Tag: lumber report

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

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

312-761-2636

07 Aug 2023

Agriculture, CME, Lumber, Market Commentary, Market Updates, Research, Risk Management, Weekly Prices rcmagserv 0 comment

LEONARD LUMBER REPORT: The quest for today’s value remains elusive

Lumber Weekly

The quest for today’s value remains elusive.

Last Week:

The futures markets fell another $19.50 as a weak cash market dominated. The makeup of the trade was the funds selling while the industry bought back shorts or got long. In this part of the cycle, all the focus is on the cash market. I am surprised at the extent of the erosion. In a hurry to raise prices, the mills did not establish a base level. The chase is on to find that level. The futures guys are hoping for a lessening of the fund selling next week could bottom futures. While I agree, it could be a tough week ahead.

Factors:

The struggle continues to determine the value of this commodity. The factors affecting the price are less production out of Canada—the slowing of Euro shipments, and the JIT inventory management strategy. The demand data shows a steady pace of construction, and reports from the field are of a good wood flow. Under these conditions, the commodity’s price will remain at or above breakeven. The reality is that the price continues to drift into the red for the mills. The lower price is also digging into the margins of most of the industry. The Milton Freeman School of Economics says that inflated profits are met with long-term deflation. That may be the easy answer here.

We have to go back to the actual supply and demand factors. The supply gap in housing continues to widen as family formation outpaces construction. There are limits to construction. Labor and government regulations are extending the timeline of all buildings. That lag is very positive long-term for housing. I did see something thought-provoking for the first-time home buyer. Here goes…

The first-time home buyer has roughly $100,000 saved for a down payment on a $350,000 home. These are estimates based on today’s data. If the buyer does an analysis, they see that they are earning 6% on $100,000 today. Buying a home, they would have $250,000 debt at roughly 8%. That is the 7.5% mortgage and the additional home expenses. Now the appreciation of a home averages 5% historically. At 8% the buyer loses 3% a year. If they do not buy a home, they make 6% on $100,000 with potential saving increases.

Summary:

This year’s actions of the lumber market highlight an industry preparing for less demand. While there isn’t data confirming a downturn, the marketplace stays guarded. I did look for less demand by the third quarter. I also looked for less supply to offset the decrease. This market doesn’t react that smoothly. At some point, the multifamily sector will show a slowing. Then the single-family sector will see a pause. In a JIT environment, prices will remain under pressure. That could be around for a long time. The good news is the market will continue to get caught short. The middle of the market can continue to benefit from those spikes.

Daily Bulletin:

Commitment of Traders:

About the Leonard Report:

Brian Leonard

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

312-761-2636

31 Jul 2023

Agriculture, CME, Lumber, Market Commentary, Market Updates, Research, Risk Management, Weekly Prices rcmagserv 0 comment

LEONARD LUMBER REPORT: The low price of lumber is straining everyone’s bottom line

Lumber Weekly

There is a battle in the Housing market pitting a tighter credit environment against a capital-rich ecosystem.
Excess inventories grow over time. The effect also grows over time. It didn’t this time.
The low price of lumber is straining everyone’s bottom line.

Last Week

The futures market was under pressure all week. The two drivers were the lack of a cash trade and the funds reentering a short position. If we look at the open interest, the funds built a short position (+408) while the hedgers took profits (-438). That’s based on data ending on Tuesday. Both numbers will grow again in next week’s report. That sums it up. The key takeaway is that a pile of wood is now unhedged and cheaper.

So, what does it look like today? The negatives are the hot weather, slowing construction, the euro arriving at the port, and an industry that just completed a buy round. The positives are the continued steady of wood out the door and the fact that we dropped $79 (futures) already.

The market is sitting in the middle of the cycle. What’s different this time is the middle now sits $20 higher than last time. However slow it may be, this market is building value at higher levels. The fund pressure may change that but only in the short run.

Technical:

There are contrasting views this week. The longer-term view is just now breaking down momentum-wise. With an RSI of 49.30%, it calls for a return to the lows. Shorter-term, the market is grinding down to a bottom. This low volatility quiet trade would generally slow the selling and cause profit-taking. The momentum indicators are trying to look positive. The only issue is that most negative cycles don’t turn when hovering at a 23% RSI. With the funds around, we could easily see a spike lower. If you liked it at $520, you’ll love it at $500 and even better at $480.

Daily Bulletin:

Commitment of Traders:

About the Leonard Report:

Brian Leonard

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

312-761-2636

24 Jul 2023

Agriculture, CME, Lumber, Market Commentary, Market Updates, Research, Risk Management, Weekly Prices rcmagserv 0 comment

LEONARD LUMBER REPORT: After a six-week run, the cash market shows signs of fatigue

After a six-week run, the cash market shows signs of fatigue.
The futures market had a $52 range from high to low, confirming that the volatility is returning.
Reports from the field are of home builders putting on the full-court press for yearend while data shows a potential future slowdown.

Cash

At six weeks, this cash round has been longer than most. Inventory management plans are causing small bottlenecks every few months. If this mechanism stays in place, it may be a while before the cash market recovers. The catalysis of these last two buys in January and June was from a supply issue and commodity funds covering. Once that energy is gone, the market tends to settle back down. The cash market back below breakeven isn’t sustainable but the fact.

Economists are talking about a potential period of commodity deflation coming. Historically, the lumber commodity enters that disinflationary period earlier than most other commodities. It also exits earlier. Hovering under breakeven for as long as it has, lumber is probably in the middle of the cycle.

Volatility

Lumber is not a volatile trade. The normal ranges are small and defined. That all changed when covid hit. This typically controlled commodity was hit with numerous issues. That created many wide swings, and volatility went off the charts. It took the last 14 months of sideways trading to bring the volatility down and, as usual, took it to record lows. That is why last week’s $52 move is essential. Today we look at it as bringing vol back to historic levels. If the swings continue and get more comprehensive, it should be a red flag to the part of this industry that is affected most by higher prices.

Demand

“Heat is not a factor this year.” There has been an uptick in the building since spring that hasn’t let up. The typical heat-caused slowdowns have not come into play. The push for completions is on. The starts number has always been a lagging indicator, but this time we could see a more dramatic drop going into the fall because of today’s rapid pace. We are entering a time of year when production capacity moves back up. It could be a struggle for the industry to digest more wood and less demand.

*This industry has yet to experience the effects of the higher rates. We could have already landed, but the industry is trading as if there is more negative to come. The lack of any honest follow-through is an industry on the defensive.

Technical:

Today the focal technical points are the 200- and 100-day moving averages. The 200 sits at 557.40, and the 100 sits at 540.30. This market is in a downtrend which highlights the 100-day average. I will look for some added momentum if the market closes under it. A few weeks back, the call was if the market rallied through the $600 mark, it would gain upside momentum. The features of the trade are the same. The close on Friday was a bit friendly, so it may pay to practice patience before committing to the short side

Daily Bulletin:

Commitment of Traders:

About the Leonard Report:

Brian Leonard

https://www.cmegroup.com/markets/agriculture/lumber-and-softs/lumber.volume.html?itm_source=cmegroup&itm_medium=friendly&itm_campaign=lbr&redirect=/lbr

312-761-2636

17 Jul 2023

Agriculture, CME, Lumber, Market Commentary, Market Updates, Research, Risk Management, Weekly Prices rcmagserv 0 comment

LEONARD LUMBER REPORT: A FEW TAKEAWAYS FROM THE FUTURES TRADE LAST WEEK

Summary: Futures and Cash

There were a few takeaways from the futures trade last week. The first is the fact that July liquidated somewhat orderly, at least by lumber standards. That will lead to more confidence in using the new contract. The other feature was data that showed a lot of the Friday to Tuesday run-up was caused by short fund liquidation. It wasn’t the only reason but most likely was the catalyst for the sharp run-up Monday. The futures market hit fund stops. As of Tuesday, they were now carrying just 700 contracts and that number could be less. If you remember they were the catalyst last January of that sharp run-up. They liquidated most of their position and then a few weeks later were selling again with both hands. Let’s watch for a rerun.

This last rally was a short covering and fill-in run. They were no major data points to set it off. That said, there is only positive economic data coming out for housing. The starts are out on Wednesday. If the marketplace can hold the demand, prices are going higher. The mills are focused on three things, getting back to breakeven, making a profit, and then running it back up to $800. Let’s get it to breakeven first before we chat about the others.

Technical:

The technical read hasn’t been an outright buy throughout this whole run. It showed a few positives but more signals not to be short. The rally started in early June. It now has a very healthy support line sitting at $552. To trade down there and hold would be expected. Now on the flip side, I have been a proponent of getting long over $600 expecting a sharp spike caused by fund buy stops. With their position much smaller, I would not expect to see that occur. Selling in front of $598.20 against inventory is now back in play. Everything else is neutral.

Lumber Futures Volume & Open Interest

CFTC Commitments of Traders Long Report

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

Lumber & Wood Pulp Options

About the Leonard Report:

Brian Leonard

312-761-2636

03 Jul 2023

Agriculture, CME, Lumber, Market Commentary, Market Updates, Research, Risk Management, Weekly Prices rcmagserv 0 comment

LEONARD LUMBER REPORT: THIS BUYING CYCLE HAS COME TO ITS COMPLETION

Summary: Futures and Cash

This buying cycle has come to its completion. The pipeline is back to normal. Wood is now parked throughout the system. The mills were able to walk the price back up to breakeven and the buy side now has a few months of inventory on its way. The cash and futures also hit par. It was typical and nothing special except for the fact that it took a few major fires and continual shutdowns to even get the needle to move. Without those issues, this market would be headed right back down. But those issues are still with us.

This cycle has seen futures run $86 and pull back almost $40. At the same time, the cash market rallied $85 and remains firm. The mills have good files and the marketplace as a whole isn’t oversupplied. The market is sitting in a good area. The next issue becomes the expiration of July futures. Expirations have been mostly negative in the past given the housing dynamics. The makeup today shows possible pressure coming from the short mills. The market will need to go to value to offset the mills. At this point, it is hard to tell if that area is substantially lower or not. On Monday there won’t be any takers. They will step up if the news out there remains the same and futures are at a discount. The market is very inefficient going into expiration. Regardless, the fact is a firm cash market trades.

Technical:

The numbers to watch are the 50% and 61.8% retracement points in July. At this point, I would be focusing on September but a sloppy July early in the week will hurt the market overall. The 50 number is $521 and the 61 number is $511. There is a lot of support from $523 to $525. Everything else is neutral. Moving to September, the formation is somewhat supportive. If July can hold in here, I think the September will rally.

With the market being open on Monday and then closed on Tuesday we could be in for a choppy week. Any firm conviction in either direction could tell the story.

https://www.cmegroup.com/markets/agriculture/lumber-and-softs/lumber.volume.html?itm_source=cmegroup&itm_medium=friendly&itm_campaign=lbr&redirect=/lbr

Lumber Futures Volume & Open Interest

CFTC Commitments of Traders Long Report

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

Lumber & Wood Pulp Options

About the Leonard Report:

Brian Leonard

312-761-2636

27 Jun 2023

Agriculture, CME, Lumber, Market Commentary, Market Updates, Research, Risk Management, Weekly Prices rcmagserv 0 comment

LEONARD LUMBER REPORT: Last week’s trade activity provided a reliable indication of the broader market conditions

Last week’s trade activity provided a reliable indication of the broader market conditions. The strength of the housing reports, including new homes, existing homes, and permits, suggests a robust demand for lumber. However, factors such as production and shipment disruptions have contributed to a tight marketplace. It’s important to consider whether the market is still experiencing a shortage and whether it’s driven by increased demand or inventory management.

When the focus shifts to inventory management, it results in fewer buyers willing to participate, indicating that the rally is nearing its end. This also prevents the market from becoming overbought. These patterns align with the typical characteristics of a market cycle in the process of bottoming out. Rejecting excess inventory is a crucial aspect of building a market bottom. Bottoming cycles tend to be of longer duration. While it might not be confirmed until December or later, the recommended strategy moving forward is to consider owning wood.

Regarding the roll and spread, the narrowing gap between buyers and sellers is an indication that the roll is nearing its end. While the spread may or may not widen again, the overall behavior aligns with typical market patterns.

Lastly, the question arises whether the strength of the pre-4th rally will disregard this overbought condition. Monitoring market strength and considering the impact of rallies over the coming weeks will be crucial in determining future trends.

https://www.cmegroup.com/markets/agriculture/lumber-and-softs/lumber.volume.html?itm_source=cmegroup&itm_medium=friendly&itm_campaign=lbr&redirect=/lbr

Lumber Futures Volume & Open Interest

CFTC Commitments of Traders Long Report

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

Lumber & Wood Pulp Options

About the Leonard Report:

Brian Leonard

312-761-2636

12 Jun 2023

Agriculture, CME, Lumber, Market Commentary, Market Updates, Research, Risk Management, Weekly Prices rcmagserv 0 comment

Leonard Lumber Report: The futures and cash market saw a much needed buy round last week

Summary:

The futures and cash market saw a much needed buy round last week. July futures finished up $27.50 while cash was up $7. I would categorize it as not explosive, but positive. The fires in eastern Canada set the rally off. The lack of inventories kept it going. It is not a runaway market. It is one that needs continuous reassurance. The current trader psyche should cause a pause early next week unless more issues arise. $350 cash isn’t the issue. Getting long is. Let’s dig down into that thought process.

There is a big divergence in confidence between the buyers and the builders. The builders have been living off old orders this year but then began gearing up for more building with no one noticing. Economics showed they could still build and sell. Wallstreet saw while distribution didn’t care. The buy side was suffering through an oversupplied marketplace. That is still around but having a much less impact. Last week we saw a slight wake-up call on the supply side. This summer wood won’t be as available and weed was at Woodstock.

Flash Crash:

At about 12:30 on Friday, the futures market experienced a flash crash. In a matter of seconds, the market fell $20 to the first circuit breaker of $25. There is a circuit breaker at the 50% mark of a limit move. It stops trading for two minutes and then resumes. It was put in place to keep computer programs from running the market limit on one order. Coming off of a market that ran $60 in a few seconds this was nothing.

Technical:

The futures market did a good job of breaking out from the sideways trade. That move turned some overdone oscillators to neutral or positive. The run also caused a rapid increase in the RSI. It hit 71% intraday. 80% is getting too rich. This is a norm for a market that was trending sideways for so long. What to watch for is a 70% RSI when July futures get into the $520s. That type of divergence is positive.

Roll/Spread:

The first takeaway is the fact that there are funds in this contract to roll. That mechanism is key for liquidity. They are holding roughly 2500 shorts. The percentage to open interest is consistent with the fund’s way of trading for years. The spreading on Wednesday and Thursday was very robust. The buying of July and selling of September helped keep July higher than the rest of the market. More rolling will keep July positive if that is the only trading.

https://www.cmegroup.com/markets/agriculture/lumber-and-softs/lumber.volume.html?itm_source=cmegroup&itm_medium=friendly&itm_campaign=lbr&redirect=/lbr

Lumber Futures Volume & Open Interest

CFTC Commitments of Traders Long Report

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

Lumber & Wood Pulp Options

About the Leonard Report:

Brian Leonard

312-761-2636

05 Jun 2023

Agriculture, CME, Lumber, Market Commentary, Market Updates, Research, Risk Management rcmagserv 0 comment

LEONARD LUMBER REPORT: The futures market had a mixed week

Summary:

The futures market had a mixed week as Tuesday saw a good flush of longs followed by a Wednesday of profit-taking. By Friday the market saw a pickup in volume as the roll began. Having an active roll is key to a fluid contract. The market is getting a little fatigued on the sell side. After over 16 sessions without a correction, the attitude has changed to “not short” from “not long.” This will leave only the algo and funds left to sell it. They won’t compete with themselves for long. Is this a bullish call? Nope, I just think that the headwinds out there for this industry are now defined. The negatives coming are expected and planned for. Without a surprise, the market is underbought.

Economic:

The overall economy expects higher unemployment and sticky high rates. Those are big negatives for this industry. The question becomes if the 80% break in prices from the 2022 highs was enough or not to offset those issues. The fact that we are in the middle of it with steady demand tells us that just maybe the underbuilt condition is a bigger factor in the demand equation. If so, demand will also remain sticky. My projection for a third quarter of less supply offsetting less demand may not play out with demand better.

Technical:

The resistance trendline is now at 499.50. The oscillators are calling for a correction. A rally back to the trendline would be expected. The issue is this elongated downtrend. It doesn’t create a comprehensive oversold condition. It gradually puts indicators overdone. Today nothing indicates caution should be used when basis trading. It continues to be a reliable tool to use.

https://www.cmegroup.com/markets/agriculture/lumber-and-softs/lumber.volume.html?itm_source=cmegroup&itm_medium=friendly&itm_campaign=lbr&redirect=/lbr

Lumber Futures Volume & Open Interest

CFTC Commitments of Traders Long Report

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

Lumber & Wood Pulp Options

About the Leonard Report:

Brian Leonard

312-761-2636

30 May 2023

Agriculture, CME, Lumber, Market Commentary, Market Updates, Research, Risk Management, Weekly Prices rcmagserv 0 comment

LEONARD LUMBER REPORT: Last week it was about demand. This week it’s all about the structure

Summary:

Last week it was about demand. This week it’s all about the structure. I mentioned a few years back how the face of this industry was changing. I think it’s here. Never have we seen home builders’ stock hit new highs in a lumber bear market. And never have we seen a distributor have more sales than many of the producers. Today the product moves very fluidly from the mill to the builder and without disruptions allows for a lower-priced commodity. That is what it looks like out there.

Let’s look at a few numbers. In the last few weeks, Pulte, and DR Horton both hit 5-year highs. Toll was right behind them. The lack of supply on the market allows them to build and sell every day at a continued high margin. Wallstreet sees that continuing. So, despite the high prices of homes and high mortgages, the market is still out there.

Now let’s go through the first quarter numbers of two of the players. West Fraser did $1.6 billion in sales with a net loss of $ 42 million. Builders First Source did $3.8 billion in sales with a net income of $333.8 million. Their gross profit margin was up 300 pts to 35.3%. You would have to group a few mills together to reach BFS sales. This is just one of the big three distributors out there. The mills have been laser-focused on the contracts and consignment structure. It works well in a bull market as the print tends to hold a premium. It doesn’t work in a bear market where print holds a discount. It is a win-win for distribution. An upmarket allows for an additional margin to be added. In a down market, they get the spread between the cash price and the selling price. Basically in a down market, they keep all the margin excess. I have to add that there are many players out there that have some of the same programs because of their sheer size today.

For us lay people what this means is that the remainder of the market is in competition with themselves. The net result is more product chasing fewer dollars in a flat market. You either go to a third party for help (the futures market) or you chase the low. A $60 premium is a windfall. A $30 premium is great.

Technical:

It took till Friday, but we did hit the $485 number. There wasn’t even a ripple of short covering for the weekend. The RSI is now at 26.80%. With a ROC of .5 to 1 there is room to go down. This isn’t the type of market that will “test” areas. It will just be a grinder until help arrives. The focus is on the 2023 trendline which comes in at 504.50. The line is almost 6 months old. It is important.

https://www.cmegroup.com/markets/agriculture/lumber-and-softs/lumber.volume.html?itm_source=cmegroup&itm_medium=friendly&itm_campaign=lbr&redirect=/lbr

Lumber Futures Volume & Open Interest

CFTC Commitments of Traders Long Report

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

Lumber & Wood Pulp Options

About the Leonard Report:

Brian Leonard