Category: Research

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

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

312-761-2636

16 Dec 2024

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

LEONARD LUMBER REPORT: THE MARKET IS IN TROUBLE

Recap:

The market is in trouble. Last week’s trade was the giveback for futures hitting $620. Now what? The trade was out of sync all week. Futures headed lower while the industry was buying. The selling was met with large buy orders all the way down. These opposing dynamics create a bearish atmosphere. Between the industry buying back shorts, the roll and the makeup of the open interest there is much to unpack. Let’s give it a try.

The industry shorts liquidated 1339 contracts in the last reporting period. I have to start by saying that the number is more spec short than actual commercial. My guess is that most of the 1339 contracts were not tied to a cash contract. My point is a spec trade will exit sooner than a hedge trade. The drop in the commercial shorts (specs) will not create an imbalance.

The roll is not typical. Today there are 995 short funds in the market. Many of those may already be sitting in March. They will not be a factor. The likelihood of the market going from a -30 to a -10 this time is small. There might be some creep in, but nothing of substance. This is the time that the market gets some positivity out of the roll. Without it, the market stays under pressure.

The cash market just can’t find a bottom. SYP continues to be the market barometer since the moves are so extreme. SPF can’t move away from that fact. It’s the bitcoin of lumber.

Technical:

The January chart sets off a lot of warning signs. It is not very attractive. A commodity chartist called me today and said, “wow you’re going to 0.” We reviewed the weekly chart only to see more of the same. Lumber futures are not reacting to an extreme RSI or stochastic anymore. It now has a lagging reaction time. Most cash traders would agree that in the cash market the same occurs and the need to retime the buy has to develop. It’s less about the deal. Less about the RSI and more about timing.

A good suggestion for those who have to write a 2025 report for the company is that we may be getting closer to our typical $129 trading range. I think the market is going to be forced sharply higher at some point, but for now set up the parameters or bookends for the year.

Daily Bulletin:

The Commitment of Traders:

About the Leonard Report:

Brian Leonard

312-761-2636

10 Dec 2024

Agriculture, CME, Corn, Education, Futures, Grain, Hedging, Market Commentary, Market Updates, Research, Risk Management, Soybeans, Weather, Weekly Prices rcmagserv 0 comment

AG MARKET UPDATE: NOVEMBER 18 – DECEMBER 10

Corn has had a good month but needs some more help to get over the $4.50 hump that it bumped against after Tuesday’s Dec USDA report. The bullish trade leading into the report was hoping the USDA would find better numbers for ethanol and US exports, but they underestimated the demand numbers with the US ending stocks coming in 168 million bushels below estimates for US stocks. World stocks were also lower by 268 million bushels. While these stocks numbers are still very strong, they have tightened enough to raise the floor for the meantime while corn could trade between $4.30-$4.55 heading into the new year.

Soybeans’ last few weeks of trade between $9.80 and $10 has not provided much bullish optimism. There were no surprises in the Dec USDA report as large South American crop expectations and the US bean carryout doubling from 2023 are still bearish influences. Soybeans have a tough road ahead as South America is on pace to produce another record crop, and the incoming administration will likely not be biofuel friendly in the US. With all the recent investments in biodiesel and sustainable aviation fuel, there is a cloud that hangs over those areas that we are not sure if it is nothing and will blow over or a storm that may linger.

Equity Markets

The equity markets have continued higher with some recent weaknesses in the largest stocks while strength in the market has broadened. Analysts are beginning to release their outlooks for 2025, while plenty still feel good about the market do not expect another year of 20+% returns like we saw in ’23 and ’24 (so far) after the down year in ’22.

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

Other News

The Assad regime in Syria is over. Israel and Hamas appear close to reaching a temporary ceasefire. The fallout of both will be watched by energy markets as many questions will emerge in the region.
There was a slight cut to US wheat stocks, but world stocks are as expected, and comfortable as low Russian cash prices continue to reflect their ample supplies.

Drought Monitor

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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].

25 Nov 2024

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

LEONARD LUMBER REPORT: Coming into the week we were expecting a sloppy trade

Recap:

Coming into the week we were expecting a sloppy trade. With a later Thanksgiving and the recent run up, a technical correction was not out of the question. The problem is that lumber futures have a tendency of unwinding gains in a hurry. That’s what we saw in January futures from Wednesday on. There was no change in market conditions to warrant a rollover so what caused the steep selloff?

The lumber market has changed. There will be times of tightness exclusively caused by supply reductions. JIT from here on out will keep you undersupplied in a trending higher market. That said, the standard operating procedure will remain the same in 2025 with the boss calling for no losses on excess inventories. That’s a receipt for price spikes. Most will agree that it will be harder to buy something in a rallying market. What holds many back is the fact that once the cycle is over there is no support. That is what we are experiencing now. The futures market can settle back towards its original value. With the cash and futures prices so close, I would not expect the futures to return to 560. The discovery period of the next level should be higher. The issue I see is that there are about 15 trading sessions left between now and the new year to gain some momentum. It might be the algo/fund buying or the cash trade picking up again. This is a tough environment for price discovery. Buy the mistake.

Technical:

The market was able to fall to the 595.15 retracement point. The major support point is the 50% mark at 586.25. The RSI is 44.50% and the stochastics are heading lower. Both indicate a market that had pressed higher than value and now is giving it back. If this was a court of law a new precedent of 623.50 is on the books. The 200-day moving average is 566.70.

The key takeaway is how to trade the basis. There needs to be a recalibration of the model. $40 or $50 basis is still great. The issue is when. The first spike could be followed by another so now you are managing the futures. It looks like the trade switch could be one that the trade makes money on the cash side now. All these are signs of a change in trend. We are still in a sideways market. The trend is only a minor factor in the overall trade. If you have too much wood, hedge it.

Daily Bulletin:

The Commitment of Traders:

About the Leonard Report:

Brian Leonard

312-761-2636

18 Nov 2024

Agriculture, CME, Corn, Education, Futures, Grain, Hedging, Market Commentary, Market Updates, Research, Risk Management, Soybeans, U.S. Dollar, USDA Report, Weather, Weekly Prices rcmagserv 0 comment

AG MARKET UPDATE: OCT 29 – NOV 18

December ’24 corn rallied back to the $4.30-point last week, matching its recent highs from the start of the month. Corn’s 40+ cent rally from the August lows has been very welcome as harvest wrapped up and bins were getting full. Corn struggled to hold this level of trading for long a few weeks ago but with the December contract getting ready to expire and all the focus shifting to March the markets need some help to push to the $4.50 mark. Funds are long 550 million bushels of corn, the largest long position in 21 months. The November 8^th USDA report had the ’24 US corn crop at 183.1 bu/ac, avoiding the fears of the USDA finding an even bigger crop and raising yields that would’ve sent the market lower. Exports have been solid but within expectations as post-election trade will involve countries positioning themselves ahead of the new Trump presidency.

Soybeans recent rally was quickly given back with January soybeans trading just over $10. The recent lows in the $9.75 range appear to the where support is showing up as it has traded down to that range a few times but keeps bouncing back. The USDA had the US soybean production to 51.7 bu/ac, below the 52.8 bu/ac estimate the markets had priced in. While the market got an initial bounce from the report the fact that another trade war may be on the horizon with record bean yields in the US and South America, the supply and demand story is not friendly in its current state.

Equity Markets

The equity markets rallied following the presidential election and have since given some back. While Trump is seen a market friendly, the “who will benefit?” is a big question mark as tariffs and promised lower government spending will have widespread effects. Republicans will control the house and senate but with some senators not high on Trump, he likely will need some help to do everything he wants (think Manchin and Sinema with Dems).

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

Other News

South America is off to a good start with another record crop expected with the expanded acreage.
Cotton has had a rough 2 months after falling below 70 cents with the recent low of $0.6626 squarely in the crosshairs.
The USD has moved higher topping 106 following the election.

Drought Monitor

Contact an Ag Specialist Today

11 Nov 2024

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

LEONARD LUMBER REPORT: New highs going into NAWLA?

Recap:

New highs going into NAWLA? Now that is different. I think it also shows how this market has been turning early for months now. This lack of supply followed by a lack of demand cycle has kept the buy side off balance. The data indicates that the demand pattern, while not busy, is coming in more often. Buyers are used to a longer lag between buys so are not ready for the next one so soon. There is also an effect on the production side as they drop prices more aggressively looking for a longer lag. I can see the mills taking a more wait and see approach as the buy side stays in. This is all predicated on a bottom for this to be correct.

I made a call for $600 in the July contract back in April. I was surprised on how long the mills would lose money. The windfall from the last few years certainly allowed for some patience. They also have a good understanding of the cycles. This is one that has to play out. Profitability is getting close. My point is there is a lot of unspent capital out there. There is a lot of dry powdered out there. And the economy is good. Not bad for housing.

This is not going to be an easy ride. There just will be less overall pressure. As we speak, they are backing up the Queen Mary to Cape in Florida. The eastern guys have already turned it up. Supply increasing is the biggest headwind to the market. It is no longer rates. The trade is conditioned to back away at any sign of extra supply. When the wholesale community is in the middle there is this false sense of extra wood available. As I said, it’s not going to be and easy ride from here, but it is better. If the mills start to hedge they will keep the market tight.

Technical:

Going back to what was said above, the market this time did not correlated to the norm. The July to Sept run up, followed by the October lows never materialized. This year the market slowed into September only to walk itself up. The technical picture had turned neutral from negative. That wasn’t enough to buy the market but indicated a change. My point is that all three turns in the technicals to become a trade may not work here. There are times where a lag skews the osculators. This was one. If that remains the case, it indicates some downside in front of us in futures, but just enough to get the tech pic neutral. It continues to lean towards hedging. That hasn’t changed.

Daily Bulletin:

The Commitment of Traders:

About the Leonard Report:

Brian Leonard

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

312-761-2636

04 Nov 2024

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

LEONARD LUMBER REPORT: It was a very healthy week for both cash and futures

Recap:

It was a very healthy week for both cash and futures. As a combination, it was the best week for price movement all year. The key was the market went higher on its own. There was no outside noise to push it. It was all demand driven. That leads us to three simple scenarios. The first is that the market is still underbought and will stay tight. This could be the case as the “off the market” mill is back in the game. A slow buy could drag the market higher since we’ve had a few years for the buy side to be engrained with less is more. The next scenario is that the market is searching for a new trading level, which would be higher. Futures may pull back and wait for cash but shouldn’t break sharply. Maybe good selloffs followed by rallies. Finally, the typical futures trade. Here, futures drop at least 61% back, often in a quick second.

My first thought is that the reduction in production is noticeable when demand picks up and then fades into the background as the market slows. We have a good handle on the industry’s inventory capacity. Without a logistics issue, capacity will always put a top in the market. Today’s question is whether we should remain confident in the numbers when supply is limited. The trade is content to stay the course. No one has seen any demand creep yet. This run is only a shot over the bow.

A critical factor in this industry is interest rates. Most haven’t noticed, but since the Fed cut on September 18^th, the 30-year mortgage rate has risen by 80 bps. Going into 2025, the builders will negotiate the marketplace at a 6 to 7% rate. The Fed is looking for a 3.5 to 4% nominal rate, up from 2%. That will keep the 30-year locked above 6%. I go back to my “check the boxes” strategy. The multifamily guys will find a way to make the higher rates work. There is a ton of money in this sector that likes condos and apartments. They don’t like to “divest”. They value this sector. Our multifamily guys should look for an uptick next year in bidding. I’m not sure SYP isn’t already signaling things are getting better there.

Again, this is a multifaceted industry. The financial drivers go well beyond the mills and distributors.

Technical:

Jan had a $41 run from last Friday’s lows to the highs this week. That’s big. The stochastics were the first indicator of a possible rally. The other oscillators followed. Last week, I commented that the outside spec trade would see lumber as a buy. I’m not sure how much they participated, but we saw a big push through a small hole. Coming into this week, the signal is to sell. With a January RSI of 82.77% and a lag to the rally, they will see weakness and room to the downside. My point is that the futures market is overbought. The cash market isn’t.

Note: the driver in this market is SYP. Follow it for the trend.

Daily Bulletin:

The Commitment of Traders:

About the Leonard Report:

Brian Leonard

312-761-2636

29 Oct 2024

Agriculture, Corn, Dow Jones, Futures, Grain, Hedging, Market Commentary, Market Updates, Research, Risk Management, Soybeans, Weather, Weekly Prices rcmagserv 0 comment

AG MARKET UPDATE: OCTOBER 4 – 29

Corn has been range-bound the last 2 months between $4 and $4.40. With no weather issues during harvest following a very dry end of the growing season, the market did not get any unexpected help to push it higher. Mexico continues to buy US corn at a fast pace, appearing again in the export reports. With no major problems starting the year in South America and smooth sailing to the finish of US harvest there does not appear to be anything to give this market a boost. Expect technicals to play a major role in the direction of the trade for the near term as the fundamental trade will be reliant on harvest news.

Soybeans weakness over the month has lowered it with corn. Beans do not have any bullish news on the horizon as they failed to rally through technical resistance. With the election next week, a tariff war with China would hurt beans in an already depressed market as we have seen in the past. Funds are very short and will need a catalyst to get them to change course, which currently is lacking. Bean harvest is 89% complete which means there won’t be much opportunity for unexpected bullish news moving forward.

Equity Markets

The equity markets continue higher as the biggest week of earnings kicks off. The Fed is expected to cut rates again by the end of the year, but inflation and jobs data are sending a mixed picture. The 10-year US treasuries have moved higher since the rate cut as the market is questioning whether or not the Fed will get it right.

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

Other News

China announced that total grain production this year would be a record 700 million metric tons. As China continues to increase domestic production of edible commodities while continuing to invest in South America the US needs to find a new partner to replace their demand as they continue to try and be less reliant on American agriculture.
Crude Oil has been volatile but has moved lower this week as possible easing tensions in the Middle East as cease fire negotiations restart.
With the election results potentially being unknown for a few days following November 5 there could be some volatility in all markets.
The October insurance averages are $4.16 1/2 for corn and $10.06 for beans as of 10/29. The February insurance averages were $4.67 for corn and $11.60 for beans.

Drought Monitor

Contact an Ag Specialist Today

28 Oct 2024

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

LEONARD LUMBER REPORT: Lumber is a very complicated commodity

Recap:

Lumber is a very complicated commodity with the most moving parts of any I have dealt with. That said, it is a commodity and commodities trade value. Lumber is only $20 either side of a trade and can’t get there. If you look at a weekly chart you’ll need a microscope to see the trading ranges for the last 5 weeks. Someone said last week that this market is coiling ready itself for a blowup. I said the same thing 12 months ago. I’m hoping he is closer to right than I was. My point is that the market is draining all the excesses caused by Covid a few ounces at a time. The shutdowns just aren’t showing up in a way that can cause a panic. It looks like more of the same.

A few recap points.

A mill reported a 3^rd quarter loss last week. Let’s take a step back. Futures contracts are designed to protect the producer in a falling market. Mills presences will actually put a floor in prices. We have little mill participation today. I’m hoping they take a deeper look into the financial design of futures.

All week I heard complaints about certain items not being available. It is not a free-flowing cash market out there. Now, yes, there are some cheap and available items, but for a flat market things are getting tight. Unless it’s a basis trade, this is a tough place to sell futures. The funds are rolling and exiting. The report this week is up to Tuesday, so it missed the 3 strongest days for the week. It all comes down to momentum. Outside money creates momentum in the lumber futures market. Shutdowns, fires, and strikes all have a very limited effect. The algo and the funds are today’s day-to-day drivers. The lack of that push keeps us flat. Now, it may be defined as flat, but I wouldn’t be short.

Technically, we are married to trying to push to a new high in futures. Cash hasn’t recently allowed it but that too is moving up. In November the last high was 538.00. Today, its 200-day moving average sits at 554.07.

Daily Bulletin:

The Commitment of Traders:

About the Leonard Report:

Brian Leonard

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

312-761-2636

14 Oct 2024

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

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:

The Commitment of Traders:

About the Leonard Report:

Brian Leonard