Leonard Lumber Report: The Futures Market Is Under Pressure

The futures market was under pressure all week as a seasonal pause had hit the market; however, the push to buy cash has eased. The transportation issue hasn’t eased, but the buying has. That has led to more wood in the secondary’s hand, thus more wood available in the field. That amount isn’t much, and it is high priced. 

The takeaway from last week is only when the push eases, so does cash flow to the middle of the market. Any time a buyer sees two offers available, they close the POs, which is what we are seeing again. This industry is more afraid of buying a car and the market falling than missing a cheap vehicle and paying up. There is a lot of inefficiencies built into the market today. Another is the fear of a margin call. This lack of structure will keep volatility around and the mills in high cotton. 

There are two ways to look at the market today: by counting sticks and needs for tomorrow or taking a closer look at where we are at in the housing cycle. For the bigger players, this quarter is done, the second is close to being finished, and now the focus is on the third quarter and those needs. 

Housing report and Early Projections

This week we have the housing report, and the early projections are for 1.7 starts and 1.85 permits. The critical number is always completions, but these are the trendsetters. Ongoing predictions are for the numbers to stay in this area and completions to have only a slight uptick. We can see the builders accepting these prices and guaranteeing the product is key, not price. 

The market experienced it last May with an uptick in forward pricing in the $1,200 range. That turned out not to be a great level to buy, but the push back from it was minor, and they were locking in the product. This year we’d expect the opposite with less forward sales. The industry will play for the break this time around, limiting the downside and extending the next rally. 

Let’s Get Technical:

The technical read is negative. There is no easy way to say it. For the first time in months, the market has all signals pointing lower. If there isn’t buying on the break, the downside objective will increase, and it won’t get as low as most expect. 

Another way to look at it is how the market reacts to the news. The added supply has pushed futures lower at a very slow pace turning the momentum indicators only after many down days. On the flip side, any good news spikes the market up.

We’d suspect the algo programmer is adding a selling layer, and the long fund is adding stops. Let’s face it. They are the drivers of our market and thus are the guiding factor for starts and stops. We see in the overall market that the buyer short cash because of jobs. The key to this move is to buy on the way down or are forced to pay up again.

The technical read is short, while the fundamentals are positive—hedge your risk.

Open Interest and Commitment of Traders:

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

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.