Category: Lumber

Futures Drifted Lower With Cash 

Last week’s feature was a very sloppy cash market, which dragged futures lower on light volume. We are sure of two things going into this week — The first is that the industry wants to buy cash, and the other is that they don’t want to today, which would be a reason for the slow grind lower of futures. It is anticipating a buy. Starting Tuesday, the front month is January, and all the focus for the first quarter will be on it. The trade is looking closely at forward sales, but the fact that mill prices continue to inch lower daily has taken some out of the game. It’s interesting how many in the industry will hold out for the last $25 down, risking $100 up. We expect a better tone after the Thanksgiving holiday. 

Supply and Demand 

As the industry gears up for the next push, we must look at supply and demand issues again. On the supply side, we saw a decrease in shipments from Canada last month and are expecting the same in November number and again in December — These are transitory numbers. The production and shipments should go back to normal after the new year and new stumpage costs. Now, when exactly that extra supply hits is in question, the effect on the market will be driven by demand.

Reports of a Robust Q1

Reports of a very robust first half of the year are numerous. If that alone were the feature, we would be calling for sharply higher prices. With projects still experiencing a start/slowdown/stop cycle, we’re not sure the added production will offset the increase. 

If we are still looking at the $550 area as breakeven, this market is closer to a bottom than a top. Having never been too involved with the dumping/duty issue, it is too hard to make a call. If all the mills go up to $50, it is still cheap.

Let’s Get Technical:

The tail of two timeframes. The daily technical picture has been negative for about three weeks now. They are getting a little overdone if you measure the timeframe, but other than that, they are still showing a negative bias. 

The longer-term picture has been positive, just showing a downward wave in a positive cycle. Next Friday will give us a better look at the longer-term outlook.

Weekly Round-Up 

This next week has two immediate features, the basis trade, and the duty. Both are potential bear traps. We still believe that the last three months were just a form of price discovery. The market has most likely seen the bottom end but not yet the top.

Open Interest

https://www.cmegroup.com/markets/agriculture/lumber-and-softs/random-length-lumber.html

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…

For the past year, commodity prices have perpetually soared and continue to trend higher. We’re diving into the fertilizer forecast with a unique guest, Billy Dale Strader, a branch manager for Helena Agri-Enterprises in Russellville, KY., who is truly at the epicenter of the rising fertilizer prices.

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. Without further ado, let’s dive into this week’s assessment:

Weakness In the Lumber Market

If you haven’t noticed lately, there has been a weakness in the lumber futures market. January futures fell $113 with never looking up due to a combination of a flat cash market and end-of-the-month position evening contributed to the selling. The futures market saw outright long liquidation in all months while the cash trade was flat, leading the market to seasonally hit a flat spot in mid-October (this one started later and now has hit the slow period later than usual). The pattern will now be of planning for the first quarter and its needs. Price will be driven by supply as we creep move towards Thanksgiving.

The challenge now is to gauge demand going into the end of the year. There was a sufficient decrease in production for the mills to get control back, but the continued disruptions in the field didn’t create any follow-through. We now need to wait for the demand to pick up at a pace to clear out inventories. My guess is that this will become the norm for the next year or so. Historically the marketplace goes into year-end with the least amount of inventory for the year. This year we also see a slowdown in logging caused by higher log costs. This is not showing up in the supply chain as of now. 

The algo selling is relentless. The end of the month selling of long positions created an excellent environment for algo selling. It took full advantage of the sales in the market. I expect to see them show up again this week, but it will go dormant without the other sales. It should be noted that we are seeing the fund type buying in January futures. It’s too early in the fundamental cycle to make much of a difference, but they are around.

Let’s Get Technical 

621.00 is the 61% retracement in January of the move. The RSI is 24%, so at 621, the market will be in the oversold zone by then. With the algo, selling points are irrelevant, but there could be a pickup in forward interest with January futures nearing cash. That would slow the algo, and the oversold condition will carry more weight. 

Final Takeaways

The trade has gone south. The hand-to-mouth traders are basking in the sunshine. Most have enough supply to keep them out. And finally, you have those who want to end the year with these numbers and not make a mistake. The net end result will be an underbought marketplace at some point. That said, I wouldn’t buy it just yet.

Open Interest

• • Section23_Lumber_Options.pdf (cmegroup.com)

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About Brian Leonard

Brian Leonard is a 30+ year veteran in the commodities trading space. Brian began his career as an assistant in the Soybean pit in the early ’80s and moved on to wood products in 1994. Brian’s current role for RCM Ag Services is to serve as a Risk Analyst specializing in the wood products sector. His customer base spans a large spectrum ranging from wood producers to home builders with different risk management needs.

Do you have questions, or are you looking for more information? Reach out to Brain at [email protected] or 312-761-2636.