What is Lumber Telling Us?

Lumber is a wild futures market. Before 2018, the all-time high in the lumber futures market was in 1993 at $493.50 per 1,000 board feet. In May 2020, the price reached a record $1711.20 high, which still stands as the all-time peak. After falling to $488 five short months later, in August 2021, lumber futures took off on the upside, rising to the $1477.40 level before turning south. 

The explosive and implosive price action in lumber is a function of its low liquidity. Offers to sell tend to disappear during rallies, and bids to buy often evaporate during price corrections, exacerbating the price variance. 

Lumber is not a trading market but a leading indicator and barometer for the industrial commodities sector. Lumber’s recent decline ushered in an overall correction in many other industrial commodities over the past weeks and months. 

Lumber became a falling knife before finding a higher low

During the week of February 28, the continuous lumber futures contract reached a lower high of $1477.40 per 1,000 board feet. 

The chart highlights the decline to a low of $517 in mid-June. The $517 level was above the August 2021 $488 low. Since then, lumber prices has traded above the $517 per 1,000 board feet higher low as the wood market attempts to build a base before its next move higher or lower. 

The chart highlights the decline to a low of $517 in mid-June. The $517 level was above the August 2021 $488 low. Since then, lumber prices have traded above the $517 per 1,000 board feet higher low as the wood market attempts to build a base before its next move higher or lower. 

Copper, crude oil, and other commodities followed wood lower

Nearby COMEX copper futures reached an all-time high at the $5.01 per pound level in March 2022. After trading above the $4.45 level until late April, the price fell sharply in May, June, and July, reaching the latest low of $3.15 per pound in mid-July. COMEX copper futures for September delivery were at the $3.35 level on July 22. 

NYMEX crude oil futures traded to the highest price in fourteen years in March at $130.50 per barrel. After correcting to $92.93 in mid-April, the price recovered to $123.68 in mid-June when it ran out of upside steam and made a lower low at $90.56 in mid-July. September crude oil futures settled at the $94.70 per barrel level on Friday, July 22.

Meanwhile, grains, precious and base metals, energy, and most other commodity prices have corrected from the recent multi-year or all-time highs over the past weeks and months. 

Higher interest rates and a rising dollar have been bearish for lumber and other commodities

The short-term Fed Funds Rate stood at the 1.50% to 1.75% level on July 22. The US Federal Reserve controls the Fed Funds Rate via monetary policy aimed at full employment and price stability. The recent consumer and producer price index data continued to reflect inflation at a four-decade high. 

This week, the FOMC will increase the short-term rate by seventy-five basis points to at least the 2.25% to 2.50% level. Some economists believe the Fed could push rates 1% higher at the meeting. Rising interest rates choke economic growth to slow inflation. In the commodities asset class, rising rates increase the cost of carrying raw material inventories, weighing on prices. The US bond futures market remains in a bearish trend as rising rates push bond prices lower. 

Meanwhile, interest rate differentials also impact the value of one currency against other world foreign exchange instruments. Increasing US rates have pushed the dollar to its highest level in two decades. The euro currency recently traded at parity against the US dollar for the first time since 2002, and the dollar index rose to levels not seen since then. 

Lumber was the first commodity to plunge, leading the other raw materials. Now that it has found at least a temporary bottom at a higher low, other commodities seem to be stabilizing. 

The recent price action has been somewhat constructive

While the continuous contract fell to $517, the active month, September futures contract’s low was $522.60 per 1,000 board feet. 

The chart illustrates the recovery in the September lumber futures contract that took the price to a high of $749.50 on July 8. While September futures pulled back to the $576.20 level last week on July 22, the price was near there on Friday, July 22, as lumber attempts to remain above the mid-June higher low over the coming sessions. 

The barometer for the commodities asset class warns against becoming too bearish

Another test for the lumber market is on the horizon this week as the Fed increases the short-term Fed Funds Rate. Higher rates push mortgage rates higher, weighing on the demand for new homes. As lumber is a critical input in home building, the wood market is a barometer for new construction.

If lumber can hold above the mid-June $517 low, it will send a signal to other commodities that the recent corrections could be ending. The highest inflation since the early 1980s causing increasing production and labor costs and supply side shortages created by the war in Ukraine, remain clear and present dangers for commodity prices. Lumber has been an excellent barometer for the commodities asset class in the past. It is worth watching the wood price over the coming weeks and months for clues about the path of least resistance of the overall commodities asset class. 

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