In a June 15, 2023, Barchart article, Lumber Could Have Found a Bottom—What’s Next? I wrote, “ I expect the decline in inflation and Fed’s pause as constructive events for the new home market. However, as lumber futures roll to the September futures contract, the offseason for building during the winter will be on the horizon. We may have to wait until the end of the year for any sustainable rallies as the wood market shifts its attention to the spring construction season in 2024.”
In mid-June, the nearby September physical lumber futures contract was at the $538.50 per 1,000 board feet level. Since then, lumber prices have made higher lows and higher highs, with the price over $560 on July 19.
Since mid-June, lumber-related ETF products and companies rallied, which could be signaling a shift in the U.S. economy.
Lumber continues to recover - Stopped short of a test of $600
September physical lumber futures have been trending higher since reaching a low on June 5, 2023.
The chart highlights the rally from $500.50 per 1,000 board feet on June 5 to the most recent $597 high on July 10. At over the $560 level on July 19, nearby lumber prices remain in a short-term bullish trend closer to the recent high than the early June low.
Lumber prices fell from record levels in 2021 and 2022, reaching a bottom near the $350 level. The price action stabilized, and the path of least resistance turned higher since early June 2023.
The CUT and WOOD ETF products reflect rising lumber prices
Lumber futures remain highly illiquid with low daily volume and limited open long and short positions. Low liquidity tends to exacerbate price volatility as bids disappear during selloffs and offers to sell evaporate during rallies.
CUT and WOOD are ETF products that own shares in lumber-related companies and tend to follow lumber prices higher and lower.
At $30.81 per share on July 19, the Invesco MSCI Global Timber ETF product (CUT) had over $57 million in assets under management. CUT trades an average of 4,179 shares daily and charges a 0.60% management fee. CUT’s 78.0 cents dividend translates to a 2.53% yield. CUT’s top holdings include:
CUT shares have been trending higher over the last months.
The chart highlights CUT’s pattern of higher lows and higher highs since the May 31 $28.12 low. At the $30.81 level on July 19, CUT has rallied over 9.5% from the recent low.
At $74.34 per share on July 19, the iShares Global Timber & Forestry ETF product (WOOD) had over $210 million in assets under management. WOOD trades an average of 8.595 shares daily and charges a 0.40% management fee. WOOD’s $1.44 per share annual dividend equates to a 1.94% yield. WOOD’s top holdings include:
Weyerhaeuser Company (WY) is the top holding of CUT and WOOD ETF products.
The chart illustrates WOOD’s rise from $69.01 on May 31. At the $74.34 level on July 19, WOOD has rallied over 7.7% from the recent low.
WY shares have rallied- WY is a lumber REIT
Weyerhaeuser Company (WY)is a unique company operating as a real estate investment trust with timberland holdings. WY owns or leases properties in the United States and Canada. The company also produces wood products. At $34.27 per share on July 19, WY had an over $25.2 billion market cap. WY trades an average of nearly four million shares daily and pays shareholders 0.76 cents annually or a 2.22% dividend.
The chart shows the bullish pattern in WY shares that rallied 21.9% from $28.12 on May 31, 2023, to $34.27 on July 19.
September physical lumber futures 12.3% move from $500.50 on June 5 to $562 on July 19, outperforming CUT and WOOD but underperforming WY shares. Lumber’s penchant for volatility tends to cause the futures to outperform the ETFs and WY on the upside but underperform during selloffs. WY’s recent rise has outperformed lumber and the stock market over the past weeks.
Lumber reflects the trajectory of interest rate hikes
Lumber is highly sensitive to interest rates because wood is a primary ingredient in new home construction. In late 2021 a thirty-year fixed-rate conventional mortgage was below 3%. Today, the rate is around the 7% level. Over the past year, rising interest rates have weighed heavily on the demand for new homes, causing lumber demand to plummet. The price action in lumber and lumber-related stocks tells us that the trajectory of interest rate hikes has slowed, borrowers are becoming accustomed to the current rate environment, and new home construction is starting to increase.
The Fed raised the short-term Fed Funds Rate from zero to over 5% from March 2022 through July 2023. Moreover, quantitative tightening pushed rates higher further along the yield curve.
The central bank paused rate hikes in June 2023. Any further rate increases will likely be marginal, given declining inflationary pressures. Lumber is signaling that the Fed has nearly reached its rate hike limit, and mortgage rates could be peaking at the 7% level.
Lumber is too illiquid to trade, but the price action is too important to ignore
I have traded commodities since 1981 and have had risk positions in almost all raw material markets. However, I have never bought or sold one lumber contract because of the low liquidity that can cause extreme slippage and significant losses.
Lumber may be too illiquid to trade, but it is a critical barometer of interest rates’ impact on the housing market. Moreover, like copper, oil, and other industrial commodities, lumber is a crucial bellwether indicator of economic trends.
Over the past weeks, lumber has told us that economic conditions are improving, and the interest rate environment is stabilizing. Lumber’s price action suggests the path of monetary policy will be less hawkish over the coming months, which could boost many industrial commodity prices.
On the date of publication, Andrew Hecht did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
