Let’s start with the technical dynamics. Lumber futures are traded through the CME on the Globex® trading platform. These are financial derivatives traded with leveraged exposure to the softwood market.
Who participates? Both hedgers and speculators exist, with the former managing risk and the latter speculating on price fluctuations. Lumber futures contracts are widely used on commodity exchanges.
Lumber futures, like most other commodity futures contracts, arose from the need to hedge price risks in the physical commodity market. The lumber futures market is particularly illiquid, as the industrial commodity generally does not attract significant hedging or speculative volumes. For this reason, open interest, i.e., the total number of open long and short positions in the lumber futures market, typically remains low compared to other industrial commodity markets. The consequences? This low liquidity causes extreme price volatility. Therefore, upward price movements can cause sales offers to disappear, while downward price movements often occur without requests to buy lumber. Trends can lead to significant price movements, reaching levels that cannot be explained by the rational supply and demand fundamentals that typically accompany classic macro thinking.
Lumber is indeed a commodity that largely reflects economic conditions, so extreme movements in lumber prices can be seen as a prelude to upward or downward price movements in other industrial commodities, such as energy or metals.
Let’s explore a bit more in detail.