THE LEONARD LUMBER REPORT: THE KEY TAKEAWAY FOR THE WEEK WAS A FALLING FUTURES MARKET AT A TIME WHEN THE SHORT FUNDS WERE COVERING

Weekly Lumber Recap 

10/30/22

The key takeaway for the week was a falling futures market at a time when the short funds were covering. The quietness in the cash market was the feature. We are seeing a sharp drop in open interest as the funds exit. While expected it still is worrisome to not see any support from it. What is apparent is the fact that the industry is in drift mode. It is a buy only what you need market. No one can project what impact the rates doubling in 6 months is going to have on the entire industry. This guarded tempo is warranted. If this last rally was caused by the election bubble we expected then it could be a long cold winter. Let’s look at a few issues.

This is an industry with rapidly changing dynamics. The key driver is the Fed. We know they are out to slow the housing market and will do a good job of it. What we are now watching is the big ones. The first indication of a slowdown is liquidity. Most believe that something needs to blow up but that isn’t the case here. What we will see is companies looking inward and slowing most activity. This is the quiet bleed. The other major issue will be when companies start to put the “lists” together for layoffs. This is really the telltale sign. It took almost 15 years to get labor back to a stable level and now they may have to let people go. So, at this point we expect a liquidity crunch followed by layoffs. So that’s the macro picture. What is the micro picture?

As said earlier, we may have pulled forward business expected from the election bubble. We have seen a draw down in inventories to a level that keeps the trade in the market. Granted housing is eroding but the on-hand inventory will always be limited. I did expect to see much better basis business in the last few weeks. What we saw was a very big push back to build inventories or make margin calls. This looks like a one up and three weeks down marketplace. Those are very tradable. Going into next week I think there are three dynamics to watch. The first is that rates have doubled in 6 months and are now called to level off and hold through 2025. That’s not a typo. Next is expectations. Forward-looking reports indicate a slowing of both production and demand. 2023 could look a lot like 2019 as far as the trade goes. Is 402 the low? Lastly is the housing market itself. Some are calling it a meltdown, but it looks too busy to me to call it that. This looks more like a bear market that trades. Use the sell offs to own cheap wood for next year.

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