Lumber Archives - Page 10 of 11

14 Mar 2022

Lumber, Market Commentary, Market Updates rcmagserv 0 comment

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.

10 Mar 2022

Lumber rcmagserv 0 comment

The Leonard Lumber Report: The Commodity Index’s Hit Decades Highs

Last week the commodity funds saw a massive influx of capital as the investment community tried to take advantage of a booming commodity cycle. The commodity index’s hit decades highs. How will this affect lumber futures? I’ll try to navigate all the features of the industry today. I’m pretty sure you can take the word lumber out and insert a different commodity because the issues look the same. Keep that in mind.

Factors pressuring the lumber market:

First is transportation, especially rail. Not only does it cause the jobsite supply to be late, but it is also complicating the whole process from logging to production. This organic slowdown in production will create shortfalls.

Next is COVID and labor. A labor shortage has been the industry’s nemesis for years now. Now COVID has placed a limit on how many days an entire crew is in place. Add to that a shrinking labor pool and the fact that production now looks different, and you get a builder that can’t get the production curve past 70%. It has kept the completion numbers down and the backlogs growing.

Another factor is the new 2-week pricing and the just-in-time inventory management. There was a major shift in inventory management after 2018’s run-up that has now grown to the number one choice of the distribution chain: contracts and VMI’s. A bullish demand cycle creates a large void in the chain, and many are forced into the market more often, creating bottlenecks.

These are the three dominant economic reasons for the lack of supply. A few others are:

Current demand and a 1.9 building permit number
The fact that another 700,000 workings were added to the economy
A push to buy as rates begin to rise

If you alleviate any of those factors, you will not solve the shortage issue. Only the lessening of demand will turn the market. Again, only the lessening of demand will turn the market.

Today, the marketplace is micro-focused on each factor, and any change will lead to selling. The market saw the result of that selling back in late January. We expect transportation to get better, and that change will take it from a horrible situation to bad. This will add some relief but not solve the problem. So, the mess continues.

An eventual pullback:

Where it can pull back to is a tough call. The first factor to look at is the new quarterly pricing. That will be a high number. This last quarter was manageable because the trade was able to mix in $600 cars with the new $1,200 cars making the number look good. This time the trade is paying the high of the year with nowhere to hide. Those same traders that were willing buyers on the last break at $800 are now at higher levels. It will create an artificial bottom again. The other issue is the trade refusing to pay up, thus sitting short in a rising market. That hasn’t been a good strategy and ends up bottoming any sell-off.

Factors to watch:

The appalling devastation Russia is causing in Ukraine adds to the logistics mess throughout Asia and Europe. Those issues will continue to disrupt the flow of lumber, bullish in a tight market. It also could be the tipping point to turn consumer sentiment down. We are already fighting massive increases in the cost of a home and major inflation on a personal level. We know the Fed has to push the economy into a recession to slow it. They have been reluctant to do that, causing even more pressure. The stock market is losing some steam. Those buying the second home with a loan from their portfolio are starting to push back. Any one of these factors can change the demand picture drastically. But each one has its own very slow-moving dynamics. There is no flip of the switch item there.

What could be a “flip the switch cause” is the drastic rise in limits, and historically that stopped a market trend which was its purpose.

Final word:

Only J. Powell and the old-timers think this market is going back to $300. It isn’t, and in fact, this market will be a tough go in the 1,000s for some time. Sell-offs will push the market lower, but buyers can’t wait on that today. If the funds start to show up down here, futures will hit $2,000. If they don’t, $400 up and $400 down will be the norm. Buy cash and buy a put…

About The Leonard Report

Before You Go…

01 Mar 2022

Lumber, Market Commentary, Market Updates rcmagserv 0 comment

The Leonard Lumber Report: The Difficulty of Managing Inventories in Today’s Marketplace

This week’s back and forth trading in futures highlighted just how difficult it is to manage inventories in today’s marketplace. The problem is insufficient real-time data to read supply or demand accurately. We saw the industry going from a too much wood attitude on Monday to a now enough by Friday. That type of uncertainty has plagued this industry for years. In the recent past, many took to contracts, which has taken out some of the emotion but has also reduced margins. This buy sides self-prescribed shrinking of margins causes voids in the market.

The reluctance of other buyers and pure demand also adds to the voids. So, where are we going with this? We can’t keep this beast full in a rising market.

The marketplace continues to argue about business. 1899 is a big permit number and too large to produce for. We hear all about the actual completion number, labor, windows, yada, yada, yada. The permit number is either business for today, potential business, or soon to be postponed business. Most economists were in the same camp for years that we couldn’t build 1.5 because of labor, and we couldn’t produce 1.5 because of log issues. If the industry can’t complete 1.5 and there isn’t enough wood available for 1.5, why are permits rising to almost 1.9? The simple answer is increasing demand. Covid, the Fed, and the stock market have hyperbole the housing sector.

The Fed flooded the system with cash that sent the stock market to new highs giving many a large windfall. Throw the urban bail into the mix, and here we are. From here, the question becomes whether these levels are sustainable, and the quick answer is no. The longer answer is that the world has changed, and attitudes towards money have changed, as has investing. It will take years for this industry to get a read on the net result of that change. History has shown that industries learn to be more efficient, but higher prices stay.

Too many or not enough issues are the primary cause of our large swings as it “encourages” the algo’s to push the market. The market experiences temporary slowdowns in purchases which negatively impacts prices in futures. We saw early last week how quickly the market focuses on supply and shuts off. As we look towards better shipping and more Euro wood, I expect the industry to take a large step back. Prices will fall sharply, but with 1.9 permits, it won’t stay down for long.

Let’s Get Technical:

There are two views diverging views of the current lumber chart. The non-lumber technicians see a market consolidating to go sharply higher, and it is a pattern of a market cliff dwelling to seasoned lumber technicians. Who is seeing it correctly? The issue today is that lumber has historically been a pure momentum-driven market, and it corrects but rarely will it maintain a flat trading area at a top or bottom.

We have two weeks of a flat market hit by a shutdown announcement and a Russian invasion. Our first takeaway is that the marketplace is accepting these higher prices levels, and it is a market looking for the middle. That said, as a seasoned lumber technician, I would not be too exposed to a possible cliff in front of us.

Weekly Round-Up:

First and foremost, betting on cheaper wood is not a good business strategy. July is sitting close to $1,000, which is $300 under March futures and cash. I am looking for a spring selloff, but the math indicates a continued tight market for months. The entire industry will sell in May and go away after last year will keep inventories very low. As the technical section says, the industry is trying to find some middle ground for pricing but keeps getting caught in the logistics. There is a better cash trade, and the industry is adding a few hedges along the way. The funds are adding a few longs on every spike, but nothing could lead to a trend.

About The Leonard Report

Before You Go…

22 Feb 2022

Agriculture, Lumber, Market Commentary, Market Updates rcmagserv 0 comment

The Leonard Lumber Report: It’s been an exciting week for futures

It has been an exciting week in futures as it traded each of the five sessions. There was continued volatility, but March closed virtually unchanged from a week ago. That’s progress. We saw that the CME upped the limits, and we’ll also see an article in the WSJ this week referencing the constant limit moves we have. Notoriety is good. At the same time, there has been a slow creep high in total open interest.

It has been a while since the futures and cash markets were this close. However, we’re not sure the futures market is that close to the cash market after hearing numerous reports of cash trades over $1,400. It looks like the market has paused to take a look.

Lumber has always been an industry that would buy into an uptrend and hedge into a downtrend, and there wasn’t much pre-positioning. The same is in place today where a switch is flipped, and we all see the panic on the buy-side. Then another switch is flipped, and you can’t find a buyer. This doesn’t take days or weeks but just hours. The massive cost of a carload of lumber is compounding the problem today. Since we don’t buy on the way down or sell up, there is a large void created on every move.

The last time we sat around $1,200, the momentum indicated a potential for a $400 move in either direction, and it turned out to be down. May is $100 cheaper than March, and July is $100 cheaper than May. The futures market is trying to smooth out the downside, and the upside will organically be smoothed out with time. Coming into Monday, there is a controlled burn to the downside, but the upside could find some running room.

We all know that any hint of better transportation will cause a sell-off. This week, we saw a little pressure from a BC mill finally shipping a few cars to the U.S. on Sunday, February 20. It just seems a little early to get the ball back.

Let’s Get Technical:

The focus here will be on the longer-term chart pattern and its momentum indicators. The most scrutinized area is the last gap left from 1114.90 to 1069.90. (Weekly) a closing of that gap in the March contract would be very negative. It should hold for now and then be an objective after expiration. The market is sitting right on a resistance line at 1264.30. It isn’t a firm point but does come off last year’s high. One positive to note is that the market made a new high on this move taking out the previous high from January. $1,336 is a new weekly high. Finally, if another leg is up, it will take a shot at the weekly gap of 1,514.80 to 1,540.00. The current RSI is at 68%. It hit 94% last year.

The technical read is slightly friendly but primarily neutral. The least resistance is up, as is most of the pain.

Weekly Round-Up:

Let’s take a look back at rising open interest. There is a new segment of the industry using derivatives for risk mitigation. Most of it is coming from the buy-side. This has been a slow-moving process but is now starting to bear some fruit. Obviously, our volatility keeps many out or limits their exposure, but they are around. The March contract shows more signing of a squeeze than any long-term relief. That said, this is a bottomless pit. The rollover will be violent this time, with the mills adding to the downside. We are again building a transit inventory mess, but the issues seem to have longer legs this time. It will drag through March expiration, but will it drag through May’s?

Open Interest and Commitment of Traders:

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

About The Leonard Report

Before You Go…

17 Feb 2022

Lumber, Market Commentary, Market Updates rcmagserv 0 comment

Leonard Lumber Report: This is a Supply-Side Industry

We tend to focus on fires, rail, a wall of wood, etc. Then one day a month, we look at housing starts. Today it is too easy to say that shipping issues are running prices up again. We hear daily from the trade that the company has too high of inventories on one day, and they don’t have enough in less than 24 hours. That is a demand issue. The other feature on the demand side is that the late cars’ fill-ins are not increasing inventories. Follow-through buying keeps the buy-side underbought. We saw this same dynamic last February. The mills have a lot of sold inventory to ship. Will new buying stay at this pace?

We must stay focused on the global economic picture. After yesterday’s booming PPI number, we now have the sense that the inflation push is unsustainable. That doesn’t indicate a pullback in prices but suggests that the trajectory will ease. What that means for housing is that production costs will remain high, and that will keep home prices high and affordability an issue for some time.

Let’s Get Technical:

There are two markets today, March and the back months. March keeps pace with the cash trade while the back months reluctantly stay above $1000. We have even seen some algo type trading as far out as July as it sets up for the rollover. The key driver remains March, and a close over the last high sets it up for a run, which will drag the back months higher.

Weekly Round-Up:

Anything bought today has to be hedged. Most refuse to sell a discount to hedge. Today you must look at the sell as a wood product trade, not a pure hedge. Puts are the way to go but are very expensive. Everyone from the local yard to the computer running the options knows we are going down at some point.

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.

11 Feb 2022

Agriculture, Lumber, Market Commentary, Market Updates, new rcmagserv 0 comment

The Leonard Lumber Report: Better Trading In Futures This Week

There was better trading in futures this week, but March opened the limit and locked. The back months had good volume, and July and Sept never hit the limit. At this point, you can exit your March shorts one way or another. That brings us to the next question: What does “life after limit” look like? If you take out the limit downs and the limit ups, we are sitting in the same area with the same dynamics. There is still good demand. Shipping out of the west is a mess, and trucking throughout North America is getting worse. And finally, we just moved closer to the Q2 buy.

The sell-off was a good indicator of a flow of wood through the system, and the rally right back indicates a continued fear that the flow will slow again. I think the industry is doing an excellent job keeping supplies flowing in. Since December, they have been buying “time” and fearing an upset chain. So today, it isn’t tomorrow’s ship time but rather next month’s ship time, and no one has that answer.

Any more bad news from the supply side will set the market off again, while any slowing in demand will force another sell-off. Buckle up….

Let’s Get Technical:

Elliot Wave is not voodoo economics, but that was funny. The biggest takeaway is that markets trade in waves, and in percentage terms, the lumber futures waves are easing in the distance. The corrective wave ran into support and a 20% RSI at a higher level this time down, keeping the cycle positive. We are looking for the top end where the market hits real resistance. Historically, the 1st quarter has strong support and weaker resistance areas, which is seasonal and consistent.

Weekly Round-Up:

$1,200 is not a happy medium, and the risk in both directions is substantial. We have never been in a place that could potentially have a $400 push up or $400 down. Time will ease the upside pressure, and the downside will be around for a while. Position accordingly.

Open Interest and Commitment of Traders:
https://www.cmegroup.com/daily_bulletin/current/Section23_Lumber_Options.pdf

31 Jan 2022

Lumber, Market Commentary, Market Updates rcmagserv 0 comment

The Leonard Lumber Report: Looking for Tempered and Defined Market

We entered 2022 looking for a more tempered and defined market but instead have seen some of the most violent swings in lumber history. The market ran up $230 in 8 sessions and then fell $375 in 8 sessions. That is in an industry that thinks making $10 on a car is good. This $11 tick market has always been clearly defined, with extremes in the $20 range. What has changed? The economics of the industry. The producing side has left its historic role as customer service orientated and now turned into profit-only speculators. The buy-side contraction has turned into a massive party of 4 with models built for much smaller structures. That is our all-in-all-out industry today. Once you mentally prepare for the swings, you will start to recognize the many opportunities that become available.

The market finished limit up on Friday after a straight down week. On Thursday, we started seeing the forward sale community showing up, which was even more aggressive on Friday. The key takeaway from the new buy interest is that prices have fallen enough to show value. That also means that the cycle isn’t over but just hit a pause. Between the constant demand, the 30-day inventory rule, and a $375 drop, one would have expected a bottom at some point. Was an 8 session down cycle enough? That is too hard to gauge, but this massive volatility could signal a market trying to find a balance. That doesn’t indicate the top is in, but if you’re long at $1,300, you could be sitting around for some time waiting to scratch it.

Let’s Get Technical:
With all the gaps above the market, any positive trade on Monday should be used to buy futures. Those stops are prominent and noticeable. With a 32% RSI, the spec trade is up. The technical focus is still on the 1059 fib area, which could be where the market finds some trade. A return to the 963 area would indicate a long cold summer ahead.

Weekly Round-Up:
At $1,000, we can comfortably say that those buying it are either doing a forward price for a customer, need it today, or enjoys speculating. I keep saying that over $1,000 is unsustainable, and these levels aren’t a norm and will continue to fail. That said, there might be a day that it will indicate a value. As for Monday morning, it is cheap.

Open Interest and Commitment of Traders

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

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

18 Jan 2022

Lumber, Market Commentary, Market Updates rcmagserv 0 comment

The Leonard Lumber Report: 2022 Rundown So Far

Welcome to the 2022 lumber market. A place no one wants to be, but all keep showing up. Here’s a brief rundown:

The futures market was up over $100 again — The run has been relentless and unforgiving, and it’s hard to find the endpoint. Recently, 4 out of 5 of those in the lumber industry think the market is going higher. Half of those are not long. So why so bullish? The two key factors are transportation and demand. We will look at each side to see if that endpoint can be projected.

Many are looking for the typical first-quarter shipping issues where supplies are bought but can’t ship. That causes an artificial secondary market where the trader is forced to buy anything he can get his hands on from anyone. Here we see a jump in truck orders to “fill in.” This time, trucking availability has been restricted, creating general chaos throughout North America. The fill-in mechanism has broken down, forcing the trader to buy a car for further out shipment regardless of price. This has extended order files at the mills when they typically shrink. It also has pushed prices to the next level.

The bigger surprise coming into 2022 was the amount of demand that continues to create itself. Usually, we could foresee a push coming from the numerous jobs that get bid and rebid. Today most are surprised at the amount of new business that shows up daily. A lot of it is long-term and not close to starting, but it has changed the psyche of the trade and added another level to the already pressured trader. That same trader who can’t buy enough was only yesterday told not to buy a stick. That chase is also pushing prices to the next level.

Let’s Get Technical:

So, what is the next level? On the technical side, the key areas now are the gap left last year at $1,514.80 and an old Fib number of $1,518.30. There is room to get there with a weekly RSI at 75%. Each month is at a new high, and there aren’t any calcs from here up. We know that recently, a market spike has had a corrective pullback. I’m not that confident in a pullback with 3 out of 5 willing to “buy the pullback,” but that has been the trend.

Weekly Round-Up:

The market is back at unsustainable levels. And why do I say that? Because we can only build so many houses, and we do not have the labor to push actual starts to 1.7 or 1.8. At $1,200, there is enough wood flowing to keep a 1.6 pace at least. The market goes to $1,500 or more because there is a significant gap in the chain. Logistic problems have bottled up the flow of needed lumber, and those logistic issues are not going away anytime soon.

Open Interest and Commitment of Traders

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

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

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…

The 2021 U.S. grain crop has the potential to be one of the largest on record. Where did all the yield come from, what areas were the hardest hit, and why on God’s green earth are grain prices still so high?

12 Jan 2022

Lumber, Market Commentary, Market Updates rcmagserv 0 comment

The Leonard Lumber Report: January 10

It’s hard to believe that this market has reentered the hyperbole dynamic we saw last year when the market lacked any restraint in upward pricing. The market bottomed on November 2nd at $606 and has gone straight up since. On Friday, the March contract made a new high of $1,250. That is a run of over 100% during the holidays. So, what are the issues causing these spikes? First is the massive contraction of this industry, creating a buy pattern that is out of balance. There are fewer players in the pipeline, making it consistently tight. The other is the new two-week to 30-day pricing that keeps everyone in the market almost daily. A quick summary of today’s dynamic is that when demand is good, there is a constant need to buy, and when demand slows, there is no need to buy under the current model. We started with the latter this time.

The need to buy throughout the 3rd quarter dropped nearly 60%. The new model of only buying when needed and only buying an item that will ship caught the market short. The previous models always had a buying program in place as prices fell, and these guys don’t. If the market slowly turns, there should be enough inventory at the mill side to keep costs balanced. As we saw in November, the slowing of production and shipment issues caused a bottleneck overnight. The market now needs to settle to ease the pressure on prices.

Today, the issue in front of the industry is that they bought great at $700 then added to the pile at $1,000 but are still averaged well. The next time they step up to the trough price will be $1,200, which is off their charts for breakeven.

Let’s Get Technical:

This type of market doesn’t relate well to momentum indicators. That said, March made a new contract high at $1,250 with an RSI of 76.70%. There is a lot of room to the upside. The math keeps bringing the value (volume) areas into focus. The two areas are $1,250 and $1,550. A good indicator on the last run was the Fib extensions. Today the 1.38% move in March is $1497. The technicals are building for a push to that level, and there isn’t much pushback from the trade. It will take a lot of energy to get there, so a pullback in some fashion would be efficient at this point of the cycle.

Weekly Round-Up:

You heard it here first… Because of global economics, if this market goes up to the $1,500 level, it will take out the historic highs, and the momentum build-up will be too great to cool. So, there should be minor issues out there of prices going higher. If you asked us if we would buy it today, we’d say, “I wouldn’t buy it with all of Doug’s money.” You can’t discount the ease of producing this commodity. There is no fundamental cause for this commodity to be over $1,000, and we just have an incredibly inefficient marketplace today.

Open Interest and Commitment of Traders

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

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

About The Leonard Report

Before You Go…

05 Jan 2022

Lumber, Market Commentary, Market Updates rcmagserv 0 comment

The Leonard Lumber Report: 2022 Outlook

What a year. The housing industry plowed through 2021 with record disruptions and record sales. Once a pipeline issue was resolved, another would pop up. We are coming into 2022 with a tight supply and high demand for this commodity. Big dollars continue to flow into the economy, and now a house has reappeared as a valuable asset. There is also roaring inflation which is a double-edged sword for this commodity.

The fact is the housing market is exceptional, and lumber prices are trending higher. The positives are firmly in place, while the negatives will need a dramatic economic shift to come into play. The black swan could be rates or inflation or a greater covid blitz. In any case, it would have to be dramatic. Let us dive into the key factors controlling this industry. Our gut instinct is to rehash the past, and we’ll attempt not to bring up the obvious.

2021 — Year in Review

We came into 2021 at a futures price of $870. While we saw $1,000 the year before, this was much too high for the industry. The refusal to buy put an industry, seeing increasing volume in construction, critically underbought. From there, a panic ensued, and the market went parabolic.

The biggest takeaway from 2021 is that the trade was willing to pay unheard-of prices for wood and passed along the cost. No price level slows buying, and there is no longer too high. What higher prices do is generate a greater supply at a quicker pace. When there is a disruption in the chain, prices go straight up. Today we are either in the middle of that cycle or near the end.

Many would build a plan around the “bookends” of that year’s trade in the past. This is a critical drill for the industry in 2022. The need is to create a value area. We need to look at some of the economics out there to look at the value of this commodity.

Housing starts average in 2021 was 1.586 million. The consensus is projecting a 1.6 number in 2022. That number could be far greater if there were the ability to build. As we said back in 2018, there is only so much capacity to go around. This year, many builders have chosen to scale back building plans so as not to get overextended. Others are adding numbers with lofty goals. Profitability drives their planning, and with the lack of availability still present, profits will stay high.

Where should value sit at 1.6 million starts?

The cost of production is skyrocketing in this industry as in all the rest. The last report showed wages up 9.2%. Yes, that is correct. That means the person who changes the oil in the logger’s truck to the people who do the final cleaning on the home before closing makes about 10% more. And that is if you can find a person to hire.

In the United States, the average monthly job offerings number is around 6 million — The December 1st number was 11 million. The stat that shows the mood of labor is the “quit” rate. This is usually a sub 1% number, and it was a whopping 3% in November. 3% of workings are quitting. These numbers are unsustainable, but many of these costs will not come off.

The best indicator today of the economic issue is the current inflation rate, and in November, it recorded 6.8% with an upward trajectory.

All this is a result of flooding the system with cash. That is flooding a system that was already building strength, and that was not the case in 2009 when the economy was headed lower. We must remember that many funds are circulating in a small economic space today. At this point, it will have to inflate itself out of the problem, which will end the housing run.

We talked earlier this year about how the housing market reacts to a cash-infused accelerating economy. With a better economy, expectations were for the first-time homebuyers to jump into the market after the “lost decade.” We have seen that increase, but more than expected went to the multi-sector. Under these dynamics, an increase in rates will not cause a slowdown in home buying. The norm has been about 38% of first-timers buying new homes, which is now closer to 20%. The troubling statistic is that the 38% group are investors. We do not need to review what happened the last time it was that high.

Projection:

Usually, most outlooks are a counter-trend analysis. Today we see only roses. This industry is highly complicated because of the various amounts of input at all levels. One factor could be bullish at one point and bearish at another. Today, we have numerous positive inputs that will lead to higher prices. At the same time, those factors have a shelf life. The tightness factors are slowing. Last year once those factors were finished, others crept into the equation. The next correction will indicate if that repeats or not. In the meantime, expect the 2021 swings again. It will also look remarkably familiar to the old-time seasonals that would make a top in the first quarter, do the sell in May and go away for the summer, followed by the fall buy starting the cycle all over again.

2022 will show owning lumber products will be a sound investment. Also, owning some type of downside risk management will soften the blow of the wide swings, especially when it is down. It is no longer a “time the buy” market; it is an opportunistic buy market.

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Tag: Lumber

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