Category: Lumber

Recap:

The market rallied $17.50 for the week before the turnaround on Friday. Futures went from a discount to par. The bounce was not unexpected. A correction was needed after the longer-than-expected down leg we just sat through. With JIT inventory management, the buyers are near fumes after about four weeks. What was surprising was that most of the future’s upside was driven by speculative or fund buying, not the industry. Those in the industry could continue to pick off deals all week. That was the catalyst for the selling on Friday. Some of the spec side didn’t see the follow-through needed in the cash market to stay long. The week was either a month-end correction or a return to normal levels. As of now, it has yet to move the needle to support things.

Monday begins a new month and a new quarter with all its history. It is all irrelevant this go around. My mantra all year was that $380 mill is too low and not sustainable for the industry. Conversely, the market has been telling us what is too high and not too low. At this point, the fourth quarter will be when the market tests the recent highs and lows and tells us what is too much. In the meantime, let’s stick to the basics. An upcycle in the cash market is created when futures reach a sufficient premium to cash. If you can buy cash and sell something, we turn.

Macro:

The facts are that neither the housing nor the stock market has yet to feel the effects of higher rates. Yes, most markets gave up a lot of value in anticipation but haven’t felt the impact. At this point, we need to get past it. The quarterback is out for the season. Let’s focus on the backup. We will see less construction, less production, and fragile inventories. Buy breaks.

Technical:

Since April 2022, the monthly RSI has hovered in the low 40s percentage-wise. Even in the flat year of 2019, the market saw better volatility. A $100 move wouldn’t even move the needle. Something to think about. The market remains generally married to the technical read. Two weeks ago, the RSI hit 20.40, the stochastics crossed, and the low rested on the lower Bollinger band. Those three indicators have been consistent all year. The RSI hit 62% on Thursday. That was up 42% in a week. The rally may be limited with the upper Bollinger band sitting at 511.60 and narrowing. When the profit availability is as low as it is today. These little indicators are essential.

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

Lumber Weekly

Last Week:

This market has been flat, is flat, and will remain flat in the near future. Every truck and every car bought out there is a battle. The gloves are off. The struggle is how to pull out a profit from a market so flat. The only possible mover to this market is the funds. If they decide to add more, then the market goes down. Absent that selling, the market has scaled down interest to own it and scaled up selling to hedge it. Everyone claims they don’t have wood to hedge, but those last few cars have taken a hit. Least resistance remains down.

The one aspect to note is that the downcycle is getting older now. With JIT inventory management, most need to show up more often. A buy round is coming. The question is if futures will hold long enough to get it rolling. Any negative pricing in September will push the buy round out to Thanksgiving.

Thought:

Last year, our reports from the builders were of a slowdown going into the first quarter. This was not a bearish projection but more of a digestive move. As we have seen, this readjusting benefited the single-family builders. They created a pace and maintained it for most of the year. Today, we are in the thick of their year-end push but expect a similar pullback going into the end of the year. We heard about it last year. I don’t think we will this year. Orders are good, and any slowdown won’t be readily noticed. While the home builders have a good handle on the business, they are still aware of possible headwinds and will slow down to discuss. Going a step further, we are starting to see the lofty stock levels of these companies start to fall off. Wallstreet wonders if the builders’ frothy profits this year can carry forward. Most believe that even the homebuilders will need to sharpen their pencils, cutting into profits.

Summary:

The weekly 100- and 200-day moving averages last cross was up in December 2020. They are now getting close to crossing again. That would be a negative cross. While that is a very substantial indicator, it is skewed because the market moved a record $1200 since the last cross. This cross could confirm a lesser trading range and lower volatility rather than a sell signal. That is how I look at it. $30 up is a big move, as is $30.

Short run: I’ll give November till Thursday to close under 494.50. If it doesn’t, the bounce will begin.

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

Lumber Weekly

Last Week:

Was there a key takeaway last week? No. It was a holiday-shortened week that saw liquidation and rolling. The focus was on moving positions and not price discovery. There was a slight erosion in the cash market as the week ended. I’m unsure if it was a lack of interest or a rebalance. I do know that expecting a sharp sell-off in cash hasn’t been a good strategy. It’s always a grind. Today, there is a forward sales value under $480 in November and a basis value over $530. Those tight parameters could keep futures flat.

Thought:

If there is one word that sums up this market in 2023, it would be “resilient.” If you made a mistake this year, you were not punished. Entering the market too early or too late didn’t end up in the catastrophic spiral it did in the last few years. The market has stayed within its value parameters for the whole year so far. Let’s face it: This market deserved to go much lower. After a run on mortgage rates from 3% to over 7%, it should have broken the market, but it held up. Any sell-off from here will be more mental-driven than physical. We were looking for September to start indicating less supply and less demand all year. If that is the case, expect more of the same trading and opportunities.

Summary:

The 200-day moving average of 548.40 and the 100 day at 535.40 are beacons of light for this market. They are also beacons of hope. Seldom do lumber futures have such prominent technical highlights and do not reach then exceed them. It will again, just not yet. A very strong downward channel comes in at 516.60 in November. This market could ride that trendline lower for the next few weeks. The industry yearend has frozen trade. The typical lows in October may be the case again.

Note: it looks like the funds are getting shorter.

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

Lumber Weekly

Last Week:

Futures and cash took different paths last week, but neither blazed a trail. The cautionary flags are out en masse throughout the industry. The time it takes to replenish the system can be measured in days, not weeks. The reason for the quick turnaround lies in the marketing of wood today. There are a lot of sellers out there with one goal: to sell. Items never seem to get tight despite some very good business. Cash last week found the last of the participants while futures saw the “deals” again. The key takeaway for the week was that the market remains in a sideways trade. The minor blips up and breaks down have nothing to do with the overall trend.

Thought:

The fiscal year-end for many in this industry comes in around the October time frame. By then, the focus becomes the 2024 building season. The industry has already moved on to next year. There are many of the same issues to contend with. Let’s take a look. The US economy, and for that matter, any country on earth, has never experienced such an influx of capital into the system. There are no models or equations to guide us. Every business today has to react instead of plan. That creates opportunities. It also causes many firms to be far more cautious.

Right now, the homebuilders have the goose and its golden egg. Rates and existing home sales remain sticky. One high and one low. There is no way they will over-accelerate construction. They will continue to feed the system but at a pace of plus 5 to 10%.

The multifamily sector is starting to have an inverse effect from the high rates. The ROI is just not there for many.

Today, lower lumber prices would not accelerate building, nor would rising prices slow it. It is all about sales momentum, which remains steady. Many are beginning to wonder if an economic slowdown, i.e., higher rates and higher unemployment, won’t slow construction. Most need to realize that between the Chips Act and the Inflation Act, there will be 2 trillion dollars entering into the system on top of what is already there. That spigot will not slow. 2024 could end up being very lucrative.

Summary:

The futures market has done a good job of trading in between the goalposts. The time after the roll tends to see the funds adding. That will lead to new lows and widening goalposts in today’s environment. No momentum indicators call for a steep decline. The lows will be fund-driven and a grinder. One trade to watch is if the industry gets short here. There are no spec shorts in the market. The industry shorts have been here for months. Will others jump in? Next week should be a carbon copy of last week. Let’s hope we don’t test the circuit breaker system…..

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

Lumber Weekly

Last Week:

The week was mixed as the futures market gave back half of its rally while cash continued higher. The futures market is in the middle of a rebalancing for the month’s end, so their dynamics are different. What is troublesome in this environment is that while the spread works, the second month gets clobbered. The risk management selling is in the next month. Also, the futures correctly projected a slowing cash market. Today, a slowing cash market doesn’t indicate lower prices. The futures will be the one making the new lows if all remains the same.

Factors:

The current trade is all about economic outlooks. No one is complaining about sales. The problem lies in the fact that there is no follow-through. The industry will not add to inventories and that is based on their projects. That won’t change anytime soon. The buy side will only step in when forced. The sell side is always $20 too high. There are bands established, but that isn’t anyone’s focus at this time.

Thought:

As we finish the third quarter many are starting to realize that covid aberration is behind us and we are back to a grind market fighting for dollars. The difference, I believe, is the ability for the market to go up. Just last 8 months ago the futures were trading at $627 mill. A complacent marketplace will cause strong rallies. My fear today is that we have to make a new low to make a new high…

Technical:

Where did the bull market go? Now that we are back in the $35/$70 mode again the 100-day moving average is the focal point. It traded back and forth on it only to fall apart by Friday. Thursday, the stochastics started to turn, as did the longs wishful thinking. The psychology of the market is not to get caught long and last week’s trade highlights that concept. Exiting and rolling could weigh on November next week.

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

Lumber Weekly

Last Week:

The futures market had a $39 trading range last week, all up. Once we crossed the halfway point in August, the short side had to start rolling or exiting. It is usually a two-week process that works well for the spread but does little for the out rights. The difference this time is that the futures market has been sitting near the bottom for a long time. The next move was up, and the exiting got it started. I have noticed the extreme level of scrutiny held by the industry. Few views this as a supply and demand rally. The focus is on the futures and the typical positioning volatility, me included. This reluctance could keep upward pressure on the market.

Factors:

The trade is reverting back to its historical norm. A $35 move is good, and a $70 move is great. This type of trade allows the industry to make money, or at least it should. Today we face a tremendous cost of doing business throughout the industry. In the past five years, small companies have morphed into significant players with all the costs associated with playing in the big leagues. They now either need higher prices to allow for better revenues, or they need to par costs. If the outlook for 2024 is of steady starts and steady supply, then the $35/$70 model is here for a while.

Thought:

I’m still in the camp that this commodity should trade higher. All commodities have run up and settled higher than their norm. Lumber trading sub $400 is too close to the norm. There have been steadily added costs to subscribe to a higher norm. There is an issue. The higher price of the finished product in most other commodities was due to the higher cost of production. None of the finished products faced a 30% Federal regulation charge. Salad dressing is not higher because of the Federal regulations put on soybeans. You cannot expect the commodity to carry that added cost. And that is most likely why the price is in the $400’s and not $600.

Makeup:

It looks like the industry is going for the Texas hedge while the funds continued to add. That should mean the spread goes $10 over to $20 under again.

Technical:

The chart formation calls for trade through the $550 area. This is a grind and most likely will take work to get there. The wildcard is if the funds liquidate outright. For now, the points are:

• 542.80
• 547.20
• 555.30

RSI 65%

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

Lumber Weekly

• The quest for today’s value remains elusive.

Last Week:

The futures markets fell another $19.50 as a weak cash market dominated. The makeup of the trade was the funds selling while the industry bought back shorts or got long. In this part of the cycle, all the focus is on the cash market. I am surprised at the extent of the erosion. In a hurry to raise prices, the mills did not establish a base level. The chase is on to find that level. The futures guys are hoping for a lessening of the fund selling next week could bottom futures. While I agree, it could be a tough week ahead.

Factors:

The struggle continues to determine the value of this commodity. The factors affecting the price are less production out of Canada—the slowing of Euro shipments, and the JIT inventory management strategy. The demand data shows a steady pace of construction, and reports from the field are of a good wood flow. Under these conditions, the commodity’s price will remain at or above breakeven. The reality is that the price continues to drift into the red for the mills. The lower price is also digging into the margins of most of the industry. The Milton Freeman School of Economics says that inflated profits are met with long-term deflation. That may be the easy answer here.

We have to go back to the actual supply and demand factors. The supply gap in housing continues to widen as family formation outpaces construction. There are limits to construction. Labor and government regulations are extending the timeline of all buildings. That lag is very positive long-term for housing. I did see something thought-provoking for the first-time home buyer. Here goes…

The first-time home buyer has roughly $100,000 saved for a down payment on a $350,000 home. These are estimates based on today’s data. If the buyer does an analysis, they see that they are earning 6% on $100,000 today. Buying a home, they would have $250,000 debt at roughly 8%. That is the 7.5% mortgage and the additional home expenses. Now the appreciation of a home averages 5% historically. At 8% the buyer loses 3% a year. If they do not buy a home, they make 6% on $100,000 with potential saving increases.

Summary:

This year’s actions of the lumber market highlight an industry preparing for less demand. While there isn’t data confirming a downturn, the marketplace stays guarded. I did look for less demand by the third quarter. I also looked for less supply to offset the decrease. This market doesn’t react that smoothly. At some point, the multifamily sector will show a slowing. Then the single-family sector will see a pause. In a JIT environment, prices will remain under pressure. That could be around for a long time. The good news is the market will continue to get caught short. The middle of the market can continue to benefit from those spikes.

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