Length at Random Lumber futures contracts (LB) are traded in 2 x 4s of various lengths ranging from 8 to 20 feet. The Chicago Mercantile Market (CME), the first exchange to offer price protection to the forest products industry, trades lumber futures. Western Spruce-Pine-Fir is the primary deliverable species, and mills must be located in Oregon, Washington, Idaho, Wyoming, Montana, Nevada, or California, or in the Canadian provinces of British Columbia or Alberta.
Lumber prices have fluctuated dramatically in recent years as a result of supply and demand imbalances. Due to mill closures, the spotted owl debate, and other environmental concerns, domestic lumber supply have been limited. Lumber supplies in Canada have been constrained as provinces strive for sustainable yields, in which just enough trees are removed to replace them in 40 or 50 years. Housing starts have varied from record highs to 36-year lows in the last decade, owing in part to economic conditions and interest rate policy.
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 is the best way to interpret a futures chart?
To see price details, select price bars. Each bar represents a trading session’s opening price, low price, high price, and closing price. The bar is made up of one solid vertical line and one horizontal line on each side. The opening price is identified by the left horizontal line, the low price is identified by the bottom of the bar, the high price is identified by the top of the bar, and the session’s high is identified by the right horizontal line. An upward trend is indicated by a sequence of higher highs, whereas a series of lower lows shows a downward trend.
How are lumber futures prices calculated?
Humans have been using lumber for construction for thousands of years, but due to the heaviness of timber and manual harvesting methods, large-scale logging did not begin until the Industrial Revolution. Hardwood and softwood are both used to make lumber. Hardwood lumber is made from broad-leaved deciduous trees. The most common hardwood lumber is oak, gum, maple, and ash, which is utilized for a variety of industrial uses, principally wood pallets. Black walnut, black cherry, and red oak are examples of hardwood species with attractive hues and patterns that are utilized for high-end products such as furniture, flooring, paneling, and cabinets. Softwood refers to wood from cone-bearing trees, regardless of its hardness. The majority of lumber produced in the United States is softwood. Southern yellow pine, Douglas fir, ponderosa pine, and true firs are mostly utilized for structural lumber like 2x4s and 2x6s, poles, paper, and cardboard.
Plywood is made up of multiple thin layers of veneer that are glued together.
Plywood is extremely sturdy for its weight because the veneer sheets are placed so that the grain of one sheet is perpendicular to that of the next.
The majority of plywood is made up of three to nine layers of wood.
Hardwoods and softwoods are both used in the production of plywood, while hardwoods are mostly used for appearance and are not as robust as softwoods.
Plywood is largely utilized in building, with flooring, roofs, walls, and doors being the most common uses.
Two-thirds of all lumber consumed in the United States is used for home construction and remodeling.
The health of the U.S. home-building market is significantly associated with the price of timber and plywood.
Weyerhaeuser Company (ticker symbol WY) dominates the forest and wood products business, with annual revenues of almost $20 billion.
Weyerhaeuser is a forest products company that does not only cultivate and harvest timber, but also manufactures and distributes forest products, develops real estate, and builds single-family houses.
Wood products, pulp and paper, and containerboard are all examples of forest products.
In North America, the forestry section maintains 7.2 million acres of company-owned land and 800,000 acres of leased commercial forestlands.
The company’s Canadian business holds long-term, renewable licenses on over 35 million acres of forestland across five provinces in Canada.
Weyerhaeuser invests in a variety of forest management techniques to maximize its long-term productivity from its acreage, including substantial planting, suppression of non-merchantable species, thinning, fertilizing, and operational pruning.
The CME Group trades lumber futures and options.
The lumber futures contract offered by the CME Group calls for the delivery of 111,000 board feet (one 73-foot rail car) of random length 8 to 12-foot 2 x 4s, which are commonly used in construction.
The deal is valued per thousand board feet in USD.
Supply – The United States led the world in industrial round wood production in 2018, increasing by +3.7 percent year over year to 368.189 million cubic meters, followed by Russia, which increased by +11.1 percent to 219.569 million cubic meters, and Canada, which decreased by -2.9 percent to 150.714 cubic meters.
In 2018, the United States dominated the world in plywood production with 11,490 million cubic meters (-0.90 percent year over year), followed by Russia with 4.013 million cubic meters (+7.6 percent year over year), and Japan with 3.298 million cubic meters (up +0.3 percent year over year).
In 2018, global plywood shipments increased by 1.4 percent year over year to 30.781 million cubic meters. Russia is the world’s top plywood exporter, accounting for 8.8% of global plywood exports in 2018, followed by Finland at 3.3 percent, Canada at 2.3 percent, and the Baltic States at 1.5 percent. Exports from the United States declined by -34.3 percent year over year to 615.000 million cubic meters in 2018.
In 2018, global industrial roundwood shipments increased by 5.1% year on year to 135.463 million cubic meters.
Russia was the world’s largest exporter of roundwood in 2018, accounting for 14.2 percent of global exports, followed by the United States (9.5 percent), the Czech Republic (6.1 percent), and Canada (4.6 percent).
In 2017, Russian industrial roundwood shipments declined 1.2 percent year on year to 19.197 million cubic meters.
Industrial roundwood shipments in the United States increased by 5.0 percent year over year to 12.814 million cubic meters in 2018.
The CRB Yearbook, the single most comprehensive source of commodity and futures market information available, provides information on commodities. Its sources – government reports, private industry reports, and trade and industry associations – are reliable, and its historical breadth for commodities data is unparalleled. The Barchart product range includes the CRB Yearbook. Please come to us for all your commodity data need.
Is it likely that lumber prices will fall in 2021?
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 factors influence the price of lumber?
Our lumber prices are calculated by board feet (BF). A BF is a measurement unit that measures 1 inch by 12 inches by 1 foot. Calculate BF the same way you would a regular board, then divide by 12. For example, to find out how many BF are in a 4 x 6 x 10, multiply the numbers together: 4 x 6 x 10 = 240, then divide by 12 to get 20 BF. To calculate the price, multiply the BF by the price/BF, which in this case is $.80/BF, resulting in a price per piece of $16.00.
Some of our standard sizes and costs in Pine and Poplar lumber have already been computed for you in the chart below.
The price per BF is listed in the first column.
The size of lumber is the following subgroup. The BF is the next column, and the price per piece is the last column. If there isn’t a standard size on the chart, you can calculate your BF and then estimate where it would fall in the price range.
Our price per BF for Mixed or Red Oak is $1.50 for 4, 6, and 8 and $2.00 for 10 and 12. (the wider stock is more expensive per BF).
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.
Will the price of lumber fall in 2022?
The United States is the primary driver of softwood lumber demand in North America. Softwood lumber consumption in the United States increased to 50.93 BBF in 2020, and we expect it to rise to 52.76 BBF in 2021, the highest level since 2006, and 53.87 BBF in 2022. Residential-improvement sectors, which will benefit from years of robust home sales, drove growth in Canadian lumber consumption. However, as the Canadian currency strengthens, the manufacturing sector will be harmed, thus we predict consumption to decline year over year from the fourth quarter of 2021 to the second quarter of 2022, before rebounding throughout the balance of the forecast period.
North American offshore exports fell by about 24% year over year between the second quarter of 2019 and the second quarter of 2021. As the global economy strengthened last year, we expect offshore lumber exports from North America to fall slightly less in 2021, perhaps 9.8% less than in 2020. (compared with a 25.7 per cent decline the previous year). Because of robust domestic demand, high prices, and competition from Europe, we estimate export growth to continue poor, decreasing another 1.6 percent in 2022.
The supply of lumber is made up of domestic capacity as well as imports. Early in 2020Q2, lumber demand and prices plummeted. Mills cut capex as a result of this, as well as the uncertainty surrounding the COVID-19-induced slump. As a result, capacity fell marginally in 2020. Pricing rose unexpectedly, and mills began investing to take advantage of the higher prices. This will result in a 1% increase in capacity in 2021-22. Over the next two years, significant additional capacity and expansions at existing facilities have been announced. Due to constraints on machinery manufacturers and mill labor, this capacity will ramp up slowly.
Offshore imports into the United States climbed nearly 40% in 2020, and with demand and prices soaring in early 2021, offshore imports are predicted to rise another 13% in 2021. In 2022, we anticipate a 9% increase in growth.
The predicted surge in imports is due to multiple factors, including strong North American consumption and high pricing; capacity constraints in Canada; ample, low-cost fiber supplies in central Europe; and the strong US currency. For a thorough description of the fiber supply problem in central Europe, see the FEA research Central European Beetle and Windstorm Timber Disaster.
Due to a combination of declining residential-improvement markets and the regular seasonal reduction in end-use market activity, demand for U.S. mills (consumption plus exports minus imports) has fallen off its seasonal peak, and we estimate demand for U.S. mills to continue weak through February. Putting it all together, we predict total demand at North American mills to rebound by 3.3 percent last year after being unchanged the previous year, and to grow by another 1.1 percent this year.
In the first half of 2020, capital expenditures came to a halt. Capacity growth has stalled until 2021 as a result of this. Meanwhile, demand was strong in the first half of 2021, and it expanded rapidly. Operating rates rose to 87 percent for the year as a result of this. In 2022, demand will continue to rise, but capacity expansions following the price spike of 2020-21 will start to come online. As a result, the demand/capacity ratio will stay unchanged in 2022, at 87 percent.
We may now turn our attention to lumber prices after putting all of this together. Prices rose at the conclusion of the year. Part of this was due to severe supply delays caused by British Columbia’s unusually wet weather. However, part of the rise in costs was due to strong demand as warm weather across the country extended the building season, and dealers rushed to replace inventory, fearful of another price spike similar to the spring of 2021. The weather’s impacts will be transient. However, we expect prices to remain high through February for a variety of reasons.
Inventories are still low across the supply chain, and dealers will want to start replenishing them before the construction season begins in March-April across much of North America. Mills took a break over the holidays as well. Finally, the all-too-fresh memories of $1,000-plus pricing will keep purchasers in the market while output is hampered by log- and labor-supply shortages.
Supply restrictions in the United States’ South will boost lumber prices in early 2022. Mill closures in British Columbia were primarily compensated for by capacity expansions in the United States South. Wet weather and labor shortages, on the other hand, have hampered log availability and mill output. We anticipate a reduction in soil moisture content over the winter, with a La Nia year in 2021-22. This will make getting into the woods a little easier. Labor shortages are expected to last longer this year, since many people who left the industry at the start of the COVID-19 pandemic have yet to return, and we expect labor concerns to continue to stymie production.
While we expect prices to stay high into early 2022, we do not expect them to return to the levels seen in 2021. Capacity additions in the United States’ South, somewhat higher inventory levels heading into the year, and weaker residential-improvement activity will likely preclude a run like the one we experienced in 2021. Furthermore, we estimate prices to fall in the second quarter as dealers work through their stockpiles built in late 2021 and early 2022. We foresee another round of buying in the third quarter as residential-construction markets remain strong seasonally and cyclically; however, as more low-cost southern pine production comes online, prices in the second half of 2022 will average lower than in the first half of the year. In 2022, we predict the RLFLCI will average 645 for the year.
In the end, we predict lumber prices to remain erratic in 2022. There are several causes for this, the most important of which is COVID-19’s residual effects. Following the first outbreak of COVID-19 in the United States, a lack of buying and production drove dealer stocks to new lows. As demand climbed, there was insufficient inventory in the system to meet the growing demand. As a result, prices skyrocketed to new highs. Dealers stopped buying lumber at such high prices, causing their stocks to fall again. Low stockpiles will almost certainly force dealers to buy wood at higher prices than they wish, and those higher costs will encourage dealers to cease buying as soon as their immediate needs are met, causing prices to fall significantly. Over the next year, this cycle will repeat itself, resulting in extremely volatile prices.
Forest Economic Advisors (FEA) LLC, the main source for North American wood products analysis and information, has Paul Jannke as a principal. North American lumber markets are Paul’s main area of expertise. Paul is the industry’s top economic analyst, having spent nearly 30 years evaluating lumber markets and giving dependable, intelligent forecasts. He wrote the FEA publications Lumber Advisor and Lumber Quarterly Forecasting Service.
Are futures a reliable predictor?
Index futures prices are frequently a good predictor of opening market direction, but the signal is only valid for a short time. The opening bell on Wall Street is notoriously turbulent, accounting for a disproportionate chunk of total trading volume. The market impact can overpower whatever price movement the index futures imply if an institutional investor weighs in with a large buy or sell program in numerous equities. Of course, institutional traders keep an eye on futures prices, but the larger the orders they have to fill, the less crucial the direction signal from index futures becomes.