Category: Lumber

20 Jul 2022

IS BETTER LUMBER LIQUIDITY HERE?

Lumber has long been known as a quite illiquid futures market. We talked about it on the RCM blog here, on the Hedged Edge podcast here, and Derivative podcast here.

But changes are afoot which may solve the main issues that lead to the illiquid nature of lumber futures, with the CME Group getting ready to launch a new lumber futures and options contract that will be smaller and have more delivery options, which we believe will allow for more effective risk management. The CME said it plans to launch the new contract early in August. The current contract that expires in May 2023 will be the last month under current specifications. This has caused some buzz in the industry, so let’s take some time to check it out.

The two big new key features as far as we’re concerns are:

• Small contract size for precise hedging
• Participation from throughout the lumber supply chain

The smaller contract size is very welcome in the industry as the current lumber contract is for 110,000 board feet (1 rail carload), whereas the new contract will trade in lengths of 27,500 feet (1 truckload). This will allow for more precise and accurate hedging while allowing for more participation in the market from smaller traders. Smaller traders had been pushed out in the past with the requirements and contracts not fitting their needs. This will allow for greater liquidity in the market that currently only sees a couple hundred contracts traded a day.

The new contract also allows eastern mills to deliver, where the current contract only allowed western mill delivery. This expands the accessibility to producers to accommodate the changing landscape and needs of the market. Delivery will now be in Chicago and allow for eastern species of spruce, pine and fir, instead of just species grown in the west (southern yellow pine is still not a deliverable species). This will make the market more accessible and will increase participation and provide more risk management options.

Now, the CME is a publicly traded company and they’re doing this to generate more volumes and interest in this market. But that doesn’t mean it’s not a good thing. We think it will definitely create better liquidity for the lumber market, by both increasing volumes from current market participants and bringing new participants to the market.

By making deliverable contracts for both east and west mills while lowering the contract size, you attract new participants from all along the supply chain from producers of wood, to mills, on through to home builders. And as those commercial groups increase their footprint, the hope is that speculative trade flow (i.e hedge funds, ETF’s, and retail traders) also begin to increase interest in the market; creating a flywheel effect adding to the liquidity for the physical market participants.

The contract is ¼ the size of the old one meaning if you want to hedge or trade the same amount of board feet it will require 4 contracts instead of 1, creating more contracts to trade across the market (more liquid). The length also allows for more accurate hedging needs by making it easier to accurately manage your risk (think now you can protect 165,000 board feet vs either 110,000 or 220,000 feet). Traders will also be able to spread across the two markets for a short time creating new trade/arbitrage opportunities as they are not the same contract and specs, so they will not trade perfectly in tandem.

Ultimately homebuilders and speculators will be welcomed back into the market with these contracts being much more friendly. Builders will be able to hedge the price of lumber on a couple houses (or one large one) instead of having to hedge several at once that may not be under contract.

Our team as well as many others in the lumber industry are fired up after years of wanting a better lumber contract…LETS DO THIS!


As the contract progresses and ultimately receives approval, we will update this article to reflect new information provided from the CME and CFTC.

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 RCM Ag Services today for more information on how this new contract could fit your business.
agsupport@rcmam.com

09 May 2022

The Leonard Lumber Report: The Fundamentals of our Market are Sound

Change for the Week:

May Futures:    1000.10 -39.60

Open Interest:   2503 -184

Commitment of Traders:   -105 industry longs -104 spec longs

The fundamentals of our market are sound. Repeat; the fundamentals are sound, and there is a strong backlog of business. More business appears every day, and the marketplace is accepting these price levels. That makes today’s market fundamentally sound. The issue is that a lot of that new business has already been bought, and there is prompt wood all over. That leads to the trade having to define its value areas. 

It is complicated to define value today. The manufacturing of this widget has too many components to peg a price to, and it wasn’t long ago we saw a survey that had 83% of respondents calling for a run back to $1,700. Today you have an industry frozen because of last Mays trade, and we end up with a sideways trade. 

The best way to judge price with so many outside issues is to look at the technical read and the trend. A picture is worth a thousand words — the futures market is in a firm channel down, and the high channel sits at $915 while the low end is at $640. This is a 3-month channel that is slow moving, and it could take a month to get to the $640 area. On the flip side, the market would need a change in dynamic to run through $914 and stay. 

Take a look at the chart below. A correction should close the gap above, which was left on Friday. If we don’t correct this by Wednesday, July may be back in the $600 quicker than most want.

 

Open Interest and Commitment of Traders

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

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

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.

26 Apr 2022

The Leonard Lumber Report: It Was A Grind Higher Week in Futures

Change for the Week:

May Futures: 1002.60 +113.60
Open Interest: 2848 +66
CoT: + 108 Industry   

It was a grind higher week in futures as the cash trade found traction. The timing of this cash buy has come about earlier than many would have liked. Logistics and timing continue to be the issue, and these issues have pushed the trade to the futures for some upside risk management. In today’s volatile environment, most find risk management to be a must. The futures did see light selling by Friday, but it mainly was Dow-related.

It’s time to reintroduce the elephant. The great debate is whether there will be a soft or hard landing. In either case, the ship is going down, and the question is how hard it will hit. While that is an interesting debate, we know the housing sector will be the first to show the negative signs regardless.  

Today the buy-side of the industry is trying to navigate the great unknown. There isn’t a big push to own wood, which keeps the marketplace slightly underbought. Contracts and programs are just enough to keep the pipeline flowing. Logistic issues are now having a negative effect on buyers. Instead of a rush to own enough, the buyer is stepping back and just filling in. Another panic buy is looming out there, but the quantity may be less this time. That is troubling long-term.

 

Let’s Get Technical: 

A while back, the support and resistance channel in May showed an intersection at the $1000 mark, and here we are. Today we have the 100-day moving average meeting the top of the Bollinger band at 1049.60. The 200-day is meeting the bottom of the bands at 861.80. That typically would lead to a breakout. Today it could be signaling a sideways trade. The chart pattern calls a sideways trade from $1200 to $800. The bands are calling it $1050 to $860.00.

 

Outlook: 

There is a change in this cycle’s features going on. Those who limited exposure for the last few years also limited their profits. The cycle is now moving towards those who limit their exposure will be limiting their losses. While that isn’t the case today, the momentum is swinging back. This new feature of limiting exposure is creeping into the industry at a time when demand is good. That leads to tightness. Every dollar higher also leads to less buying. This creates a positive cycle staying in place for a long period. That is what the market indicators are telling us. The short-term investment could be long lumber futures and shorting ARC…..

Open Interest and Commitment of Traders

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

 

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…

RCM Ag Services put a unique spin on National Agriculture Day by going international. That’s right, we jumped right into international waters with Maria Dorsett from USDA’s Foreign Agriculture Services for an interesting discussion about linking U.S. agriculture to the rest of the world.

Each year, March 22 represents a special day to increase public awareness of the U.S.’s agricultural role in society, so why not take it one step further by bringing in a global component? As the world population soars, there’s an even greater demand for producing food, fiber, and renewable resources. That’s why we’re taking a deeper dive into the USDA’s trade finance programs, like the GSM-102, which supports sales of U.S. agricultural products in overseas markets and supports export growth in areas of the world that are seeing some of the fastest population growth.

So, jump aboard (no passport needed), as Maria discusses how U.S. companies use GSM-102, what the program features, and the benefits that it offers!

18 Apr 2022

The Leonard Lumber Report: The feature of the week was easily the $122 swing this past Monday

Change for the Week:
May Futures 889.00 -$60.90
Open Interest 2782 +15
CoT + 245 Industry -143 Long Funds

 

The feature of the week was easily the $122 swing on Monday. May went from $40 higher to $80 lower in a matter of minutes. The feature may be more about how it was received than the distance, and it was met with a lot of yawns. What is noticeable is the collective sigh of relief from the whole industry on limit-down moves in futures. People need wood again. Looking at the commitment of the trader’s report, there is a continuing gain in the industry longs. These are forward buys in futures at the discount. They keep stacking up, keeping the cash side slow, and that will turn into business at some point. I would look for that to slow now that cash is close to futures. Any push in that market will cause a futures rally as short hedges cover. That is how the futures swing from a discount to a premium and bottoms cash. 

While we expect the froth starts to come off the housing market, it won’t happen tomorrow. The market has slowed enough to allow the wood to ship in real-time, and it has not solved the logistics issue. We saw back in February reports of the rail sector staying tied up through the summer. Reports over the weekend of nitrogen producers seeing their car allotment shrink have turned the ag community on its head. Planting and growing seasons could see a shortage of fertilizer. If the rail side limits cars to that sector, we can’t see them freeing up more to the lumber side. That will be a factor in our market if the buyers hold out too long. 

 

Let’s Get Technical: 

The focus here is on a bottoming formation. There is a little-known gap in May from 825.00 to 809.00 set on December 1st. May hit $829.30 last week, putting the gap in play. Also, the bottom of the channel comes in at 795.00. If you are getting long, you can use $829 as your stop area. There’s no reason to wait around for $795. On the flip side, we don’t see a value in shorting the market on a rally. A close over $900 and a loss of the algo will send this thing $100 higher overnight. 

 

Outlook: 

Repeat… We’ve seen this drill before. One day the mills can’t give wood away, and then they are off the market. We hate to say it, but it is going to happen again. The longer this one takes to catch, the less the worthy the “sell in May and go away” will be. We see that $1000 wood could now be the new $1400. The mills should start to sell rallies in futures. 

The trade locked in their second-quarter needs around $1400. Today the fight is at the $1100 mark and getting a lot of pushback. The point is a trading level of $1100. If that is the case, then futures are getting cheap. Cash was quoted at $1030 on Friday with no takers. We recommend staying out of the riptide Mondays in futures and waiting for a better read on Tuesday….

 

Open Interest and Commitment of Traders:

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

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

 

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…

RCM Ag Services put a unique spin on National Agriculture Day by going international. That’s right, we jumped right into international waters with Maria Dorsett from USDA’s Foreign Agriculture Services for an interesting discussion about linking U.S. agriculture to the rest of the world.

Each year, March 22 represents a special day to increase public awareness of the U.S.’s agricultural role in society, so why not take it one step further by bringing in a global component? As the world population soars, there’s an even greater demand for producing food, fiber, and renewable resources. That’s why we’re taking a deeper dive into the USDA’s trade finance programs, like the GSM-102, which supports sales of U.S. agricultural products in overseas markets and supports export growth in areas of the world that are seeing some of the fastest population growth.

So, jump aboard (no passport needed), as Maria discusses how U.S. companies use GSM-102, what the program features, and the benefits that it offers!

04 Apr 2022

The Leonard Lumber Report: Biggest Takeaways From Last Week’s Trade

The biggest takeaway from last week’s trade is that lumber cycles develop and remain in place. We as an industry try to decipher each outside influence on pricing to help make a call for a reversal or add to the confirmation. That was the case last week as a flood of news, noise, and reactions flipped the bull or bear switch a few times. By Friday, all we had was a lower price for the week. The key to businesses is to judge those cycles to be buying on the way down and selling on the way up. Is that possible today with a different rumor every other day and late ship times?

Cycle: 

Cycles in lumber were generally easier to determine as they tended to relate to expirations, holidays, and seasonals. Today, they still relate but are also influenced more by previous trading and potential upcoming issues. This last upcycle, which may still be in place, has lasted longer than most at this time of year. This late Nov to early Mar run was unusual. But if we go back to where the market started in terms of moves, you can see how it became more underbought than usual and thus extended this upcycle. Another factor was that it took longer for the buy-side to reenter the market after the scaring it just took. That is also why you can’t call this upcycle done because the industry has not returned to the normal inventory building. It probably never will, but it’s always underbought in a good demand-driven market. If that catches up to this market, it will rally again.

Economics: 

The publicly traded homebuilders, distribution, and producers are not the darlings of Wallstreet anymore. And why is that? Higher rates and inflation kills housing markets. The only way to come back into favor with the street is through increased sales. If the home builders can ramp it up for the rest of 2022, all three of the sectors will do better. My guess is the plan will be to increase construction based on the uptick in business showing up on desks.

Outlook: 

The market has two opposing dynamics at work today. The one is good demand that is neither letting up nor getting bought for. The other is rising rates etc. Rates will be an issue, as we can see by Wall Street’s attitude towards the industry, but at the end of the day, this is a micro-focused industry. It looks only at the immediate buy or sells, and today it is looking for that cheap buy. 

** There has been an increase of open interest of about 400 contracts. Almost all of that is from the industry, and it is evenly split between buyers and sellers. Many have realized the benefits of using the board to protect themselves from the ever-present swings.

 

Open Interest and Commitment of Traders:

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

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…

RCM Ag Services put a unique spin on National Agriculture Day by going international. That’s right, we jumped right into international waters with Maria Dorsett from USDA’s Foreign Agriculture Services for an interesting discussion about linking U.S. agriculture to the rest of the world.

Each year, March 22 represents a special day to increase public awareness of the U.S.’s agricultural role in society, so why not take it one step further by bringing in a global component? As the world population soars, there’s an even greater demand for producing food, fiber, and renewable resources. That’s why we’re taking a deeper dive into the USDA’s trade finance programs, like the GSM-102, which supports sales of U.S. agricultural products in overseas markets and supports export growth in areas of the world that are seeing some of the fastest population growth.

So, jump aboard (no passport needed), as Maria discusses how U.S. companies use GSM-102, what the program features, and the benefits that it offers!

28 Mar 2022

The Leonard Lumber Report: The market has been quiet for over two weeks

One of the smartest guys in the industry always reminded me that once the NCAA brackets came out, the industry went quiet. That couldn’t be more true today. The market has been quiet for over two weeks. Futures were off $175 last week, and even print was down. Putting basketball to the side, this usually is a slow period as construction ramps up. Add to the many storm clouds overhead, and you get an inactive market. That said, the dynamics are still very strong. Let’s look at some pros and cons of the market today.

Pros:

  • New business keeps piling in. While the focus has been on logistics issues and supply chain constraints, business keeps flowing in and is at higher cost levels. One forward sales guy compared it to “taking a drink out of a firehose.” 
  • Supplies of new and existing homes are still near historic lows. 

Cons:

  • Mortgage rates are nearing 5% and moving higher. That will affect the buyers.
  • The mills stay at $1,400 while the industry sits at $600. That is an $800 spread! That just is not seen in any other commodity. 

All this will lead to a lower bottom, followed by another bottleneck. 

 

Let’s Get Technical:

Both the daily and weekly are sitting on support lines. At times, the chart patterns have been looking for a bottom but never turning up. May futures needs to hold the $1,000 mark or could be sitting at $920 in a hurry. Please notice the continuous call for areas to hold, and the key focus for the week is $964. That is the 50% retracement of the whole move starting back at $448.

 

Weekly Round-Up:

For the last few months and again back last spring, the market reacted to one thing and one thing only: if there was a car available or not. Today there are cars available, and they either have to get cheap enough or show a risk of going away again. That is when enough buying comes in to chase away the algo. It would not be surprising if the week was a slugfest. 

 

Open Interest and Commitment of Traders:

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

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

 

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…

RCM Ag Services put a unique spin on National Agriculture Day by going international. That’s right, we jumped right into international waters with Maria Dorsett from USDA’s Foreign Agriculture Services for an interesting discussion about linking U.S. agriculture to the rest of the world.

Each year, March 22 represents a special day to increase public awareness of the U.S.’s agricultural role in society, so why not take it one step further by bringing in a global component? As the world population soars, there’s an even greater demand for producing food, fiber, and renewable resources. That’s why we’re taking a deeper dive into the USDA’s trade finance programs, like the GSM-102, which supports sales of U.S. agricultural products in overseas markets and supports export growth in areas of the world that are seeing some of the fastest population growth.

So, jump aboard (no passport needed), as Maria discusses how U.S. companies use GSM-102, what the program features, and the benefits that it offers!

14 Mar 2022

Leonard Lumber Report: The Futures Market Is Under Pressure

The futures market was under pressure all week as a seasonal pause had hit the market; however, the push to buy cash has eased. The transportation issue hasn’t eased, but the buying has. That has led to more wood in the secondary’s hand, thus more wood available in the field. That amount isn’t much, and it is high priced. 

The takeaway from last week is only when the push eases, so does cash flow to the middle of the market. Any time a buyer sees two offers available, they close the POs, which is what we are seeing again. This industry is more afraid of buying a car and the market falling than missing a cheap vehicle and paying up. There is a lot of inefficiencies built into the market today. Another is the fear of a margin call. This lack of structure will keep volatility around and the mills in high cotton. 

There are two ways to look at the market today: by counting sticks and needs for tomorrow or taking a closer look at where we are at in the housing cycle. For the bigger players, this quarter is done, the second is close to being finished, and now the focus is on the third quarter and those needs. 

 

Housing report and Early Projections

This week we have the housing report, and the early projections are for 1.7 starts and 1.85 permits. The critical number is always completions, but these are the trendsetters. Ongoing predictions are for the numbers to stay in this area and completions to have only a slight uptick. We can see the builders accepting these prices and guaranteeing the product is key, not price. 

The market experienced it last May with an uptick in forward pricing in the $1,200 range. That turned out not to be a great level to buy, but the push back from it was minor, and they were locking in the product. This year we’d expect the opposite with less forward sales. The industry will play for the break this time around, limiting the downside and extending the next rally. 

 

Let’s Get Technical:

The technical read is negative. There is no easy way to say it. For the first time in months, the market has all signals pointing lower. If there isn’t buying on the break, the downside objective will increase, and it won’t get as low as most expect. 

Another way to look at it is how the market reacts to the news. The added supply has pushed futures lower at a very slow pace turning the momentum indicators only after many down days. On the flip side, any good news spikes the market up.

We’d suspect the algo programmer is adding a selling layer, and the long fund is adding stops. Let’s face it. They are the drivers of our market and thus are the guiding factor for starts and stops. We see in the overall market that the buyer short cash because of jobs. The key to this move is to buy on the way down or are forced to pay up again.

The technical read is short, while the fundamentals are positive—hedge your risk.

 

Open Interest and Commitment of Traders:

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

 

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.

10 Mar 2022

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.

 

01 Mar 2022

The Leonard Lumber Report: The Difficulty of Managing Inventories in Today’s Marketplace

This week’s back and forth trading in futures highlighted just how difficult it is to manage inventories in today’s marketplace. The problem is insufficient real-time data to read supply or demand accurately. We saw the industry going from a too much wood attitude on Monday to a now enough by Friday. That type of uncertainty has plagued this industry for years. In the recent past, many took to contracts, which has taken out some of the emotion but has also reduced margins. This buy sides self-prescribed shrinking of margins causes voids in the market. 

The reluctance of other buyers and pure demand also adds to the voids. So, where are we going with this? We can’t keep this beast full in a rising market. 

The marketplace continues to argue about business. 1899 is a big permit number and too large to produce for. We hear all about the actual completion number, labor, windows, yada, yada, yada. The permit number is either business for today, potential business, or soon to be postponed business. Most economists were in the same camp for years that we couldn’t build 1.5 because of labor, and we couldn’t produce 1.5 because of log issues. If the industry can’t complete 1.5 and there isn’t enough wood available for 1.5, why are permits rising to almost 1.9? The simple answer is increasing demand. Covid, the Fed, and the stock market have hyperbole the housing sector. 

The Fed flooded the system with cash that sent the stock market to new highs giving many a large windfall. Throw the urban bail into the mix, and here we are. From here, the question becomes whether these levels are sustainable, and the quick answer is no. The longer answer is that the world has changed, and attitudes towards money have changed, as has investing. It will take years for this industry to get a read on the net result of that change. History has shown that industries learn to be more efficient, but higher prices stay.

Too many or not enough issues are the primary cause of our large swings as it “encourages” the algo’s to push the market. The market experiences temporary slowdowns in purchases which negatively impacts prices in futures. We saw early last week how quickly the market focuses on supply and shuts off. As we look towards better shipping and more Euro wood, I expect the industry to take a large step back. Prices will fall sharply, but with 1.9 permits, it won’t stay down for long.

 

Let’s Get Technical:

There are two views diverging views of the current lumber chart. The non-lumber technicians see a market consolidating to go sharply higher, and it is a pattern of a market cliff dwelling to seasoned lumber technicians. Who is seeing it correctly? The issue today is that lumber has historically been a pure momentum-driven market, and it corrects but rarely will it maintain a flat trading area at a top or bottom. 

We have two weeks of a flat market hit by a shutdown announcement and a Russian invasion. Our first takeaway is that the marketplace is accepting these higher prices levels, and it is a market looking for the middle. That said, as a seasoned lumber technician, I would not be too exposed to a possible cliff in front of us.

 

Weekly Round-Up:

First and foremost, betting on cheaper wood is not a good business strategy. July is sitting close to $1,000, which is $300 under March futures and cash. I am looking for a spring selloff, but the math indicates a continued tight market for months. The entire industry will sell in May and go away after last year will keep inventories very low. As the technical section says, the industry is trying to find some middle ground for pricing but keeps getting caught in the logistics. There is a better cash trade, and the industry is adding a few hedges along the way. The funds are adding a few longs on every spike, but nothing could lead to a trend. 

 

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.

22 Feb 2022

The Leonard Lumber Report: It’s been an exciting week for futures

It has been an exciting week in futures as it traded each of the five sessions. There was continued volatility, but March closed virtually unchanged from a week ago. That’s progress. We saw that the CME upped the limits, and we’ll also see an article in the WSJ this week referencing the constant limit moves we have. Notoriety is good. At the same time, there has been a slow creep high in total open interest. 

It has been a while since the futures and cash markets were this close. However, we’re not sure the futures market is that close to the cash market after hearing numerous reports of cash trades over $1,400. It looks like the market has paused to take a look. 

Lumber has always been an industry that would buy into an uptrend and hedge into a downtrend, and there wasn’t much pre-positioning. The same is in place today where a switch is flipped, and we all see the panic on the buy-side. Then another switch is flipped, and you can’t find a buyer. This doesn’t take days or weeks but just hours. The massive cost of a carload of lumber is compounding the problem today. Since we don’t buy on the way down or sell up, there is a large void created on every move. 

The last time we sat around $1,200, the momentum indicated a potential for a $400 move in either direction, and it turned out to be down. May is $100 cheaper than March, and July is $100 cheaper than May. The futures market is trying to smooth out the downside, and the upside will organically be smoothed out with time. Coming into Monday, there is a controlled burn to the downside, but the upside could find some running room. 

We all know that any hint of better transportation will cause a sell-off. This week, we saw a little pressure from a BC mill finally shipping a few cars to the U.S. on Sunday, February 20. It just seems a little early to get the ball back.

  

Let’s Get Technical:

The focus here will be on the longer-term chart pattern and its momentum indicators. The most scrutinized area is the last gap left from 1114.90 to 1069.90. (Weekly) a closing of that gap in the March contract would be very negative. It should hold for now and then be an objective after expiration. The market is sitting right on a resistance line at 1264.30. It isn’t a firm point but does come off last year’s high. One positive to note is that the market made a new high on this move taking out the previous high from January. $1,336 is a new weekly high. Finally, if another leg is up, it will take a shot at the weekly gap of 1,514.80 to 1,540.00. The current RSI is at 68%. It hit 94% last year.

The technical read is slightly friendly but primarily neutral. The least resistance is up, as is most of the pain.

 

Weekly Round-Up:

Let’s take a look back at rising open interest. There is a new segment of the industry using derivatives for risk mitigation. Most of it is coming from the buy-side. This has been a slow-moving process but is now starting to bear some fruit. Obviously, our volatility keeps many out or limits their exposure, but they are around. The March contract shows more signing of a squeeze than any long-term relief. That said, this is a bottomless pit. The rollover will be violent this time, with the mills adding to the downside. We are again building a transit inventory mess, but the issues seem to have longer legs this time. It will drag through March expiration, but will it drag through May’s? 

 

Open Interest and Commitment of Traders:

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

 

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.