RCM Ag Services

Tag: Market

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

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.

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

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?

20 Dec 2021
Lumber, Market Commentary, Market Updates rcmagserv 0 comment

The Leonard Lumber Report: The Three “C’s” of the Industry

Introducing the Three “C’s” of the Industry: 

The best way to recap the market is to look at its tone. To sum it up, we will introduce the 3 “C’s” or confusion, congestion, and consternation. We’ve heard repeatedly, “how could this have happened so fast?” The trade was not looking for an early start to the yearend run. It also believed that there was enough supply. That proved to be incorrect. Most of the supply issues are related to the congestion at transportation points caused by COVID and weather. Things are fluid but at a pace that allows shipping to stay fluid. That is not at a pace to fill in the needs. 

This leads us to the third “C,” or consternation. Concern and anxiety about future wood deliveries have trickled back into the marketplace. All have been caught in that nightmare this year and the nightmare that followed. Most are now working towards not being there again in 2022. So, we are ending the year with a more aggressive buy pattern than usual at a time when things are moving slow. 

The issue plaguing this industry is its overall weakness in defining value. At $600, 50% of the industry went hand to mouth. At $900, 80% of the industry is hand to mouth. There is no investment in between. The buy-side has to scale into the market as it falls, and that will take the volatility out of the market. Waiting for the bottom is not a business strategy. We think we are seeing more of that today, but after the fact. When everyone owns $1,200, it will be a long way down again. This commodity fits well between $650 and $750.

Let’s Get Technical:

There is a lot of noise between here and 1,000 in January. Trying to gauge the trend during the holidays is fruitless. We’ll say that January futures were up $20 for the week, but the RSI fell 13%. The market is technically very friendly, but trading during the quiet holidays with some big gaps below takes some enthusiasm away from the long side. The Fibonacci points below could be the range to finish out the year:

38% 929.80

50% 1079.00

61.8% 1228.20

 Weekly Round-Up:

This push higher had a lot of energy, and in this industry, the earlier the energy, the quicker the end. We think this market needs to cool some for the holidays, but we, including Rick Santelli, Kramer, the Fed, and everyone else, have never been here before. Today the consumer is accepting higher prices as the norm. There isn’t any pushback; builders are paying up, multifamily guys are paying up, homebuyers are paying up. Next year, we have no actual data to track for possible outcomes. Buying futures here could be the best trade of 2022.

 Open Interest:

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

Commitment of Traders:

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

Disclaimer

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