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01 May 2023
Agriculture, CME, Lumber, Market Commentary, Market Updates, Research, Risk Management rcmagserv 0 comment

LEONARD LUMBER REPORT: All markets, regardless if it is a commodity or equity, will telegraph a change in their trend

All markets, regardless if it is a commodity or equity, will telegraph a change in their trend. The lumber market is one of the easiest markets to predict. It only takes 10 or 12 missteps before you are right. In the few months of 2023, we have gone from expecting a sideways give-it-back market to looking for a recession, and finally, it getting positive. We are now back to the sideways thought process as an industry. The key facts are that the housing sector didn’t get as bad as we thought, but that better-than-expected business didn’t help prices. The demand has not cleaned up the excess supply. May 1st. looks much different than we had thought back on January 1st. or does it?

Are the wholesalers feeding on their young? Yes. Are the buyers locking in jobs at $700 and beating up distribution for another $30? Yes. Is it true that all euro wholesalers can only go out after dark? Yes. We are where we expected to be at this point. The problems on the supply side are working themselves out. It is just looming micro issues now. These micro-dynamic issues should not control pricing, but in this small industry, they do. The industry’s macro dynamics do not look bad. They are just very slow-moving. The macro issue of logs. The macro issue of reduced production, no infrastructure replacement, and the macro issue of costs are all factors that determine the price on a timeline never defined. All we have is Elliot Wave to help.

The main technical read today is the long-term Elliot Wave. The pattern consists of a 1 down in August of 2021, a 2 up in August of 2022, and now a wave 3 down which has not been defined yet. I’m confirming that completion is somewhere between here and May 15th. for 2 reasons. First is that we tend to make our new lows somewhere around expiration and the fact that the next expiration is a delivered price. We need to put an asterisk next to Wave 3 as it might be artificial. I’m not recommending buying July because Wave 3 is in, just defining a bottom.

There have been two very successful strategies for the first 4 months of the year. The first is straight out of futures 101, the basis trade. No one wanted to waste their time making $20 on a basis trade. Today those same naysayers are hoping they don’t lose $20. If you did the basis in LBK rolled it to LBRK and then to July you picked up $50 of basis. Really…. The other success has been the strategy that is older than dirt. Counter those with wood in a falling market and counter them aggressively. There is a rhythm to this market. We have been in a lower high and lower lows cycle that could be shifting to flat highs and higher lows. That brings the “Don’t be the second guy into the Pool” syndrome back into play again.

The one way a market telegraphs a change is through the news. This industry has gone from reports of shutdowns to extensions of those shutdowns. Today’s news is about how many guys showed up late for work. The Beaks of the world are telling us that more of the same is in front of us.

Lumber Futures Volume & Open Interest

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

CFTC Commitments of Traders Long Report

https://www.cftc.gov/dea/futures/other_lf.htm

Lumber & Wood Pulp Options

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

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

[email protected]

312-761-2636

24 Apr 2023
Agriculture, CME, Lumber, Market Commentary, Market Updates, Research, Risk Management, Weekly Prices rcmagserv 0 comment

LEONARD LUMBER REPORT: THERE COMES A TIME WHEN BEING PROACTIVE AND OR INACTIVE BECOME THE SAME

There comes a time when being proactive and or inactive become the same. That is where this industry is today. A better way to put it is the best offense is a good defense. The daily data bombs send mixed messages. These are messages interpreted differently over the generational chasm. If you are over 40 you are looking for the next shoe to drop in housing. If you are under 40 you are looking for the next opportunity. Neither is right or wrong, just educated differently. Let’s look at the issues.

The first focal point that always amazes me is the difference in cycles between multifamily and single-family. In the last 10 years, single-family construction has had 3 downturns while multifamily has yet to see one. Ask a trader in the multifamily space how things are going, and he will say if this is what a recession looks like then he’ll take it. Ask a single-family trader the same question and he will be leaning more on the negative side. The confusing part is the fact that DR Horton had a great quarter, and the home builder stock index is nearing its all-time highs. Things are not that bad so why can’t wood products pull themselves out of this big hole they dug?

Reports are of almost a record number of multifamily projects going on today. That is why those in that space are enjoying the ride. The confusion is in the single-family sector. Data show that the marketplace is tremendously underbuilt. I think the market is telling us differently. Existing home sales are off sharply. The reason is relatively easy to define. The answer is that a few want to increase their mortgage rate by 200%. This normal supply of homes on the market will not be available for some time. Builders will have to step up to supply the shortfall. Starts are hovering above 2019. That was a year that saw an extreme lack of price volatility. That isn’t my call here. The other focal point is that this market no longer can “lack” volatility. It can remain range bound in the new post covid world but with much wider swings. I think what this market is telling us is that there is still more bottoming work to come.

This coming week I expect to see wide swings caused by position evening in May. There aren’t many who want to carry a position into a no-limit May. That covering will add more pressure down than up. What is marketable is the July contract. It is a few dollars away from being a good hedge buy and also a few dollars away from a good basis trade. The basis traders are cleaning up. July is in the zone.

Lumber Futures Volume & Open Interest

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

CFTC Commitments of Traders Long Report

https://www.cftc.gov/dea/futures/other_lf.htm

Lumber & Wood Pulp Options

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

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

[email protected]

312-761-2636

10 Apr 2023
Agriculture, CME, Lumber, Market Commentary, Market Updates, Research, Risk Management, Weekly Prices rcmagserv 0 comment

LEONARD LUMBER REPORT: CROSSWINDS VS. HEADWINDS

Crosswinds verse headwinds. I am starting to wonder if the story is of how we all walked 3 miles to school uphill both ways. We are getting to the point where we may just have to take the charts and data from 2020 to 2023 and put them off to the side. While it is reflective historically it may not be the true focal point today. If we push that information to the side, we can focus on today’s factors. All of which we have experienced in earlier cycles.

Positives:

  • The housing market is underbuilt.
  • There has been a generational shift to owning a home.
  • Labor is tight.
  • Real log issues.
  • Great overall employment.

Negatives:

  • The economic question.
  • Highest rates in years.
  • Euro wood. It is a race to the bottom in the wholesale community.
  • The home mortgage business sits with the community bank. They are becoming more restrictive.

 

The negative factors will smooth themselves out more quickly than the positives. Rates and the Euro wood will be less an issue by the third quarter. The economy on the other hand will take much longer to be defined and then to recover. That will be a hinderance to our market. On the positive side, if you build less houses you take care of the labor issue and keep the marketplace thin. That is the direction the home builders have headed towards.

The question coming into 2023 remains the question today. What should the price of a 2×4 be with a 1.2 or 1.1 starts number? That cannot be answered until the Euro problem has cleared up. What I will say is this market has built a box around it. The first thought coming into the year was a muted 2023 trade. That shifted to a higher trade because of business. Now I am an afraid that it is boxed in. What I mean is that momentum will be created only to get hit from the existing factors. This will show up when inventories are light in a falling market and overbuying in a rising market. That is not a sideways trade. It is a trade that finds momentum and then stops abruptly. Opportunity is only available in the middle and lost when the push up or down is in place. It will break out and trade at a higher level eventually, but not anytime soon. For today, real inventories will be a value while the churn and burn crowd are in the liability zone. There is absolutely no reason not to hedge inventories when in this box and futures are a premium.

 

Lumber Futures Volume & Open Interest

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

CFTC Commitments of Traders Long Report

https://www.cftc.gov/dea/futures/other_lf.htm

Lumber & Wood Pulp Options

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

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

[email protected]

312-761-2636

03 Apr 2023
Agriculture, CME, Lumber, Market Commentary, Market Updates, Research, Risk Management, Weekly Prices rcmagserv 0 comment

LEONARD LUMBER REPORT: ALL MARKETS ARE CYCLICAL

All markets are cyclical, and most will return to their historical value area.  In lumber the lens to look through is a long-term one. One that can bypass the noise and create a sharper picture of the market. If you look at 50 years of lumber futures data, you will come up with a mean close to $330. With a $330 mean the closes of January and March so far this year have been normal. Add to that the fact that May is also hellbent on getting there. This is not an abnormal trade. Trading in the $300’s for months and getting about 6% margins is normal. So, what is different this time? The current cycle. Cycles, like waves, are not perfect. The typical long-term cycle runs from 13 to 18 months. Most planted commodities run in 6-to-12-month cycles tied to the growing season. Lumber has a longer cycle because of the timeline of the project. We a currently in our 13th month of a down cycle. The difference is that this cycle started way up at $1477.40. Just a small percentage correction puts the market substantially higher. A $200 rally in a 6% margin environment would be devastating. Then again so would 5 more months of this current cycle.

Lumber Futures Volume & Open Interest

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

CFTC Commitments of Traders Long Report

https://www.cftc.gov/dea/futures/other_lf.htm

Lumber & Wood Pulp Options

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

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

[email protected]

312-761-2636

20 Mar 2023
Agriculture, CME, Lumber, Market Commentary, Market Updates, Research, Risk Management rcmagserv 0 comment

LEONARD LUMBER REPORT: THE STRUGGLE BETWEEN WHAT THE LUMBER MARKET WAS AND WHAT IT IS

Recap:

As I write this, I am struggling between what the lumber market was and what it is. It was a low margin high volume structure for a thousand years. In recent years it has turned into a high margin low volume trade. You have to ask which it is today. There have been structural changes to the industry. There was a big consolidation in distribution. A loss of available cut and contraction in production. And most importantly was the change in volatility. Three months into 2023 I’m wondering if we have integrated those changes into the marketplace or need more time. If it has been integrated into the market prices will be range bound. If it has yet to be integrated, then there are higher highs coming.

Markets are efficient when value is defined. A farmer will sell futures if the price is a few pennies over the elevator. It’s called the basis. Over the past few weeks, I have noticed the traders in this industry are reluctant to do a basis trade that will net out a $40 profit after all the expenses. I am not judging. I am just stating one of many issues we have with pricing. The buy side does not trade a $40 gain, nor does the sell side trade a $40 less of a loss. The nature of the trade today will cause more volatility and that volatility will remain until it’s deemed unproductive.

Another aspect of the volatility equation is the fear and greed quotient. Today we are going to redefine it as the fear and fear quotient. The industry is waiting for the other shoe to drop in housing, and it will stay hand to mouth until defined. Last week’s 1.45 starts number was great. I was looking for a 1.1 to 1.2 number coming into spring. The Fed told us that housing would be pushed into a recession. We haven’t seen it. We should all be dancing the tarantella. (Happy St. Joseph’s Day) Instead the big number is all the more reason to practice restraint. Maybe there is a little bit of greed out there too. Why give it back? For whatever the reason, the lumber market will remain underbought.

Technical:

The chart pattern has been flat for almost a year now. It is grinding along the bottom with no end in sight. The market manages a rally every 8 weeks but doesn’t change the pattern. Today the market is sitting on the weekly resistance line from back at the highs of 2022. It’s at 455.00. A close above that area will bring in some buying as signals are set off with the short funds. There are three parts to a cycle today. First is fund short covering followed by the industry buying cash and finished off with spec futures buying. To sum it up, the technicals indicate a market that is $100 away from mediocracy and $200 away from a bull cycle.

 

NEW CONTRACT:

Lumber Futures Volume & Open Interest

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

CFTC Commitments of Traders Long Report

https://www.cftc.gov/dea/futures/other_lf.htm

Lumber & Wood Pulp Options

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

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

[email protected]

312-761-2636

13 Mar 2023
Agriculture, CME, Lumber, Market Commentary, Market Updates, Research, Risk Management rcmagserv 0 comment

Leonard Lumber Report: Last week I led off with how bad should bad look? Here are two responses from the question

Recap:

Last week I led off with how bad should bad look? Here are two responses from the question. The first is “there is a massive new home neighborhood going up next to a 40 acre reload full of Euro wood. The other was “for the first time, housing isn’t leading the shit show.” Very eloquent economic summaries. What we saw last week was a very quiet sideways futures market exhibiting some of those characteristics. The sideways trade was not a building of a trend but a sign of confusion and fear. No one is making a call one way or another at this price. If you look at the cash market, no one is making a call at any price. Historically that is friendly at some point. Let’s do the math.

Since the Fed speak turned up in February of 2022 the futures market has fallen over 76% from the 1477 high. During that same period,  crude fell from $130 to $75 and corn from $8.27 to $6.26. All three commodity markets and most others have felt the effects of the raising of rates. Lumber, unlike the other markets, has pulled back close to its historic norm while all others have not. Is this price indicating a harder bottom coming? Considering the lead time needed in this industry it may take till Q4 of 23 or Q1 of 24 to answer.

Macro: The housing market does not bottom out until rates top.

The micro picture has many other dynamics. I think all would agree that these prices are not good for any producer. That fact alone will cause a slowdown in production. It is already in process. We see it in BC shipments and reports from eastern and southern mills. What is hard to determine is where the number was pre-Fed. While production is getting cut it may be from a 1.7 starts equivalent number. If we took the number from 1.7 to 1.4 then we are still over producing. The market needs to see a production number set for 1.2 starts and an erosion of Euro imports. Then we will have a market again.

Micro: Slowing production will cause upward spikes in prices.

The trade for 2023 will be the basis and the best form of protection will be forward pricing. It won’t be a year of making $15,000 on a truck. It’s back to futures 101. That said, build a fence around your risk. You have banks blowing up and many other created ramifications from the spike in rates. A basis trade needs calls against it. Forward pricing needs puts.

NEW CONTRACT:

Lumber Futures Volume & Open Interest

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

CFTC Commitments of Traders Long Report

https://www.cftc.gov/dea/futures/other_lf.htm

Lumber & Wood Pulp Options

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

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

[email protected]

312-761-2636

06 Mar 2023
Agriculture, Lumber, Market Commentary, Market Updates, Research, Risk Management rcmagserv 0 comment

LEONARD LUMBER REPORT: HOW BAD SHOULD BAD LOOK?

Recap:

How bad should bad look? We are coming up on one year since the Fed began to raise rates and slow the economy. The effects on the housing industry have been drastic. Starts topped at 1805 last April and dropped to 1309 by last month. The price of the commodity has dropped from the $1000 level to $370 during the same period. The Fed has done its job in this sector. I go back to my question of is this bad going to worse or bad to better? Looking at the futures trade so far in 23 I’m starting to see the possibility of the bad to worse scenario not because of lower prices or less construction but because of a flat market. The most pain would be caused by a $400 market for months on end. That is a no volatility environment at a below breakeven price. That is where the Fed would like us to be. There have been two rallies this year so far. The first was started and driven by fund liquidation. The cash market was underbought but took itself to overbought in days. It was a futures driven rally not an uptick in demand. This last rally of $50 was more of the same in futures as the final group of short funds liquidated. This has become a stagnant market. The housing market has correctly reacted to the Fed’s policies. It has stopped the bubble. The Fed will keep it that way.

The lumber market is commodity driven and that gives it two dynamics demand (which is being controlled) and supply. The panic we saw in January was the supply siders buying up the market. There is too much recent history not to create a panic. The producer side is trying to curb excess supply. That is a very difficult maneuver when mill operations have multifunctional reaches and cash flow. What I do know is that production control leads to a hard bottom. It doesn’t slow down before demand picks up. The supply question is and will cause volatility.

Another point that was brought to my attention last week was industry makeup. We talk about the covid effect on the housing industry as being a “one of a kind event.” While I do agree with that fact, I have to add that on September 12th, 2001, things were looking very bad and in 2009 worse. What I realized last week was that a high percentage of the decision makers in our industry today where not in the business in 2009 or 2001. The movement today is what has been successful over the last 5 years or so. Do we overreact or under react?

I’ll finish with the funds. As of February 7th, the funds had a little over 600 longs and 200 shorts. For a two-week period in January the short fund took their 1950 contracts and a ton of money and went home. That was expected, but not over such a short period of time. As we are trying to establish a trading range in futures, I don’t think the January run is one to look at since it was driven by the funds. Better defined bounces are needed.

Technical:

The technical picture is in the process of developing a fan like model. If we keep it simple the midpoint of the fan sits at 356.55 on the weekly chart. That line goes back to the beginning of the Fed action. This week it is support. If the market can hold that trend line the next measurements will be higher ectara. It spreads out in a fan pattern. If this is a correct model, it shows the timeline between steps as being very long. The next line comes in as resistance at $509. Again, this process would be long and drawn out. Most would rather the market just to blow through the points and spike higher. That really is the risk in today’s  market. An unexpected and unwarranted run-up hurting those with jobs. Put a fence around your risk!!

NEW CONTRACT:

Lumber Futures Volume & Open Interest

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

CFTC Commitments of Traders Long Report

https://www.cftc.gov/dea/futures/other_lf.htm

Lumber & Wood Pulp Options

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

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

[email protected]

312-761-2636

21 Feb 2023
Agriculture, CME, Lumber, Market Commentary, Market Updates, Research, Risk Management, Weekly Prices rcmagserv 0 comment

Leonard Lumber Report: There is still too much wood out there

Commentary: 

There is still too much wood out there. This week the euro traders had to not only deal with a soft market but also with the basis wood getting cheaper daily. Add to the mix that every Friday those with contract wood start off in the negative and you get this extreme malaise. With the amount of construction going on out there the market is either telling us the slowdown will be drastic or we are undervalued. Neither will be answered anytime soon so for today the market is the true indicator. Futures are on day 13 of this sell off. The rally lasted 16 days so the market could be close to bottoming. The resiliency of futures the last few days in light of all the algo selling pressure tells me it is close. What the bounce will look like is anyone’s guess, but the conditions are for a better grind higher market into the spring and not a spike up from the low.  So, prepare for the spike and how for the grind.

Economic:

The housing starts report this week added to the confusion already lingering throughout the industry. Today multifamily units under construction are at the highest level since 1973. Combined single and multifamily there are 1.7 million units under construction. That number bumps up against the record. These are seasonally adjusted numbers. That said, there is near record construction going on with a third of the country dormant because of winter. When digging down into the numbers one must wonder with construction at this pace are we really under built? Rents are sticky, so I would expect that pace to remain in place while single families continue to fall off. The construction dynamics bare some resemblance to the housing market in 2004-2005. That is when the housing bubble burst. The housing sector was in a bear market well before the 2009 economic meltdown. The pace of today’s construction will lead to an overbuilt industry at some point. In a year from now we will not have 1.7 million units under construction. Now let us add to the confusion. The fact is today there are 1.7 million units under construction and that makes $382 way too cheap.

Technical: 

March futures objective is for the January settlement of $344. The gap will be closed at $359.00 but the market is searching for value and that is the last expiration. The fact that the market is headed back to that area is troubling long-term. It indicates that $344 wasn’t a onetime fluke. It was considered a value the first time down and now is the area of rebuilding. The next rally up may just have to correct back again to this area. Momentum is oversold and a correction is coming but the market is not stair stepping higher yet. My only hope is that it isn’t a continuation of the stair stepping lower mode. In any case these are good levels to own wood going into the spring.

Below are the option links to the new contract. Please take a look at the quote page for options.

Quote page: https://www.cmegroup.com/markets/agriculture/lumber-and-softs/lumber.quotes.options.html#optionProductId=10192

Calendar Page: https://www.cmegroup.com/markets/agriculture/lumber-and-softs/lumber.calendar.options.html#optionProductId=10192

 

CFTC Commitment of Traders report still delayed!!

 

NEW CONTRACT:

Lumber Futures Volume & Open Interest

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

CFTC Commitments of Traders Long Report

https://www.cftc.gov/dea/futures/other_lf.htm

Lumber & Wood Pulp Options

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

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

[email protected]

312-761-2636

13 Feb 2023
Agriculture, CME, Lumber, Market Commentary, Market Updates, Research, Risk Management, Weekly Prices rcmagserv 0 comment

LEONARD LUMBER REPORT: The market just experienced a long needed buy round

Commentary: 

The market just experienced a long needed buy round. It started as a fill in and turned into a fill up. The buy side had the futures to lean on so many stepped up their buying. The problem with that was the fact that futures fell quicker than expected and now there is more wood out there than needed. You throw the Euro wood into the mix, and we have more wood chasing too few dollars again. In traders’ terms “the market lost the bid again.”

Economic:

The key to housing fundamentals is labor. We went all through the teen years without enough skilled labor. Finally, prices were forced up enough to allow wages to rise and get the needed labor. We have not seen any layoffs in the home building sector so far. That is a sign of confidence on the home builder’s side. Today we are all data dependent. The builders are not seeing big downturn in the numbers but its early.

Technical: 

It is hard to believe but the week gap left by the expiration is coming back into play. That gap is 419 to 344. Please remember the last time I talked about the gap the market rallied $100. This time I don’t think the timing is right for a rally. The downside channel comes in at 379.50. The expiration pushed the market over the channel not market conditions. This area has become relevant again today but is also now defined as cheap.

The market of the past few months reminds me of the typical “controlled burn” markets of the past. You have to hold inventory because the spikes are quick and violent. We are back to the first buy is good and then not. The difference on this one is there just may be a premium to sell in futures to stop the bleeding. That’s what just occurred. The other positive is now futures are headed for a deep discount allowing forward pricing again. That is a controlled burn. There is a path to mitigate risk and invest.

 

CFTC Commitment of Traders report still delayed!!

 

NEW CONTRACT:

Lumber Futures Volume & Open Interest

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

CFTC Commitments of Traders Long Report

https://www.cftc.gov/dea/futures/other_lf.htm

Lumber & Wood Pulp Options

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

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

[email protected]

312-761-2636

06 Feb 2023
Agriculture, Lumber, Market Commentary, Market Updates, Research, Risk Management, Weekly Prices rcmagserv 0 comment

LEONARD LUMBER REPORT: The futures market lost momentum last week but still remained near its 3-month highs

Commentary: 

The futures market lost momentum last week but still remained near its 3-month highs. The indifference trade was caused by a flat cash market. It is hard to tell if the resilience shown in futures was from a better outlook or from funds covering shorts. We have been flying blind the last few sessions as an outage in statement reporting at many firms has stopped the CME from being able to report open interest accurately. It has also prevented the CFTC from issuing the commitment of trader’s report for last week. What we do know is that the housing market, like equities, has support. Mortgage rates are back down to 6.09% which equates to another 3 million buyers who now qualify. Traffic is reported to be better than expected. While it is down sharply from the Dec 2021 highs, it still shows potential. After Friday’s jobs data we can be confident that there are buyers out there and they have jobs. All past housing downturns remained negative because of job losses. This isn’t the case this time. The key takeaway from last week was that once the froth is off the market and when homes become affordable again there is a market waiting. Let’s take a broader look at the economics.

Economic:

The Economic downturns have a timeline from when it reaches recession, pushes capital into the system and then recovers. This process tends to take time. Milton Friedman called it “the long and variable lag.” Today, unlike ever before, there is enough capital in the system to move the economy out of a recession. Since we have never been here before no one can tell us what it will look like. That said, the consensus seems to be leaning to a longer timeline for things to turn. The typical move would be to cut rates and boost confidence. Without that type of stimulus, money will only trickle into the economy. The markets are acting less nervous and more confident. If this economy has its way the market will move from point A to point B instead of heading to Z from A.

Technical: 

Things are as not bad as we thought they would be at this point, and the rally in the lumber market just confirmed it.  The upside focus is on the 200-day moving average. It is sitting at 564.75. That’s a $200 futures run in a short period of time. The market got caught short. The slight sell off last week allowed a few of the momentum indicators to correct. That’s mildly friendly and consistent with reports from the field. Builders were projecting cutting production by 40%. It turns out that they only cut 20% so far. A 20% reduction from lofty highs isn’t a reason for $335 cash but it also isn’t a reason for $600 cash. The technical read is right.

Notes:

There is a lot of confusion about the commodity funds in general and especially those in lumber. The funds that participate in the lumber futures market are generally ones with either a focus on a basket of products or purely momentum. The long fund that is getting all the press recently is a fund that carries a basket of commodities on the long side. This Rogers fund has been around since the early 2000’s. We haven’t seen it for a while during the big run up but seems to be back. The last commitment of traders report two weeks ago had the long fund count at 393. We have no way of knowing if that is all Rogers or if it is made up of a few funds. I have heard that smaller funds were looking at lumber futures when it was in the $300’s so it could be spread out some. On the other side are the short funds. Those looked to be mostly momentum funds that add to a winning position. They hit a high of 1955 open interest a few weeks ago. The last report had them down to 954. These types of funds carry defined positions based on equity. They are designed to add as the market goes lower and exit when it rallies a certain distance. There is no opinion of market direction. When the futures market was breaking $400, they were adding. When the market failed to continue lower and turned, they began to exit. The question today is of how much they will liquidate instead of rolling because of the switch of the contract. These funds are designed with strict liquidity rules. They will not accumulate open interest in an illiquid market. That said, if this is one fund or a big fund with tags attached, it has been making a windfall in this market. Their design has worked extremely well so I would expect them to stay around but the downside momentum model could be less profitable from here on out.

 

NEW CONTRACT:

Lumber Futures Volume & Open Interest

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

CFTC Commitments of Traders Long Report

https://www.cftc.gov/dea/futures/other_lf.htm

Lumber & Wood Pulp Options

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

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

[email protected]

312-761-2636

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