LEONARD LUMBER REPORT: “It’s the economy, stupid.” Remember that wise response to a reporter’s question many years ago?
Recap:
“It’s the economy, stupid.” Remember that wise response to a reporter’s question many years ago? After another muted reaction to another shutdown on Friday, I’m worried that it is a much bigger problem than rates and home prices. I keep going back and forth each month, wondering if there is something wrong in Mudville. With a continued contraction in supply, rates nearing 6% and flat employment numbers, one would expect some upside anxiety. The raw data has pointed to a better marketplace for about three years now. We are consumed by a flood of data that has repeatedly been proven wrong about the market. Lumber prices have been held artificially high by the duties and tariffs, not because of a better demand equation. That scenario has pushed the producers back into the red numerous times this year, with the buyers “good dealed” to death. Today, the 2026 first quarter decision is to either add more cheap wood to the pile and watch it sit for months or hold off. Some of the prices talked about on Thursday and Friday tell me the cash buyers are on the sidelines. Data shows that the mills cannot continue to lose money at this pace. My argument is that determining pace has to include the millions of dollars they made post-COVID. Factor that in, and it may show their ability to hang on for longer than we think.
Futures trading is rather easy. In premium markets, you basis trade. In discount markets, you forward price. In premium markets, you should also hold a higher percentage of futures to cash. The opportunities are in the items and species that are undervalued compared to the historical norm. Today, we can’t define value, so you are buying undervalued products and selling a high premium futures market. A. it allows you to hold more wood because it is hedged, and B. is an opportunity.
Finally, momentum has been generally down in lumber this year. We did have strong rallies, but they were based on shorts covering off of news. Absent that news, the market is always seeing selling. That selling is computer-generated, but all the same, it is momentum. Create true upward momentum, and the algo switches sides. Not today….
Technical:
The futures low was $516 in 2025. That’s the focal point this week for November. If the market can’t break $17 in 5 sessions, then we have a positive. The RSI in January is 24.50% which is a higher RSI than the last time we were down here. Jan is trading near its lows but is no longer oversold. The slow stochastics have crossed back into negative territory. The technical read is for a wallow around the bottom, not a big selloff.
At 1452, the November open interest is normal. The US government is no longer shut down. I’m not sure anyone noticed. That could be another economic indicator of a larger problem.
Daily Bulletin:
https://www.cmegroup.com/daily_bulletin/current/Section23_Lumber_Options.pdf
Southern Yellow Pine:
https://www.cmegroup.com/markets/agriculture/lumber-and-softs/southern-yellow-pine.volume.html
The Commitment of Traders:
https://www.cftc.gov/dea/futures/other_lf.htm