Category: Market Commentary

14 Oct 2024

LEONARD LUMBER REPORT: There is malaise over almost every market out there

Recap:

There is malaise over almost every market out there, whether it is corn or equities. Lumber is no different. The futures market has traded between 538 and 515 for 14 straight sessions. There is no energy and no real direction. The lumber market is flat, as is housing. The upcoming election may be a factor, but even that has gone flat. Economic uncertainty has put us all back into the weeds. That is friendly. Lumber gets bought in the fall. The longer one waits, the higher it will go. Today, the lumber futures are not showing signs of going higher. It shows signs of fatigue at the higher levels. The premium gets no help from the cash market each time it is up. That creates fatigue and the continued cycle of tight highs and lows.

Patience is key as we navigate these market conditions. The upcoming start reports on Friday could be the trigger we’re waiting for. Remember, hibernating till spring only works for bears.

Technical:

The technical read has been challenging in a flat market. Today, there is a flag pattern channel with $500 as support and $539 as resistance. The rules for flag patterns tell us that a close over $539.00 calls for a run to $578.00. We have had patterns in the past that call for a higher trade. The problem is the market can’t close over those areas. Maybe we are closer on this one. In any case, it is a buy lower market.

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

07 Oct 2024

AG MARKET UPDATE: SEPTEMBER 12 – OCTOBER 4

Corn’s rally back to $4.25 has been welcome heading into harvest as South America’s weather started off a little weary but have added rains to the upcoming forecast. The US drought to end growing season does not appear to have impacted the corn crop very much. Export demand has picked up putting us ahead of the USDA annual projections. The recent rally has taken corn above other major exporters which will likely lead to slowing exports unless South American weather becomes more of a concern. Harvest has gotten off to an average start with 21% harvested as dry weather shouldn’t cause any problems in the next week.

Via Barchart

Soybeans faded to end the week as harvest progress and pressure lead to profit taking after the recent rally. The biggest news related to soybeans, non harvest related, is that congress seems to be working on bipartisan legislature to address the importing of used cooking oil while still collecting tax credits. The American farmer wants this loophole closed to force biofuel producers in the US to use domestic production. This will lead to millions of more bushels used at crush facilities in the US throughout the year with a major question of, what happens to the bean meal? The longer congress and the lobbying associations take on this legislature will lead to more frustration among farmers across the country so with it being an election year I would be careful with what gets “leaked” by parties involved. The end of year drought across much of the US likely led to a smaller crop as pods did not get the moisture needed for max fill. Bean harvest is slightly ahead of expectations at 26% to start the week of Sept 30.

Via Barchart

Equity Markets

The equity markets continue to roll hitting new all-time highs as Fed rate cuts and the likelihood of a soft landing becomes higher. The market has broadened out but the biggest names (Nvidia, Meta, etc) are still doing well. With rates lowering over the next year expect money that has been getting 5%+ in fixed income to begin to move back into the market. Chinese stimulus prompted a large rally in Chinese stocks this week as they try to get their economy going again.

Via Barchart

Other News

  • The Fed announced a 50-basis point rate cut this month, cutting rates for the first time since the Pandemic. More rates are expected into the end of the year.
  • Tensions in the Middle East escalated as Iran launched attacks on Israel. Israel is expected to respond but how and when remain unknown, with attacks on oil fields a possibility crude oil rallied over the week.
  • Hurricane Helene caused massive devastation in the United States Southeast over the weekend causing loss of life and destruction of major infrastructure. The total amount of damage is still unknown, but it will take the mountain communities a long time to recover.

Drought Monitor

Via Barchart.com

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 Ag Specialist Brady Lawrence today at 312-858-4049 or [email protected].

 

16 Sep 2024

LEONARD LUMBER REPORT: September futures settled at $20 under print, the first recorded discounted expiration in almost 12 months

Recap:

September futures settled at $20 under print, the first recorded discounted expiration in almost 12 months. Was it a one-off trade or a change in market dynamics? It’s too early to tell, but we must remember that it doesn’t necessarily indicate a bull or bear market, only a change. If it holds, it is a shift from basis trading strategies to forward pricing. I don’t expect to see much forward selling from the industry. They didn’t touch the basis, so why do forwards? I expect the industry to continue to trade extremely guarded through the end of the year. We saw an almost 30% reduction in the commercial short position after the Canfor announcement. That massive bail is a result of the guardedness of the trade. Most took hedges off above $520 and are naked under $500. Is this a dynamic shift or a fluke?

Production is getting cut. When will the supply cut be a factor? Someday, but not tomorrow? The struggle now is to continue to navigate a balanced marketplace. Can value be brought back into play in housing after a few rate cuts and increasing existing home supplies? We are starting that process based on the futures trade, but it could take another year. If you look back, in 2012, there was a fear of a fiber shortage that shot prices higher. It took five years to get our next spike to new highs in 2017. And finally, our covid 2021 debacle. My point is it takes years to create the undersupplied pocket. If we are there, our lows will be higher and highs sharply higher. Today, all the pressure is from the funds or the algo selling. That’s where the work needs to be done. The mills should start with the funds if they want to curtail something.

Technical:

The November contract low is 473.00. September’s low was 455, and July’s was 418. The market is already stair-stepping higher, making these lows significant points. As we head into October and the traditional lows, 473 is key. A trade under 473 indicates a more aggressive fund-selling program, knocking all fundamentals out of the equation.

The technical picture is negative for the short term. To change the trend, we need to reach an oversold condition. The problem with the RSI today is that it holds long-term bearish divergence. It remains high every time the market breaks. Walk that down into the low 20s, and the momentum can change. I could bring in almost every other oscillator and show the same results. The selloffs are not hurting the market.

The key upside point is 518. This area has been key for months and could be the top for now. The computers will target the low of 473. It could be a $10 market until the next announcement comes out.

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

12 Sep 2024

AG MARKET UPDATE: AUGUST 26 – SEPTEMBER 12

Corn has gotten back above $4.00 in a struggling market that needs good news to propel it back to the mid $4s. The USDA raised US corn yield to 183.6 bu/ac up from 183.1 bu/ac in last month’s report. In the USDA’s eyes the crop is getting bigger as struggling areas will be more than made up for by the best areas across the corn belt. Despite the higher US yield numbers, the corn trade following the report was welcome to see as it did not move much lower on larger numbers. If corn can bounce off or hold this $4 level then we can probably expect it to hang around here as planting gets rolling until we know what is actually in the field and if the numbers are closer to 180 or 183.6.

Via Barchart

Soybeans have seen a nice 50+ cent rally off recent lows with dryness in areas causing a little concern with pod fill and some pickup in demand. The USDA kept yield the same at 53.2 bu/ac as they agree with Pro Farmer tour that a massive crop is out there. Like corn, this recent bounce off lows is encouraging but may setup a range bound trade until harvest gets rolling and we have a better idea on the true yield. The USDA did slightly lower US ending stocks in both 23/24 and 24/25. Continued exports and any issues to South American planting are needed to drive beans higher in the current market.

Via Barchart

Equity Markets

The equity markets have been on a bit of a roller coaster lately with the tech/semiconductor trade having quite a bit of volatility while some rotation occurs with the Fed rate cuts expected to begin this month.

Via Barchart

Other News

  • The market is expecting a 25 basis point cut to the Fed Funds rate this month

Wheat

  • Wheat has been the one positive market lately, hitting new 2-month highs. The war in Ukraine and Russia continues to escalate and the market has responded accordingly. The USDA did not make any major changes in the report.

Drought Monitor

Via Barchart.com

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 Ag Specialist Brady Lawrence today at 312-858-4049 or [email protected].

 

09 Sep 2024

LEONARD LUMBER REPORT: Last week’s trade showed just how much the headwinds are weighing on the market

Recap:

Last week’s trade showed just how much the headwinds are weighing on the market. Rates coming off are a given, but employment direction and costs aren’t. That leaves two reasons for the futures to rally. The first is the fill-in buy, which occurs every few months. The other is the “spook.” That is when another announcement comes out and spooks good shorts out. Lumber, unlike most other industries, has a quick reaction to news. We saw that early in the week with a mill announcement set off the short covering. Once that was finished, the algo/fund stepped back in to sell it off. There was an abundance of emotion in the market last week. It seems like the anxiety level is starting to rise.

The housing market is priced too high. Case/Shiller last week showed another gain in values—that’s 17 straight months. We are seeing inventories grow out there. The existing home inventories have been held low because of the rate spike. There is a growing pent-up sell lurking out there in the existing space. The inventory number could see a sharp bounce once the Fed cuts. That will push prices lower and cause a pickup in demand. This is important because a fluid housing market starts and ends in the existing home market.

The futures are behind the proverbial eight ball. The November contract is generally near value. The issue is the front-month expiring month. The spread trading is a good indication of the liquidation mode. The spread goes from -20 to -10 and then out to wherever. It is already at -29. The lack of industry participation in the big discount hurts the search for value. Commodity markets are efficient when value is recognized.

Technical:

The failure to create momentum last week was troublesome. This indicates a “more of the same” trade. We know rates are coming off. That is a major tailwind for us and should bring in support. September expires on Friday. It’s back to wait and see. In general, this market finds support faster than resistance.

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

26 Aug 2024

AG MARKET UPDATE: AUGUST 12 – 26

Corn’s continued weakness following the August USDA report. Pro Farmer completed their crop tour last week and see the US yield being 181.1 bu/ac and a total 14.979-billion-bushel production. With another record crop expected this year, the market is continuing lower as plenty of 2023 corn remains in storage needing to be moved before this year’s harvest gets underway. The end of month heat is not expected to do much damage to the corn crop, but this crop is not done yet and still needs some more rain to get to the finish line. While demand is improving in the commodity space with a weaker USD, the large supply is still driving prices lower for the time being. There is not any major news to keep an eye on coming up except export and weather news.

Via Barchart

Pro Farmer found a massive crop in their tour last week estimating the 2024 US bean crop at 54.9 bu/ac(!!) and 4.74-billion-bushel total production. This soybean yield would easily be a record and would justify the collapse in bean prices seen this year. The current heat will likely stress the crop a bit, making that big a yield unlikely, however we should still expect to see a record crop, like corn. Soybeans need some good news in the form of demand whether that be from exports or the sustainable fuel market to get this thing turned around without production concerns in South America.

Via Barchart

Equity Markets

The equity markets have rallied back to recent highs after a small correction with the Yen carry unwind and some market broadening out of tech. With earnings season coming to an end markets will trade on economic data and any election surprises after Nvidia this week.

Via Barchart

Other News

  • Fed chairman Powell spoke in Jackson Hole last week and set up for the Fed to begin cutting rates next month.
  • The Canadian rail strike started and seemingly ended quickly with the government stepping in and saying that arbitration will decide negotiations.
  • Wheat’s summer trend lower from the $7.59 high looks to continue as it is not getting any help from other commodities to pull it up.

Drought Monitor

  

Via Barchart.com

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 Ag Specialist Brady Lawrence today at 312-858-4049 or [email protected].

 

26 Aug 2024

LEONARD LUMBER REPORT: As much as we all want to discuss the rail issue, we should take a step back and look at the market

Recap:
As much as we all want to discuss the rail issue, we should take a step back and look at the market. The cash market is up $75 from reported lows in a few weeks. That strength has pulled futures higher and also narrowed the premium. Two weeks ago, there was an uptick in cash interest. This past week saw digestion. That is very efficient. Last week’s futures trade was anything but efficient. There were wide swings from rail news and algo selling. The roll held it up while the computer sold. The futures are signaling an ending cash buy round. That remains to be seen.

It looks like the Teamsters were blindsided by the Minister’s next-day order to return to work, so they decided to serve 72 hours’ notice and sue the Minister. Welcome to Chicago. This back and forth has drained some of the momentum/panic out of the situation. This could lead to another week of digestion on the cash side and more $20 moves back and forth in futures.

I’m not a fan of shorting a commodity priced below the cost of production. While the cash market has robustly rallied, most mills are still underwater. While waiting for the reduced supply equation to hit the market finally, we may have to suffer the testing of lows a few times. Lumber 101, prepare for the worst, and hope for the best.

Technical:

The momentum couldn’t carry futures to new highs last week. The market hit an artificial wall in the high 530’s. It’s considered artificial because of the aggressive selling shown by the industry over 540. That doesn’t top the market but shows the growing inventory lists. It’s interesting how moving averages on the chart and inventories tend to match up over time. A slow Monday will allow the algo to shove Sept under $500. They’ll take one more shot at forcing the spec longs out before the labor news heats up again. This week, it may be more prudent to play the news cycles than the technical points…

 

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

19 Aug 2024

LEONARD LUMBER REPORT: This has turned into a strong upcycle in the cash and futures markets

Recap:

This has turned into a strong upcycle in the cash and futures markets. I thought the market would correct after 23 days up and a very weak starts report, but it didn’t. The long lag between buys left many short cash. Yes, those holes are filled, but the wood is also going out the door. The buy-side hasn’t formed its rhythm yet. The rail issue isn’t helping the equation, as everyone knows it won’t be a factor until it is. The market has spent a few years in this area. The reluctance to participate at value is confusing.

Let’s take a look at the 2023 and 2024 cycles. In 23, the market traded flat, but with a good takeaway. It started near its lows and drifted marginally higher by year-end. In 2024 it was
“load the boat” coming into the year only to see the pace of outtake slowing. Today, we are seeing that pace pick up, similar to 2023. If the pace stays steady, there is a chance for a continued drag higher.

Technical:

The elephant in the room is the obvious. September futures are up $82 from their lows four weeks ago and $119 from July’s settlement. The fundamental question is whether Sept has returned to normal or is $40 too expensive. The technical question is whether Sept is overbought. On the fundamental side, the creep higher in the cash market keeps the higher futures levels in check. A good correction in futures could put them at a discount?? The technical picture is somewhat confusing up here. It lacks the momentum to go higher but will not enter into the overbought condition. There is more room for the upside. The issue with a pullback is this lack of momentum could stall the market out. Scale-up hedging is still the strategy. This type of market stops on a dime giving you little chance to hedge. If you wait till 560 or 580 you may miss it.

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

12 Aug 2024

AG MARKET UPDATE: JULY 22 – AUGUST 12

Corn moved lower in the last couple weeks to trade around $4 heading into the August 12th USDA report. While the market saw small gains after the report, the numbers will continue to put pressure on corn as a record crop is headed our way. The August report has the US crop with a 183.1 bpa, 15.147-billion-bushel production, with good weather in the forecast there is not much to push this market higher currently. While these numbers are more bearish than expected, the market response to finish higher is a welcome sight after another move lower.

Via Barchart

Beans have very little positive news behind them as you can see from the chart. The US yield was bumped to a would be record of 53.2 bpa while harvested acres were 1.2 million acres higher than the trade was expecting, neither are good for prices. Brazil planting will get rolling in about a month with acreage expansion expected again. With prices this low, the acreage expansion will not be as straight forward as in the past but with no weather issues here or in South America there is not much supporting beans. Corn and beans would both greatly benefit from funds getting out of some short positions.

Via Barchart

Equity Markets

The equity markets have been volatile over the last couple weeks with last Monday seeing some huge swings in global equity markets. With rate cuts expected in September and a big week of economic news we should get a better idea of what to expect heading into the election.

Via Barchart

Other News

  • Election years add another wrinkle in the markets as Kamala Harris’ campaign has been off to a fast start naming Minnesota Governor Tim Walz as VP running mate ahead of the DNC in Chicago next week.
  • Escalation in war in Israel/Gaza and Ukraine/Russia will be worth keeping an eye on as it could lead to issues in global energy supply.
  • Wheat numbers were slightly bullish in the report with production and stocks below estimates

Drought Monitor

Via Barchart.com

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 Ag Specialist Brady Lawrence today at 312-858-4049 or [email protected].

 

12 Aug 2024

LEONARD LUMBER REPORT: FUTURES ARE BACK

Recap:

Futures are back. We have to say they are back when they can break $20 and then rally $25 in a matter of hours. This market is also so fragile that anything spooks it. Friday’s turnaround confirmed most opinions of the futures side of the market. The tailwinds caught up. The next read is how a perceived undersupplied market trade. Supply-driven markets are very volatile. We saw that on Wednesday and Thursday as futures retreated near $500. This week, I’m going to dig down into the fundamentals, the futures makeup, and the general psyche that’s pushing the market.

We know the trade came into 2024 bullish. Even by April, it was still a 50/50 mix. By June 1st. the buy-side of the industry had become fully entrenched. They were going to run inventories at a highly tight JIT model regardless of their business. This lack of exposure in the marketplace when the dynamics are moving quickly to a supply-driven market puts a floor in. In this industry, trading decisions are made over weeks and months while the market turns are in minutes. If a supply issue is built, this makeup will cause volatility. Another change was around June 1st.  The reappearance of traders in the futures market, which had been gone for years, was very telling. a few never even traded the new contract. They tend to buy futures instead of cash when prices are very low. They don’t look at the premium. They are buying the market to protect against upside risk. This isn’t forward sales. It is hedging.

I want to make a quick point about the Fed. When Powell announced the possibility of the Fed having to increase rates, it had an immediate effect on us. All he had to do was announce the possibility of it occurring to shift the builder’s plans. Last week’s announcement of the possible half-point cut in September could motivate some builders. The reason why he is cutting could be disastrous to this sector. If the possibility of high unemployment is the reason, then this will be short-lived, but for now, there is excitement.

The futures trade is the primary driver of this market. I know it is supply and demand, but futures can push cash $100 higher or lower with little to no reason. There is a lot of confusion about who exactly the drivers are, so I will break it down. In 2024, the industry has been carrying a very long future position in an environment that isn’t conducive to forward pricing. I like to call these traders the “Texas Hedgers.” They are long cash and futures. That speculative position and upward bias added to the six-month selloff. The industry shorts tend to only position against a cash position. In most cases, they do not speculate. We have also seen in 2024 a very large holding of shorts by the funds. There is no question that the funds drive the futures market. They drive all markets. The problem with the funds is that they aren’t a barometer for the trend or price of the lumber cash market. They have numerous reasons to be in markets, from the US dollar to managing a long position in one market with a short position in another. What is a benefit to us is that it creates movement to where the futures price works for your overall risk management plan. A good example is today. No one will hedge at $500, leaving a large swatch of exposure. The industry hopes that the funds will run the market higher to bring hedging back into play. The final category is all others, where most of us fall. A group of these trades is very astute to the market. While having been very quiet over the past few years, these traders recognize a possible tipping point in futures and try to push the market through it. They set off panic. I wouldn’t be surprised if they have been trying to get some upside panic on this recent move. I left the algorithm trade out because they do not carry a position. Their design is to be flat at the end of the day. They are great for intraday turmoil. They also search for tipping points.

To sum up, this industry’s market cap has shrunk. The available profit dollars are limited, so a $10 swing can shift you from a profit to a loss. This makes the outside dynamics more critical now than ever. We are a “data desert.” The indicators for direction out of the futures are needed to determine the makeup and cash buying cycles. Both need to be front and center in any planning.

Technical:

It was pretty ugly, but the futures finally broke through the resistance area of $518.00. This has created some upside momentum. Fridays $528 high will likely force more shorts to cover based on the technicals. As I said before, the market is set up to liquidate naturally with higher trading levels above $520. It has no relationship to the cash market at this point. It is all numbers driven down here. The high in futures only a few months ago was $563. That price isn’t high, given the pile of shutdowns since then. That price is high in relationship to July’s expiration.
Upside resistance has a threefold dynamic. The $100 rally from July’s low could bring the funds back to look at November. It also creates better hedging scenarios. Finally, given the state of the buy-side psyche, the 80/20 rule applies here. That is, 80% of the industry will not be paying the higher prices.

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