The biggest takeaway from last week’s trade is that lumber cycles develop and remain in place. We as an industry try to decipher each outside influence on pricing to help make a call for a reversal or add to the confirmation. That was the case last week as a flood of news, noise, and reactions flipped the bull or bear switch a few times. By Friday, all we had was a lower price for the week. The key to businesses is to judge those cycles to be buying on the way down and selling on the way up. Is that possible today with a different rumor every other day and late ship times?
Cycle:
Cycles in lumber were generally easier to determine as they tended to relate to expirations, holidays, and seasonals. Today, they still relate but are also influenced more by previous trading and potential upcoming issues. This last upcycle, which may still be in place, has lasted longer than most at this time of year. This late Nov to early Mar run was unusual. But if we go back to where the market started in terms of moves, you can see how it became more underbought than usual and thus extended this upcycle. Another factor was that it took longer for the buy-side to reenter the market after the scaring it just took. That is also why you can’t call this upcycle done because the industry has not returned to the normal inventory building. It probably never will, but it’s always underbought in a good demand-driven market. If that catches up to this market, it will rally again.
Economics:
The publicly traded homebuilders, distribution, and producers are not the darlings of Wallstreet anymore. And why is that? Higher rates and inflation kills housing markets. The only way to come back into favor with the street is through increased sales. If the home builders can ramp it up for the rest of 2022, all three of the sectors will do better. My guess is the plan will be to increase construction based on the uptick in business showing up on desks.
Outlook:
The market has two opposing dynamics at work today. The one is good demand that is neither letting up nor getting bought for. The other is rising rates etc. Rates will be an issue, as we can see by Wall Street’s attitude towards the industry, but at the end of the day, this is a micro-focused industry. It looks only at the immediate buy or sells, and today it is looking for that cheap buy.
** There has been an increase of open interest of about 400 contracts. Almost all of that is from the industry, and it is evenly split between buyers and sellers. Many have realized the benefits of using the board to protect themselves from the ever-present swings.
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…
RCM Ag Services put a unique spin on National Agriculture Day by going international. That’s right, we jumped right into international waters with Maria Dorsett from USDA’s Foreign Agriculture Services for an interesting discussion about linking U.S. agriculture to the rest of the world.
Each year, March 22 represents a special day to increase public awareness of the U.S.’s agricultural role in society, so why not take it one step further by bringing in a global component? As the world population soars, there’s an even greater demand for producing food, fiber, and renewable resources. That’s why we’re taking a deeper dive into the USDA’s trade finance programs, like the GSM-102, which supports sales of U.S. agricultural products in overseas markets and supports export growth in areas of the world that are seeing some of the fastest population growth.
So, jump aboard (no passport needed), as Maria discusses how U.S. companies use GSM-102, what the program features, and the benefits that it offers!