Lumber’s Latest Price Rally Signals Stronger-For-Longer Spring Prices
September’s all-time record price highs came with much cheaper springtime prices in the futures market; but the current late year rally has flattened the curve, foretelling slightly higher springtime prices than had been expected just three months ago.
Lumber prices have had a wild roller-coaster type ride since front month futures hit $1000 on September 14, 2020. In the three ensuing months since then, spot lumber futures prices actually halved, closing just above $495 on October 30, 2020, only to stage an immediate rally of more than 70 percent to around $880 at the close of markets today, December 21, 2020.
When the record breaking price of $1000 per board foot traded, the price of lumber six months out the futures curve was a full 45% lower than lumber’s spot price, a deep discount which accurately predicted, at the time, a coming decline in lumber prices. Indeed, the fifty percent price drop in spot month prices was accompanied by a twenty percent decline in the May lumber futures contract, driving the May 2021 price from around $530 on September 15, 2020 down to $405 on October 7, 2020.
But the dramatic late-year rally in spot lumber has also pushed the price of May lumber back up to $705, a full 74 percent above its early October lows. Notably, the price of July lumber futures, now representing the six month forward price, is around $670, or only about 24 percent below today’s spot lumber price.
Besides confirming the fact that lumber is one of the most volatile commodities in the world right now, what does all this mean? As stated before in this Forbes forum, futures prices are predictive, and the futures curve can foretell quite a lot about market sentiment, particularly that of the highly knowledgeable and skilled participants who trade “out the curve.” Back in mid-September, a 45 percent price discount six months out the curve from the spot lumber price said prices would fall, and they did. Now, a meager (by comparison) 24 percent discount 6 months out the futures curve is far less predictive.
MORE FOR YOU
This flattening of the lumber futures curve indicates a new equilibrium of sorts, one that has been achieved due to both current supply/demand fundamentals and a healthy dose of confusion regarding what those same fundamentals might look like a few months from now.
Back in September, wildfires raged and lumber mills across the West faced an uncertain supply of timber against an unbelievable backdrop of historic demand for lumber. At the time, record high prices, the approaching winter season, and the impending loosening of Canadian tariff restrictions led me to wrongly predict a decline in both autumn building permits and retail demand for lumber. Building permits are still up year-on-year, and retail demand for things like 8 foot 2 x 4’s is only just now beginning to wane.
Right now, lumber mills are closing for much needed maintenance (they’ve been running full tilt to meet demand) which has tightened near term supply, causing the spot lumber price rally. Uncertainty about how much Canadian lumber is actually available for export, unexpectedly resilient demand, and lumber yards scrambling to fill contracts through year end and even into Q1 2021 has caused the rally in the outer month lumber futures, because folks are far less confident on bearish bets than they were only three months ago. Hence the flattening of the lumber futures price curve and the rendering of the curve’s predictive ability to being far less potent than usual.
There is undoubtedly much more price turmoil to come in the lumber markets, but right now the futures price curve isn’t providing many easily readable clues as to the future of overall lumber prices. Stay tuned.