Looking to the Futures
Choppy Trade in Lumber Futures
Lumber futures rallied to a 52-week high last week as a slew of supply constraints pushed the notoriously volatile market above $1,300 per thousand board feet. This week, however, a risk-off market has been on the sell side leading to three consecutive limit-down trading sessions for lumber futures in a holiday shortened week.
March 2022 lumber futures closed Thursday at $1188.70. Although the contract has fallen from $1329.00 just a week ago, it has still rallied more than 75% over the last 90 days.
Lumber futures’ daily primary and secondary price limits of 30 points and 45 points, respectively, had been unneeded in 2022 until this week. A stretch of limit-up conditions had been observed following the flooding in the pacific northwest last fall, including fourteen trading sessions between November 16 and December 15. Daily primary price limit bands for lumber futures are reviewed twice a year with the most recent adjustment happening at the end of October.
On lumber’s supply side, several factors have contributed to the recent upswing in prices. One major issue is perceived to be the floods last fall that impacted British Columbia, where disruptions were reported for trucking and rail lines and access to ports. While temporary in nature, the complications forced producers to pause.
Other supply issues have aligned to push lumber futures to lofty levels. To some degree there may be a continuation of the hoarding that builders and lumberyards started last year. New tariffs announced by the U.S. Commerce Department the evening before Thanksgiving may also be complicating the structure of the lumber market. 2022 tariffs on lumber imports from Canada to the U.S. have been roughly doubled from 8.9% to 17.9%. Congestion at shipping ports may also be a factor.
Even with interest rates showing signs of moving higher, the demand for lumber to feed the U.S. housing market remains robust. One data point for reference is a recent jump in permits for future homebuilding, which jumped 9.1% MoM in December to 1.873 million units. This Wednesday we’ll see updates on December new home sales (10:00 a.m. ET) and mortgage applications (7:00 a.m. ET). A survey of economists calls for new home sales to register 744,000 single family houses, above the 5-year average of 676,253 units.
Cardboard boxes have been in record demand as shipping has replaced the in-store experience. While sourced from different timber than the lumber futures delivery specifications, demand continues to rise with containerboard production increasing 5.6% in 2021 to a new record, according to the American Forest and Paper Association.
Looking at the pricing for longer-dated lumber futures contracts, the market suggests some degree of resolution to the lumber shortage as observed in the deep discount in the May 2022 contract well below the front-month March 2022 contract. The spread, which started last December near parity, now stands at 100.10. Looking farther out at the higher-priced March 2022 contract vs. lower-priced September 2022, we see a spread near 250.00 points.
Lumber futures, in existence now for over 50 years, had trading volume drop 25.6% year-over-year in 2021. 2020 saw more volume as lumber prices more than doubled from pre-COVID levels. Lumber futures’ hit an all-time high May 7 of last year at $1,686 per 1,000 board feet.
Margin requirements for March 2022 lumber futures are $13,068, roughly 10% of the contract value.
Technicals March 2022 Lumber Futures LBH22
Resistance 2 1337.40
Resistance 1 1285.60
Support 1 1207.80
Support 2 1181.80
10-day SMA 1252.90
20-day SMA 1184.70
50-day SMA 989.90
200-day SMA 813.60
10-day RSI 52
FHFA U.S. House Prices 01/25/2022 9:00 a.m. ET
Mortgage Applications 01/26/2022 7:00 a.m. ET
New Home Sales 01/26/2022 10:00 a.m. ET
Pending Home Sales 01/27/2022 10:00 a.m. ET