Category: Lumber

It was a quiet holiday-shortened week with the roll being the feature. The market broke $100 and rallied back $60 by the end of the session Thursday. All said the weakness in the market was only via futures, and the cash market held steady or gained for the week. 

The Christmas holiday keeps giving. Next week there are more holidays to contend with — that’s why we saw the big push before the Christmas week. The question is if the push was sufficient for a while or not. Surprisingly, the cash market demand remained in place last week, so this thing could be off to the races again once the holidays are over. It looks like the aggressive cash buying is to keep the flow going. That will start to ease at some point, but it’s a positive for today.

Let’s Get Technical:

To keep it simple, the market left a gap last week between 990.20 and 979.30. With another quiet week in front of us, we would look for a test of that area. The one caveat is that lumber is famous for leaving a gap partially filled. If that is the case, the 61.70% RSI gives the market a lot of room to go back to the $1,200 area. There are two possibilities next week. Either it back and fills the gap and then trades sideways, or it off to the races dragging cash up with it.

Weekly Round-Up: 

The entire market psyche is one of a trade that is range-bound and manageable. This one isn’t ready for that, and it feels like setting itself up for another run-up. Cash is still king but hedging up here is a must. 

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…

The 2021 U.S. grain crop has the potential to be one of the largest on record. Where did all the yield come from, what areas were the hardest hit, and why on God’s green earth are grain prices still so high?

Futures Were Off $35.70 for the Week

The weeks are starting to look the same. Each one has numerous undefined potential threats. Unlike most commodities, this industry has so many working parts that it is hard to rank them from least to most. Let’s look at a few. 

The futures market continues to act top heavy every time it breaks through the $800 mark. A combination of speculative profit-taking and basis trades weigh on the run. Most of last week saw a positive market as the BC shipping issues grew. But the COVID talk on Friday changed the focus from worries of undersupplied to concerns of being oversupplied. Unlike most other commodities, housing is affected more by stock market moves, so Friday was tough. 

The Facts are in Front of Us

The facts in front of us are that business is excellent, but shipping has slowed. What we are having an issue with is the value of the commodity. If the marketplace stays at 1.6 and shipping remains at a slower pace, then most would agree that the high end of the cash trade is around the $700 mark, and with a typical $100 premium, the futures will be sitting at $800. If supply starts to move freely, cash could rest around $550 and futures closer to $600. This is a fair analysis and would challenge others to set it up differently. 

The Sleeper Out There is the Industry’s Psyche 

In the futures market, 70% of the industry was bearish back at $500. Today 80 to 90% are bearish at $800. That big negative push keeps the market underbought. Monday, the focus will be on any potential COVID disruptions. Tuesday, we should be back to transportation issues.

Let’s Get Technical:

The futures market is forming a volume area in the mid $ 700’s. If the market starts to rerun upside, that volume area measures up to the 38% retracement point of $924.85. If the market can get to the 38% mark — a good enough base was built, and the futures are on their way to the 61% mark of $1,225. That should be food for thought when developing a basis or general hedging strategy. Using calls would be prudent. On the other side, generally, if a market builds a volume area without a follow-through push, it is a very defined top to focus on. The overall structure of the recent trade in both cash and futures leads me to believe that the chart pattern is trying to build the top end of the trading range. 

Weekly Round-Up: 

The smartest strategy for those who need a product is to stay in front of it. Owning enough wood or having a derivative positioned for a run-up will keep you out of the middle of the noise. There is no way to navigate the issues thrown at us daily. The only way is to be proactive for those who like all the noise trade the spread. It’s a good buy -20 and a good sell +20. What I do see happening is that those in the middle will have a much harder time staying out of those whips back and forth. 

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…

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.

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.