Lumber prices have fluctuated wildly over the past few years as pandemic-related supply chain disruptions and housing booms have thrown supply-demand patterns up and down. Since March 2020, lumber prices shot up more than 250% — only to crash back down to earth before repeating the pattern in recent months.
The unpredictable nature of lumber prices has caused confusion since the pandemic began, and contractors have been forced to navigate their businesses amidst an extremely volatile financial minefield.
Fortunately for construction professionals, a new lumber futures trading contract may soon reduce price volatility in the market.
CME Group recently announced a new lumber futures contract that will begin trading on August 8, 2022. The new contract replaces an existing lumber contract and introduces a number of changes for traders that should result in positive effects for the construction industry.
Price volatility can be painful in either direction: If a supplier agrees to sell an order of lumber just before the price skyrockets, they’ll miss out on substantial profits. Inversely, if a contractor purchases lumber only for the price to suddenly bottom out, they may be forced to swallow the losses instead of seeking cheaper lumber elsewhere.
Lumber’s volatility has been so severe in recent years that purchase agreements have struggled to keep up with the pace of price swings. Last summer, the price of lumber tumbled from its all-time-high price of nearly $1,700 per board feet by over 60% in a span of just two months.
Contractual safeguards such as escalation clauses can help in scenarios like this, but some contractors have found themselves in difficult situations regardless.
Just months ago, a North Carolina lumber supplier sued one of its customers when the contractor refused to accept an $800,000 delivery of lumber after the price of lumber fell 67% from the agreed purchase price. The contractor allegedly declined to honor the purchased agreement and instead sourced cheaper lumber from another vendor.
Fortunately, CME Group’s new lumber futures contract may bring some stability to the market.
The new contract replaces an existing one and introduces three key changes that are anticipated to increase trading volume and reduce volatile price swings:
- Reduces the minimum lumber order size by 75%: This allows trucks to transport lumber instead of only railcars and should, in theory, increase trading volumes by at least four times and potentially as much as ten times according to traders.
- Purchased lumber will be delivered to Chicago instead of Canada: This offers a more central trade destination that may be more accessible to buyers.
- Allows for a greater variety of lumber to be purchased: Eastern species will now be available in addition to existing western species, increasing the total quantity of available lumber to be traded.
“The new Lumber futures and options contract reflects changing production patterns which will make it a more effective risk management tool for market participants,” according to CME Group’s description of the new contract.
These changes should encourage more buyers and sellers to become market participants, and as trading volume increases, price volatility is expected to decrease. While the price of lumber will continue to rise and fall naturally, it should be less erratic and rollercoaster-like as time goes on.
While futures trading is risky for investors, the end result for contractors and suppliers should be smoother prices, less volatility, and more predictable project budgets and cash flows.
Up-to-date prices on several lumber units, including dimensional lumber and plywood, can be found with the Construction Materials Price Tracker, which also shows price trends over time.