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.
What are the prospects for lumber pricing in the future?
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.
How do futures contracts for lumber work?
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.
Why are lumber futures on the rise?
Lumber prices have risen to their highest level in six months as a result of strong building demand and increased supply issues. The Chicago Mercantile Exchange’s lumber futures rose 4.4 percent to a six-month high of $1,069.30 per 1,000 board feet on Friday.
Will the cost of lumber 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).
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.
Why are lumber prices increasing once more?
Lumber prices have been extremely erratic this year. Lumber prices jumped to an all-time high in May, spurred by historic levels of demand and escalating supply chain concerns, after steadily climbing through the end of 2020 and the beginning of 2021.
The cost of wood gradually began to revert to historically average levels throughout the summer, providing relief. That appeared to be the end of the roller coaster journey that lumber had been on. However, lumber prices are beginning to rise again, causing further alarm.
From the beginning of September to the middle of October, lumber prices climbed by more than 60%, from less than $500 to more than $700 per thousand board feet. This rise caused the National Association of Home Builders (NAHB) to write to the White House, requesting that the federal government take further steps to address specific supply-chain limitations.
In an Oct. 6 letter to President Biden, NAHB board chairman John C. Fowke said, “We applaud your decision to study the building supply chain issues affecting the United States and greatly appreciate your efforts to improve transportation and logistics by easing the hours for transportation workers involved in delivering goods.”
Why are lumber futures prices dropping?
Little’s remarks On Thursday, lumber fell to a low of $480.40 per thousand board feet, the lowest level since July 8, 2020, when it fell to $465 per thousand board feet. After plummeting by more than 9%, lumber prices are on course for their 13th consecutive weekly loss.
Lumber futures fell by more than 40% in June, marking the worst month on record since 1978. After epidemic shutdowns, Americans began going away from their houses rather than pursuing renovation and building projects, which caused the decline. Lumber prices touched an all-time high of $1,670.50 per thousand board feet on a closing level earlier this year in May, following a catastrophic low in April 2020.
Little stated on Thursday that the lumber market is currently “in this balance stage or hunt for equilibrium.”
Little explained, “What we’re finding is that the support level that follows the bottom end of that continuous trend pre-Covid is very, very positive.” “With the predicted demand that we are currently seeing, it would also make a lot of us in the timber sector feel much more comfortable going and rebuilding inventories here for the second part of this year.”
Is the cost of lumber increasing once more?
A year ago, the cost of construction particularly house construction skyrocketed due to soaring lumber prices. Construction was slowed by rising prices and a supply deficit. Then, in summer 2021, prices dropped to pre-pandemic levels of 2019.
Lumber prices, like most commodities, are now on the rise once more. According to Random Lengths, an industry website, they are presently roughly 15% lower than their peak in May 2021, but still nearly three times their normal pre-pandemic price.
Due to Russia’s invasion of Ukraine, lumber prices are continue to rise, and traders may soon see even larger price swings.
Since the start of the COVID-19 outbreak, futures have been on a wild ride, reaching a high of $1,711 per thousand board feet in May. They’ve been rebounding after a stumbling start to the spring and summer, and Russia’s war has given them a new impetus. Prices have risen 14% to $1,452 since Vladimir Putin pushed troops into Ukraine, placing them just 15% behind their all-time high.
According to the National Association of Homebuilders, the recent increase has increased the cost of a newly constructed home by $18,600. Even if you rent, you are paying for rising development costs, according to CNBC:
(High lumber prices) increased the cost of the average new multifamily housing by roughly $7,300, resulting in households spending $67 more per month to rent a new unit.
There are various reasons for the increase, but the main one is that sawmills are unable to meet demand. Sawmill output fell during the outset of the epidemic, and while it has recovered somewhat, labor shortages continue to be a problem. When compared to the rise in house starts, sawmill output is lagging far behind.
Other factors driving increased lumber costs include supply chain interruptions, levies on Canadian lumber imports, and a particularly active wildfire season in the American West and British Columbia.
What is the best way to invest in lumber futures?
What is the best way to trade lumber futures? Lumber futures contracts are traded electronically through Schwab and are offered by CME on the Globex trading platform. To trade lumber futures, you’ll need a futures account that has been approved.