Plan or Pain?
It’s time to talk about lumber
First, the devastating weather event in Western Canada. Market uncertainty and a wait and see attitude for buyers. Some focus on buying, but for most, a lack of urgency. Second, the holiday shortened week of Thanksgiving. Lots of people looking forward to a long four-day weekend in the US. Markets were picking up momentum, but most industry participants decided to wait for this past week to make any buying decisions.
Two weeks of market disruption. Two weeks of most buyers not paying attention. Buyers without a plan treading water. All the while, the savvy buyers with their strategic purchasing plan continue to find value in the markets.
Plan or Pain?
This past week, the reality of this current market set in. For the well prepared, it was time to step back, review, reassess, and plan ahead. For them, 2021 is completed and in the books. Their next step is to continue to build and balance their inventory needs into and through Q1 of 2022. These are the “Sooner” buyers I referenced in our November 14th post. The “Later” buyers were saying “what now?”. Here was our response,
“Everyone appears to be asking that same question. Everyone except those prepared for this cycle bottom. With their purchasing strategy in place, this small percentage of lumber buyers have slowly started to rebuild their inventory positions for Q1 of 2022. There is value in declining markets. They are taking advantage of the sooner rather than later. While everyone waits and tries to pick the bottom, the savvy buyers are purchasing on a scale down basis. They will average down their cost structure into the bottom of this price cycle.”
For the vast majority of unprepared buyers out there, the pain is just beginning. Pricing that continues to grind higher, lean product availability, extended lead times at the mills, ongoing transportation issues, and depleted secondary inventories. Most reloads and ports have been picked clean of inventory. The search for wood this past week quickly moved from the scramble mode to outright panic. How does this happen? Lack of planning. Everyone is looking for the “bottom”. Most buyers can’t plan more than a week ahead. They continually set themselves up for failure. Same people, all the time! You can resolve to change the way you do business or continue to endure the pain. Your choice.
Fundamentals
Sawmills have order files; therefore, they have control of this price cycle. They will revert back to their time-tested play book and attempt to raise prices on lower volumes sold. In the meantime, they will lean on extended shipping lead times to support pricing and order file.
If you need to buy inventory at this point, your options are limited. Virtually all stocking distributors and reloaders have some volume of contracted wood. Now would be the time to pick up the phone and start dialing these wholesalers. Check their current inventory availability, and rolling car status, for items you will be needing. At this point, pricing becomes secondary. If you need the wood, you need the wood and will end up paying accordingly. Such is the pain for not having a plan.
Search for distributors that might sell you an extra contract they might own. Again, think of availability ahead of price. You might even be able to secure a tally of your liking. A bonus would be mill production that you would prefer.
If you’re in close proximity to a port, check with your local Euro importer. In rising markets, they tend to be a bit judicious in how much inventory they will sell. Especially, if they know they can get a better price in a couple days. They tend to hold some “ghost” inventory to cover inquiry in an escalating market. That said, you will pay to own inventory.
For those buyers comfortable in the cyber world, check out the new digital format being marketed out of the upper Midwest. There is usually something trading on their platform for just about everyone in every major US market. Give them a try, you’ll be adding another tool to your purchasing toolbox.
Last but not least, you can always try the local big box store in search of inventory. Doesn’t make much sense to be buying from one of your largest competitors, but if the price is right and you need the inventory, beggars can’t be choosers. After all, they didn’t put you in this bind.
All of this chasing of price and inventory is extremely time consuming. I’m sure you could be using this time in a more cost-effective manner to build your business. What better time to step back and decide to implement a purchasing plan? You may have to wait 45-60 days for pricing to cycle back around for another inventory buy-in. Put in the time now. Don’t shortchange yourself and your business. Be proactive, be decisive, be a leader!
Technical Turmoil
Lots to be said when the front month January contract moves $140.50 higher in five trading days. Even more to be said when the average basis is just shy of -$162.00. In my mind, these hyperbolic moves are a concern, a process of the irrational. Sure, cash lumber moved $100m+ higher in a week. How does that justify January futures trading limit bid three days in a row at an average basis of -$162.00? It doesn’t. We all know at some point between now and January 14th, this basis will narrow. Higher cash? Lower futures? Don’t know, really don’t care. That’s the way basis works. What we do know for certain is there will be convergence.
Why does this matter? You as a trader have no control over where prices move in the cash and futures markets. I was told a long time ago; the markets are bigger than you. You do, however, have the ability to take advantage of these arbitrage opportunities to gain value in the markets. We have mentioned basis trading on numerous occasions. Here is a perfect reason why you should know and understand the mechanics. The best buy in lumber right now is cash. Is $745+ a deal? Perhaps. Is January futures a buy at $900+? We don’t think so. So, you need to buy cash lumber, what do you do? Buy the $745 cash, sell the $900 January futures. Lock in that $155 basis. Your best buy opportunity right now is cash, your best sell opportunity right now is January futures. Risk management. Lock in the $155 basis profit.
What else are we seeing in lumber futures? There was a build in total open interest this week. A bullish sign, right? Let’s dig deeper. Open interest gained 94 contracts on Monday, 88 on Tuesday, 78 on Wednesday, 25 on Thursday. Seeing a pattern here? Three limit bid days in a row, plus the extreme basis, and participation is decreasing on a daily basis. The January gain in open interest through the week was marginal. Look at daily trading volumes. Limit bid Tuesday and 611 contracts. Wednesday was an expanded limit bid day and 525 contracts; Thursday was another expanded limit bid day and 499 contracts traded. Blow off top? Exhaustion? Perhaps.
The Commitment of Traders report released Friday shows us market make up. On a net position basis, Managed Money’s net long position decreased, Swap Dealers were unchanged, and Commercial’s net position increased to the short side. So, who is driving this futures rally higher? Non-reportable longs added 193 positions. For those of you that follow lumber futures, you should find this rather disconcerting. These are smaller volume accounts, normally with limited capital. When futures prices exhibit wild swings, the non-reportable is usually stopped out of their positions or forced to liquidate on increased margin requirements. They could be the key to any correction to the downside in lumber futures.
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