In a September 26, 2024, Barchart article, I ask if lumber futures consolidation at the $500 per 1,000 board feet level is a gateway to higher or lower prices. I concluded with the following:
The downside risk for lumber prices could be limited around the $500 per 1,000 board feet level, and the upside could be explosive. Lumber futures are dangerous because of their low liquidity, and no ETF or ETN products track physical lumber futures. However, the odds favor higher prices in 2025.
The active month CME physical lumber futures contract was at $529.50 per 1,000 board feet on September 26 and has moved higher to nearly $620 in November 2024.
Lumber futures are trending higher
After reaching a low of $512 per 1,000 board feet on September 13, 2024, nearby January physical lumber futures on the Chicago Mercantile Exchange have been trending higher.
The daily chart shows that January lumber futures rallied 20.5% to $617 high on November 13.
The three-year continuous contract chart illustrates that physical lumber futures are moving toward a challenge of the February 2024 $629.50 high, which would end the pattern of lower highs.
The Fed Rate cuts support higher lumber demand
The Fed has changed its monetary policy stance, cutting the short-term Fed Funds Rate by 75 basis points since the September 2024 FOMC meeting. In September, the central bank announced a 50-point reduction and followed up with another twenty-five-point cut at the November 6 meeting. The Fed Funds Rate has dropped from a midpoint of 5.375% to 4.625%. Meanwhile, the FOMC dot plot forecasts another 25-point reduction at the December meeting and a 100-point drop in 2025. pent
Falling interest rates are bullish for commodity prices as they reduce the cost of financing inventories, and lumber is no exception. Moreover, pent-up housing demand and limited existing homes available for sale could lead to a new home-building boom in 2025 if mortgage rates follow the short-term rate cuts. Homeowners with mortgage rates below 4%, and in many cases, under 3%, are not moving, creating a housing shortage that could lead to a rise in the demand for new homes.
Long-term rates have not followed short-term rates
While short-term rates have declined, the longer-term rates that determine mortgage rates have remained stubbornly high.
The U.S. government long bond futures chart shows the decline from 127-22 in September 2024 when the Fed began cutting the Fed Funds Rate to the 116-14 level after the most recent rate cut. While short-term rates have declined, longer-term rates have increased as inflationary pressures, the U.S. debt and the geopolitical landscape have weighed on bonds and lifted longer-term rates. Since mortgage rates are based on the long end of the interest rate curve, mortgage rates remain high in the current environment. Time will tell if continued Fed Rate cuts filter through to the long end of the curve, increasing mortgage, new home, and lumber demand in 2025. Lumber futures’ illiquidity can exacerbate price volatility
The delisted random-length lumber futures contract reached a record $1,711.20 high in 2021 and a lower $1,477.40 per 1,000 board feet peak in 2022 when conventional fixed-rate 30-year mortgage rates were at or below the 3% level. Over the past years, potential homeowners have faced a double whammy of higher rates and rising home prices because of the limited existing home market. However, if the mortgage rates head back towards the 4% level, pent-up demand from the past years could likely increase the demand for new home building, translating to increased lumber demand.
CME lumber futures remain a highly illiquid commodity with only 6,597 contracts of open interest. Daily trading volumes are typically below 1,000 contracts. Low liquidity fosters high volatility when trends develop as bids to buy disappear during bearish periods and offers to sell evaporate when prices rise. The 2021 and 2022 highs occurred as prices gapped higher because of the lack of selling. As we have witnessed over the past years, low liquidity that fosters price volatility can exacerbate price highs or lows in the lumber futures arena.
The WOOD and CUT ETFs and WY shares tend to follow lumber prices higher or lower
I am bullish on lumber prices as a more accommodative Fed could eventually filter through to longer-term rates, pushing the bond market highs. Moreover, the pent-up demand and low existing home inventories over the past years support new home building. Low liquidity in the lumber futures market could cause another rally to over the $1,000 per 1,000 board feet level if mortgage rates decline over the coming year. Meanwhile, pent-up demand for homes will likely support lumber prices, limiting the downside and making the upside potentially explosive for lumber prices in 2025.
While the most direct route for lumber exposure is the CME’s physical lumber futures market, its illiquidity makes it dangerous for investors, traders, hedgers, and other market participants. The WOOD and CUT ETF products and WY shares tend to move higher and lower with lumber futures prices.
January lumber futures rallied 20.5% since the September 13 low. Over the same period:
- The WOOD ETF moved 5.06% lower from $82.82 to $78.63 per share.
- The CUT ETF fell 2.21% from $34.40 to $33.64 per share.
- WY shares moved 4.23% lower from $32.45 to $31.11 per share.
While the WOOD, CUT, and WY products have not tracked the January physical lumber futures, which have moved over 20% higher since mid-September, a significant move in lumber futures over the coming months could cause these ETFs and WY shares to follow.
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.
- Will Lumber Rally During the First Half of 2025?
- Lumber Consolidation- Is $500 a Gateway to Higher or Lower Prices?
- Can Lumber Sustain a Recovery?
- Is Lumber Close to a Bottom?
