, improved yields, and reduced environmental impacts. Real-time monitoring, disease management, efficient irrigation, and waste reduction are some of the advantages technology brings to the agricultural industry. By harnessing technology, farmers can enhance profitability while reducing their environmental footprint.

Supporting Farmers and Industry Professionals in the Ever-Evolving Agricultural Sector: Discover the Expertise and Tailored Solutions of RCM Ag Services

RCM Ag Services is committed to supporting farmers and industry professionals navigate these complex agricultural landscapes. Our team of experts is well-versed in the latest trends, regulations, and technologies impacting the industry. We provide various services, including consulting, risk management, and financial solutions tailored to your specific needs.

If you’d like to learn more about how RCM Ag Services can assist you in optimizing your operations and staying ahead in the dynamic agricultural sector, schedule a call with our team here. Together, we can explore strategies to help you thrive in an ever-evolving industry.

Don’t forget to check out the full episode of @ChiGrl Live Ag Talk on Place Your Trade for an in-depth discussion on these critical agricultural topics. You can find the episode on their Twitter page here: https://twitter.com/i/spaces/1YpJkgQAVrwJj?s=20

27 Jun 2023

LEONARD LUMBER REPORT: Last week’s trade activity provided a reliable indication of the broader market conditions

Last week’s trade activity provided a reliable indication of the broader market conditions.  The strength of the housing reports, including new homes, existing homes, and permits, suggests a robust demand for lumber. However, factors such as production and shipment disruptions have contributed to a tight marketplace. It’s important to consider whether the market is still experiencing a shortage and whether it’s driven by increased demand or inventory management.

When the focus shifts to inventory management, it results in fewer buyers willing to participate, indicating that the rally is nearing its end. This also prevents the market from becoming overbought. These patterns align with the typical characteristics of a market cycle in the process of bottoming out. Rejecting excess inventory is a crucial aspect of building a market bottom. Bottoming cycles tend to be of longer duration. While it might not be confirmed until December or later, the recommended strategy moving forward is to consider owning wood.

Regarding the roll and spread, the narrowing gap between buyers and sellers is an indication that the roll is nearing its end. While the spread may or may not widen again, the overall behavior aligns with typical market patterns.

Lastly, the question arises whether the strength of the pre-4th rally will disregard this overbought condition. Monitoring market strength and considering the impact of rallies over the coming weeks will be crucial in determining future trends.

Section23_Lumber_Options.pdf

Lumber Futures Volume & Open Interest

https://www.cmegroup.com/markets/agriculture/lumber-and-softs/lumber.volume.html?itm_source=cmegroup&itm_medium=friendly&itm_campaign=lbr&redirect=/lbr

CFTC Commitments of Traders Long Report

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

Lumber & Wood Pulp Options

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

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

[email protected]

312-761-2636

12 Jun 2023

Leonard Lumber Report: The futures and cash market saw a much needed buy round last week

Summary:

The futures and cash market saw a much needed buy round last week. July futures finished up $27.50 while cash was up $7. I would categorize it as not explosive, but positive. The fires in eastern Canada set the rally off. The lack of inventories kept it going. It is not a runaway market. It is one that needs continuous reassurance. The current trader psyche should cause a pause early next week unless more issues arise. $350 cash isn’t the issue. Getting long is. Let’s dig down into that thought process.

There is a big divergence in confidence between the buyers and the builders. The builders have been living off old orders this year but then began gearing up for more building with no one noticing. Economics showed they could still build and sell. Wallstreet saw while distribution didn’t care. The buy side was suffering through an oversupplied marketplace. That is still around but having a much less impact. Last week we saw a slight wake-up call on the supply side. This summer wood won’t be as available and weed was at Woodstock.

Flash Crash:

At about 12:30 on Friday, the futures market experienced a flash crash. In a matter of seconds, the market fell $20 to the first circuit breaker of $25. There is a circuit breaker at the 50% mark of a limit move. It stops trading for two minutes and then resumes. It was put in place to keep computer programs from running the market limit on one order. Coming off of a market that ran $60 in a few seconds this was nothing.

Technical:

The futures market did a good job of breaking out from the sideways trade. That move turned some overdone oscillators to neutral or positive. The run also caused a rapid increase in the RSI. It hit 71% intraday. 80% is getting too rich. This is a norm for a market that was trending sideways for so long. What to watch for is a 70% RSI when July futures get into the $520s. That type of divergence is positive.

Roll/Spread:

The first takeaway is the fact that there are funds in this contract to roll. That mechanism is key for liquidity. They are holding roughly 2500 shorts. The percentage to open interest is consistent with the fund’s way of trading for years. The spreading on Wednesday and Thursday was very robust. The buying of July and selling of September helped keep July higher than the rest of the market. More rolling will keep July positive if that is the only trading.

 

Section23_Lumber_Options.pdf

Lumber Futures Volume & Open Interest

https://www.cmegroup.com/markets/agriculture/lumber-and-softs/lumber.volume.html?itm_source=cmegroup&itm_medium=friendly&itm_campaign=lbr&redirect=/lbr

CFTC Commitments of Traders Long Report

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

Lumber & Wood Pulp Options

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

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

[email protected]

312-761-2636

05 Jun 2023

LEONARD LUMBER REPORT: The futures market had a mixed week

Summary:

The futures market had a mixed week as Tuesday saw a good flush of longs followed by a Wednesday of profit-taking. By Friday the market saw a pickup in volume as the roll began. Having an active roll is key to a fluid contract. The market is getting a little fatigued on the sell side. After over 16 sessions without a correction, the attitude has changed to “not short” from “not long.” This will leave only the algo and funds left to sell it. They won’t compete with themselves for long. Is this a bullish call? Nope, I just think that the headwinds out there for this industry are now defined. The negatives coming are expected and planned for. Without a surprise, the market is underbought.

Economic:

The overall economy expects higher unemployment and sticky high rates.  Those are big negatives for this industry. The question becomes if the 80% break in prices from the 2022 highs was enough or not to offset those issues. The fact that we are in the middle of it with steady demand tells us that just maybe the underbuilt condition is a bigger factor in the demand equation. If so, demand will also remain sticky. My projection for a third quarter of less supply offsetting less demand may not play out with demand better.

Technical:

The resistance trendline is now at 499.50. The oscillators are calling for a correction. A rally back to the trendline would be expected. The issue is this elongated downtrend. It doesn’t create a comprehensive oversold condition. It gradually puts indicators overdone. Today nothing indicates caution should be used when basis trading. It continues to be a reliable tool to use.

Section23_Lumber_Options.pdf

Lumber Futures Volume & Open Interest

https://www.cmegroup.com/markets/agriculture/lumber-and-softs/lumber.volume.html?itm_source=cmegroup&itm_medium=friendly&itm_campaign=lbr&redirect=/lbr

CFTC Commitments of Traders Long Report

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

Lumber & Wood Pulp Options

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

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

[email protected]

312-761-2636

30 May 2023

LEONARD LUMBER REPORT: Last week it was about demand. This week it’s all about the structure

Summary:

Last week it was about demand. This week it’s all about the structure. I mentioned a few years back how the face of this industry was changing. I think it’s here. Never have we seen home builders’ stock hit new highs in a lumber bear market. And never have we seen a distributor have more sales than many of the producers. Today the product moves very fluidly from the mill to the builder and without disruptions allows for a lower-priced commodity. That is what it looks like out there.

Let’s look at a few numbers. In the last few weeks, Pulte, and DR Horton both hit 5-year highs. Toll was right behind them. The lack of supply on the market allows them to build and sell every day at a continued high margin. Wallstreet sees that continuing. So, despite the high prices of homes and high mortgages, the market is still out there.

Now let’s go through the first quarter numbers of two of the players. West Fraser did $1.6 billion in sales with a net loss of $ 42 million. Builders First Source did $3.8 billion in sales with a net income of $333.8 million. Their gross profit margin was up 300 pts to 35.3%. You would have to group a few mills together to reach BFS sales. This is just one of the big three distributors out there. The mills have been laser-focused on the contracts and consignment structure. It works well in a bull market as the print tends to hold a premium. It doesn’t work in a bear market where print holds a discount. It is a win-win for distribution. An upmarket allows for an additional margin to be added. In a down market, they get the spread between the cash price and the selling price. Basically in a down market, they keep all the margin excess. I have to add that there are many players out there that have some of the same programs because of their sheer size today.

For us lay people what this means is that the remainder of the market is in competition with themselves. The net result is more product chasing fewer dollars in a flat market. You either go to a third party for help (the futures market) or you chase the low. A $60 premium is a windfall. A $30 premium is great.

Technical:

It took till Friday, but we did hit the $485 number. There wasn’t even a ripple of short covering for the weekend. The RSI is now at 26.80%. With a ROC of .5 to 1 there is room to go down. This isn’t the type of market that will “test” areas. It will just be a grinder until help arrives. The focus is on the 2023 trendline which comes in at 504.50. The line is almost 6 months old. It is important.

Section23_Lumber_Options.pdf

Lumber Futures Volume & Open Interest

https://www.cmegroup.com/markets/agriculture/lumber-and-softs/lumber.volume.html?itm_source=cmegroup&itm_medium=friendly&itm_campaign=lbr&redirect=/lbr

CFTC Commitments of Traders Long Report

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

Lumber & Wood Pulp Options

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

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

[email protected]

312-761-2636

26 May 2023

AG MARKET UPDATE: MAY 15 – 26

Corn had its best 2 week stretch in quite a while. As you can see from the chart below this has been the first meaningful rally, we have seen in 2023. As corn planting was 81% complete to start the week, ahead of the average pace, the trade has started to look at the weather outlook as we head into June. A dry pattern has begun forming in the coming weeks as it begins to warm up across the corn belt. While the heat in June is not overly worrisome it will be important to keep an eye on it as a warm dry June, followed by a hot dry July, could be plenty to do some serious damage to the US crop. We are a long way from this becoming a reality but a few weeks of dry heat to start June could help this rally keep some momentum or at least not give back the recent gains. Exports continue to be disappointing, and the extension of the Black Sea grain corridor isn’t bullish, but as usual the focus will be on final planted acres and weather in the coming weeks.

Via Barchart

Soybeans can’t get any momentum as South American beans continue to be the preferred option in the world market. November futures made a new low this week before getting a modest bounce on Friday heading into the long weekend. As demand continues to struggle the USDA will likely continue to trim exports in the next report, which will add to ending stocks for 22/23. Beans were 66% planted, ahead of the average pace, as weather concerns won’t hit the soybean market just yet. Beans are lacking any bullish news as they wait for a spark but struggle to find where it will come from.

Via Barchart

Cotton had a volatile week as seen in the chart below. When these opportunities present themselves, you do not want to miss the opportunity to hedge your risk. Have a plan and be prepared if there is another 5-cent spike that could make a big difference in your bottom line and potentially a good spot to place a hedge. The 78-84 cent range of Dec 2023 cotton has been consistent with pops to the upside and dips back to the bottom. The world economic outlook and US weather will be the main drivers moving forward into the long weekend.

Via Barchart

Equity Markets

The equity markets continue their mixed run of late with the DJI continuing to struggle while the S&P and NASDAQ stocks see gains. NVIDIA was the big winner of the week as chips and AI have investors’ focus. While the jury is still out on Artificial Intelligence and what role it will play in the coming years, one thing is clear, investors don’t want to miss the boat even though we do not know if the boat is the Titanic or the USS Missouri.

Via Barchart

Drought Monitor

The drought monitor below shows the struggles in the weestern corn belt as the eastern corn belt is in good shape as planting wraps up.

Podcast

With every new year, there are new opportunities, and there’s no better time to dive deeply into the stock market and tax-saving strategies for 2023 than now. In our latest episode of the Hedged Edge, we’re joined by Tim Webb, Chief Investment Officer and Managing Partner from our sister company, RCM Wealth Advisors. Tim is no stranger to advising institutions and agribusinesses where he has been implementing no-nonsense financial planning strategies and market investment disciplines to help Clients build and maintain wealth and reach financial goals since

Inside this jam-packed session, we’re taking a break from commodities, and talking about the world of equities, interest rates, tax savings, and business planning strategies. Plus, Jeff and Tim delve into a variety of topics like:

  • The current state of the markets within the wealth management industry
  • Is there a beacon of hope, or is it all doom and gloom for the markets?
  • Other strategies to think about outside of the stock market and so much more!

 

Via Barchart.com

 

Contact an Ag Specialist Today

Whether you’re a producer, end-user, commercial operator, RCM AG Services helps protect revenues and control costs through its suite of hedging tools and network of buyers/sellers — Contact Ag Specialist Brady Lawrence today at 312-858-4049 or [email protected].