How To Trade Lumber Futures

The Chicago Mercantile Exchange (CME) is the world's largest derivatives marketplace, offering the public a vast array of options and futures contracts. Several of the CME's featured products face the equity, debt, agricultural, energy and metal asset classes. Among these listings is a softwood industry staple known as random length lumber futures.

What Are Lumber Futures?

Lumber futures are financial derivatives that furnish participants with leveraged softwood market exposure. Hedgers and speculators alike trade lumber futures to manage risk or capitalise on pricing volatility.

When it comes to trading softwoods, CME random length lumber futures are the go-to market. In fact, the CME was the first to offer forest products via the introduction of the random length lumber futures contract in 1969. Since then, CME futures have played an integral role in the lumber industry of North America, which is valued in the neighborhood of US$10 billion.[1]

Lumber Futures Specifications

Below are the official specifications for CME random length lumber futures[2]:

  • Symbol: The symbol for the random length lumber futures contract is "LBS."
  • Availability: LBS contracts are available for trade on the CME Globex electronic exchange. Also, the CME ClearPort offers over-the-counter (OTC) clearing services.
  • Hours: On the CME Globex, the lumber futures trading day runs from 10:00 AM to 4:05 PM EST, Monday through Friday.
  • Contract Size: The LBS contract unit is 110,000 board feet or approximately 260 cubic meters.
  • Denomination: Lumber prices are quoted in U.S. dollars (USD) and cents per 1,000 board feet (mbf).
  • Tick Size: The minimum price fluctuation for LBS is $0.10 per mbf.
  • Tick Value: The LBS tick value is US$11.00.
  • Listings: The contract month for LBS is either January, March, May, July, September, or November. Contracts are listed for seven consecutive months.
  • Expiration: Trading is terminated at 1:05 PM EST on the first business day ahead of the 16th of the contract month.
  • Settlement: LBS futures are settled via physical delivery. This means that holders of LB contracts at expiry are required to assume possession or produce a quantity of lumber that is "double end trimmed, four side surfaced, eased edge and of minimum dressed dimensions as specified by the American Softwood Lumber Standard."[3]

CME lumber futures afford participants secure, efficient exposure to the softwood market. For producers looking for protection from the downside risk of volatile lumber prices or speculators interested in profiting from beneficial price movements, the CME LBS contract is an ideal mode of trade.

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Trading CME Random Length Lumber Futures

When trading the futures markets—whether it's soybeans, crude oil, or lumber—there are two important things to keep in mind.

Expiration

All futures contracts are perishable securities. Each has an expiration date and a finite shelf life. This is very different from stocks or forex currencies, which may be held in perpetuity and are not subject to contract rollover.

Leverage

Futures contracts are leveraged financial instruments. Accordingly, traders are able to boost their capital efficiency by controlling positions in the live market much larger than their initial monetary outlay. Although the typical 3-12%[4] margin requirements local to futures can help generate extraordinary returns, it can also contribute to significant loss.

Two Necessities When Trading

In order to trade the CME LBS contract, you must first obtain a few items. Aside from an internet connection, computing power and risk capital, there are two things that you'll need to become active in the market:

Brokerage Service

To trade futures, the services of a futures brokerage are required. A futures broker facilitates its clientele's transactions through extending margin and providing market access. Unless you purchase or lease a membership directly from the exchange, a broker is necessary to trade LBS futures.

Trading Platform

The software trading platform is an integral part of any self-directed trader's operation. Trading software provides the user real-time market data, charting applications and order-entry functionality. Unless you're utlising a full-service brokerage, obtaining a trading platform with CME Globex accessibility is vital to trading lumber futures.

Advantages Of Lumber Futures

When compared to other financial products, futures traders benefit from a collection of distinct advantages. Ranking near the top of the list are the availability of leverage, consistent volatility and robust liquidity.

Perhaps the greatest advantage of trading CME LBS futures is direct market exposure. With the LBS contract, one can engage the price of lumber directly, not indirectly per trading options such as sectoral NASDAQ stocks or geared ETFs. This advantage eliminates negative elements such as tracking errors, fund maintenance fees and vastly greater margin requirements.

Key Market Drivers Of Lumber Futures

CME random length lumber futures are subject to a host of primary underpinnings. Two of the largest are the evolving supply/demand relationship and strength of the USD.

Supply And Demand

Generally speaking, commodity prices hinge on the relative levels of supply and demand. In cases of rising supply and shrinking demand, prices typically fall. Conversely, as demand rises and supplies decrease, prices are prone to increase. While these tendencies are not exhibited 100% of the time, they do serve as guiding tenets of commodity futures prices.

For forest products and softwoods, the world's leading producer and exporter is Canada. The country's sawn wood exports totalled US$7.7 billion for 2020, approximately 21% of the global supply.[5] From a supply side perspective, any large-scale disruptions to the Canadian lumber industry can quickly send CME lumber futures trending.

On the demand side of the equation, the real estate and construction industries are crucial to softwood valuations. For instance, a spike in housing starts suggests growing demand from homebuilders, a scenario that can send the market price of lumber dramatically higher.

A premier example of the lumber supply/demand dynamic came during the COVID-19 pandemic of 2020/201. Faced with a reduced supply of sawn lumber and a hot U.S. real estate market, CME LBS futures reached record highs above US$1,700 (10 May 2021).[6] However, the gains were soon pared as receding demand from homebuilders prompted a June 2021 all-time record 40% plunge in lumber futures prices.[7]

Strength Of The USD

Because the U.S. dollar is the world's reserve currency, most commodity prices are denominated in USD. Subsequently, the price of assets such as crude oil, soybeans, natural gas and lumber depend on the relative strength of the dollar.

As a fundamental rule, a devalued USD typically leads to an uptick in commodity prices. Thus, dovish or hawkish monetary policy from the U.S. Federal Reserve (Fed) can positively or negatively impact lumber prices.

For example, the Fed's COVID-19 era institution of near-0% interest rates and aggressive debt purchases contributed to a devalued USD and rising commodity prices. In the case of November 2021 CME LBS futures, the bearish USD Index of October 2020 to May 2021( -4.2%)[8] spurred a 134%[9] rally in lumber prices for the same period. Essentially, as the USD surrendered market share, lumber futures saw robust, bullish participation.

Summary

Random length lumber futures (LBS) listed on the Chicago Mercantile Exchange (CME) offer hedgers and speculators an array of unique trading options. Among the key market drivers of CME lumber futures are Canadian exports, housing starts, interest rates and demand from homebuilders.

For retail participants, the LBS contract is available for public trade on the CME Globex. The offering features consistent liquidity and volatility, both conducive to efficient trade. All one needs to get involved with LBS futures is the service of a futures brokerage, trading platform and risk capital.

Leverage: Leverage is a double-edged sword and can dramatically amplify your profits. It can also just as dramatically amplify your losses. Trading foreign exchange/CFDs with any level of leverage may not be suitable for all investors.

References

1

Retrieved 25 Oct 2021 https://www.cmegroup.com/trading/agricultural/files/AC-243_RanLenLumberBrochure.pdf

2

Retrieved 25 Oct 2021 https://www.cmegroup.com/markets/agriculture/lumber-and-softs/random-length-lumber.contractSpecs.html

3

Retrieved 25 Oct 2021 https://www.cmegroup.com/content/dam/cmegroup/rulebook/CME/II/200/201/201.pdf

4

Retrieved 25 Oct 2021 https://www.cmegroup.com/education/courses/introduction-to-futures/margin-know-what-is-needed.html

5

Retrieved 25 Oct 2021 https://www.worldstopexports.com/sawn-wood-exports-country/

6

Retrieved 25 Oct 2021 https://www.cnbc.com/2021/05/19/lumber-futures-fall-for-an-eighth-straight-day-as-speculation-that-took-prices-to-a-record-unwinds.html

7

Retrieved 25 Oct 2021 https://www.cnbc.com/2021/06/30/lumber-prices-dive-more-than-40percent-in-june-biggest-monthly-drop-on-record.html

8

Retrieved 25 Oct 2021 https://www.tradingview.com/chart/O4WFjll6/

9

Retrieved 25 Oct 2021 https://www.fxcm.com/za/research/forex-charts/

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