© Bloomberg. A customer wearing a protective mask views lumber for sale at a Home Depot Inc. store in Daly City, California, U.S., on Monday, Nov. 16, 2020. Home Depot Inc. is scheduled to release earnings figures on November 17. Photographer: Josie Norris/Bloomberg
(Bloomberg) — Lumber roared to a fresh record high on Monday, with traders in bidding wars after the Chicago Mercantile Exchange removed limits on how high some futures prices could go.
Futures exchanges regulate how much a commodity can swing on one day, to keep volatility in check. But the rules also say that for lumber, contracts near expiration lose those limits. Wood supplies are so tight that market participants are taking advantage of the newly liberated May contract, driving prices up by nearly $100 to $1,600 per 1,000 board feet. By contrast, the most-active July contract rose by $42, the maximum allowed.
The aggressive buying of May futures will continue up until the contract ends on May 14th, said Stinson Dean, chief executive officer of Deacon Lumber Co.
“The market has been trying to find equilibrium and no limits allows that,” he said.
Monday’s surge is the latest sign of the stunning demand for wood that’s emerged as the U.S. economy picks up. It’s peak home-building season, and Americans, tired of being cooped up in cramped spaces during the pandemic, are seeking to purchase bigger homes. That’s clashing with a lumber supply chain that’s being dogged by everything from trucking delays to worker shortages.
Other commodities have similar rules about exchange limits coming off, and it’s common, occurring whenever a futures contract is expiring. But lumber is seeing the extreme bump in prices while others are not because of the tightness in the market.
Part of the price increases are also due to traders covering short positions. Brian Leonard, a lumber analyst for RCM Alternatives in Chicago, said it’s possible for the May contract to extend gains to as high as $2,000.
Some lumber buyers “have no purpose being hedged right now, so they have to get out of their position,” Leonard said. “They don’t have enough inventory.”
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