LEONARD LUMBER REPORT: THE FATIGUE FACTOR
Recap:
The fatigue factor. A lumber cycle only has so much life. An upcycle runs about 15 sessions before needs are met. A down cycle tends to last longer. The consumption factors are slow-moving, causing a longer lag until the next buy. Last week, we saw futures making what I would call a triple top and then failing. It was a sign of fatigue. The cash market is also struggling to keep up momentum. It is too early to call for a change in cycle direction, but it does give a reason to hedge a little.
We are starting each week with the same fundamental issue: trying to predict the macro trend. It is easy to say that we are in an upcycle in the micro picture, but we haven’t been able to call the macro down cycle finished. We are fence-sitting, poised for higher prices caused by less supply, not better demand. Consistent data shows less supplies coming out of Canada. It would not take much to put us in an undersupplied market. A slight downtick in rates would start to set it up. Today, the market has the war and crude to contend with. All other factors are pushed to the sidelines. The fact that housing inventories are at a high level and rates are grinding higher will keep construction in check.
What is troubling is that since last July, every upcycle has made a lower high. This comes at a time when production out of Canada is being reduced. This fact, more than any other, highlights the affordability issue. Demand is flat. There is never enough of an increase in sales to bring about an uptick in construction. The 2026 plans remain in place.
Trading:
The supply issue has caused the JIT buyer to chase the market. The rule is to carry inventory in a supply-driven market.
The demand issue warrants hedging of the excess inventories. No one today will do a $30 basis trade, but if futures go to a discount, the true basis is higher. We believe that the underbought condition of the housing sector should firm our trading range up, but the rules are to be hedged in a downcycle regardless.
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
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
bleonard@rcmam.com
312-761-263