The futures contract is based on 2 inch thick by 4 inch broad dimension timber, which is the most extensively produced material in North America. Finally, lumber lengths are commonly measured in even number increments between 8 and 20 feet.
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.
How do lumber futures are calculated?
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 are the foundations of futures?
Futures contracts are, in fact, a sort of derivative. Because their value is reliant on the value of an underlying asset, such as oil in the case of crude oil futures, they are derivatives. Futures, like many derivatives, are a leveraged financial instrument that can result in large gains or losses. As a result, they are often regarded as an advanced trading product, with only experienced investors and institutions trading them.
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).
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.
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.
What is the distinction between lumber and boards?
The height and girth of the tree from which dimensional timber is milled determine the length of a unit. The maximum length is often 24 feet (7.32 m). Engineered wood products, which are made by fusing wood strands, particles, fibers, or veneers with adhesives to create composite materials, have more flexibility and structural strength than traditional wood building materials.
Because pre-cut studs are pre-cut by the manufacturer for use in 8-, 9-, and 10-foot ceiling applications, they save a framer a lot of time. This means the manufacturer has removed a few inches or centimetres of the piece to allow for the sill plate and the double top plate with no additional sizing required.
Two-bys (24s, 26s, 28s, 30s, and 32s), as well as the 44 (89 mm 89 mm), are standard lumber sizes used in modern construction in the Americas. They are called for traditional board thickness in inches. They serve as the foundation for constructions like balloon-frame and platform-frame houses. Softwood dimensional lumber is generally utilized for building, although hardwood boards are more commonly used for cabinets and furnishings.
The notional dimensions of lumber are bigger than the completed lumber’s standard specifications.
Historically, nominal dimensions were the size of green (not dried), rough (unfinished) boards that were subsequently dried and planed into smaller finished lumber (to smooth the wood).
Today, the mill cuts the logs to whatever size it requires to obtain the final specifications specified by the standards.
Because contemporary technology allows for more efficient use of the logs, the rough cut is usually less than the nominal size.
A “24” board, for example, began life as a green, rough board measuring 2 by 4 inches (51 mm 102 mm).
It would be smaller by an unusual amount after drying and planing.
Today, a “24” board starts out as something smaller than 2 inches by 4 inches and not specified by standards, and after drying and planing is minimally dimensionally dimensionally dimensionally dimensionally dimensionally dimensionally dimensionally dimensionally dimensionally dimensionally dimensionally dimensionally dimensionally dimensionally
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.