On January 12, I published an article on Barchart, Lumber- An Ugly 2022 But Spring Is On The Horizon. In that piece, I wrote, “At below $425 on January 12, lumber could have upside room as illiquid markets can experience significant appreciation when they run dry of selling.” The article forecast that seasonality favored the upside, but prices over $1,000 per 1,000 board feet were unlikely on the nearby random-length lumber futures contract. The active month random-length lumber contract’s price closed at $373.70 on December 30, 2022. After falling to a $338 low in early January, the price turned higher and was around $520 on February 1, 2023. 

Weyerhaeuser Company (WY), a unique company that is a real estate investment trust with lumber exposure, has appreciated from its December 30, 2022, closing price. 

A rally in the random-length lumber futures

March random-length lumber futures closed 2022 at $382.70 per 1,000 board feet. After falling to $360.20 on January 6, wood’s price turned high. 

The chart highlights lumber futures recovered and rallied 48.2% from the January 6 low to their most recent high of $533.70 on February 1. The lack of liquidity likely led to a significant rally as selling evaporated. However, lumber futures put in a substantial technical reversal on the longer-term chart. 

The ten-year chart shows random-length lumber futures put in a bullish key reversal pattern on the monthly chart as the price fell below the December 2022 low and closed above the $436.40 December 2022 high on January 31, 2023. Lumber futures had not been above the $500 level since October 2022. 

The new physical contract has posted gains in 2023

While the new smaller physical lumber contract only began trading in August 2022, they have followed a similar path to the random-length futures it will eventually replace. 

The March physical contract price rose 33.3% from $469.00 per 1,000 board feet on January 6 to $627.00 on February 1. 

The monthly chart shows the same bullish technical reversal as lumber fell below the December 2022 $472 low and closed above the $535 high in January. 

Lumber can be a leading indicator for industrial commodities

Lumber is an industrial commodity that can be a leading indicator for other raw material markets. Low liquidity often causes selling to dry up on the downside or buying to evaporate on the upside before the same phenomenon occurs in other industrial commodities. 

In early 2023, nearby copper futures, another critical industrial commodity, rallied. 

The chart shows March copper futures, a leading base metal, have moved from $3.8105 on December 30, 2022, to above the $4.13 per pound level on February 1, 2023 after reaching $4.3550 on January 18. The bullish price action in copper validates the move in lumber futures. 

Interest rates will influence the path of least resistance of wood prices as lumber is critical for new home building

Lumber is one of the most interest rate-sensitive commodities because of wood’s role in new home construction. Rising interest rates tend to weigh on lumber prices as the demand for new homes declines when mortgage rates increase. 

In March 2022, the short-term Fed Funds Rate stood at a midpoint of 0.125%. At the end of 2022, the rate rose to 4.25% to 4.50%. Moreover, the Fed’s quantitative tightening program reduces the central bank’s swollen balance sheet by $95 billion monthly. Higher rates have dampened the demand for new homes and pushed real estate values lower from the 2022 highs. Since wood is a critical construction input, a weak housing market is bearish for lumber futures. The trajectory of rate hikes in 2023 will not likely approach the rise in 2022. Therefore, markets have digested higher rates. 

Moreover, the most recent inflation data shows the economic condition is declining. While inflation is nowhere near the Fed’s 2% target, the potential for a recession could curb the central bank’s enthusiasm for increasing short-term rates. Lumber’s price action could tell us that rates will level off in 2023, and the demand for new homes will increase. 

WY shares can be sensitive to lumber prices
I have been trading commodities for over four decades but have never traded one lumber contract because of lumber’s low liquidity. Time will tell if the new physical contract gains the critical mass that supports trading. Still, the physical lumber contracts have not attracted the volume and open interest necessary to facilitate risk positions. 

Weyerhaeuser Company (WY) is a real estate investment trust tied to the lumber market. WY’s company profile states:

WY’s company profile highlights the company’s sensitivity to lumber prices. At $34.02 on February 1, WY had an over $25.337 billion market cap. WY traded an average of over 4.69 million shares daily, and the $0.72 dividend translates to a 2.12% yield. 

WY shares tend to underperform the illiquid lumber futures on the upside and outperform on a percentage basis when lumber futures prices decline. Since the end of 2022, WY shares have moved higher. 

The chart shows the rise from $31.00 on December 30, 2022, to $34.02 per share on February 1, a 9.74% rise. The range in WY shares in December 2022 was from $30.34 to $33.91, in January 2023, it was from $30.20 to $34.45. The close of $34.43 on January 31 was a bullish key reversal in the stock, and a continuation of bullish price action in the lumber futures market will likely support gains in WY shares. 

Another factor supporting lumber and WY shares is seasonality, as construction projects tend to increase after the winter months. Lumber futures reached an all-time high in May 2021 at $1,711.20 and a lower peak at $1,477.40 in March 2022. The lumber market could tell us that slowing interest rate hikes and seasonal factors could push prices higher over the coming weeks. The trend is always your best friend in markets across all asset classes, and lumber futures have turned from bearish to bullish in early 2023, a potentially bullish sign for all commodity prices. 

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