RCM Ag Services

Category: Lumber

05 Aug 2024
Agriculture, CME, Hedging, Housing, Lumber, Market Commentary, Market Updates, Research, Risk Management, Weekly Prices rcmagserv 0 comment

LEONARD LUMBER REPORT: The main takeaway is that the dynamics of the last six months have changed

Recap:

The main takeaway is that the dynamics of the last six months have changed. The first change is that the commodity funds are no longer sellers and are liquidating. If that stays true, the futures market will have no sellers. The next is that both cash and futures have moved higher despite what looks to be a stock market meltdown and other economic woes. Our market tends to ignore news as the trend changes. This market is forward-thinking. The plans coming into the year were to build as rates were lowered and traffic picked up. Going into the 3rd. quarter, some of that business is now on the books, as is the yearend homebuilders surge. This is not a bunch, but it changes the current pipeline structure. That brings us to the third change. Production has been cut. The amount is minimal with zero demand, but it will mean something if things pick up. Just because inventories are kept so low is enough to force prices higher. Add to that the mill’s song and dance, and you can’t find a stick. That’s what I love about this business. Two weeks ago, your mill guy was begging for an offer, and soon, they will be telling you to go scratch.

The market has less production going into the fall. We also see better demand as the year’s first half has pulled some building forward. Without funds, prices will be pushed higher.

What has changed? When things get tighter, the lack of funds for selling changes the market dynamics. What hasn’t changed is the fact that housing will stagnate in the near future. You have this major economic headwind versus a much-needed buy. The technical read calls for higher levels, and the buy round should get us there. While we may look good for a while, the fundamentals will creep back in. I don’t think we need to go back to $308 cash anymore.

Technical:

I have talked about the noise above the market for months now. Last week’s action tells me the market can grind through those areas. The market is nearing a pivotal area around 518. Whatever the reason, a push that high indicates there is more momentum behind this. I like to say if the market goes to $520, it will go to $540. Points become meaningless if momentum takes over.
 
Next week what to watch:
How quickly will the futures market get to 518.00? Or does it fail?
How does the fund roll go when the actual market is better?

Daily Bulletin:

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

The 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

22 Jul 2024
Agriculture, CME, Futures, Housing, Lumber, Market Commentary, Market Updates, Research, Risk Management, Weekly Prices rcmagserv 0 comment

LEONARD LUMBER REPORT: To keep it simple the sharp selloff on Monday rattled some cages and woke up a marketplace

Recap:

To keep it simple the sharp selloff on Monday rattled some cages and woke up a marketplace. All of a sudden, the trade looked up and saw low inventories with a cash market very close to $300. The round of cash was enough to bring in short covering in futures. To sum it up we finally are getting a cash buy. The question now is it one of the new 2024 tepid buys or a good old fashion fill in?

Early in the year, we expected shutdowns, fires, or rail to hold prices up. Most of those factors are still here. As a matter of fact, we are in the thick of the shutdowns, so that can become a feature. Nothing has changed with demand. We had run inventories to very low levels with fall coming soon. The market bottomed out in cash, and if it is going to go much higher, the futures have to become the driver.

Some could buy early in the week and sell most of it by Friday. The next buy will be higher, so they have to decide on building inventory. With the futures at such a premium, there is a way to protect it, but for now, buyers want to book a few profitable cars, noting that it’s been a few months. Market psychology always has the last word.

A higher futures trade will bring in more cash buying. The focus from here will be on the ability to manage the risk of the next cash buy. I bet everyone is putting the futures app back on their phones this weekend.

Technical:

The futures offer two major focal points. The first is a bottoming of the market with real upside potential. I’ll add to that in a moment. The other fact is that July futures expired at 418.50. With all the headwinds facing the economy and this industry, you can’t call it a low. But today, we are.

I have talked about the noise above the market for months now. Last week’s action tells me that the market can grind through those areas. The problem with the grind is that you have to deal with more fund selling each day. The data shows that it would take a trade over $518 to slow or stop that. A close over it gains momentum to the $528 area. The next level is $550. I’m not calling for anything like that, but if you are short and sitting on your hands, pay attention.

The gap left Tuesday adds a little “generative” confidence to futures. This rally was needed. It’s healthy and should stay intact until the funds say that’s enough.

15 Jul 2024
Agriculture, CME, Futures, Hedging, Housing, Lumber, Market Commentary, Market Updates, Research, Risk Management, Weekly Prices rcmagserv 0 comment

LEONARD LUMBER REPORT: Last week, many “new-news” were created

Recap:

Last week, many “new-news” were created. There were new lows in futures, new lows in cash, new highs in industry longs, and the list goes on. Market participants have turned their ire or blame toward Southern Yellow Pine. The data isn’t in line with such a bearish market. The data lag has kept us all on a constant watch for the bounce. I’m beginning to wonder if that bounce is a unicorn. As we clean up July next week and traders get back to work, we should expect some corrections.

The facts are most have reduced inventories. It has been a while since there has been a good buy round. This is not the time of year for that, but since it’s been so long, it may come early. There are shutdowns going on. It does not move the needle but will add up at some point. If there is going to be an imbalance, we should see futures acting more friendly. After hitting new lows last week, maybe not going down is all we can muster to define friendly. The sleeper is that business isn’t dead. It trades at a price. If that is a fill-in business, then the market can get friendly. If it is forward buying for the fall, then it is over.

Technical:

September has a trendline that speaks volumes. In place since March, it has become a tremendous resistance line. Close over it this time, and maybe we have something. That said, treat it like major resistance until it isn’t. It comes in at 493.80.

Daily Bulletin:

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

The 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

01 Jul 2024
Agriculture, CME, Futures, Housing, Lumber, Market Commentary, Market Updates, Research, Risk Management, Weekly Prices rcmagserv 0 comment

LEONARD LUMBER REPORT: The best word to describe last week’s trade was erosion

Recap:

The best word to describe last week’s trade was erosion: erosion in value, erosion in the housing sector, and finally, erosion in the economy. The industry waits for a truckload of sand to show up as the beach slips into the ocean. We searched for green shoots to pop up all week, only to see lower cash prices. One fact remains: it is the lumber market, and rallies are created out of nothing. Last week’s trade indicates the market isn’t ready. Let’s look at a few factors which could already be in play or are forming.

The key factor is the extreme lag of shutdown effects on the market. It indicates a steeper decline in construction than the data shows. With inventory management at a steady pace, sufficient supply is sitting in the pipeline. Last week’s sideways trade was a good indicator. Continued pressure would point to eroding construction.

As housing goes, so goes the economy. Remember that quote? If you have been around long enough, you have seen it occur a few times. This is not a doom-and-gloom forecast. What has happened here is that the industry was geared up for lower rates and didn’t get them. Because of that, today, we see a 9.3-month supply of new homes and confusion about when or if a cut will happen. This doubt will slow construction planning. It won’t slow the plans in place. We can’t underestimate the fall building cycle, but we also can’t underestimate the economic psychology.

If you did a SWOT analysis of our industry, the biggest threat is unemployment. That will kill an already teetering sector. My worry here is that most industries are over-hired. Today, you have a 3-person team doing the work for 2 and a manager who won’t let anyone go. As we have seen in the past, there will be a day when management tells one person to stay and lets the other two go. Today, it is using more to get less. Tomorrow, it will be using less to get more. You don’t have to slow the economy to see this shift. That’s a threat today to housing.

This industry doesn’t have many tailwinds to rely on. China’s weakness continues. Euro and bug kill keep the supply coming despite prices. The fact that Canada shipments increased in the first few months doesn’t help. And finally, our sticky 7%. Most of those reasons are why prices are hitting new lows today. If they remain in place, the market will be forced lower. One constant and a positive is the lumber buyers’ pattern. It’s all in or all out. Not even the algo can figure them out. This last buy round was very guarded, with limited purchases. Most still lost money. It will take time to generate another buy. There is construction every day. It may be less, but it is still going on.

Technical:

The 200-month moving average is 398.47. This has been a support line for the market for many years. It tends to sit very close to breakeven for the mills. It has turned up slightly over the last 10 years, but so has breakeven. I saw in the WSJ an article where the CEO of Weyerhaeuser was quoted as saying producers can’t stay in the red for long. The conversation in the C-suites has changed from so much cash to an all-out panic. When the pig farmers could no longer feed all their pigs it had to cull the herd. Look for a little of that in labor and lumber. FYI: I believe the last time Wall Street wrote an article on lumber; we were at about $1700. from and saw

Daily Bulletin:

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

The 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

24 Jun 2024
Agriculture, CME, Education, Futures, Lumber, Market Commentary, Market Updates, Research, Risk Management, Weekly Prices rcmagserv 0 comment

LEONARD LUMBER REPORT: IS DEMAND SLOWING AT A PACE THAT HURTS THE MARKET?

Recap:

The challenge coming into the year was curbing enough production to offset the slowdown in housing. The economics are simple. Demand slowed at a quicker pace than most would have expected. The question now becomes whether demand is slowing at a pace that hurts the market. Are we done?

Since 2019, all I have heard was the amount of business showing up on traders’ desks, even at the COVID lows. Every bearish run was only temporary. I have not heard those words all year. It looks like the old business has now run out of steam. Without China and Europe, our market has to rely on interest rate fluctuations to add sales. That is a tough reality, but at least we see an uptick in interest when rates pull back.

I believe I am making a case for why futures dropped $58 in three days and $100 in seven weeks, not a bearish call. Reality has set in. Lumber, being a very efficient market, has drained much of the excess. The two traditional takeaways from this cycle are that the lows aren’t in. There will be a constant struggle for the rest of the year. The other takeaway is that now the trade will run inventories down to dirt. We are in the middle innings, so don’t get too bearish.

Note: There is no changing the way a commodity can be produced 24/7 and is so tied to the economy. There is no formula, swap, or EFP that will help. Historically, mills set up reloads and then abandoned the strategy. They move to contracts, etc., and then abandon that strategy. Any way you look at it, in a falling market, the mills need to protect supply, not push it out. Oversupply comes in a quick second. On the buy side, I saw limited selling this week even though the market fell $58.50. Those with inventory have no excuse. It is a one-button push, back to the grind.

 

Technical:

The computer is pushing the market lower, but the technicals don’t see it. The critical point is 424.50. That is major support. If the futures market gets there, it will be after adding a ton of longs. As of Tuesday, they continue to add. This doesn’t end well. That said, the longer-term indicators are entering into an oversold condition. It takes time for that to create itself, but it’s something to watch.

FYI, the tech read last week was up.

 

Daily Bulletin:

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

The 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

10 Jun 2024
Agriculture, CME, Futures, Hedging, Housing, Lumber, Market Commentary, Market Updates, Research, Risk Management, Weekly Prices rcmagserv 0 comment

LEONARD LUMBER REPORT: THE GREAT LONG LIQUIDATION

Recap:

The great long liquidation. Between Monday and Tuesday, it looked as if the industry longs blew out. That was after a previous week of light liquidation. This blowout pushed July’s futures to a low of 484, which is at par with the cash market. That was a structural change to the market dynamics and should be noted for the future. By Thursday, July was back to a $30 premium and showing some confidence. So, in the short run, we are considering trading par too cheap at a $30 premium normal, and a $50 premium as a gift.

We are entering the summer months with some tough headwinds. We were told “rates higher for longer” 18 months ago. They were right. Any rate relief in housing isn’t coming soon. The other is the sharper-than-expected drop in multifamily projects in the regions that have led the way. Some are as high as 40%. As a trader, this is a lot to digest, but it looks like the market has already started.

RDFTV is a farmer’s channel. On Friday, they interviewed a SYP tree farm owner. He said SYP farmers never lose money. He must not have gotten the memo on the falloff of the multi-sector.

The cash market looks to have three zones of value today. The first is the current zone of $335 to $450. The market has spent a lot of time down here as it digests the less demand and good supply scenario we are in. The next is $451 to $500. And the last is $501 to $600 or shall we say the happy days are here again zone. It has bounced back and forth between zones 1 and 2 since the end of covid. It is not getting any help from the fundamentals to change that.

Technical:

The value areas and technical points are becoming a better road map than in the past. The two featured points today are the 200-day moving average at 562.50 and the value area at 440.00. That correlates well with the cash zone. The support area is the low of 484.00, and resistance is the value area of 520.00. A break of either could cause a nice little run.

Daily Bulletin:

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

The 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

04 Jun 2024
Agriculture, CME, Education, Hedging, Lumber, Market Commentary, Market Updates, Research, Risk Management, Weekly Prices rcmagserv 0 comment

LEONARD LUMBER REPORT: Last week’s trade was in line with expectations

Recap:

Last week’s trade was in line with expectations. The computer pushed the market to new lows. Coming into this week, I would expect the computer to put pressure on the longs to blow them out. It doesn’t take a computer to know that the spec longs are in much higher and now getting margin calls. If you put a fundamental face on the market, the lack of any interest out there allows this sell-off. The fact that we buy the deals today adds pressure in a slowing market.

Yes, the housing market is slowing. The data is confusing, but the economy is acting as a weight around this industry. We need to keep employment at this level to keep the buyers around. A jump in the unemployment rate will cause us to lose the market, which keeps us most guarded.

There are two takeaways. The first is how much SYP weighs on the market when things are slow. The other is the stats on how well the basis traders have done. The market has a downward bias.

Technical:

It wasn’t too long-ago that the RSI was at 6%. Today, at 23%, it seems high. The futures market is building a case for less business this year. Most are already trading that way. At some point the lack of inventory will bring in the buying and we will be off again.

A bit of advice to the producers. Sell all you can when the futures price starts with a 6.

Daily Bulletin:

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

The 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

28 May 2024
Agriculture, CME, Futures, Lumber, Market Commentary, Market Updates, Research, Risk Management, Weekly Prices rcmagserv 0 comment

LEONARD LUMBER REPORT: HEADWINDS, BROWN SHOOTS, INTEREST RATES

Recap:

Headwinds, brown shoots, interest rates—whatever data we look at is not good. The question is whether we have to start worrying about the housing market. We were looking for more but didn’t get it. What we have is the same market we have had for 17 months now. It has pockets of positives followed by a long bleed. That has been the lumber market for over 40 years now. It is tradable and profitable when one adapts to the trade mode. So what does that look like?

Buying into a falling market has always been a challenge for most. For a few years, you could buy into strength and make money. That is no longer the case. There isn’t enough time between cycles. What this indicates is a flat demand curve. What has finally hit the market is the higher rate uncertainty. For a year, the builders worked around the higher rates. That worked for the aggressive buy side. We now have returned to the “average Joe” buyer. This was expected but came early. The builders are reacting by pulling back. This knee-jerk reaction will take time to work itself out, but for now, it adds pressure.

This is an environment where you need to dust off that 10-year-old playbook. How do you take advantage of a flat market that offers a pop every so often? Today, the industry is offside, being long futures when there is a $40 or more basis opportunity available. Lower prices will rebalance that.

The fear of a strike, fires, or another shutdown has kept the marketplace off balance. At the end of the day the wood continues to show up.

Technical:

The trading range is very narrow. The focus today is on the outer bands. On the upside, the 38% retrace sits at 556.90, and the 200-day moving average sits at 564.98. This market can gain momentum with a move over the 200 day. On the downside, 511.00 is the key support point, followed by 497.00 and 486.00. This area has been support for months. There isn’t a technical point that would increase the downside momentum. Breaking back into the 400’s would indicate an economic turn in housing. The funds seem to be leaning towards a slowdown and could help it lower. That conversation is not for today.

For today, 540 is too high and 520 is too low. Enjoy.

Daily Bulletin:

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

The 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

20 May 2024
Agriculture, CME, Futures, Hedging, Lumber, Market Commentary, Market Updates, Research, Risk Management, Weekly Prices rcmagserv 0 comment

LEONARD LUMBER REPORT: IT WAS A TOUGH WEEK FOR CASH AND FUTURES

Recap:

It was a tough week for cash and futures as the quiet market pushed prices lower. Before we sound the alarm, the market is $22 off its high and $18 off the low. After 20 sessions, the market sits in the middle. At this time of year, the market tends to put in a seasonal low. This battle with a $35 range is mildly friendly. This marketplace is not heading for the exits. The industry and speculators are firmly committed to the long side, while the funds are firmly committed to the short side. If you are long waiting for the funds to react, it will be a long 30 days. Last year, we saw the same dynamics of less traffic, falling builders’ sentiment, and less construction than projected. What happened was a grind higher market. I want to make a call for the same, but this year, we are just now confirming more negatives and fewer positives. More brown shoots don’t necessarily equal sharply lower prices. It will just be a continued drag on this market. I would be mildly friendly to the market if it weren’t for the fact that the industry is long-future and cash-playing Texas Holdem with a Texas hedge. Those long cash should be selling the pops in futures.

Technical:

The tech read hasn’t been effective this year due to the tight range between swings. Today, there is a mildly friendly candlestick. The market is building a new value area about $20 higher than last year at this time. I’m looking for a lower RSI up here to confirm.

Daily Bulletin:

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

The 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

06 May 2024
Agriculture, CME, Futures, Hedging, Lumber, Market Commentary, Market Updates, Research, Risk Management, Weekly Prices rcmagserv 0 comment

LEONARD LUMBER REPORT: MIXED REVIEWS

Recap:

Mixed reviews. That is the industry’s opinion of this market. What we saw in futures last week was slightly more positive than mixed. Futures are showing signs of a turn. The market closed slightly higher for the second week as print continued down. It also works higher on low volume. That indicates a muted computer trade down here. The fundamentals are the focus. The funds are short but didn’t add much for the week. This lack of momentum puts them on the sidelines. So, with all the blah in the market, I would expect more of the same this week, but that’s not lumber. One side will try to push the market. Today, it is more likely that the longs will do the pushing, but never count the funds out. The cash market is getting better, albeit from some very low levels. That creep should support futures. There are still eight long sessions until May expires, so volatility could be an influence.

Technical:

The tech picture is still no help. We see better momentum signs and a slightly higher trend but no confirmation of direction.

There are two key focal points. The first is the upside objective of 556.60, which is the 38% retracement of the move. A close over it may cause the short funds to start exiting. That push sends it to the 200-day moving average at 566.80, setting off another round of short-covering. All of a sudden, the futures market is at $600.

The other point is the low at 511.00. Here, the opposite happens, and the computers kick into sell mode. Futures fall to $480, and the cash market shuts off.

Your risk model should lean towards higher prices and hope it happens. For two years now, the market has never signaled an end to the basis opportunity. It still hasn’t.

 

Daily Bulletin:

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

The 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

Disclaimer

RCM Ag Services is a registered DBA of Reliance Capital Markets II LLC. Trading futures, options on futures, and retail off-exchange foreign currency transactions are complex and involve substantial risk of loss and are not suitable for all investors. Loss-limiting strategies such as stop loss orders may not be effective because market conditions or technological issues may make it impossible to execute such orders. Likewise, strategies using combinations of options and/or futures positions such as “spread” or “straddle” trades may be just as risky as simple long and short positions. There are no guarantees of profit. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge and financial resources. You may lose all or more than your initial investment. You should not rely on any of the information herein as a substitute for the exercise of your own skill and judgment in making such a decision on the appropriateness of such investments. Opinions, market data and recommendations are subject to change without notice. Reliance Capital Markets II LLC shall not be held responsible for any actions taken based on this website or attached links. Parties acting on this electronic communication are responsible for their own actions. Past performance is not necessarily indicative of future results.