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Lumber Futures Explained

By Fred Banbury 29 June, 2023 2 mins read

Lumber futures contracts are derivatives that commit to buying or selling specific amounts of wood at a fixed price and on a specified date. Hedgers can use them to protect their portfolios from the negative impact of fluctuating lumber costs, while traders may profit from favorable price movements.

The lumber market is driven by supply and demand, which can shift rapidly based on changes in weather conditions, environmental policies and interest rates. The increase in housing starts can drive the price of lumber up dramatically, while weather-related logging or mill closings could reduce supply.

Two other factors can drive the price of wood higher: a weaker US dollar and a higher rate of inflation. A dovish, or hawkish, shift in the Fed's monetary policy could also help or hurt the lumber market.

Wood prices are usually denominated as dollars and tend to move together with other commodities like oil, cobalt, corn, or soybeans. Many other currencies, unlike the US Dollar, have a floating exchange rate. This means they can move faster and more widely than the US dollar.

Lumber futures have surged over $1,500 per 1000 board feet in the past year, and are now at their highest trading levels in three-years. A global supply shortage is driving the YOY spike, which is pushing up prices of raw materials, shipping container and just-in time distribution networks.

While this trend has been positive for the overall economy, it is not keeping up with the rising demand as home owners upgrade their properties to accommodate higher interest rates and increased renovations. The recent surge in lumber prices has slowed down the housing recovery and is putting pressure on the real estate industry, according to Chris Robinson, analyst at the Commodity Channel.

Lumber prices have been fluctuating over the last few months. In early May 2021, the random length framing wood price soared above $1,500 for 1,000 board feet. The price then sank to around $400 per thousand board feet by August, before recovering above $700 by October 2021.

As of the 3rd of January, random length lumber cost $374 for 1000 board feet. This is down from its peak of $1733 a few months ago and down 67% compared to $1,148 one year prior. This is a far cry from the $400 pre-pandemic price, but still a 50% increase since the bottom of previous cycles.

As mortgage rates continue to rise, and as the boom in home renovations stalls, there is a cyclical downward trend on the lumber market. While prices are likely to decline again in the coming months, it is possible that this downturn will be short-lived and that the lumber market can rebound once the economy improves. But investors should wait until then to avoid lumber futures speculation and instead look for stocks with good exposure in the lumber market.

FAQ

Can bonds be traded

Yes, they are. Bonds are traded on exchanges just as shares are. They have been doing so for many decades.

The difference between them is the fact that you cannot buy a bonds directly from the issuer. They can only be bought through a broker.

Because there are fewer intermediaries involved, it makes buying bonds much simpler. You will need to find someone to purchase your bond if you wish to sell it.

There are different types of bonds available. Different bonds pay different interest rates.

Some pay interest annually, while others pay quarterly. These differences make it possible to compare bonds.

Bonds are a great way to invest money. For example, if you invest PS10,000 in a savings account, you would earn 0.75% interest per year. The same amount could be invested in a 10-year government bonds to earn 12.5% interest each year.

If you put all these investments into one portfolio, then your total return over ten-years would be higher using bond investment.

How can I find a great investment company?

A good investment manager will offer competitive fees, top-quality management and a diverse portfolio. Commonly, fees are charged depending on the security that you hold in your account. Some companies have no charges for holding cash. Others charge a flat fee each year, regardless how much you deposit. Others charge a percentage of your total assets.

It's also worth checking out their performance record. You might not choose a company with a poor track-record. Companies with low net asset values (NAVs) or extremely volatile NAVs should be avoided.

Finally, it is important to review their investment philosophy. To achieve higher returns, an investment firm should be willing and able to take risks. If they aren't willing to take risk, they may not meet your expectations.

What is a REIT and what are its benefits?

A real-estate investment trust (REIT), a company that owns income-producing assets such as shopping centers, office buildings and hotels, industrial parks, and other buildings is called a REIT. These companies are publicly traded and pay dividends to shareholders, instead of paying corporate tax.

They are very similar to corporations, except they own property and not produce goods.

How does Inflation affect the Stock Market?

The stock market is affected by inflation because investors need to pay for goods and services with dollars that are worth less each year. As prices rise, stocks fall. That's why you should always buy shares when they're cheap.

Who can trade on the stock market?

The answer is yes. But not all people are equal in this world. Some people are more skilled and knowledgeable than others. They should be recognized for their efforts.

There are many factors that determine whether someone succeeds, or fails, in trading stocks. If you don’t know the basics of financial reporting, you will not be able to make decisions based on them.

These reports are not for you unless you know how to interpret them. You must understand what each number represents. And you must be able to interpret the numbers correctly.

You will be able spot trends and patterns within the data. This will enable you to make informed decisions about when to purchase and sell shares.

If you're lucky enough you might be able make a living doing this.

How does the stock markets work?

When you buy a share of stock, you are buying ownership rights to part of the company. Shareholders have certain rights in the company. He/she is able to vote on major policy and resolutions. He/she has the right to demand payment for any damages done by the company. He/she can also sue the firm for breach of contract.

A company can't issue more shares than the total assets and liabilities it has. This is called "capital adequacy."

A company with a high ratio of capital adequacy is considered safe. Low ratios can be risky investments.

Statistics

Individuals with very limited financial experience are either terrified by horror stories of average investors losing 50% of their portfolio value or are beguiled by "hot tips" that bear the promise of huge rewards but seldom pay off. (investopedia.com)
Ratchet down that 10% if you don't yet have a healthy emergency fund and 10% to 15% of your income funneled into a retirement savings account. (nerdwallet.com)
"If all of your money's in one stock, you could potentially lose 50% of it overnight," Moore says. (nerdwallet.com)
The S&P 500 has grown about 10.5% per year since its establishment in the 1920s. (investopedia.com)

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How To

How can I invest into bonds?

An investment fund is called a bond. Although the interest rates are very low, they will pay you back in regular installments. You can earn money over time with these interest rates.

There are many ways to invest in bonds.