The CME’s physical lumber futures contract moved 5.66% higher in Q4 2024 but was 3.76% lower in 2024, settling at $550.50 per 1,000 board feet on December 31, 2024. In a mid-November 2024 Barchart article on lumber, I concluded:
Pent-up demand for homeownership is a serious factor for 2025. If mortgage rates begin to decline, we could see a housing boom that would lead to rising lumber demand. The illiquid lumber futures arena could spark a rally in lumber-related products during the first half of 2025. As construction tends to be seasonal, favoring spring, the lumber futures market could be poised to rally above technical resistance levels over the first half of 2025. Lumber’s 2021 and 2022 peaks occurred during May and March, making the end of 2024 a great time to put lumber and lumber-related products on your investment radar.
The nearby physical lumber futures contract was trading at the $617.50 level on November 13, 2024, and was slightly lower at around the $600 level in January 2025.
Lumber futures remain highly illiquid, which favors high price volatility
The new physical lumber futures contract is one-quarter the size of the old random-length contract. The CME had hoped that a smaller contract size with more flexible delivery locations and grades would increase liquidity. However, at 5,960 contracts of open interest, the total number of open long and short positions in the lumber futures market, and the average daily volumes of around 1,000, the physical lumber market has become even less liquid since the CME delisted the random-length futures. The CME’s hope for increased hedging and speculative activity has not materialized.
Low liquidity supports high volatility when significant price trends develop. As witnessed in 2021 and 2022, substantial rallies can cause offers to sell to disappear, exacerbating the upside price pressures. During corrections, bids to purchase can evaporate, causing prices to plunge with little or no volume trading.
As the lumber market heads into the 2025 construction season, low liquidity could set the stage for another very volatile period.
The trend in March futures is choppy
The two-year chart of CME physical lumber futures displays a choppy trend in a narrow range compared to the prices in 2021 and 2022.
The weekly continuous contract chart shows that wood prices have traded between roughly $460 and $620 per 1,000 board feet over the past two years. The high was nearly one-third of the 2021 peak lumber price. At near the $600 level, physical lumber for March delivery was at the upper end of the trading range as the spring construction season approaches. Lumber’s all-time highs in 2021 and 2022 were in May and March, as construction tends to increase the demand after winter.
Interest rates will determine lumber’s price path- The tragedy in Los Angeles and tariffs could be very bullish
Since lumber is the critical ingredient in new home building, mortgage rates are a crucial demand factor. While the U.S. Federal Reserve has cut the short-term Fed Funds Rate by 100 basis points in 2024 and forecasts another 50 basis point cut in 2025, long-term rates have remained high.
As the 30-year U.S. Treasury Bond futures chart illustrates, bonds remain in a bearish trend, pushing interest rates higher along the yield curve. The bottom line is that higher long-term rates increase mortgage rates, weighing on home demand and construction. Increasing home prices because of a shortage of existing home sales by owners with below-market fixed-rate mortgage rates have caused a tight housing market. high prices and mortgage rates have excluded many potential buyers from the market.
Tariffs under the Trump administration could push lumber prices higher as Canada exports wood to the U.S. Meanwhile, the tragic wildfires in Los Angeles, California, in January 2025 could become a tipping point for the lumber market, as a massive rebuilding effort could significantly increase wood demand over the coming months and years. Given the current environment, it is difficult to be bearish on lumber.
Levels to watch in the lumber futures market
Since the CME’s physical lumber futures began trading in August 2022, the continuous contract low has been $450.50, and the high has been $712.00 per 1,000 board feet.
The weekly chart shows at the $595 level, lumber prices are just above the midpoint of the trading range going into the 2025 construction season. Short-term technical support and resistance levels are at $530.50 and $623.50 per 1,000 board feet, respectively, in January 2025.
Lumber is a bellwether industrial commodity- Watch the price for economic clues
Lumber is a critical industrial commodity, like copper and crude oil. However, while the crude oil and copper futures contracts are highly liquid, lumber futures have not attracted the critical mass to make them effective hedging, arbitrage, speculative, and investment tools. The low liquidity can cause severe price volatility when trends develop, making lumber a barometer to watch and monitor for clues about the overall economy instead of a market to trade on the long or short side.
Bullish and bearish factors are pulling lumber prices in opposite directions as the market moves towards the 2025 construction season in spring. High interest rates could depress new home demand, while pent-up demand for new homes, reconstruction efforts in California, and shortages created by tariffs could lift prices over the coming months., We could see another explosive move to the upside if interest rates fall.
I favor higher lumber prices over the coming months as the current price limits the downside. As we learned in 2021 and 2022, the illiquid lumber futures market could explode higher, making the upside potential far more interesting from a risk-reward perspective.
