The lumber price was nothing short of wild in 2021. After rising to a new all-time high at $1711.20 in May, the price plunged, reaching a bottom at $488 per 1,000 board feet in August. Lumber fell to under one-third the price at the high in three months.
The lumber futures arena is illiquid. On most days, fewer than 500 contracts change hands. The total number of open long and short positions at 2,458 contracts at the end of last week reflects the low market participation level. Crude oil’s open interest was over 2.01 million contracts, and gold’s stood at over 531,000 contracts. The lack of liquidity makes lumber untradeable for speculators and investors. Hedgers experience problematic margin calls because of the high volatility.
Illiquid markets like lumber tend to experience far more price variance than liquid markets as bids evaporate during selloffs and offers to sell disappear during rallies. The low volume and open interest level exacerbate price moves, creating highs and lows that defy logic, reason, and rational fundamental analysis.
I do not trade lumber as the futures arena is a roach motel. Getting into the wrong position is easy; a risk position in the correct direction can be problematic. When wrong, getting out is often impossible as limit moves are the norm, not the exception. While I do not participate, I am a keener observer of the price action in lumber as it is an industrial raw material that provides clues about the path of least resistance of other industrial commodities and the overall economic landscape.
Rates are heading higher
Last week, the Bureau of Labor Statistics reported that the consumer price index rose by 7% in 2021. Excluding food and energy, inflation rose 5.5% in 2021, which was far above the Fed’s 2% average target rate.
Measuring inflation by excluding food and energy may suit economists because prices can be highly volatile, but it is a mirage for the average consumer as food and energy make up significant percentages of household budgets. Meanwhile, the producer price index of wholesale prices rose by nearly 10% in 2021.
The latest inflation reports only increase the chances of the end of quantitative easing and liftoff from a zero percent Fed Funds rate in March 2022. The Fed will likely begin to reduce its swollen balance sheet simultaneously which will tighten credit further out along the yield curve as bonds roll off and are not replaced. The central bank is not likely to miss a step as it shifts from quantitative easing to quantitative tightening.
The latest CPI data validates that the US Federal Reserve is far behind the inflationary curve. Tightening credit via higher interest rates has become a certainty in early 2022.
Lumber has been rallying
Lumber may be one of the most illiquid futures markets, but it is a bellwether industrial commodity. After a highly volatile 2021, the lumber price moved back into bullish mode after reaching a bottom in August 2021.
The monthly chart (featured above) highlights that nearby lumber futures settled at $873.10 per 1,000 board feet at the end of 2020. Lumber was already trading at an elevated price. Before 2017, the all-time high was in 1993 at $493.50 per 1,000 board feet.
While many commodities tend to rise and fall to illogical, irrational, and unreasonable prices that defy fundamental and technical analysis when they move, less liquid markets tend to experience magnified price volatility. During significant price moves, bids or offers in less than liquid markets can evaporate, causing price gaps and moves to levels that market participants never believed possible.
Lumber futures rose to a high of $1711.20 per 1,000 board feet, an all-time high, in May 2021 where they ran out of upside steam. They proceeded to plunge to less than one-third of that price over three months, reaching a low of $488 in August 2021. Lumber reached unsustainable prices on the up and downside. At the end of last week, it was elevator up again for lumber with the price above the $1300 per 1,000 board feet level. March lumber futures settled at $1308.70 on Friday, January 14.
The total open interest of 2,458 contracts and daily trading volume below 500 contracts make lumber untradeable, but it is a critical market to watch as it provides clues about other raw material prices and the economy’s overall state.
A spring scramble for new homes
Lumber’s latest ascent is likely because of a scramble to buy new homes before interest rates move appreciably higher. Wood is a critical construction component.
The Fed’s plans to increase short-term rates and tighten credit will not happen overnight; it will be a slow and steady process that will take years. Three factors support the increasing demand for new homes in 2022:
Framing lumber is at the heart of the construction business and is pushing wood’s price higher in January 2022. Rising interest rates mean that procrastinating buyers are likely to pull the trigger over the coming months.
Infrastructure rebuilding requires more wood
In 2021, the US passed an infrastructure rebuilding package to build and refresh roads, bridges, tunnels, airports, government buildings, schools, and many other parts of infrastructure over the coming years.
Construction projects will require wood, increasing the demand. Meanwhile, Canadian supplies have struggled to keep pace with the US demand, putting upward pressure on prices. New COVID-19 variants only increase supply chain bottlenecks and mill issues for the lumber industry.
Lumber says inflation will continue unless the Fed gets serious
The trend in lumber remains bullish, with the price now above the 2021 midpoint at the $1,100 per 1,000 board feet level.
We are coming into the peak season for construction projects in the spring, which means demand is likely to continue to increase over the coming months. Lumber’s price action has been head-spinning. The wood price is a barometer for the housing market and all industrial commodities. Over the past weeks, crude oil, copper, and other industrial raw material prices have been rising. WTI and Brent crude oil prices were back over the $83 per barrel level in early 2022, threatening to move to new multi-year highs above the early October 2021 peaks. Copper traded to the $4.60 per pound level last week, the highest price since October 2021 before correcting to the $4.40 level. Natural gas prices were back over $4.25 per MMBtu, after trading below $3.55 in late December. Lumber had led the way higher for many industrial commodities as the price eclipsed the $1000 level in early December when most industrial commodities were under selling pressure.
Lumber is a bellwether and an indicator that provides clues about the industrial commodities sector, and it is also an economic barometer that tells us about the housing market. In mid-January 2022, the wood market is screaming that inflation remains the most significant financial challenge facing markets across all asset classes this year. The US central bank’s most recent forecast of a 0.90% Fed Funds rate in 2022 and 1.60% in 2023 is far short of what is necessary to stem inflation. Lumber’s price action screams that the Fed is far behind the inflationary curve.
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Trading advice given in this communication, if any, is based on information taken from trades and statistical services and other sources that we believe are reliable. The author does not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects the author’s good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice the author provides will result in profitable trades. There is risk of loss in all futures and options trading. Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal. This article does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein, or any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction.
- Rates are heading higher
- Lumber has been rallying
- A spring scramble for new homes
- Infrastructure rebuilding requires more wood
- Lumber says inflation will continue unless the Fed gets serious
The lumber futures arena is illiquid. On most days, fewer than 500 contracts change hands. The total number of open long and short positions at 2,458 contracts at the end of last week reflects the low market participation level. Crude oil’s open interest was over 2.01 million contracts, and gold’s stood at over 531,000 contracts. The lack of liquidity makes lumber untradeable for speculators and investors. Hedgers experience problematic margin calls because of the high volatility.
Illiquid markets like lumber tend to experience far more price variance than liquid markets as bids evaporate during selloffs and offers to sell disappear during rallies. The low volume and open interest level exacerbate price moves, creating highs and lows that defy logic, reason, and rational fundamental analysis.
I do not trade lumber as the futures arena is a roach motel. Getting into the wrong position is easy; a risk position in the correct direction can be problematic. When wrong, getting out is often impossible as limit moves are the norm, not the exception. While I do not participate, I am a keener observer of the price action in lumber as it is an industrial raw material that provides clues about the path of least resistance of other industrial commodities and the overall economic landscape.
Rates are heading higher
Last week, the Bureau of Labor Statistics reported that the consumer price index rose by 7% in 2021. Excluding food and energy, inflation rose 5.5% in 2021, which was far above the Fed’s 2% average target rate.
Measuring inflation by excluding food and energy may suit economists because prices can be highly volatile, but it is a mirage for the average consumer as food and energy make up significant percentages of household budgets. Meanwhile, the producer price index of wholesale prices rose by nearly 10% in 2021.
The latest inflation reports only increase the chances of the end of quantitative easing and liftoff from a zero percent Fed Funds rate in March 2022. The Fed will likely begin to reduce its swollen balance sheet simultaneously which will tighten credit further out along the yield curve as bonds roll off and are not replaced. The central bank is not likely to miss a step as it shifts from quantitative easing to quantitative tightening.
The latest CPI data validates that the US Federal Reserve is far behind the inflationary curve. Tightening credit via higher interest rates has become a certainty in early 2022.
Lumber has been rallying
Lumber may be one of the most illiquid futures markets, but it is a bellwether industrial commodity. After a highly volatile 2021, the lumber price moved back into bullish mode after reaching a bottom in August 2021.
The monthly chart (featured above) highlights that nearby lumber futures settled at $873.10 per 1,000 board feet at the end of 2020. Lumber was already trading at an elevated price. Before 2017, the all-time high was in 1993 at $493.50 per 1,000 board feet.
While many commodities tend to rise and fall to illogical, irrational, and unreasonable prices that defy fundamental and technical analysis when they move, less liquid markets tend to experience magnified price volatility. During significant price moves, bids or offers in less than liquid markets can evaporate, causing price gaps and moves to levels that market participants never believed possible.
Lumber futures rose to a high of $1711.20 per 1,000 board feet, an all-time high, in May 2021 where they ran out of upside steam. They proceeded to plunge to less than one-third of that price over three months, reaching a low of $488 in August 2021. Lumber reached unsustainable prices on the up and downside. At the end of last week, it was elevator up again for lumber with the price above the $1300 per 1,000 board feet level. March lumber futures settled at $1308.70 on Friday, January 14.
The total open interest of 2,458 contracts and daily trading volume below 500 contracts make lumber untradeable, but it is a critical market to watch as it provides clues about other raw material prices and the economy’s overall state.
A spring scramble for new homes
Lumber’s latest ascent is likely because of a scramble to buy new homes before interest rates move appreciably higher. Wood is a critical construction component.
The Fed’s plans to increase short-term rates and tighten credit will not happen overnight; it will be a slow and steady process that will take years. Three factors support the increasing demand for new homes in 2022:
- Rising interest rates will push mortgage rates higher over the coming years. New home buyers are under pressure to lock in interest rate risks at historically low levels as 30-Year conventional mortgage rates remain below the 4% level.
- The migration from cities and high-tax states supports new home building in low-tax states like Florida, Texas, Tennessee, and Nevada. In those states, home buyers are waiting up to one year or more for new home deliveries as builders cannot keep up with the demand.
- The incredible gains in real estate prices since early 2020 have caused a frenzy of buying where homes are selling above initial offer prices and have been rising each week. Few things entice buyers like a bull market trend.
Framing lumber is at the heart of the construction business and is pushing wood’s price higher in January 2022. Rising interest rates mean that procrastinating buyers are likely to pull the trigger over the coming months.
Infrastructure rebuilding requires more wood
In 2021, the US passed an infrastructure rebuilding package to build and refresh roads, bridges, tunnels, airports, government buildings, schools, and many other parts of infrastructure over the coming years.
Construction projects will require wood, increasing the demand. Meanwhile, Canadian supplies have struggled to keep pace with the US demand, putting upward pressure on prices. New COVID-19 variants only increase supply chain bottlenecks and mill issues for the lumber industry.
Lumber says inflation will continue unless the Fed gets serious
The trend in lumber remains bullish, with the price now above the 2021 midpoint at the $1,100 per 1,000 board feet level.
We are coming into the peak season for construction projects in the spring, which means demand is likely to continue to increase over the coming months. Lumber’s price action has been head-spinning. The wood price is a barometer for the housing market and all industrial commodities. Over the past weeks, crude oil, copper, and other industrial raw material prices have been rising. WTI and Brent crude oil prices were back over the $83 per barrel level in early 2022, threatening to move to new multi-year highs above the early October 2021 peaks. Copper traded to the $4.60 per pound level last week, the highest price since October 2021 before correcting to the $4.40 level. Natural gas prices were back over $4.25 per MMBtu, after trading below $3.55 in late December. Lumber had led the way higher for many industrial commodities as the price eclipsed the $1000 level in early December when most industrial commodities were under selling pressure.
Lumber is a bellwether and an indicator that provides clues about the industrial commodities sector, and it is also an economic barometer that tells us about the housing market. In mid-January 2022, the wood market is screaming that inflation remains the most significant financial challenge facing markets across all asset classes this year. The US central bank’s most recent forecast of a 0.90% Fed Funds rate in 2022 and 1.60% in 2023 is far short of what is necessary to stem inflation. Lumber’s price action screams that the Fed is far behind the inflationary curve.
--
Trading advice given in this communication, if any, is based on information taken from trades and statistical services and other sources that we believe are reliable. The author does not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects the author’s good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice the author provides will result in profitable trades. There is risk of loss in all futures and options trading. Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal. This article does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein, or any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction.