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I Received an Urgent E-mail Alert from My Lumber Contact

By Tom Dyson, publisher, The Palm Beach Letter
Monday, July 6, 2009

A loud cheer went up. Suddenly activity in the pit exploded, and I was almost trampled by more traders joining the fray...
 
I was at the New York Mercantile Exchange on a day when oil made a new all-time high. This was in 2005 during the big bull market. I was standing next to the crude oil pit at the precise moment it made the new high. The energy was incredible...
 
Now, imagine a couple of old timers sitting around drinking coffee and telling jokes as they wait for new trades to enter the exchange. That's what the lumber trading pit looks like at the Chicago Mercantile Exchange. Unlike oil, it's a tiny market, for professionals only...

Oil prices are subject to the speculative mood of the market. Lumber's price is not. Speculators hate lumber's high storage and transportation costs. So there are no hedge funds or retail investors to energize the pits.
 
This makes lumber the perfect leading indictor for business conditions. Because the volume is so small, any change in supply or demand has an immediate and dramatic effect on prices. And it's a "true" price, as there's no speculation to muddy the water. Price movements are driven by the supply and demand of commercial players.
 
Housing is the most important asset class in America. When house prices fall, banks fail, consumers cut back, unemployment rises, and the economy collapses. But when house prices are strong, the economy rebounds. Is it any wonder the government concentrated its bailout efforts on reviving the real estate market?
 
Lumber is the raw material of the housing industry, so it's especially sensitive to trends in real estate. CME Lumber prices peaked in May 2004. The Bloomberg Homebuilders Index peaked in July 2005. And the Case-Shiller U.S. home price index peaked in July 2006.
 
The lumber futures price staged a dramatic rally in the last three months... rising from $140 per thousand board feet in March to over $210 last month. In the last couple of weeks, prices have cooled off and now trade below $190.
 
Lumber prices have cooled, but something may be stirring…

I have an "on the ground" contact who's seeing something else altogether... Don runs a large lumber supply depot outside Orlando. Last week, he sent me a "special commodity alert."
 
"Over the last 30 days," he wrote, "there have been significant increases in the lumber and plywood markets."
 

Don attached a list of 133 different lumber prices to his e-mail. The list includes treated lumber, plywood, and the more obscure wide dimensions. These are the actual prices Don pays the sawmills for his inventory. Here's a sample of the biggest price increases... 
 
Pine 2x10s have increased 22% in the last 30 days.
Treated pine 2x6s have increased 29%.
Pine 2x6 borates are up 31%.
Spruce 2x4s are up 37%.
Spruce 2x6s are up 44%.
15/32 Oriented Strand boards are up 7%.
15/32 Plywood is up 12%.
 
It looks like there's something stirring in the lumber market. It could be a local aberration in Orlando... or it could be something bigger. I'm not sure, and neither is Don.
 
Let's keep an eye on the Chicago futures price to see if it confirms Don's view. In the meantime, I'll hunt for more clues from lumberyards in other parts of the country... 
 
Good investing,
 
Tom




Further Reading:

I'm Going to Double My Money on a Railcar Full Of...

What I Learned on My Trip to a Canadian Sawmill

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