The Chicago Mercantile Exchange attempted to inject life into the lumber futures realm by introducing a physical contract, replacing the erstwhile random-length lumber contract. Despite the effort to enhance liquidity through smaller contracts and flexible delivery terms, the volume and open interest in lumber futures have not experienced a substantial uptick. With low liquidity restraining hedging and speculative activities, the market witnesses heightened price volatility. During upswings, meager participation leads selling offers to vanish, while downward movements prompt buying bids to dissipate. Consequently, the prices of lumber futures can fluctuate to levels that defy conventional wisdom and logical reasoning.
Could the Fed Influence Prices?
Spring and summer typically mark the peak seasons for lumber prices, buoyed by the surge in new home constructions. The Fed’s shift towards a more accommodative monetary stance might drive mortgage rates downwards in the upcoming months, stimulating an increase in lumber demand and prices.
Recent economic indicators signal persisting inflationary pressures
Throughout late 2023, inflationary forces seemed to ease, with consumer and producer price indices gravitating towards the Fed’s 2% target range. As signs of inflation coming under control emerged, the Federal Reserve halted its rate hikes and began preparing the market for a potential 2024 rate cut.
Impact of Mortgage Rates
Comparing mortgage rates over the years reveals a stark contrast. In 2021, thirty-year conventional fixed-rate mortgages remained below the 3% mark. However, in the wake of hawkish monetary policies in 2023, mortgage rates soared beyond 8%. As of late February 2024, rates hovered close to 7%, double the pre-2022 levels, exerting pressure on potential homebuyers.
Existing vs. New Home Dynamics
Although high mortgage rates have shrunk the pool of potential home purchasers, existing home prices have largely held firm. The depletion of existing home inventories, as owners who acquired or refinanced properties during the sub-3% rate era opt to stay put, has underpinned robust demand for new home constructions.
Long-Term Trends in Lumber Futures
Long-term charts for nearby physical lumber futures exhibit a bullish trajectory since early 2023, alternating higher lows. The recent climb to $581 per 1,000 board feet in January, followed by levels over $560 in late February, indicates a positive momentum as the construction season approaches post-winter.
Correlation with WOOD ETF
Although lumber futures remain illiquid for market participants, the WOOD ETF ($77.93 per share) offers a liquid alternative, mirroring lumber futures’ price movements. Despite lumber futures’ constrained liquidity, the WOOD ETF remains liquid, catering to investors with nearly $197.7 million in assets and solid trading volumes.
As of late February 2024, nearby lumber prices retreated 3.6% from $585.50 per 1,000 board feet in late December 2023 to the current $564 level. Likewise, the WOOD ETF dipped 4.1% to $77.93 from its December closing.
Conclusion: A Glimpse into the Future
The cyclical nature of lumber futures indicates a historical peak during spring and early summer annually. Previous years’ data reveals peaks in May 2018 and March 2022, while the all-time high occurred in May 2021. With burgeoning pent-up demand in the housing sector propelling lumber consumption despite mortgage rate hikes, a potential rally in lumber futures and the WOOD ETF looms on the horizon.
Navigating the current market dynamics, the lumber sector appears shielded from substantial downside risks. Furthermore, the past price actions suggest the potential for explosive gains once the Federal Reserve embarks on a rate-cutting cycle, broadening the scope for prospective homebuyers.
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On the date of publication, Andrew Hecht did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
