Lumber prices have risen again in the United States over the previous month. Since the start of the COVID-19 pandemic, the price of lumber has been volatile, sharply plunging and unexpectedly soaring during the last two years.
Despite a brief drop in pricing in the new year, lumber prices have risen steadily throughout February, reaching $1,272 per thousand board feet, the highest level since summer 2021.
According to the Labor Department’s most recent producer price index report, softwood lumber prices increased by a stunning 25.4 percent in the month of January alone.
What is the price of lumber futures?
One tick costs $0.10 per MBF in timber (one thousand board feet). The high and low prices during the first 30 seconds of trade are included in the opening price range for a contract month. The average of the high and low prices during the last 30 seconds of trade is the closing or settlement price for a contract month.
What exactly are lumber futures?
Lumber futures are contracts that allow you to buy and sell a specific amount of wood that has been cut into beams and planks in the future. A futures contract is a legally binding agreement between two parties to trade a commodity for a fixed price at a future date.
Companies in the forestry business utilize lumber futures to speculate on the cash price of lumber. The price of timber can fluctuate at each stage of the lumber distribution chain forestry, milling, processing, wholesale, retail, and construction due to the delay between purchase and final sale. Companies can lock in a price and reduce their risk exposure by employing futures.
This risk is essentially passed on to speculators or investors hoping to profit from price fluctuations.
Lumber has been used in construction for thousands of years, but it wasn’t a market commodity until the industrial revolution.
- Hardwood lumber, such as oak and maple, is employed in commercial enterprises and is commonly found in the form of wood pallets, furniture, and flooring.
- Softwood timber, such as pine and fir, is structural lumber that is used mostly for construction. Western Spruce-Pine-Fir species are the most common species traded in lumber futures.
What do you think will happen to lumber prices?
According to a poll of home builders, timber prices are expected to continue to rise in 2022. The projected surge occurs while housing demand remains high and supply chain difficulties persist. “Lumber is projected to rise dramatically this year,” said one Austin home builder.
Will the price of lumber drop in 2022?
When COVID-19 first hit in early 2020, most timber suppliers cut production, assuming that the broader economic environment caused by widespread lockdowns and uncertainty would delay building activity and, as a result, diminish demand for housesand, as a result, wood.
Instead, home purchases and remodeling increased as a result of the development of remote work, which coincided with the entry of millennials into their peak home-buying years, creating a perfect storm that the lumber sector had not anticipated. Construction didn’t slow down though, since the industry was immediately designated “vital” by regulators.
In 2020, prices for the critical home-building commodity skyrocketed as a result of this. However, by mid-2021, the price of lumber had plummeted as the industry’s output had stabilized.
The recent timber price increase, according to David Logan, senior economist at the National Association of Home Builders (NAHB), is due to many factors:
- Supply chain constraints for framing kits are causing more builders to postpone their projects.
- In November 2021, severe flooding took away some infrastructure in southern British Columbia and Washington (two major lumber production areas).
High lumber tariffs, together with growing home demand, are also causing the spike in timber prices, according to Zach Fritz, an economist with Associated Builders and Contractors.
The US Department of Commerce said in November 2021 that tariffs on softwood timber imported from Canada would rise from roughly 9% to 17.9% in 2022. Fritz pointed out that this is a little reduction from the previous administration’s 20 percent lumber tariffs, which were reduced to 9% in December 2020 in the face of historically high lumber prices.
Demand for new housing
Housing starts also hit their highest level since September 2006 in November 2021. “Several factors, including the influx of millennials into the housing market, retirees downsizing, Americans migrating in large numbers from the Northeast to the South and Southwest, and pandemic-induced shifts from urban to suburban living, have boosted demand for new housing to levels not seen since the mid-2000s,” Fritz said. “Because lumber is a key component of residential building, accounting for roughly one-sixth of the total cost of a home, demand has skyrocketed.”
The trends that are driving up lumber prices aren’t going away anytime soon. The lumber tariff issue between the US and Canada stretches back to the early 1980s. Permits for new residential building have remained near their highest level since 2006, despite historically low housing inventories.
“With tariffs in place and home demand expected to outstrip supply for some time,” Fritz added, “expect lumber prices to remain high for the foreseeable future.”
The United States uses lumber to construct more than 90% of its single-family homes, a much larger percentage than the rest of the globe. In the United Kingdom, for example, only approximately 20% of single-family homes are constructed with lumber. This trend will not reverse very soon, according to Fritz, because the two main substitutessteel and concretehave also suffered rapid price hikes in recent months.
Board feet prices 254% higher than pre-COVID price levels
Logan noted at the time of writing, “Futures markets anticipate that lumber will remain above $1,000 per thousand board feet until September 2022.” Logan and other industry observers can only point to futures pricing because NAHB does not publicly forecast commodities prices.
The huge increase in the cost of building materials has resulted in project delays and cancellations across the country. According to Logan, the data shows that the number of single-family units sanctioned but not started is at its highest level since April 2007. Furthermore, single-family starts have climbed by 31% since January 2018, while the number of units permitted but not started has increased by 70%.
Logan went on to say that interest rates, which have already begun to climb this year, are anticipated to rise further through 2022, creating a headwind for the construction industry, which has benefited from supportive monetary policy since the outbreak began.
Why has the cost of lumber increased?
Lumber prices are increasing once again, upsetting the housing industry and threatening house affordability, after a few months of moderated costs last spring and summer.
According to NAHB standard estimates of timber used to build the average home, lumber costs have nearly quadrupled in the last four months, leading the price of an average new single-family home to rise by more than $18,600. This increase in lumber prices has increased the market value of the average new multifamily housing by roughly $7,300, resulting in households paying $67 more per month to rent a new apartment.
According to Random Lengths, the price of framing timber has surpassed $1,000 per thousand board feet as of Dec. 29, a 167 percent rise since late August.
The softwood lumber that goes into the average new home, as collected in the Builder Practices Survey performed by Home Innovation Research Labs, was used by NAHB to compute these average home price increases. Any softwood used in structural framing (beams, joists, headers, rafters, and trusses), sheathing, flooring, and underlayment, interior wall and ceiling finishing, cabinets, doors, windows, roofing, siding, soffit and fascia, and exterior features such as garages, porches, decks, railing, fences, and landscape walls are all included.
Why Lumber Prices Have Surged
The unprecedented price volatility in the lumber market began in April 2020, when the COVID-19 pandemic spread and sawmills slowed production in expectation of lower demand. Lumber mills did not scale up output in response to the fact that housing weathered the storm considerably better than expected and demand remained robust in the months that followed.
Lumber prices peaked at a record-breaking $1,500 per thousand board feet in May 2021, before gradually declining until late August, due to sawmills’ sluggish response and a significant increase in demand from do-it-yourselfers and big box stores during the pandemic.
- Increased price volatility due to a doubling of duties on Canadian lumber imports into the US market.
- Summer wildfire season in the western United States and British Columbia has been exceptionally active.
NAHB Actions
While lumber prices remain stubbornly high, NAHB continues to work tirelessly with the White House, Congress, and lumber producers to alleviate supply chain interruptions, increase lumber production, and lower material prices. This is the association’s top priority. NAHB has made the following steps in the last few weeks:
- 84 members of Congress wrote to Commerce Secretary Gina Raimondo in late December at NAHB’s request, expressing grave concern about the Commerce Department’s recent decision to double tariffs on softwood lumber goods from Canada. The letter also urges the US to resume negotiations with Canada on a new softwood lumber trade agreement.
- The NAHB met with top Canadian officials at the Canadian embassy in Washington in early December to discuss major softwood lumber concerns, including the urgent need to initiate negotiations on a new softwood lumber deal that would eliminate tariffs.
- On Dec. 3, NAHB issued a letter to President Biden, urging him to work with Canada on a new softwood lumber accord and increase American lumber production to battle high lumber costs.
- Over the holiday season, NAHB engaged its grassroots by having members call or write their members of Congress, urging them to tell President Biden to negotiate an updated softwood lumber agreement with Canada and increase U.S. lumber production by harvesting more timber from U.S. forest lands through BuilderLink.
- Sens. Jeanne Shaheen (D-NH) and Jerry Moran (R-Kan.) wrote to Commerce Secretary Gina Raimondo in late November to express their opposition to the Commerce Department’s decision to double tariffs on Canadian lumber imports into the United States, citing NAHB’s assertion that historically high lumber and building material prices continue to be a headwind for the housing sector in the United States.
- On October 20, NAHB Chairman Chuck Fowke spoke before Congress, urging lawmakers to address supply chain constraints that are compounding the housing affordability crisis.
- On Oct. 6, NAHB wrote to Biden, urging him to address lumber and building material supply chain bottlenecks that are driving up construction prices and threatening housing affordability.
Government Affairs, Communications, Economics, and Legal the NAHB advocacy team continues to work relentlessly on all fronts to develop solutions that will secure a long-term and consistent supply of timber and other construction supplies for the home building industry at a reasonable price.
Random length lumber futures are what they sound like.
CME Random Length Trading Mills, wholesalers, homebuilders, and retail dealers can use lumber futures to control price risk and take advantage of price opportunities. Softwood 2 4s, the type used for repairing and building, are specified in the contract. Individual investors prefer lumber because of its price volatility and ability to watch the economy.
A futures contract binds two parties – the seller (the short) and the buyer (the long) to supply a standardized commodity within a specified futures contract month. For each contract traded, the quantity, quality, and location of the delivery point(s) are the same. Only the price is still to be determined until the buyer and seller have signed the contract.
Lumber Investing
That cash appeals to investors. Lumber prices are frequently erratic and unpredictable. Mill closures, environmental policies, and other factors might cause supply fluctuations. Demand fluctuates a lot, depending on interest rates and other economic factors that influence home starts. As a result, lumber prices fluctuate dramatically in response to supply and demand imbalances.
Lumber Futures Prices/Rates
Lumber trade contracts are made up of 110,000 bd. ft. of 2x4s of varying lengths (8 to 20).
1 point equals $.10 per 1,000 bd. ft., or $11 per contract, according to the pricing point definitions.
Lumber Futures Contract Trading
With the introduction of CME Random Length Lumber futures contracts in 1969, CME became the first exchange to offer price protection to the forest products industry. By establishing an equal and opposite position in CME Random Length Lumber futures, companies involved in the production, processing, marketing, or use of lumber and lumber products have been able to hedge their risk exposure and lower the risk of keeping or acquiring inventories.
Lumber Trading Strategy
Due to its great volume, big lumber moves. Almost every company in the distribution chain bets on the cash price of lumber. Because of the time gap between purchase and final sale, economic trends may generate unfavorable pricing fluctuations between each stage forest, mill, processor, wholesaler, retailer, builder, or end-user. The hazards are considerable, even if the lag is only a few days or weeks. According to the North American Wholesale Lumber Association’s data, its member companies have around a half-billion dollars in distribution inventories. A 2% reduction in the price of lumber may cost that sector of the industry more than $10 million.
Lumber Trading Major Indicators and indices
The months for which lumber delivery contracts are available are January, March, May, July, September, and November. The last day of trade is the business day before the contract month’s 16th calendar day. The last day of lumber trade is the business day before the contract month’s sixteenth calendar day.
Lumber Trading News
In North America, there are a variety of periodicals and sources for lumber trading information. To improve their trading profits, a lumber trader may be able to better comprehend the market by looking to different sources of information.
Lumber Trading Advice
Trading lumber for business expansion can be done without putting the firm at risk. Business growth hedges resemble price protection hedges in appearance, but they extend beyond the 30- or 60-day time frames in which such business deals are typically executed.
Following the development of a foundation of knowledge of the cultivation and processing cycles of lumber, lumber traders must comprehend how that information must be linked with an understanding of the economic variables that effect each phase of transporting the lumber from the forest to the jobsite. Traders must investigate the link between global economic conditions and lumber pricing and trends.
Why is 2020 lumber so expensive?
Because homebuilding can go up and down far faster than sawmill capacity, wood product prices often fluctuate more than most goods. Other applications of wood goods, such as non-residential construction, crates, and pallets, are more stable, although new housing is the most common, followed by home repairs and renovation, all of which are highly cyclical.
In North America, particularly in the southern forests, wood is plentiful. Modern mills are extremely efficient at converting logs into 2x4s and plywood sheets. Because of the short-run dynamics of demand and supply, lumber and plywood prices are at an all-time high.