All markets are cyclical, and most will return to their historical value area. In lumber the lens to look through is a long-term one. One that can bypass the noise and create a sharper picture of the market. If you look at 50 years of lumber futures data, you will come up with a mean close to $330. With a $330 mean the closes of January and March so far this year have been normal. Add to that the fact that May is also hellbent on getting there. This is not an abnormal trade. Trading in the $300’s for months and getting about 6% margins is normal. So, what is different this time? The current cycle. Cycles, like waves, are not perfect. The typical long-term cycle runs from 13 to 18 months. Most planted commodities run in 6-to-12-month cycles tied to the growing season. Lumber has a longer cycle because of the timeline of the project. We a currently in our 13th month of a down cycle. The difference is that this cycle started way up at $1477.40. Just a small percentage correction puts the market substantially higher. A $200 rally in a 6% margin environment would be devastating. Then again so would 5 more months of this current cycle.
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.
The USDA prospective plantings and quarterly stocks reports were released today, March 31st, with a mix of news. The report pegged this year’s crop at 92 million acres while the trade estimates were about 91 million. This led to a mixed trade as pre-report strength faded with futures ending mixed for the day. Current US weather conditions and the expectation of a slow start to planting could lead to this number falling, it is unlikely we will see a number higher than this the rest of the year, similar to last year. Corn stocks were lower than estimates by 69 million bushels and over 350 million bushels lower than last year.
Soybeans received a boost from the report as with lower acreage and stocks than expected. The planted acreage number came in at 87.5 million acres, lower than the 88.24 million trade estimate. The quarterly stocks were 247 million bushels lower than a year ago, continuing to show the tightness on the balance sheet. South America still has some uncertainty around their crop, but we should get a better idea in the coming weeks. Both numbers from today’s report are seen as bullish for the market.
Wheat saw some bearish numbers with higher planted acreage and higher stocks than pre-report estimates. 49.9 million acres, 1 million over estimates, and 946 million bushels in stocks, 934 mbu estimate, were both bearish while the price did not overreact. Wheat will follow corn’s lead for now with many questions still surrounding the conditions in the southern plains and the Black Sea.
Cotton’s bounce this week back to over 83 cents was very welcome after a couple weeks of lower trade. The market did not have a major reaction to the report with planted acreage estimates coming in at 11.3 million acres vs the 11.2 million trade estimate. Speculative short covering helped cotton rally this week while spreads were also a lower than normal percent of the trade. The problem continues to remain of recession fears and how that affects companies purchases trying to weigh supply and demand.
Equities had another good week as investors seem to believe the Fed will relax with rate hikes and the banking fears have calmed down along with an ease in inflation pressure as we slowly move lower. Tech companies would be the beneficiary of lowering rates by the end of the year but the Fed’s recent comments would indicate they have no intention to lower rates before the end of the year. There was strength in most sectors this week.
The eastern corn belt has gotten plenty of moisture, some too much, so far this winter with the western corn belt needing more heading into the spring.
Podcast
With every new year, there are new opportunities, and there’s no better time to dive deeply into the stock market and tax-saving strategies for 2023 than now. In our latest episode of the Hedged Edge, we’re joined by Tim Webb, Chief Investment Officer and Managing Partner from our sister company, RCM Wealth Advisors. Tim is no stranger to advising institutions and agribusinesses where he has been implementing no-nonsense financial planning strategies and market investment disciplines to help Clients build and maintain wealth and reach financial goals since
Inside this jam-packed session, we’re taking a break from commodities, and talking about the world of equities, interest rates, tax savings, and business planning strategies. Plus, Jeff and Tim delve into a variety of topics like:
The current state of the markets within the wealth management industry
Is there a beacon of hope, or is it all doom and gloom for the markets?
Other strategies to think about outside of the stock market and so much more!
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].
Corn leveled out over the past couple weeks after its move lower into the mid $5 range. Good exports and continued problems in Argentina have been able to keep corn from moving any further lower while funds continue to offload long positions. Corn will continue to trade here until the prospective plantings and quarterly stocks report on the 31st that will play a role in its next move. There could be surprise news that gives it a bump higher or lower but for overall directional change something surprising would need to be in the report. How the USDA adjusts for further losses in Argentina and unpredictable world demand will be two questions to look for in the stocks report.
Soybeans finally caved and followed corn and wheat lower after putting up a good fight. Brazil’s record bean harvest is under way and with insufficient storage they have to get rid of them driving prices lower to keep US beans even remotely competitive. Like corn the funds are legging out of their long held long positions making the moves sudden and large. Beans saw a nice bounce to end the week making up for Thursdays losses. One would expect the markets to calm down a little next week as the report looms large for any further downward pressure or welcome support.
The markets continue to be confused as they look for guidance that does not appear to be coming. Sec. Yellen this week flipped back and forth on whether or not they would increase deposit insurance for a period of time to help calm fears while the Fed went ahead with its 25 point rate hike. The banking issues make analysts think the Fed could cut rates before the end of the year helping tech stocks but ultimately the Fed likely wont cut rates until we are in a recession.
The eastern corn belt has gotten plenty of moisture so far this winter with the western corn belt needing more heading into the spring.
Podcast
With every new year, there are new opportunities, and there’s no better time to dive deeply into the stock market and tax-saving strategies for 2023 than now. In our latest episode of the Hedged Edge, we’re joined by Tim Webb, Chief Investment Officer and Managing Partner from our sister company, RCM Wealth Advisors. Tim is no stranger to advising institutions and agribusinesses where he has been implementing no-nonsense financial planning strategies and market investment disciplines to help Clients build and maintain wealth and reach financial goals since
Inside this jam-packed session, we’re taking a break from commodities, and talking about the world of equities, interest rates, tax savings, and business planning strategies. Plus, Jeff and Tim delve into a variety of topics like:
The current state of the markets within the wealth management industry
Is there a beacon of hope, or is it all doom and gloom for the markets?
Other strategies to think about outside of the stock market and so much more!
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].
As I write this, I am struggling between what the lumber market was and what it is. It was a low margin high volume structure for a thousand years. In recent years it has turned into a high margin low volume trade. You have to ask which it is today. There have been structural changes to the industry. There was a big consolidation in distribution. A loss of available cut and contraction in production. And most importantly was the change in volatility. Three months into 2023 I’m wondering if we have integrated those changes into the marketplace or need more time. If it has been integrated into the market prices will be range bound. If it has yet to be integrated, then there are higher highs coming.
Markets are efficient when value is defined. A farmer will sell futures if the price is a few pennies over the elevator. It’s called the basis. Over the past few weeks, I have noticed the traders in this industry are reluctant to do a basis trade that will net out a $40 profit after all the expenses. I am not judging. I am just stating one of many issues we have with pricing. The buy side does not trade a $40 gain, nor does the sell side trade a $40 less of a loss. The nature of the trade today will cause more volatility and that volatility will remain until it’s deemed unproductive.
Another aspect of the volatility equation is the fear and greed quotient. Today we are going to redefine it as the fear and fear quotient. The industry is waiting for the other shoe to drop in housing, and it will stay hand to mouth until defined. Last week’s 1.45 starts number was great. I was looking for a 1.1 to 1.2 number coming into spring. The Fed told us that housing would be pushed into a recession. We haven’t seen it. We should all be dancing the tarantella. (Happy St. Joseph’s Day) Instead the big number is all the more reason to practice restraint. Maybe there is a little bit of greed out there too. Why give it back? For whatever the reason, the lumber market will remain underbought.
Technical:
The chart pattern has been flat for almost a year now. It is grinding along the bottom with no end in sight. The market manages a rally every 8 weeks but doesn’t change the pattern. Today the market is sitting on the weekly resistance line from back at the highs of 2022. It’s at 455.00. A close above that area will bring in some buying as signals are set off with the short funds. There are three parts to a cycle today. First is fund short covering followed by the industry buying cash and finished off with spec futures buying. To sum it up, the technicals indicate a market that is $100 away from mediocracy and $200 away from a bull cycle.
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.
Last week I led off with how bad should bad look? Here are two responses from the question. The first is “there is a massive new home neighborhood going up next to a 40 acre reload full of Euro wood. The other was “for the first time, housing isn’t leading the shit show.” Very eloquent economic summaries. What we saw last week was a very quiet sideways futures market exhibiting some of those characteristics. The sideways trade was not a building of a trend but a sign of confusion and fear. No one is making a call one way or another at this price. If you look at the cash market, no one is making a call at any price. Historically that is friendly at some point. Let’s do the math.
Since the Fed speak turned up in February of 2022 the futures market has fallen over 76% from the 1477 high. During that same period, crude fell from $130 to $75 and corn from $8.27 to $6.26. All three commodity markets and most others have felt the effects of the raising of rates. Lumber, unlike the other markets, has pulled back close to its historic norm while all others have not. Is this price indicating a harder bottom coming? Considering the lead time needed in this industry it may take till Q4 of 23 or Q1 of 24 to answer.
Macro: The housing market does not bottom out until rates top.
The micro picture has many other dynamics. I think all would agree that these prices are not good for any producer. That fact alone will cause a slowdown in production. It is already in process. We see it in BC shipments and reports from eastern and southern mills. What is hard to determine is where the number was pre-Fed. While production is getting cut it may be from a 1.7 starts equivalent number. If we took the number from 1.7 to 1.4 then we are still over producing. The market needs to see a production number set for 1.2 starts and an erosion of Euro imports. Then we will have a market again.
Micro: Slowing production will cause upward spikes in prices.
The trade for 2023 will be the basis and the best form of protection will be forward pricing. It won’t be a year of making $15,000 on a truck. It’s back to futures 101. That said, build a fence around your risk. You have banks blowing up and many other created ramifications from the spike in rates. A basis trade needs calls against it. Forward pricing needs puts.
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.
The last 2 weeks have not been friendly to corn despite a neutral to bullish USDA report this week. The USDA lowered Argentina’s production by 40 mmt, but the crop could still be smaller amid a historically poor weather year in Argentina. Corn took a nosedive to end the month of February and has taken another leg lower this week, with the new crop hitting $5.50. After a flat trade for most of February the move lower presents farmers with important decisions regarding what to do for crop insurance. With the Feb average price of $5.91, 40ish cents higher than current levels, farmers should seriously look at the highest level of revenue protection you can get. The premiums will likely be high, but the recent price movement has created an uncertain environment with a long way to go.
Soybeans moved lower again this week after rebounding last week as soybeans have held together better than corn. Bean stocks were tighter than the trade expected while exports were up 25 mbu but crush down 10 mbu. Global oilseed supply and demand forecasts include lower production, crush and stocks. Like for corn, the USDA lowered Argentina’s production below the average trade estimate. While the news out of the report was mildly bullish, the negativity around corn and wheat bled into beans to end the week.
Cotton was punched in the mouth on Friday after trading lower this week. The USDA did not make any significant changes to the supply and demand report. The lack of demand is the main problem as the global 22/23 forecasts this month include lower consumption and trade with higher production and stocks. The world economic outlook is questionable for the coming year and a global recession would hurt cotton more than other areas.
The story for wheat has not changed as markets continue to get crushed. The report made no major changes to forecasts and balance sheets and there has not been any major changes in Ukraine as Russia continues their assault. Russian officials are expected to meet with UN officials in Geneva on March 13 to discuss the grain deal renewal and trade sanctions.
Equity Markets
Equity Markets moved lower this week on overall market weakness and the Silicon Valley Bank news. While one day doesn’t make a trend, the trend lower since the start of February looks to have room to move lower with another big jobs added number keeping the Fed rate hikes as a question mark.
The eastern corn belt has gotten plenty of moisture so far this winter with the western corn belt needing more heading into the spring.
Podcast
With every new year, there are new opportunities, and there’s no better time to dive deeply into the stock market and tax-saving strategies for 2023 than now. In our latest episode of the Hedged Edge, we’re joined by Tim Webb, Chief Investment Officer and Managing Partner from our sister company, RCM Wealth Advisors. Tim is no stranger to advising institutions and agribusinesses where he has been implementing no-nonsense financial planning strategies and market investment disciplines to help Clients build and maintain wealth and reach financial goals since
Inside this jam-packed session, we’re taking a break from commodities, and talking about the world of equities, interest rates, tax savings, and business planning strategies. Plus, Jeff and Tim delve into a variety of topics like:
The current state of the markets within the wealth management industry
Is there a beacon of hope, or is it all doom and gloom for the markets?
Other strategies to think about outside of the stock market and so much more!
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].
How bad should bad look? We are coming up on one year since the Fed began to raise rates and slow the economy. The effects on the housing industry have been drastic. Starts topped at 1805 last April and dropped to 1309 by last month. The price of the commodity has dropped from the $1000 level to $370 during the same period. The Fed has done its job in this sector. I go back to my question of is this bad going to worse or bad to better? Looking at the futures trade so far in 23 I’m starting to see the possibility of the bad to worse scenario not because of lower prices or less construction but because of a flat market. The most pain would be caused by a $400 market for months on end. That is a no volatility environment at a below breakeven price. That is where the Fed would like us to be. There have been two rallies this year so far. The first was started and driven by fund liquidation. The cash market was underbought but took itself to overbought in days. It was a futures driven rally not an uptick in demand. This last rally of $50 was more of the same in futures as the final group of short funds liquidated. This has become a stagnant market. The housing market has correctly reacted to the Fed’s policies. It has stopped the bubble. The Fed will keep it that way.
The lumber market is commodity driven and that gives it two dynamics demand (which is being controlled) and supply. The panic we saw in January was the supply siders buying up the market. There is too much recent history not to create a panic. The producer side is trying to curb excess supply. That is a very difficult maneuver when mill operations have multifunctional reaches and cash flow. What I do know is that production control leads to a hard bottom. It doesn’t slow down before demand picks up. The supply question is and will cause volatility.
Another point that was brought to my attention last week was industry makeup. We talk about the covid effect on the housing industry as being a “one of a kind event.” While I do agree with that fact, I have to add that on September 12th, 2001, things were looking very bad and in 2009 worse. What I realized last week was that a high percentage of the decision makers in our industry today where not in the business in 2009 or 2001. The movement today is what has been successful over the last 5 years or so. Do we overreact or under react?
I’ll finish with the funds. As of February 7th, the funds had a little over 600 longs and 200 shorts. For a two-week period in January the short fund took their 1950 contracts and a ton of money and went home. That was expected, but not over such a short period of time. As we are trying to establish a trading range in futures, I don’t think the January run is one to look at since it was driven by the funds. Better defined bounces are needed.
Technical:
The technical picture is in the process of developing a fan like model. If we keep it simple the midpoint of the fan sits at 356.55 on the weekly chart. That line goes back to the beginning of the Fed action. This week it is support. If the market can hold that trend line the next measurements will be higher ectara. It spreads out in a fan pattern. If this is a correct model, it shows the timeline between steps as being very long. The next line comes in as resistance at $509. Again, this process would be long and drawn out. Most would rather the market just to blow through the points and spike higher. That really is the risk in today’s market. An unexpected and unwarranted run-up hurting those with jobs. Put a fence around your risk!!
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.
Corn took it on the chin this week as it traded lower to levels last seen in early January. The bulk of the losses came in the second half of this week following the USDA Ag Forum’s bearish numbers. The Ag Forum estimates 91 million acres of corn with a 181.5 bu/ac yield. While these numbers are not surprising as they are mostly just trend line projections the market still reacted in a bearish way as this would raise ending stocks. These numbers also expect neutral external conditions such as weather, politics, etc. While these numbers historically are not the most accurate the market does listen and this was a major bearish factor for the week. They also released their price expectation for the year with December corn being $5.60, this is about 17 cents lower than Friday’s close. February insurance prices for corn sit at $5.95.
Soybeans moved lower to end the week in sentiment with corn and wheat. The USDA Ag Forum numbers for beans were 87.5 million acres with a yield of 52 bu/ac. These numbers are very realistic and did not send any shock into the market. These numbers would raise stocks by 65 million bushels to 290 mbu which would help alleviate some balance sheet stress. While these numbers were not surprising they did say they expect November bean price of $12.90, so there is room for downward movement in their view. The news that pulled soybeans lower had to do with other commodities as Argentine production estimates continue to fall and Brazil’s harvest is delayed. The insurance average for soybeans is $13.77 for November beans.
Wheat has struggled the last two weeks after pushing up against the $8.00 mark before falling all the way to $7.08 to end the week. Wheat has moved lower as Russia is selling their wheat the cheapest of anyone, with Egypt purchasing 240,000 tonnes this week. Russia selling their wheat cheaper to gain market share and get money to continue to fund their war on Ukraine. Funds were also sellers this week on the news as they expect Russia to get business as long as countries are saving money. The Ag Forum released estimates for wheat of 49.5 million acres and a trend yield of 49.2 bu/ac. This news combined with Russia were bearish but with first notice day approaches we could see calmer trade than the past few days soon.
The cotton story has not changed much as the supply/demand story has not changed. There is both a lack of demand and a supply surplus here in the US, which has led to less imports of cotton goods. With the potential recession looming the lack of current demand mixed with that does not paint a great picture for cotton as it continues to trade on the lower end of its recent range.
Equity Markets
Equity Markets were down this week as economic data keeps coming in supporting higher rates. Inflation is sticking around and earnings are mixed as February will post big losses across the major indexes. Many market commentors still believe we are heading lower from several different factors including the Fed, inflation, layoffs, valuations and more. Continue to keep an eye on the strengthening USD.
Eastern corn belt has gotten plenty of moisture so far this winter with the western corn belt needing more heading into the spring.
Podcast
With every new year, there are new opportunities, and there’s no better time to dive deeply into the stock market and tax-saving strategies for 2023 than now. In our latest episode of the Hedged Edge, we’re joined by Tim Webb, Chief Investment Officer and Managing Partner from our sister company, RCM Wealth Advisors. Tim is no stranger to advising institutions and agribusinesses where he has been implementing no-nonsense financial planning strategies and market investment disciplines to help Clients build and maintain wealth and reach financial goals since
Inside this jam-packed session, we’re taking a break from commodities, and talking about the world of equities, interest rates, tax savings, and business planning strategies. Plus, Jeff and Tim delve into a variety of topics like:
The current state of the markets within the wealth management industry
Is there a beacon of hope, or is it all doom and gloom for the markets?
Other strategies to think about outside of the stock market and so much more!
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].
There is still too much wood out there. This week the euro traders had to not only deal with a soft market but also with the basis wood getting cheaper daily. Add to the mix that every Friday those with contract wood start off in the negative and you get this extreme malaise. With the amount of construction going on out there the market is either telling us the slowdown will be drastic or we are undervalued. Neither will be answered anytime soon so for today the market is the true indicator. Futures are on day 13 of this sell off. The rally lasted 16 days so the market could be close to bottoming. The resiliency of futures the last few days in light of all the algo selling pressure tells me it is close. What the bounce will look like is anyone’s guess, but the conditions are for a better grind higher market into the spring and not a spike up from the low. So, prepare for the spike and how for the grind.
Economic:
The housing starts report this week added to the confusion already lingering throughout the industry. Today multifamily units under construction are at the highest level since 1973. Combined single and multifamily there are 1.7 million units under construction. That number bumps up against the record. These are seasonally adjusted numbers. That said, there is near record construction going on with a third of the country dormant because of winter. When digging down into the numbers one must wonder with construction at this pace are we really under built? Rents are sticky, so I would expect that pace to remain in place while single families continue to fall off. The construction dynamics bare some resemblance to the housing market in 2004-2005. That is when the housing bubble burst. The housing sector was in a bear market well before the 2009 economic meltdown. The pace of today’s construction will lead to an overbuilt industry at some point. In a year from now we will not have 1.7 million units under construction. Now let us add to the confusion. The fact is today there are 1.7 million units under construction and that makes $382 way too cheap.
Technical:
March futures objective is for the January settlement of $344. The gap will be closed at $359.00 but the market is searching for value and that is the last expiration. The fact that the market is headed back to that area is troubling long-term. It indicates that $344 wasn’t a onetime fluke. It was considered a value the first time down and now is the area of rebuilding. The next rally up may just have to correct back again to this area. Momentum is oversold and a correction is coming but the market is not stair stepping higher yet. My only hope is that it isn’t a continuation of the stair stepping lower mode. In any case these are good levels to own wood going into the spring.
Below are the option links to the new contract. Please take a look at the quote page for options.
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.
The market just experienced a long needed buy round. It started as a fill in and turned into a fill up. The buy side had the futures to lean on so many stepped up their buying. The problem with that was the fact that futures fell quicker than expected and now there is more wood out there than needed. You throw the Euro wood into the mix, and we have more wood chasing too few dollars again. In traders’ terms “the market lost the bid again.”
Economic:
The key to housing fundamentals is labor. We went all through the teen years without enough skilled labor. Finally, prices were forced up enough to allow wages to rise and get the needed labor. We have not seen any layoffs in the home building sector so far. That is a sign of confidence on the home builder’s side. Today we are all data dependent. The builders are not seeing big downturn in the numbers but its early.
Technical:
It is hard to believe but the week gap left by the expiration is coming back into play. That gap is 419 to 344. Please remember the last time I talked about the gap the market rallied $100. This time I don’t think the timing is right for a rally. The downside channel comes in at 379.50. The expiration pushed the market over the channel not market conditions. This area has become relevant again today but is also now defined as cheap.
The market of the past few months reminds me of the typical “controlled burn” markets of the past. You have to hold inventory because the spikes are quick and violent. We are back to the first buy is good and then not. The difference on this one is there just may be a premium to sell in futures to stop the bleeding. That’s what just occurred. The other positive is now futures are headed for a deep discount allowing forward pricing again. That is a controlled burn. There is a path to mitigate risk and invest.
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.
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