ECONOMY

Plunge in Lumber Contracts Signals Turning Point for Wood Rally

While builders are still paying record-high cash prices for lumber, the futures market is signaling that the historic rally could be coming to a close.

The Lumber contract for July delivery fell $63 on Tuesday, the maximum permitted by the Chicago Mercantile Exchange, with the price sinking to $1,264 per 1,000 board feet. That’s the seventh straight session of falling prices for the futures contract, marking the longest streak of declines since September. Lumber’s most-active futures contract is down 27% from its May 10 peak of $1,733.50, a level more than four times above prices a year ago.

While the drop indicates market weakness, with traders saying the preceding rally went too high, builders who need to purchase wood for summer projects are still paying top dollar due to tight supplies at sawmills and strong demand.

The Fastmarkets Random Lengths U.S. Framing Lumber Composite Index soared to a record $1,495 per 1,000 board feet on Friday, the most recent pricing. That is up 6% from the week prior and nearly four times the price of a year ago. A composite index for oriented strand board, a plywood substitute product, jumped 3% from the previous week to $1,426 per 1,000 square feet, five times more than a year ago.

“The mills have this order file where they’ve sold the physical production through the middle of June,” said Greg Kuta, chief executive officer of Westline Capital Strategies Inc., an Ohio-based firm that specializes in lumber trading strategies. “They don’t have to come to the open market here and take counteroffers on their physical cash for at least two to three weeks.”

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