US prices for all categories of lumber break records as futures prices surge with no relief in sight for buyers. Closing prices on Friday, April 16, 2021 of Chicago Mercantile Exchange Random Length Lumber Futures contracts for every delivery month in 2021 were all above US$1000 per board foot, with the spot, or nearest delivery contract for May 2021 settling at an incredible US$1294.70.
For perspective, exactly one year prior on April 16, 2020 that very same May 2021 futures contract was trading at around US$345. Not many asset classes can claim a 375% price increase in a year’s time, and lumber’s historic price rise will surely ripple through the building industry and the overall economy with consequences as yet unknown.
What’s certain now is that the futures curve is still not signalling when lumber prices might halt their relentless ascent and eventually head lower. It could be observed in both December 2020 and again in February 2021 that the lumber futures curve was inverted and relatively flat, meaning the nearby price of lumber was higher than the price of lumber further into the future, but that prices further out were not at enough of a discount to indicate an imminent easing of prices like happened in September of 2020, when there was a steep discount eight months out the futures curve of around 45%. Lumber prices declined shortly thereafter by about half in only six weeks’ time.
Right now, though, the price difference between the May 2021 and November 2021 lumber futures contracts is about 22%, which in the lumber futures world simply isn’t enough of a discount to signal an impending price decline.
Even the May 2022 contract, a full year out the curve from the current spot month, is priced at “only” a 25% discount. None of this is good news for builders or other professional buyers of nearly all grades of lumber, because they’ve got to have lumber to build, and the building season is hitting full stride as the calendar advances.
They are paying up because they have no alternative, and there is no indication this trend will end anytime soon. The pros who use lumber will continue to buy what they need, if they can get it, even at elevated price levels.
A few signals are starting to emerge that could be harbingers of a change in trend. There are incidental reports that the price increases in lumber materials for DIY home improvement projects may cause consumers to redirect their attention away from lumber intensive activities to other endeavours, such as new appliances, landscaping upgrades, or even taking more vacations. Whatever their choice, less lumber will likely be in the consumer retail mix than last (northern) summer.
Most significantly, the futures price of lumber is approaching a nearly US$100 premium to the actual “cash price” of certain comparable physical random length lumbers, a situation that won’t last long if history is any guide.
Price disconnects of this sort rectify in one of two ways: either the physical price rises to meet the futures price, or, more commonly, the futures price, usually driven to a premium over physical supplies by panic buying, corrects down to the true price of the commodity.
There is no way to predict which way the premium will correct, but there is a very real physical lumber supply shortage, with many yards sold out through May 2021 and beyond.
The price of physical lumber seems like it still has to rise a bit more because mills are at capacity and unable to meet current demand. Price rationing is really the only solution, and lumber prices have clearly begun the painful process of finding the highest price above which few people, be they professionals or DIYers, will pay.
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