Can Lumber Sustain a Recovery?

The CME’s continuous physical lumber futures contract fell 22.99% in Q2 and was down 21.24% over the first six months of 2024, closing Q2 at $450.50 per 1,000 board feet. In a July 4, 2024, Barchart article, I wondered if lumber prices were close to a bottom, concluding:

Lumber could be close to a bottom near the $450 per 1,000 board feet level on July futures but the price could move lower as the wood futures market traded to a $326.60 low in May 2023. A long-term scale-down approach to buying lumber proxies (WOOD, CUT, and WY) could be optimal for the coming years at the current low price level. 

Physical lumber futures for September delivery were at the $488 per 1,000 board feet level on July 3, and they are higher above $500 on August 5. 

Lumber prices are stuck in neutral

As interest rates have remained higher for longer, lumber prices have been stuck in a static trading range. 

As the three-month chart highlights, nearby September physical lumber futures have traded in a $455.50 to $563.00 per 1,000 board range. The chart has a bearish bias, but the range is small, considering the old random-length lumber contract reached over $1,700 in 2021 and above $1,475 per 1,000 board feet in 2022. 

Over the past months, lumber futures have gone nowhere fast. 

The odds of an interest rate cut are increasing

The U.S. Fed’s mandate is stable prices and full employment. The data over the past months indicates that unemployment is increasing. Meanwhile, the consumer and producer price indices and the Fed’s favored PCE data have moved significantly lower, as inflation is now closer to its 2% target than the 2022 high. 

At recent press conferences, Fed Chairman Powell said that inflation does not have to drop to 2% before the central bank trims the short-term Fed Funds Rate. However, the FOMC will need “evidence” that inflation is trending towards the target. 

The bottom line is that recent economic data has set the stage for a 25-basis-point Fed Funds Rate cut. Lower rates favor lumber prices because falling mortgage rates support new home purchases and construction. The action in the stock market in early August could suggest a more aggressive 50 basis point cut. 

Seasonality tells us we may have to wait for a recovery

Lumber tends to be a seasonal commodity as construction often gears up during spring and reaches a low during winter. The 2021 high was in May, and the 2022 peak was in March. Moreover, highs in 2018 and in previous years often occurred during spring months.

As markets are now in the heart of summer, falling interest rates may not meaningfully filter through to lumber demand until spring 2025. Therefore, lumber could remain in the current trading range throughout the rest of 2024. 

A look at the price action in WOOD, CUT, and WY since early July

I have been writing that I avoid the lumber futures market because of its low liquidity. While the CME replaced the random-length lumber futures with the physical contract with smaller contract sizes and more flexible delivery requirements to attract more trading volume, open interest, and volume remain at very low levels. Low liquidity increases price variance as bids to purchase tend to disappear during selloffs, and offers to sell often evaporate during rallies, as we witnessed in 2021 and 2022 when prices soared. 

I favor lumber proxies, such as the WOOD and CUT ETF products and WY shares, which are lumber-related assets that tend to move with the prices. Since July 3:

• Lumber futures for September 2024 edged 3.25% higher from $493 to $509 per 1,000 board feet. 
• WOOD shares moved 2.43% lower from $78.29 to $76.39 per share. 
• CUT shares moved 1.75% higher from $32.65 to $32.08 per share. 
• WY shares moved 16.86% higher from $27.05 to $31.61 per share. 

While lumber futures edged higher, the overall stock market declined in the early days of August. Meanwhile, WOOD, CUT, and WY underperformed lumber futures during the 2021 and 2022 explosive price action as the shares tend to offer far less dramatic returns than the illiquid lumber futures market during significant upside price pressure. Conversely, when lumber prices plunge, the ETFs and WY tend to outperform lumber on a percentage basis. 

Levels to watch on the continuous physical lumber futures contract over the coming months

Physical lumber futures began trading in mid-2022, limiting the price history. 

The chart over the past two years shows technical support for September physical lumber futures at the early 2023 $400 low and technical resistance at the March 2024 seasonal $613.50 high. Above there, the January 2023 $627 and the August 2022 $712 per 1,000 board feet peaks are upside technical targets. 

If the Fed begins cutting short-term interest rates and continues reducing its quantitative tightening program, taking pressure off long-term rates, expect lumber prices to challenge the upside technical targets in early 2025. 

Lumber may not be able to sustain a significant rally over the coming weeks and months. Still, any price weakness could be a buying opportunity for lumber-related assets for 2025 when seasonal strength reemerges.