Is A Bottom Forming For Lumber Prices? What do you think?

Here is an article from Andrew Hecht - Barchart. Do you think a bottom is forming for lumber prices?

On March 30, I wrote, “After elevator rides higher and lower throughout 2021 and the first three months of 2022, the lumber futures market needs to settle into a trading range where the consolidation would likely be around the $1,000 level.” On April 19, the July futures were well below that price, but the recent price action suggests that a bottom could be developing.

Lumber’s liquidity makes it challenging to pick tops or bottoms as buying tends to evaporate during bearish periods and selling disappears when the price rallies. Trading lumber when it moves is like riding a psychotic horse through a burning barn with no exits.

Meanwhile, the nearby wood futures price is sitting below the midpoint of the August 2021 low, and the March 2022 peak, but the odds of a move back to the $1,000 level are rising.

Lumber futures remain in a bearish trend, but they are running out of downside steam

The active month July lumber futures contract reached a high of $1204.70 per 1,000 board feet on March 4. A backwardation where deferred prices were lower than nearby prices pushed the continuous contract to a high of $1477.40 in early March.

The chart shows the decline to a low of $758.80 on April 12, where lumber futures ran out of downside steam, at least temporarily. Since the April 12 low, lumber has remained above the $800 per 1,000 board feet level.

Before 2018, the all-time high in the lumber futures market was in 1993, when the price reached $493.50. At over the $880 level, lumber remains at a historically high price.

Inflation is not running out of upside steam

In early 2020, unprecedented levels of central bank liquidity and government stimulus to stabilize economic conditions during the global pandemic planted inflationary seeds that began blooming in 2020 and continued to blossom in 2021 and 2022. The latest March consumer and producer price index data showed the highest inflationary pressures in over four decades. March CPI rose by 8.5%, with the core index excluding food and energy rising 6.5%. March PPI moved 11.2% over twelve months.

Rising prices have impacted all raw materials, and lumber is no exception. Wildfires in the US and Canada, supply chain bottlenecks, work actions by truckers, and robust demand for new homes have supported wood demand, which continues to underpin lumber prices.

Global lumber shortages because of the war in Ukraine

The top wood exporters in the world are:

Source: worldatlas.com

While Canada is the leader, the US, Sweden, Finland, Germany, and Russia produce and export significant amounts of wood. The war in Ukraine and sanctions on Russia are likely impacting Russian lumber exports to “unfriendly” countries. While inflation was already lifting prices, the lack of Russian wood available to a large sector of the consumer market is likely putting additional upside pressure on wood’s price.

New home demand remains robust despite rising interest rates

At the end of 2021, the interest rate for 30-Year mortgages in the US was just below the 3% level, fueling the demand for new homes. Moreover, a shortage of homes sent prices vaulting higher. Homebuilders were struggling to keep pace with the demand.

As of April 18, conventional mortgage rates have risen to the 5% level. While rising rates could impact new home demand, the potential for even higher rates is causing a scramble for many buyers to locate new houses and lock in rates.

Higher interest rates could impact home prices and the construction market over the coming months and years, but the spring buying season in 2022 has not caused any dramatic decline in demand.

The value of money is declining- Bullish for all commodities, and lumber is no exception

Inflation erodes money’s purchasing power. While the lumber market faces supply issues, the decline in money’s value could be the most bullish factor facing wood’s price.

The July futures chart illustrates that technical support sits at the April 12 $758.80 low, with the first resistance level at the April 11 $906.90 high. Above there, $945, 1049.90, and $1204.70 are upside technical hurdles on the July futures contract.

The 2021 $448 to $1711.20 range should likely contain the price action. Meanwhile, inflation, supply issues, and robust demand favor the lumber arena’s upside around the $880 per 1,000 board feet level.

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