Lumber prices have bottomed out, but are likely to stay double the historical average for at least the next 5 years, trader says

A lumber yard
  • Lumber has probably found a bottom at current levels, but prices will remain over double the average for the next few years, Stinson Dean told Insider.
  • The Deacon Trading founder expects lumber to trade above $1,000 for potentially the next three to five years.
  • He added that the current state of the lumber futures curve confirms that lumber prices have bottomed.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

Lumber price have probably found a bottom at current levels, but will remain higher than average for the next few years, a lumber trader told Insider.

Stinson Dean, CEO and founder of Deacon Trading, expects lumber to trade above $1000 for potentially the next three to five years. The historical average is around $400, he said.

“My argument is the new normal is going to be significantly higher than the old normal while others think we’re going to go back to pre-COVID price ranges,” Dean said.

After an intense run-up in the beginning of the year, Lumber has fallen nearly 50% from May’s record high of over $1,700 per thousand board feet.

“Business has slowed dramatically. There’s ample supply. So there’s just not pressure on buyers to cover those needs…they’ve bought enough to cover whatever needs they do have,” Dean said.

He added that the current state of the lumber futures curve confirms his take that lumber prices have bottomed out. The curve can give an indication of the health of the underlying supply and demand market, he said.

Lumber futures recently began trading in contango – a situation in commodities wherein the future price is higher than the spot price. For the past year, the futures curve was inverted and in backwardation, where the future price is cheaper.

The backwardation and subsequent premium on front-month futures occurred because everyone needed lumber as soon as possible, and they were willing to pay whatever price for it, said Dean.

“People didn’t care about two months down the road, they only cared about right now because they were in the middle of a short squeeze. They had to get covered,” he added.

Now, that dynamic has changed and supply is ample. Dean explained that the futures curve in contango isn’t bearish for lumber, but it’s not necessarily bullish. It means that supply and demand are normalizing, and an equilibrium is being found.

He expects lumber prices to average around $900, but remain volatile.

Over the next five years, he sees lumber trading around $1000.

“For the rest of 2021, the phrase I would use is grind higher,” Dean added. “I think we’ll start trading around above $1000 this fall and stay there.”

Before this fall, he sees prices staying muted until homebuilders begin to expand production and deliver more homes in the next quarter. What partly caused the prices to fall from the peak was that homebuilders began to slow down and lumberyards grew hesitant to lock in future business. Now that homebuilders’ near-term needs have been covered, there’s less of a scramble for wood.

Read more: ‘If lumber crashes, stocks might be next’: An award-winning portfolio manager who’s tracked lumber prices for years breaks down why futures hitting record highs is an ominous sign – and shares what investors can do ahead of the eventual crash

Read the original article on Business Insider

Lumber prices have bottomed out, but are likely to stay double the historical average for at least the next 5 years, a lumber trader says

A lumber yard
  • Lumber has probably found a bottom at current levels, but prices will remain over double the average for the next few years, Stinson Dean told Insider.
  • The Deacon Trading founder expects lumber to trade above $1,000 for potentially the next three to five years.
  • He added that the current state of the lumber futures curve confirms that lumber prices have bottomed.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

Lumber price have probably found a bottom at current levels, but will remain higher than average for the next few years, a lumber trader told Insider.

Stinson Dean, CEO and founder of Deacon Trading, expects lumber to trade above $1000 for potentially the next three to five years. The historical average is around $400, he said.

“My argument is the new normal is going to be significantly higher than the old normal while others think we’re going to go back to pre-COVID price ranges,” Dean said.

After an intense run-up in the beginning of the year, Lumber has fallen nearly 50% from May’s record high of over $1,700 per thousand board feet.

“Business has slowed dramatically. There’s ample supply. So there’s just not pressure on buyers to cover those needs…they’ve bought enough to cover whatever needs they do have,” Dean said.

He added that the current state of the lumber futures curve confirms his take that lumber prices have bottomed out. The curve can give an indication of the health of the underlying supply and demand market, he said.

Lumber futures recently began trading in contango – a situation in commodities wherein the future price is higher than the spot price. For the past year, the futures curve was inverted and in backwardation, where the future price is cheaper.

The backwardation and subsequent premium on front-month futures occurred because everyone needed lumber as soon as possible, and they were willing to pay whatever price for it, said Dean.

“People didn’t care about two months down the road, they only cared about right now because they were in the middle of a short squeeze. They had to get covered,” he added.

Now, that dynamic has changed and supply is ample. Dean explained that the futures curve in contango isn’t bearish for lumber, but it’s not necessarily bullish. It means that supply and demand are normalizing, and an equilibrium is being found.

He expects lumber prices to average around $900, but remain volatile.

Over the next five years, he sees lumber trading around $1000.

“For the rest of 2021, the phrase I would use is grind higher,” Dean added. “I think we’ll start trading around above $1000 this fall and stay there.”

Before this fall, he sees prices staying muted until homebuilders begin to expand production and deliver more homes in the next quarter. What partly caused the prices to fall from the peak was that homebuilders began to slow down and lumberyards grew hesitant to lock in future business. Now that homebuilders’ near-term needs have been covered, there’s less of a scramble for wood.

Read the original article on Business Insider

Lumber prices decline for a 6th straight day even as supply bottlenecks persist

Saw mill.

  • Lumber futures fell to $1,327 per thousand board feet on Monday.
  • Prices are still up more than 85% year-to-date and 280% in the past year.
  • The National Home Builders Association told NBC if lumber prices don’t continue to fall “you will see the homebuilding sector slow down and grind to a halt.”
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

Lumber prices fell for the sixth straight day on Monday, even as supply bottlenecks at mills across the US and Canada persist.

Specifically, lumber futures fell to $1,327 per thousand board feet and are now down roughly 20% from May 7’s record high of more than $1,670.

Of course, despite the recent fall in prices, lumber futures are still up more than 85% year-to-date amid supply bottlenecks at mills and rising demand for home offices, renovations, and new homes.

Looking back a little further, lumber futures are up an incredible 283% over the last year alone.

Lumber’s rise has been so significant that NPR reported DIYers have begun to cut out the middlemen by creating their own sawmills to cut timber.

Typically, when demand increases, suppliers will increase the number of mills available to process timber. But Chad Hesters, a forest-product advisor and managing partner of the consulting firm Korn Ferry, told the Wall Street Journal that’s not an option for many suppliers these days because of how long it takes to create a modern mill and the significant capital investment involved.

“Trying to build capacity and make investments that have a lot of lead time at the top of a cycle is historically a good way to lose money,” Mr. Hesters said, per WSJ.

On top of that, semiconductor and rural labor shortages make it almost impossible for mill owners to build new operations profitably.

However, according to Stinson Dean, the owner of Deacon Lumber Company, there has been some reprieve for lumber pricing of late due to the end of a lumber short squeeze.

Dean told Bloomberg’s Joe Weisenthal and Tracy Alloway on the “Odd Lots” podcast at the end of April that lumber’s historic price run-up was a “de facto short squeeze.”

The squeeze was caused by commitments lumber yards made to homebuilders prior to a run-up in lumber prices and a tightening of the market, which forced them to buy at any price to meet obligations to customers.

Now, Dean says those conditions have abated, leading to some breathing room in the lumber market, according to a report from Bloomberg.

That’s good news considering Jerry Howard, the CEO of the National Home Builders Association, recently told NBC that if lumber prices continue to climb, “you will see the homebuilding sector slow down and grind to a halt.”

“This problem with lumber and other building material costs is sort of setting another potential perfect storm for housing to lead us into a recession,” Howard added.

Read more: ‘If lumber crashes, stocks might be next’: An award-winning portfolio manager who’s tracked lumber prices for years breaks down why futures hitting a record high of $1,600 is an ominous sign – and shares what investors can do ahead of the eventual crash

Read the original article on Business Insider