July 28

Lumber Trading – 12 Things you should now before you start (Futures Traders)

Last Updated on 28 July, 2022 by Samuelsson

Lumber futures are trading through CME on the Globex® trading platform. Lumber futures are financial derivatives that are traded with leveraged softwood market exposure. Hedgers and speculators alike are trading lumber futures to manage risk or speculating through price fluctuations.

Lumber futures market explained. Lumbers is also known as timber. Lumber is the type of wood that has been cut into standard beams and planks. It is very important to builders, furniture makers, and makers of kitchen cabinets and wood flooring. Although there is evidence to suggest that wood has been in use in constructing homes for over 400,000 years, it wasn’t until the establishment of sawmills about 1,700 years ago that lumber became a commercial commodity.

Lumber, today, accounts for about 1 percent of the total global GDP — adding more than $600 billion to the world’s economy. The global demand for lumber is expected to quadruple in the next 30 years, making it an important commodity in the global market. Lumber futures contracts are widely traded on commodity exchanges.

1. What are the Lumber Futures Contract Specifications (CME)?

Lumber Trading - 12 Things you should now before you start (Futures Traders)

2. What can Lumber be used for?

With lumber futures trading on the commodity exchanges CME, homebuilders and other lumber users can easily get the woods they need for their various works. There are many uses of lumber, and these are some of them:

  1. Home construction: Lumber is needed in various aspects of building constructions, such as roofing, paneling, trim work, setting up beams, making rafters, and making doors and windows. In some places, an entire building can be constructed with woods alone.
  2. Furniture making: Many home furnishing items, such as chairs, tables, desks, beds, nightstands, and shelves, are made from lumber. Similarly, most of the items used in offices and schools are also made from lumber.
  3. Kitchen cabinetry: Most of the structures in the kitchen for washing, cooking, and storing foods are made from wood because it makes it easy to integrate the necessary appliances like refrigerators and dishwashers into the kitchen cabinet.
  4. Wood flooring: Both outside decks and indoor flooring can be constructed with lumber.

3. Who are the largest Producers and Consumers of Lumber?

According to the UN Global Forest Products facts sheet, the largest producer of lumber is the United States, followed by Russia. Other top producers include China, Canada, India, and Brazil. Canada tops the list of countries that export the commodity, and it is followed on that list by the United States, Sweden, Finland, Germany, Russia, Brazil, Australia, and Chile.

On the aspect of wood consumption, the countries that use the most woods in the world are the United States, China, Russia, Canada, Brazil, Sweden, Indonesia, Finland, India, Germany, and the United Kingdom. Global trades in lumber futures is done through the commodity exchanges.

4. Why Trade Lumber Futures Contracts?

The reasons for trading lumber futures vary from person to person. Some trade the contract for speculative purposes, while others use it to hedge against inflation or to diversify their investment portfolio. For the stakeholders in the lumber market, lumber futures offer a way to manage price fluctuations.

  1. Hedging against price fluctuation: While wood mills and producers of lumber come to the lumber futures market to secure a good price for their product, lumber users, such as homebuilders, wholesalers, retail dealers, and others, come to the market to ensure a stable supply of the commodity.
  2. Speculation: Apart from the stakeholders in the lumber industry, most of the traders in the lumber futures market trade purely for speculative purposes. Their sole aim is to see how they can benefit from the daily fluctuations in lumber commodity prices.
  3. Diversifying portfolio: Some investors and fund managers invest in the commodity market as a way of diversifying their investment portfolio across several asset classes so as to reduce systemic risk. Lumber is popular among agricultural commodity investors.
  4. Inflation hedge: Fiat money is constantly losing value due to the frequent reduction in interest rates and other central bank policies. Some people tend to see commodities as a means of hedging their wealth against inflation.

5. How to Trade Lumber Futures

How to Trade Lumber Futures
How to Trade Lumber Futures

Even though there are other ways you can play the lumber market, such as trading options on lumber futures or trading lumber CFDs, it is better to simply trade lumber futures contacts. The CME (Chicago Mercantile Exchange) offers a contract on Random Length Lumber Futures, and it can be traded from any part of the world through the Globex electronic trading platform.

A random length lumber futures contract is equivalent to 110,000 board feet (approximately 260 cubic meters) of lumber, and the pricing unit is in dollars per 1000 board feet. The lumber itself comes in 2 inches by 4 inches, with a length of 8-20 feet.

The contract normally expires in January, March, May, July, September, and November. At expiration, the contract is settled by physical delivery. Speculative traders, who don’t want to take or make delivery of the commodity, can avoid that by rolling over to contracts in the next expiration months.

It is easy to start trading lumber futures. All you need to do is to create an account with the exchange through your futures broker and deposit the required margin. Being a leveraged instrument, you need not have the entire dollar worth of the contract before you can trade it. Be cautious of leveraged instruments though — while you can make more money, you can also lose more.

6. What are some Lumber Futures Trading Strategies?

The lumber futures market may not be the most common market to trade. However, it should be possible to create a lumber futures trading strategy, although we haven’t found so much as in other markets. Here are some of the other futures trading strategies we have created and published so far.  Just be sure to account for slippage, which can be substantial on less traded markets like the lumber futures market.

For those who are interested in receiving edges for a variety of futures markets and ETFs, we recommend taking a look at our edge membership. Members receive new edges each month!

7. What is the Seasonality for lumber?

Here is a seasonal chart of the lumber futures market:

Lumber Futures Seasonality
Lumber Futures Seasonality. Source: equityclock

8. What makes the Lumber markets go up and down?

There are many factors that can affect the prices of lumber futures, and these are some of them:

  • Housing and construction data: Lumber is very important to the housing and construction industry, so lumber prices are normally sensitive to construction and housing reports as they offer clues about the demand for the commodity.
  • Lumber supply: Whatever affects the production and supply of lumber, such as deforestation and forest change, can affect the prices of lumber.
  • The price of substitutes: Other building materials, such as metals and plastics, may be used to substitute woods in some situations. Thus, the prices of these substitutes can influence lumber prices.
  • Trade policy: Trade policies (tariffs, quotas, and subsidies) in the large producing and consuming countries can have major effects on lumber prices.

9. Where can I find lumber commodity prices live?

Here is a good source for lumber futures prices.

10. Are there any ETFs for the lumber market?

There are 2 lumber ETFs traded right now. 

WOOD: iShares Global Timber & Forestry ETF

CUT: Invesco MSCI Global Timber ETF

11. How can I invest in Lumber?

Here are 4 ways you can participate in wood investing in a number of ways.

  1. Ownership in Woodland. Mainly the preserve of institutional investors with a long time horizon, outright ownership of timberland may be available through certain large pension funds or endowments. …
  2. REITs
  3. Stocks of Forestry Companies
  4. Lumber Futures
  5. Lumber ETFs

12. What is the all-time-high price for lumber?

In May 2021, lumber topped $1,500 per thousand board feet (mbf). The price of framing lumber averaged roughly $550 in 2020 and nearly $850 in 2021, each a new annual record.

Conclusion

Lumber is a very important commodity, which is used in home building, furniture making, kitchen cabinetry, and wood flooring. It has been in use for thousands of years. Due to its economic importance, lumber futures contracts are offered on the commodity exchanges such as the CME.

Here is our archive with articles about other tradeable futures markets.


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