Timberland Investment
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Real Estate Is Going Higher. Just Ask Lumber.

Real Estate Is Going Higher. Just Ask Lumber. | Timberland Investment | Scoop.it

When it comes at the cost of lumber, one can glean a lot of useful information about the state of the home building market, particularly in the United States. It turns out that market for wood provides robust confirmation of trends or at times can signal a market top or bottom or pending reversal of fortune in particular sectors of the housing market.
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Lumber has traded in a range between $214.40 and $338.70 per 1,000 board feet since the beginning of 2015. It closed last week around $325. As the weekly chart of lumber futures that trade on the Chicago Mercantile Exchange highlights, the price of lumber has appreciated since September 2015. The move in lumber has been slow and steady with the commodity making higher highs and higher lows. The weekly historical volatility, a measure of the variance of the lumber market, currently stands at 17.44%. Considering this metric was at almost 38% in February 2016, and was at over 40% in October 2015 and June 2015, the current level price volatility in lumber is comparatively low. Lumber is now trading at close to the highest price since 2014, but the price of wood has crawled higher. Higher lumber prices are a confirmation of a trend that we see in the housing markets across the United States.
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The price of wood peaked in 2004 at $464 per 1,000 board feet and began a multi-year slump. While the housing market crashed in 2008, lumber had already been falling for four years by the time the mortgage-backed securities issues caused massive headaches for homeowners and banks alike. Lumber futures had dropped to under $300 by 2007 while the buying and lending merry-go-round continued to send home prices to astronomical heights Lumber was screaming at markets that the housing bubble was about to burst. While markets were reeling from the aftereffects of the financial crisis of 2008, the price of lumber bottomed in early 2009 amidst a flurry of mortgage defaults as property prices dropped below loan values. The lumber price has appreciated steadily since, even as foreclosures and the aftermath of the crisis played itself out.

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Timber ETFs: Rebuilding After Hurricane Sandy

Timber ETFs: Rebuilding After Hurricane Sandy | Timberland Investment | Scoop.it

Lumber prices reached a 19-month high Wednesday as traders anticipated a spike in demand to repair the damaged homes situated in Hurricane Sandy’s path.

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Most Chicago Mercantile Exchange lumber futures hit the daily trading limit of $10 per thousand board feet and halted trading at those levels on Wednesday, with the benchmark January futures adding a little over 3.0% to end at $331.2. Lumber futures are trading relatively unchanged Thursday at $331.1.

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While ETF investors can’t directly gain exposure to lumber futures, investors can follow timber equities through the Guggenheim Timber ETF (NYSEArca:CUT) and the iShares S&P Global Timber & Forestry Index Fund (NYSEArca: WOOD).

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UPDATE: West Fraser Timber Down 2% Amid Reports Lumber Prices May Tumble

UPDATE: West Fraser Timber Down 2% Amid Reports Lumber Prices May Tumble | Timberland Investment | Scoop.it

West Fraser Timber Co Ltd (WFT.TO) may be a stock to watch as Bloomberg cites Forest Economic Advisors LLC as saying that lumber futures may tumble as much as 25% from a seven-year high as output increases in Canada, the world's biggest exporter. WFT rose in the early minutes of today's session to as high as $71.90 but it soon turned negative and is now down more than 2%.


The price may touch US$300 per 1,000 board feet in 2013, Paul F. Jannke, a principal at the consulting company, said in a telephone interview on Dec. 27. In mid-October, he correctly forecast the rally. Futures on the Chicago Mercantile Exchange on Dec. 26 reached $399.50, the highest since April 2005.

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Jack D Bridges's curator insight, January 1, 2013 11:19 AM

Ah, a good stub of an article to read (leave aside the WFT.TO news), because it talks about timber market price dynamics. FEA may be right about lumber futures--we've seen a huge rally in most N.American wood baskets due to forecasts of a continued rebound in domestic housing construction/demand. 

 

Yes, timber harvests across Canada may indeed ramp-up and help push down lumber pricing...but how much of Canada's harvest is shipped to China/Japan/Korea? If US housing starts stay steady, and we see a rebound in single family home new construction (which uses 3x as much wood as multi-fam), a big surge in supply should be balanced by the amount exported to Asia, and the return to normalized home construction in N. America. This scenario relies on continued economic growth in Asia (say, China at a self-proclaimed 7% GDP growth, and Japan muddling through their 25+ year deflation puzzle), but I don't think it's overly optimistic.  Sure, lumber prices are vulnerable after a massive (speculative) rally, but as long as other input costs stay under control (crude under $100 barrel would be nice), I wouldn't expect anything but a reversion to the mean. Tumble? Makes for a good headline, but not much else. 

JDB