Tag: Risk Management

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

28 Oct 2024

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

LEONARD LUMBER REPORT: Lumber is a very complicated commodity

Recap:

Lumber is a very complicated commodity with the most moving parts of any I have dealt with. That said, it is a commodity and commodities trade value. Lumber is only $20 either side of a trade and can’t get there. If you look at a weekly chart you’ll need a microscope to see the trading ranges for the last 5 weeks. Someone said last week that this market is coiling ready itself for a blowup. I said the same thing 12 months ago. I’m hoping he is closer to right than I was. My point is that the market is draining all the excesses caused by Covid a few ounces at a time. The shutdowns just aren’t showing up in a way that can cause a panic. It looks like more of the same.

A few recap points.

A mill reported a 3^rd quarter loss last week. Let’s take a step back. Futures contracts are designed to protect the producer in a falling market. Mills presences will actually put a floor in prices. We have little mill participation today. I’m hoping they take a deeper look into the financial design of futures.

All week I heard complaints about certain items not being available. It is not a free-flowing cash market out there. Now, yes, there are some cheap and available items, but for a flat market things are getting tight. Unless it’s a basis trade, this is a tough place to sell futures. The funds are rolling and exiting. The report this week is up to Tuesday, so it missed the 3 strongest days for the week. It all comes down to momentum. Outside money creates momentum in the lumber futures market. Shutdowns, fires, and strikes all have a very limited effect. The algo and the funds are today’s day-to-day drivers. The lack of that push keeps us flat. Now, it may be defined as flat, but I wouldn’t be short.

Technically, we are married to trying to push to a new high in futures. Cash hasn’t recently allowed it but that too is moving up. In November the last high was 538.00. Today, its 200-day moving average sits at 554.07.

Daily Bulletin:

The Commitment of Traders:

About the Leonard Report:

Brian Leonard

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

312-761-2636

30 Sep 2024

Agriculture, CME, Futures, Hedging rcmagserv 0 comment

LEONARD LUMBER REPORT: Data is starting to confirm a change in market dynamics

Recap:

Data is starting to confirm a change in market dynamics. The funds exited 1000 shorts from Tuesday to Tuesday, leaving them with 3500 pre-roll. The Oct 1st. mark tends to be the start of the funds cleaning their positions by year-end. The futures focus is always on the funds and algos as they drive our market. They will rally it further than warranted and drive it lower than the actual market. It does it in all commodities markets. They tend to create a speculative value outside the bounds of the fundamentals. We have seen a few highs and lows recently that confirm it. Two rolls are coming up with the fund-type side, but the decrease in the position on the short side and the decrease in open interest tells me that the fundamentals should become the focus of value. Maybe lower rates and less production will become the focus?

Technical:

Today, we have the strongest tech read in many months. It shows trends and support. The moving averages are stacked up from 520 down to 515. This is major support. The slow stochastics turned up ten sessions ago, and the MACD turned up six sessions ago. This change in momentum is hard to reverse. Should we correct rallies? Yes, but it is still pointing higher.

The change is finding support as the market goes lower. It doesn’t indicate new highs. It will still be a slug. The SYP factor today looks very similar to the Euro factor last year. The cheapness and overabundance keep the buyers out. You want to rattle the cage, show an increase in demand.

Daily Bulletin:

The Commitment of Traders:

About the Leonard Report:

Brian Leonard

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

312-761-2636

16 Sep 2024

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

LEONARD LUMBER REPORT: September futures settled at $20 under print, the first recorded discounted expiration in almost 12 months

Recap:

September futures settled at $20 under print, the first recorded discounted expiration in almost 12 months. Was it a one-off trade or a change in market dynamics? It’s too early to tell, but we must remember that it doesn’t necessarily indicate a bull or bear market, only a change. If it holds, it is a shift from basis trading strategies to forward pricing. I don’t expect to see much forward selling from the industry. They didn’t touch the basis, so why do forwards? I expect the industry to continue to trade extremely guarded through the end of the year. We saw an almost 30% reduction in the commercial short position after the Canfor announcement. That massive bail is a result of the guardedness of the trade. Most took hedges off above $520 and are naked under $500. Is this a dynamic shift or a fluke?

Production is getting cut. When will the supply cut be a factor? Someday, but not tomorrow? The struggle now is to continue to navigate a balanced marketplace. Can value be brought back into play in housing after a few rate cuts and increasing existing home supplies? We are starting that process based on the futures trade, but it could take another year. If you look back, in 2012, there was a fear of a fiber shortage that shot prices higher. It took five years to get our next spike to new highs in 2017. And finally, our covid 2021 debacle. My point is it takes years to create the undersupplied pocket. If we are there, our lows will be higher and highs sharply higher. Today, all the pressure is from the funds or the algo selling. That’s where the work needs to be done. The mills should start with the funds if they want to curtail something.

Technical:

The November contract low is 473.00. September’s low was 455, and July’s was 418. The market is already stair-stepping higher, making these lows significant points. As we head into October and the traditional lows, 473 is key. A trade under 473 indicates a more aggressive fund-selling program, knocking all fundamentals out of the equation.

The technical picture is negative for the short term. To change the trend, we need to reach an oversold condition. The problem with the RSI today is that it holds long-term bearish divergence. It remains high every time the market breaks. Walk that down into the low 20s, and the momentum can change. I could bring in almost every other oscillator and show the same results. The selloffs are not hurting the market.

The key upside point is 518. This area has been key for months and could be the top for now. The computers will target the low of 473. It could be a $10 market until the next announcement comes out.

Daily Bulletin:

The Commitment of Traders:

About the Leonard Report:

Brian Leonard

312-761-2636

12 Sep 2024

Agriculture, CME, Corn, Futures, Grain, Hedging, Market Commentary, Market Updates, Other News, Research, Risk Management, Soybeans, USDA Report, Weekly Prices, Wheat rcmagserv 0 comment

AG MARKET UPDATE: AUGUST 26 – SEPTEMBER 12

Corn has gotten back above $4.00 in a struggling market that needs good news to propel it back to the mid $4s. The USDA raised US corn yield to 183.6 bu/ac up from 183.1 bu/ac in last month’s report. In the USDA’s eyes the crop is getting bigger as struggling areas will be more than made up for by the best areas across the corn belt. Despite the higher US yield numbers, the corn trade following the report was welcome to see as it did not move much lower on larger numbers. If corn can bounce off or hold this $4 level then we can probably expect it to hang around here as planting gets rolling until we know what is actually in the field and if the numbers are closer to 180 or 183.6.

Soybeans have seen a nice 50+ cent rally off recent lows with dryness in areas causing a little concern with pod fill and some pickup in demand. The USDA kept yield the same at 53.2 bu/ac as they agree with Pro Farmer tour that a massive crop is out there. Like corn, this recent bounce off lows is encouraging but may setup a range bound trade until harvest gets rolling and we have a better idea on the true yield. The USDA did slightly lower US ending stocks in both 23/24 and 24/25. Continued exports and any issues to South American planting are needed to drive beans higher in the current market.

Equity Markets

The equity markets have been on a bit of a roller coaster lately with the tech/semiconductor trade having quite a bit of volatility while some rotation occurs with the Fed rate cuts expected to begin this month.

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

Other News

The market is expecting a 25 basis point cut to the Fed Funds rate this month

Wheat

Wheat has been the one positive market lately, hitting new 2-month highs. The war in Ukraine and Russia continues to escalate and the market has responded accordingly. The USDA did not make any major changes in the report.

Drought Monitor

Via Barchart.com

Contact an Ag Specialist Today

Whether you’re a producer, end-user, commercial operator, RCM AG Services helps protect revenues and control costs through its suite of hedging tools and network of buyers/sellers — Contact Ag Specialist Brady Lawrence today at 312-858-4049 or [email protected].

26 Aug 2024

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

LEONARD LUMBER REPORT: As much as we all want to discuss the rail issue, we should take a step back and look at the market

Recap:
As much as we all want to discuss the rail issue, we should take a step back and look at the market. The cash market is up $75 from reported lows in a few weeks. That strength has pulled futures higher and also narrowed the premium. Two weeks ago, there was an uptick in cash interest. This past week saw digestion. That is very efficient. Last week’s futures trade was anything but efficient. There were wide swings from rail news and algo selling. The roll held it up while the computer sold. The futures are signaling an ending cash buy round. That remains to be seen.

It looks like the Teamsters were blindsided by the Minister’s next-day order to return to work, so they decided to serve 72 hours’ notice and sue the Minister. Welcome to Chicago. This back and forth has drained some of the momentum/panic out of the situation. This could lead to another week of digestion on the cash side and more $20 moves back and forth in futures.

I’m not a fan of shorting a commodity priced below the cost of production. While the cash market has robustly rallied, most mills are still underwater. While waiting for the reduced supply equation to hit the market finally, we may have to suffer the testing of lows a few times. Lumber 101, prepare for the worst, and hope for the best.

Technical:

The momentum couldn’t carry futures to new highs last week. The market hit an artificial wall in the high 530’s. It’s considered artificial because of the aggressive selling shown by the industry over 540. That doesn’t top the market but shows the growing inventory lists. It’s interesting how moving averages on the chart and inventories tend to match up over time. A slow Monday will allow the algo to shove Sept under $500. They’ll take one more shot at forcing the spec longs out before the labor news heats up again. This week, it may be more prudent to play the news cycles than the technical points…

Daily Bulletin:

The Commitment of Traders:

About the Leonard Report:

Brian Leonard

312-761-2636

22 Jul 2024

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

LEONARD LUMBER REPORT: To keep it simple the sharp selloff on Monday rattled some cages and woke up a marketplace

Recap:

To keep it simple the sharp selloff on Monday rattled some cages and woke up a marketplace. All of a sudden, the trade looked up and saw low inventories with a cash market very close to $300. The round of cash was enough to bring in short covering in futures. To sum it up we finally are getting a cash buy. The question now is it one of the new 2024 tepid buys or a good old fashion fill in?

Early in the year, we expected shutdowns, fires, or rail to hold prices up. Most of those factors are still here. As a matter of fact, we are in the thick of the shutdowns, so that can become a feature. Nothing has changed with demand. We had run inventories to very low levels with fall coming soon. The market bottomed out in cash, and if it is going to go much higher, the futures have to become the driver.

Some could buy early in the week and sell most of it by Friday. The next buy will be higher, so they have to decide on building inventory. With the futures at such a premium, there is a way to protect it, but for now, buyers want to book a few profitable cars, noting that it’s been a few months. Market psychology always has the last word.

A higher futures trade will bring in more cash buying. The focus from here will be on the ability to manage the risk of the next cash buy. I bet everyone is putting the futures app back on their phones this weekend.

Technical:

The futures offer two major focal points. The first is a bottoming of the market with real upside potential. I’ll add to that in a moment. The other fact is that July futures expired at 418.50. With all the headwinds facing the economy and this industry, you can’t call it a low. But today, we are.

I have talked about the noise above the market for months now. Last week’s action tells me that the market can grind through those areas. The problem with the grind is that you have to deal with more fund selling each day. The data shows that it would take a trade over $518 to slow or stop that. A close over it gains momentum to the $528 area. The next level is $550. I’m not calling for anything like that, but if you are short and sitting on your hands, pay attention.

The gap left Tuesday adds a little “generative” confidence to futures. This rally was needed. It’s healthy and should stay intact until the funds say that’s enough.

14 Jun 2024

Agriculture, CME, Corn, Cotton, Futures, Grain, Hedging, Market Commentary, Market Updates, Research, Risk Management, Soybeans, USDA Report, Weather, Weekly Prices, Wheat rcmagserv 0 comment

AG MARKET UPDATE: MAY 31 – JUNE 14

Corn’s small 18 cent rally off recent lows for new crop corn has been very welcome after 6 down days in a 7-day period to end May and start June. This week’s USDA Report was a non-event with the USDA making no changes to South Americas production from last month despite the trade expecting production well below the USDA’s estimate of 175 mmt (171.82 estimated). CONAB released their estimates on Thursday, increasing their estimates for Brazil’s corn crop but still 310 million bushels below what the USDA is saying. The heat over the next couple of weeks is not expected to be a major problem but if this level of heat with a lack of rain goes into July the markets would take notice and begin to worry a bit.

Beans are lower over the last 2 weeks with them settling into a flat trade this week. The USDA report was uneventful despite the USDA cutting another 1 mmt from Brazil’s bean crop. US exports were revised lower and ending stocks rose as the slow pace of exports continued. With no major surprises and no major weather/production issues yet there is not much bullish news outside of CONAB’s Brazil production estimate which is 207 million bushels below this week’s USDA update.

Equity Markets

The S&P 500 and NASQDAQ continue to move higher setting new all-time highs as several large tech companies beat on earnings. The AI movement is continuing its dominance, but some other areas are starting to find strength as funds are forced to reposition.

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

Other News

The cotton market continues lower as there is nothing bullish in the news cycle for it other than the potential for up to 25 named hurricanes this year.
Wheat’s roller coaster ride continues with potential for lower Black Sea production still a possibility after the $1.50+ rally follows by a $1 fall with 10 down days in a row.

Drought Monitor

Via Barchart.com

Contact an Ag Specialist Today

20 May 2024

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

LEONARD LUMBER REPORT: IT WAS A TOUGH WEEK FOR CASH AND FUTURES

Recap:

It was a tough week for cash and futures as the quiet market pushed prices lower. Before we sound the alarm, the market is $22 off its high and $18 off the low. After 20 sessions, the market sits in the middle. At this time of year, the market tends to put in a seasonal low. This battle with a $35 range is mildly friendly. This marketplace is not heading for the exits. The industry and speculators are firmly committed to the long side, while the funds are firmly committed to the short side. If you are long waiting for the funds to react, it will be a long 30 days. Last year, we saw the same dynamics of less traffic, falling builders’ sentiment, and less construction than projected. What happened was a grind higher market. I want to make a call for the same, but this year, we are just now confirming more negatives and fewer positives. More brown shoots don’t necessarily equal sharply lower prices. It will just be a continued drag on this market. I would be mildly friendly to the market if it weren’t for the fact that the industry is long-future and cash-playing Texas Holdem with a Texas hedge. Those long cash should be selling the pops in futures.

Technical:

The tech read hasn’t been effective this year due to the tight range between swings. Today, there is a mildly friendly candlestick. The market is building a new value area about $20 higher than last year at this time. I’m looking for a lower RSI up here to confirm.

Daily Bulletin:

The Commitment of Traders:

About the Leonard Report:

Brian Leonard

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

312-761-2636

15 Apr 2024

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

LEONARD LUMBER REPORT: The futures market got crushed last week

Recap:

The futures market got crushed last week. The lack of a cash market increased the negative momentum. It was, as one trader put it, a “strange change in dynamics.” On almost every break in the last 16 months, the mantra was to buy it lower. We did that dance under $520 and again under $500 numerous times. Last week, the majority were preaching to sell a bounce. That is a definite change. That said, let’s wait to sell the farm.

The starts and permits report come out on Tuesday. They are looking for a number around 1.5. I struggle to see how, with the current reduced production, there can be an abundance of wood. We do generate abundance with every buy, but that is drained over time. This last buy round was more aggressive than usual. Traders became more confident and added purchases showed this. Today, we are living in the glow of that abundance. It will get cleaned up.

Economic:

We talked for months, going on years, about the probability of something breaking in the system. I’m worried the Fed can upset the marketplace with continued bad decisions. They want to cut interest rates while still carrying a large balance sheet. Continuing to push money into the system and cutting rates in an inflationary environment will choke off the market. And just to be clear, we are the first to feel the choke. I am worried we are seeing it in the multifamily sector already. Disrupt the apple cart, causing unemployment to rise, and we get the single-family sector to start to feel that choke.

Our last rally was a needed fill-in that was better than expected. This current downturn is the clearing out of those extras. Once done, another fill-in will be needed.

Technical:

The downside move last week was violent, to say the least. This pushed the RSI down to 11.80%. The selling is computer-related, driving markets well beyond the norm. Lumber futures went from $1250 to $1700 purely on computer buying. My point is that computers can move markets. Now that said, here it comes: the futures market has been following the cash market lower. The move in futures has been as much fundamentally driven as it has been computer driven.

This RSI extreme will correct itself.

Daily Bulletin:

The Commitment of Traders:

About the Leonard Report:

Brian Leonard