This week’s back and forth trading in futures highlighted just how difficult it is to manage inventories in today’s marketplace. The problem is insufficient real-time data to read supply or demand accurately. We saw the industry going from a too much wood attitude on Monday to a now enough by Friday. That type of uncertainty has plagued this industry for years. In the recent past, many took to contracts, which has taken out some of the emotion but has also reduced margins. This buy sides self-prescribed shrinking of margins causes voids in the market.
The reluctance of other buyers and pure demand also adds to the voids. So, where are we going with this? We can’t keep this beast full in a rising market.
The marketplace continues to argue about business. 1899 is a big permit number and too large to produce for. We hear all about the actual completion number, labor, windows, yada, yada, yada. The permit number is either business for today, potential business, or soon to be postponed business. Most economists were in the same camp for years that we couldn’t build 1.5 because of labor, and we couldn’t produce 1.5 because of log issues. If the industry can’t complete 1.5 and there isn’t enough wood available for 1.5, why are permits rising to almost 1.9? The simple answer is increasing demand. Covid, the Fed, and the stock market have hyperbole the housing sector.
The Fed flooded the system with cash that sent the stock market to new highs giving many a large windfall. Throw the urban bail into the mix, and here we are. From here, the question becomes whether these levels are sustainable, and the quick answer is no. The longer answer is that the world has changed, and attitudes towards money have changed, as has investing. It will take years for this industry to get a read on the net result of that change. History has shown that industries learn to be more efficient, but higher prices stay.
Too many or not enough issues are the primary cause of our large swings as it “encourages” the algo’s to push the market. The market experiences temporary slowdowns in purchases which negatively impacts prices in futures. We saw early last week how quickly the market focuses on supply and shuts off. As we look towards better shipping and more Euro wood, I expect the industry to take a large step back. Prices will fall sharply, but with 1.9 permits, it won’t stay down for long.
Let’s Get Technical:
There are two views diverging views of the current lumber chart. The non-lumber technicians see a market consolidating to go sharply higher, and it is a pattern of a market cliff dwelling to seasoned lumber technicians. Who is seeing it correctly? The issue today is that lumber has historically been a pure momentum-driven market, and it corrects but rarely will it maintain a flat trading area at a top or bottom.
We have two weeks of a flat market hit by a shutdown announcement and a Russian invasion. Our first takeaway is that the marketplace is accepting these higher prices levels, and it is a market looking for the middle. That said, as a seasoned lumber technician, I would not be too exposed to a possible cliff in front of us.
Weekly Round-Up:
First and foremost, betting on cheaper wood is not a good business strategy. July is sitting close to $1,000, which is $300 under March futures and cash. I am looking for a spring selloff, but the math indicates a continued tight market for months. The entire industry will sell in May and go away after last year will keep inventories very low. As the technical section says, the industry is trying to find some middle ground for pricing but keeps getting caught in the logistics. There is a better cash trade, and the industry is adding a few hedges along the way. The funds are adding a few longs on every spike, but nothing could lead to a trend.
About The Leonard Report
The Leonard Lumber Report is a new column that focuses on the lumber futures market’s highs and lows and everything else in between. Our very own, Brian Leonard, risk analyst, will provide weekly commentary on the industry’s wood product sectors.
Before You Go…
A special guest joins us for this episode of The Hedged Edge, who is well known for his many titles, which include Doctor, Editor-in-Chief, Dean, and Chief Academic Officer, just to name a few. Dr. Channa S. Prakash, Dean of the College of Arts and Sciences (CAS) at Tuskegee University, has served as faculty since 1989 and is a professor of crop genetics, biotechnology, and genomics. He is also well recognized for mentoring underrepresented minority students.
Tune in as biotech guru Dr. Prakash discusses everything from Alabama football, genetics as one of the most extensive agricultural advancements, the most significant risk factors to feeding the world over the next 30-50 years, plus everything in between. And as a bonus, we find out what sport he would be interested in playing if he went professional.
Soybeans gained on the week as the Russia and Ukraine news dominated headlines. Outside of this news, the weather outlook improved for South America that would have been bearish for bean prices if the eastern European turmoil was not going on. The USDA Ag Forum came out with an estimated 88 million acres with a 51.5 bu/acre yield for beans this year in the U.S., which is a bearish number but not surprising at these current price ranges. The November bean price had a more visceral reaction as it fell quickly Thursday off the highs having over a $1 trading range for the day, ultimately falling 36 cents to $14.51 ½. The February insurance price for beans is $14.33 ½.
After days of large gains earlier in the week, wheat was limit up on Thursday after Russia invaded Ukraine. Ukraine is a major exporter of wheat and other agricultural goods as it is the 5th largest wheat exporter in the world, with Russia being #1. Not only is the world wheat supply threatened, but all trade in the Black Sea area will be affected, potentially only for a short period but disrupted, nonetheless. Russia accounts for more than 18% of the world’s wheat export and is a large oil and natural gas exporter, so any sanctions that hit their export economy could see ripple effects. This is only the beginning of this conflict, and wheat will be along for the whole ride, so you should expect volatility.
