Lumber looks set to build a new rally

Perhaps professional fund managers know something about lumber prices that we don’t, judging from the weekly commitment of traders report. According to CFTC data (Commodity Futures Trading Commission) managed funds increased their net-long exposure to random length futures at their fastest pace in 19-months last week. The report also revealed that managed funds also flipped to net-long and gross short exposure fell at its fastest pace in 11-weeks. If funds managers are correct to expect higher lumber prices it could exacerbate inflationary forces further along supply chains (and of course support lumber prices).

This comes as a time where inflation in the US is already twice the Federal Reserve’s target, bottlenecks in the supply chain are placing upwards pressure on raw material costs and consumers expect higher inflation a year out from now. Even Fed Chair, Jerome Powell, finally conceded that inflation is not actually ‘transitory’. And rising lumber prices certainly feed into this theme, which we argue is not a theme isolated to the US.

Listening to the ears to the ground

We’re based in Australia but many of the issue here ring true elsewhere, such as soaring house prices alongside the cost of living. From my own DIY ventures, speaking with builders and hardware store retailers, it seems lumber is in short supply yet demand remains strong. According to my local store, timber is flying off the shelf and builders aren’t even looking at the price (as they’re marking up their jobs an extra 20-30% to protect themselves from volatile timber prices). The CEO of one of the largest building firms in Australia was in radio recently saying “if you don’t have to build now, don’t” as prices are high and cues are long. On the face of it, it appears that lumber demand remains high despite the inflated prices. Another takeaway is that the higher prices seen earlier this year remain entrenched in the system despite lumber futures falling -73.4% from its 2021 high.

We can see on the daily chart of random length lumber futures that prices have risen to retest their October high. Prices have held above the 10-day exponential average and volumes increased over the past three days as prices rallied back to those higher. From here bulls likely need to break prices above $830 to extend its current rally, and we would also want to see managed funds increase bullish exposure after any potential breakout to confirm it as such. However, if prices break below $800 it risks speculative bulls to close and spark a deeper correction in the process. But for now, the October highs are clearly a pivotal level for traders to monitor.