The Expert Podcast

Here's an interesting development from the financial industry about trading lumber. This is one of the first major developments in lumber finance that's happened in decades, maybe even a century. It used to be that lumber prices and lumber futures were sold in rail car volumes. Now, they're breaking it down into truckload volumes. There's a new contract that you can trade that will sell two-by-four lumber batches in smaller loads with a central delivery point.

What does that mean? It means that there's a new lumber futures product, and it's trying to eliminate some of the price swings of the larger thousand-board-foot security. The ticker symbol for this will be LBR, and it will represent a truckload of boards instead of a rail car. The delivery point is Chicago rather than a remote Canadian rail junction. The specification will allow for Eastern Spruce, Pine, and Fir instead of only Western Fir like Doug Fir.

This is going to be an interesting development where traders and lumber yards can get a more specific read on lumber prices because it's a smaller batch. It's about a quarter of the volume of wood for a truckload instead of a rail car, and it's FOB Chicago rather than out of the country, which has to go through customs. The futures is going to start next month, and the current contract expiring in May will be the last listed under existing specs. They’re going to phase out the Canadian rail car in about a year.

The change is aimed at drawing home builders, lumber yards, and sawmills into a market with limited participation. This way, it's more reliable because you don't have to worry about customs, limited species of wood, or a larger volume. The old contract could swing significantly—it may have fluctuated from $176,000 and by $20,000 a day, up or down. So this is a big deal. This is a completely different way to peg the market for lumber, and it will make a difference in how lumber yards buy and sell goods.

It'll do that because the lower price will bring in more speculators and liquidity to the market, where it’s not just the big players that can swing a $200,000 contract. Maybe now it’s a $40,000 or $50,000 contract. This way, smaller companies like home builders and small lumber yards can buy these futures and trade futures to help hedge their bets.

So, if you're building a house, by the time you get your permits, finalize contracts with the homeowner, and lay your footings and foundations, you start buying your lumber package. If you've pegged or hedged your bets for lumber futures, it'll protect you from too much volatility and uncertainty in lumber costs. You may not have to buy the contract, but if you purchase an option on the contract, at least you'll know the maximum you'd have to pay. It'll help smooth out the peaks and valleys of your costs.

If you're a builder or lumber yard, let us know what you think about this new pricing and how it works. The current lumber package really requires you to build six houses to buy that contract. Many builders only build one or two at a time. This new pricing, the LBR security, allows you to build one house at a time or maybe two, depending on the size. It also enables you to hedge your future expenses, at least for part of the lumber package. Your labor costs may still be volatile, but at least your lumber package will be established, and you'll know both your upside and stop-loss for the lumber package.