LEONARD LUMBER REPORT: You need to go back a year to find futures prices this low

You need to go back a year to find futures prices this low. That makes the next move either a return to previous lows or a bounce to a sustainable level. This isn’t a ‘could go lower’ or ‘could go higher’ statement. It’s a warning shot that the next lower targets are significantly lower if the reduced supply doesn’t support prices. There remains a wall of concern about economic issues that could hurt housing in the future. I’ve been hoping for a lower supply for two years now to offset this, but nothing has changed. All the run-ups have been driven by speculation. The market has never been short on optimism. The main issue with all this is that our industry, like the Fed, is data-driven, and that data lags. Economic data comes after the fact. I’m hoping that’s not the case today.
Once September expires, the industry will focus closely on the November contract, looking for any signs of increasing value. If demand stays the same, shrinking production will start to tighten the market. This process must be gradual enough for the industry to accept higher prices. Rumor or announcement rallies rarely last, and their aftermath often results in prices lower than needed. I believe lumber, as a commodity, is very efficient at price discovery and will, given enough time, settle near its true value. Today, however, we’re pushing it too high or too low based on nothing. Speculators love this, but it’s tough on the industry.

The Technical Read:

The factual data is that the last low was in July 2024 at 418.50, and the next low was in January 2023 at 352.50. That is the major worry. The minor read is a weekly gap from 499.50 to 493.00. The next down leg is to the trendline at 466.01. This market has always reduced its confidence level to zero and saw prices go well below value. That is a real fear today. I drove by a lumber yard in Mokena, Illinois, that was packed, and a few unloaded cars were still sitting idle. The only thing I could think of was that I hope it was hedged. My point being that we are focusing on the reduction in production while a shit load of wood is sitting in the US. The result of that focus has been lower prices, still heading lower.

Enough gloom and doom. The production side of the industry has been working very hard to find a breakeven level that carries through the spikes and valleys. The gap mentioned above, from 499.50 to 493.00, is probably a good value level on paper. There has been enough supply reduction to warrant a better cash price. Sub $500 (futures) is cheap. We still need the marketplace to adapt to levels that will be sustainable during economic uncertainty; it takes time.

The funds are getting short again. I’m not sure if that is good news or not.

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