Lumber futures gyrated in wild trading on Wednesday as traders struggled to determine if a recent pullback in wood prices had removed enough froth from the market.
Lumber futures for July delivery at first fell 5% to $1,201 per thousand board feet Wednesday morning, only to turn positive and rally 5% by the afternoon. Prices hit what's known as limit down, and then limit up, the maximum percentage changes allowed by the Chicago Mercantile Exchange, where the futures trade.
Prices have fallen every day since lumber hit a record of $1,711 per thousand board feet on May 10. Despite the swoon, the price of lumber is still up about 37% in 2021.
"Price stifled demand. Period. There's no other question about it," Robin Cross, a commodities broker at StoneX, said of the recent pullback from highs. "It's not like I have a whole bunch of guys calling and selling it. What's really happening is guys bought high-priced inventory, and they're afraid to add to it. ... No one wants to get left holding the $1,700 bag."
Tens of thousands of stuck-at-home homeowners, and new homebuilders, have for much of the last year snapped up processed pine by the ton. But more recently, with sawmills unable to keep up with demand as the calendar turned to spring, a speculative frenzy entered the market with traders bidding up prices aggressively since March.
Single family housing starts dropped 13% in April, the biggest decline since the Covid pandemic hit, data this week showed. The rise in lumber costs was partly to blame for homebuilders slowing production even as housing demand increases.
Cross explained that while lumber looked overbought as recently as earlier this month based on price and technical metrics, he said its recent pullback is starting to appear overdone in the opposite direction.
"I do believe that in the market we are going to see a dead cat bounce. When the market got up to $1,733, that was the most overbought lumber market in history. Technically speaking, not just on price," he said. "Now, sitting at $1,201 and a singular straight line [downward], it's not quite the most oversold market in history. But it's pretty damn close."
Cross made his remarks before lumber's afternoon recovery.
While the rules for reaching limit down prices vary by asset class, reaching that level in commodity markets can be especially stressful for traders who are unable to sell their positions because trading on exchanges is halted as soon as the limit down price is met.
Lumber futures' limit down price change on May 19 is $63, according to the CME Group. As of the latest reading, lumber futures had hit that limit and had been halted at $1,201.
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