Learn About Futures Insider for December 15, 2011: Lumber

Contract Size: 110,000 board feet (˜260 cubic meters)

Price Quote & Tick Size: US Dollars per 1,000 board feet (mbf); minimum tick size is $.10 per mbf ($11 per contract)

Contract Months: Jan, Mar, May, Jul, Sep, Nov

Trading Specs: Open outcry trading is conducted MON-FRI: 9:00 a.m. -1:05 p.m. CT. Electronic trading is conducted via the CME Globex® trading platform MON - THU 5:00pm - 4:00pm CT (next day); SUN and holidays 5:00pm - 4:00pm CT (next day)

Daily Price Limit: $10 per mbf above or below previous day's settlement price; expandable to $15 per mbf

Trading Symbols: LB
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Past performance is not indicative of future results.
***chart courtesy of Gecko Software

Lumber Facts

The production of lumber has a rich history in North America and critical economic importance. As the United States grew westward, so did the timber industry and by the twentieth century, New England’s white pine, the Western redwood, pine, and fir forests, and the South’s pine forests had become important sources of national lumber.

The following map shows the softwood lumber resources across Canada and the United States:
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Concerns over sustainability of lumber resources were brought to industry attention as early as the 1870s and eventually gave rise to professional forestry and the national forest system. Tree nurseries and reforestation efforts are now important parts of the industry.
According to the CME rule book, deliverable types of lumber are nominal lengths of 2x4’s manufactured in the western United States or from British Columbia or Alberta in Canada. A variety of rules exist regarding the specifics of origin and the type of wood allowed. Coniferous species like pine, fir, and spruce provide the bulk of softwood used for lumber as well as cedar and hemlock.

Manufacturers remove much of the moisture content from the green lumber, usually surfaced dry to 20% moisture content. Accepted grades No. 1 and No.2 must also be packaged by banding together and wrapping in poly or paper.

The US Census Bureau’s 2007 annual industry report shows production by state as illustrated in the following table:
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*- Represents zero. D Withheld. Z Less than 500,000 board feet.
**Data courtesy of the US Census Bureau Lumber Production and Mill Stocks report
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**Data courtesy of the US Census Bureau Lumber Production and Mill Stocks report
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**Data courtesy of the US Census Bureau Lumber Production and Mill Stocks report

Price highlights for this market include:

In 1973, high prices for lumber were blamed for higher home costs as builders said at least $1,200 more were added to the average home. At the time, builder's urged curbs on exports of American logs to Japan and increased cutting in national parks.
By 1974 the US housing market was slumping, bringing pressure to lumber prices which finally hit eight year lows in October of that year. Sawmills in the US and Canada cut shifts and slowed activities. Prices would go from more than $150 to dipping below $100 per 1,00 board feet.
Throughout the balance of the 1970s, prices would trend higher, eventually moving towards $300 in 1979, prompting another call for increased cutting in the national forests. A gradual slowdown in housing demand and starts coupled to higher mill production brought fresh selling pressure through the early 1980s, driving prices back under $150 per 1,000 board feet.
In 1982, prices staged a recovery as one of the US' top timber official's predicted robust demand for lumber in, "the near and long term." A dip in mortgage rates in 1983 would fuel a surge in lumber orders and tip sawmills into a frenzy of activity.
Environmental concerns in the early 1990s delivered a spike in prices, led by logging closures in parts of the Pacific Northwest on the heels of changes in environmental policy making. Researchers in Congress denied claims that protections of cutbacks in federal logging were to blame for a nearly 90 percent jump in lumber prices. They cited a national economic recovery increasing demand. Prices would hit a high above $490 per 1,000 board feet. Prices would dip back through $250 in 1995 and then spike again the following year, trading well above the $400 level.
Housing starts slumped again in 1997 and helped pressure lumber prices which headed back below the $300 level. Prices would continue to fluctuate wildly, proving to be a headache for homebuilders through the early 2000s.
A perceived supply glut would knock prices down, but the real lows would come during the onset of the housing crisis and economic slowdown by 2008. Price lows would be made just above $130 per 1,000 board feet.

Key terms for the lumber market include:

MBF - an abbreviation for 1,000 board feet of lumber (not one million) which is about 83.33 cubic feet or 2.36 cubic meters. Board feet is a common measurement of lumber volume, 144 cubic inches. Lumber is normally specified in its rough size before drying, which is why a finished board is normally smaller than the quoted dimensions.

Hardwood & Softwood - ways to describe wood from different trees. In general, softwoods are often from conifers like pine, fir, and spruce. Hardwoods are most likely from deciduous trees like ash, birch, or cherry. The terms are not always based on actual hardness of the wood e.g. balsa is a hardwood but much softer than a softwood like yew.

Key Uses

Lumber is primarily destined for structural construction applications.

Key Concerns

Environmental Concerns: The impact of the forestry industry as well as logging practices comes under regular scrutiny and can often spark a number of strong arguments.

Trade Concerns: Issues concerning softwood imports, exports, and applicable duties can often bring volatility. Trade discussions or issues between the United States and Canada are often worthy of note.

Industry Reports: The possible demand and usage within construction reports may bring price volatility. The reports of new home sales and new construction from the US Census Bureau are worth noting as well as the production reports from western wood manufacturers.

Weather: Price volatility is also possible during periods surrounding extreme weather events such as hurricanes, tsunamis, and earthquakes as they related to the overall destruction and perceived rebuilding requirements.

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