Lumber: An Illiquid Market but a Critical Economic Indicator

Lumber is a critical industrial commodity for infrastructure and new home building. Like many other industrial raw materials, lumber trades on the CME futures exchange. However, the wood futures market has suffered from low volume and open interest for years. Open interest is the total number of open long and short positions in the futures arena.

In 2022, the CME delisted the random-length lumber futures contract and introduced smaller, more flexible physical lumber contracts to attract more hedging and trading activity. So far, the physical contract has not caused volume and open interest to increase, leaving lumber a critical industrial benchmark without an active futures trading market.

Lumber is a volatile commodity because of its low liquidity. Price explosions and implosions over the past years resulted from bids disappearing during selloffs and offers to sell evaporating during rallies. While lumber futures are untradeable, some proxies reflect wood’s price action.

No liquidity in the lumber futures arena

• Each CME’s physical lumber contract calls for 27,500 board feet, far smaller than the random-length contract for 110,000 board feet.
• The current number of open long and short positions in the physical lumber futures market is below 6,300 contracts. The delisted random-length contract that was much larger peaked at over 14,000 contracts in 2008.
• At $556, the lumber futures market’s total value is around $93.7 million.
• Daily volume is below 2,000 contracts. Illiquid markets experience far more significant price variance, inhibiting hedging and other activity.

Weyerhaeuser tracks lumber prices

• Weyerhaeuser Company (WY) operates as a real estate investment trust in the lumber market, with timber properties in the United States and Canada.
• At $31.84 per share, WY’s market cap is over $23.5 billion. An average of more than 364 million WY shares change hands daily.
• WY pays shareholders a $1.65 annual dividend, translating to an over 5% yield.
• WY shares are highly sensitive to lumber prices.

WOOD is a liquid lumber-related ETF

• The iShares Global Timber & Forestry ETF (WOOD) owns shares of lumber-related companies.
• At $76.07 per share, WOOD has a $206.3 million market cap. Over 9,000 WOOD shares change hands daily.
• WOOD pays shareholders a $1.44 dividend, equating to a 1.9% yield.
• WY is a top holding of the WOOD ETF.

CUT Tracks lumber prices

• The Invesco MSCI Global Timber ETF (CUT) is a smaller lumber-related ETF than WOOD.
• At $30.54 per share, CUT had $52.5 million and trades an average of just under 5,000 shares daily.
• CUT’s $0.78 dividend translates to a 2.5% yield.
• WY is also a top holding of the CUT ETF.

Lumber is a leading economic indicator

• The path of least resistance of lumber prices is a crucial economic factor.
• Lumber tends to rally when interest rates are falling and vice versa.
• Lumber’s low liquidity often causes significant price moves in the futures market that signal the path of least resistance for other industrial commodities.
• Lumber futures are an untradeable barometer for many other commodities and markets across all asset classes.
• Never trade lumber but watch the price action like a hawk.
• Since lumber prices trend, WY, WOOD, and CUT can be acceptable proxies.

Thanks for reading, and stay tuned for the next edition of the Tradier Rundown!