US lumber futures are on another wild ride, but trading them has gotten pretty boring.<\/p>\n
In 25 of this year\u2019s 35 trading sessions, prices of the leading lumber futures contract have moved so sharply that they have ended the Friday stuck at limits designed to ensure an orderly market. Some mornings, trading has opened at the limit and remained there. On those days, trading in lumber futures basically ends before it begins.<\/p>\n
The condition is called \u201clock limit.\u201d Traders compare it to squeezing through a keyhole. Trading doesn\u2019t officially halt, but once the price rises or falls to the maximum dollar amount allowed by exchange rules, there can be no more trades in the direction the market is moving. And so the action grinds to a standstill until the next day. Or until some big news reverses sentiment among the few dozen humans and algorithms that regularly trade lumber futures.<\/p>\n
Stinson Dean, a Colorado lumber broker , usually bets the price of a futures contract will decline, so that if it does, the earnings will make up for the lost value of the wood he stockpiles to supply to lumber yards. The narrow trading windows have prevented him from moving out of such short positions. Unable to liquidate his hedges has forced him to hang on to the wood he has piled in warehouses around the country so that he isn\u2019t exposed to big losses if prices move against his futures wagers.<\/p>\n
He likens his situation to not being able to sell a house because the homeowners insurance policy can\u2019t be canceled.<\/p>\n
\u201cMy prices to my customers are so tied to the futures market that if I can\u2019t execute, I tell them I\u2019m off the market,\u201d said Mr. Dean. \u201cI\u2019m not trading anything until it calms down.\u201d<\/p>\n
Brian Leonard, a lumber analyst at Chicago\u2019s RCM Alternatives, said he has never seen such an illiquid market in more than 30 years of trading commodities.<\/p>\n
One big problem is that speculators have fled the lumber market as the stakes have risen. Before the pandemic, when the typical price per thousand board feet was around $350, a futures contract for 110,000 board feet cost around $38,500. Daily swings in price were smaller. Lately, because of higher prices, each contract\u2019s value can fluctuate by more than $20,000 a week.<\/p>\n
Lumber futures are a lightly traded contract used mostly to manage the financial risks involved in trading railcars\u2019 worth of two-by-fours. Nonetheless they are an important benchmark price for wood products, a barometer of building costs and a reliable gauge of the housing market.<\/p>","protected":false},"excerpt":{"rendered":"
US lumber futures are on another wild ride, but trading them has gotten pretty boring. In 25 of this year\u2019s 35 trading sessions, prices of the leading lumber futures contract have moved so sharply that they have ended the Friday … Continue reading