Commodity Futures Trading

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Lumber Watches The Economy While We Watch Lumber Prices
By: Barchart | March 21, 2023

In my last lumber article on Barchart on February 27, May random-length lumber futures were at the $406 per 1,000 board feet level. The physical lumber futures for May delivery was at a premium above $530 per 1,000 board feet. In that article, I wrote, “Interest rates are critical for lumber prices. In February 2023, the trend in rates is higher, putting pressure on lumber as we head into the spring construction season, with mortgage rates at the highest level in many years.”

Last week, crude oil and copper futures prices plunged as the markets faced a banking crisis in the U.S. and Europe. Despite Credit Suisse’s travails, the ECB hiked rates by 50 basis points. However, lumber edged higher, which could be a sign for other commodity markets. If lumber found a bottom, it could mean copper and oil prices fell to levels that are compelling buying opportunities.

Lumber prices do not react to the latest crisis

On February 27, 2023, nearby May random-length lumber futures prices were at the $406 level, with the new physical contract for May delivery at around $530 per 1,000 board feet.



The chart shows at $444, the May random-length contract has moved over 9% high.



The new physical contract for May delivery at $537.50 was slightly higher on March 21, 2023, than the late February level.

The recent issues in the banking sector have impacted many markets, but lumber has not declined. The ECB raised interest rates by 50 basis points last week, and all signs point to another at least 25 basis point hike by the U.S. Federal Reserve at this week’s meeting. On February 27, nearby April NYMEX crude oil and May COMEX copper futures settled at $75.68 per barrel and $4.0110 per pound, respectively. While lumber prices increased, crude oil was 9.2% lower at $68.70, and copper edged lower to $3.9895 on March 21.

Lumber tends to move first and lead- Liquidity is the likely reason

Lumber is a highly illiquid futures market. The total number of open long and short positions in the soon-to-disappear random-length lumber futures market was 1,499 contracts as of March 20, with daily volume below the 500-contract level. Open interest in the May physical contract was lower at 1,039 contracts, with daily volume below 120 contracts.

The low volume and open interest compared to crude oil, copper, and other futures markets lead to excessive price variance as bids to buy disappear when the price declines and offers to sell evaporate during rallies.

Over the past years, lumber has often signaled the path of least resistance for other commodity futures markets because of the low liquidity that leads to sudden changes in its price path. Lumber is untradeable, but has been a barometer for other industrial raw material markets. Lumber’s recent strength in the face of bank failures and tight credit markets could be an omen for copper, crude oil, and other commodity prices.

Lumber’s seasonal tendencies- Mortgage rates do not support new home construction

Lumber is a seasonal commodity that tends to reach lower as the winter approaches and recovers during the spring.



The long-term chart shows four peaks in the lumber futures market:

• In March 1993, nearby lumber futures rose to $493.50 per 1,000 board feet.
• The 2018 $659 high occurred in May.
• The 2021 record $1,711.20 high was in May.
• The 2022 lower peak at $1,477.40 high was in March.

The spring is the start of the construction season, and the recent strength could be a seasonal factor in the lumber futures arena. However, mortgage rates at the 7% level or higher do not support new home construction this spring. In late 2021, a conventional 30-Year fixed-rate mortgage was below 3%. The difference of over $1,300 per month in interest on a $400,000 loan has disqualified many potential new home buyers, weighing on wood demand.

Watching and not trading lumber

I have traded commodities since the early 1980s but have never bought or sold one lumber contract. The illiquidity makes lumber a roach motel, allowing market participants to enter risk positions with significant price slippage, but exiting when the market moves contrary to expectations is another story. Hedgers have avoided lumber futures because of liquidity issues.

While the new physical contract is smaller and allows for more flexibility for hedgers, it has yet to attain the critical mass in open interest and volume the Chicago Mercantile Exchange had hoped. Time will tell if it survives.

While I do not trade lumber, I watch the price like a hawk because it is a barometer that often signals price action in other industrial markets.

Critical levels to watch in the May contracts for the coming weeks

Technical resistance for the expiring random-length futures market for May delivery stands at the February 1 $541.50 high, with support at the February 24 $386.20 low and the January 6 $369.30 bottom. Support and resistance on the May physical lumber contract are $478.50 and $648.50 per 1,000 board feet. A move above or below those levels would be a technical break for the wood market.

Over the past weeks, the inaction in the lumber market could be a lull before a return to lower levels because of high interest rates and a weakening economy. However, if lumber heads higher, it could signal that inflation remains a clear and present danger and may lead other raw material markets that have declined to rebound.

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