What are lumber futures and how do you trade them?

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Rebecca Cattlin
By :  ,  Financial Writer

Lumber futures are a popular way to track the economy due to the construction industry’s reliance on the commodity. Find out how to speculate on the price of lumber here.

 

What are lumber futures?

Lumber futures are contracts used to buy and sell a certain amount of timber that has been cut into beams and planks. Futures contracts are a legally-binding agreement between two parties to exchange the commodity for a set price, on a set date in the future.

Lumber futures are used by companies in the forestry industry to speculate on the cash price of lumber. At each stage of the lumber distribution chain – forestry, milling, processing, wholesale, retail and building – the price of lumber can change because of the period of time between purchase and final sale. By using futures, companies can lock in a price and hedge against their risk exposure.

This risk is essentially transferred onto speculators or investors who want to profit from the price movements.

Lumber has been used in construction for thousands of years, but it wasn’t until the industrial revolution that it became a commercial commodity.

Lumber is broadly its divided into two classes:

  1. Hardwood lumber, including oak and maple wood, which is used for commercial industries and mostly comes as wood pallets, furniture and flooring
  2. Softwood lumber, such as pine and fir, which is structural lumber and is mostly used for building. Lumber futures primarily trade in Western Spruce-Pine-Fir species

 

Chicago Mercantile Exchange lumber futures

The Chicago Mercantile Exchange became the first exchange to offer lumber futures in 1969. CME lumber futures are called ‘Random Length Lumber Futures’, although the contract size stipulates, they’re as close to 2x4 as possible.

The contracts are standardised as much as possible in terms of dimensions – with the aim of being as close to 2x4 as possible – grade and moisture content. Although no two types of lumber will be identical due to natural differences such as knots, slope of grain and natural wear.

All CME lumber futures trade in Western Spruce-Pine-Fir species, although Hem-Fir, Engelmann Spruce and Lodgepole Pine can also be included. The mills have to be located in Oregon, Washington, Idaho, Wyoming, Montana, Nevada or California, or the Canadian provinces of British Columbia and Alberta.

The specifications are as follows:

 

CME Random Length Lumber Futures

Contract size

110,000 boards (bd ft) of random length 2x4s

Settlement

Physical delivery

Market price

$ per 1,000 bd ft

Per point movement

$0.10 per 1,000 bd ft = $11 per contract

Delivery months

January, March, May, July, September and November

Last trading day

16th calendar day of the contract month

Trading hours

2 am Monday to 6:55 pm Friday with daily breaks from 9pm to 10pm

 

What moves the price of lumber?

Lumber prices are unpredictable and often volatile due to rapidly-shifting supply and demand. Supply of lumber can be hit by mill closures, weather conditions and changes to environmental policies, while demand changes based on interest rates and economic conditions.

As lumber demand is so heavily influenced by housing starts, lumber prices react quickly to the monthly report released by the US Department of Commerce. A third of all US lumber is used to build homes, so changes in starts and even mortgages play out across the commodity’s price. 

This means lumber has a close connection with gross domestic product too. Studies have shown that if GDP rises by more than 2%, demand for lumber will increase due to the rise in infrastructure projects and housing builds. But if GDP increases at a rate slower than 2%, demand falls as people become more efficient in their commodity usage.

Due to its significant ties to economic activity, trading lumber futures has become a popular way of speculating on global economic health.

 

How to buy and trade lumber futures

You can buy and trade lumber futures in just a few simple steps:

  1. Open a City Index account, or log in if you’re already a customer
  2. Search for ‘lumber’ in our award-winning platform
  3. Choose your position and size, and your stop and limit levels
  4. Place the trade

Alternatively, you can practise trading lumber futures first in a demo trading account. 

When you trade lumber futures with us, you’ll be doing so via CFDs. You’d open a position to buy lumber if you thought the price of futures would rise – this happens when demand outstrips supply. Conversely, you’d open a position to sell lumber if you though that futures prices would fall, due to supply outweighing demand.

Due to the highly volatile nature of lumber prices, trading lumber creates opportunities for profit but also, a large amount of risk. This is why it’s important to learn how to manage your risk before you open a position.

Find out how to build a risk management strategy.

 

Related tags: Commodities Insights

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