Lumber Futures Offer New Insights to Residential Construction’s Recent Slowdown

In July 2022, the economics team at ConstructConnect reported that the CME Group, the holding company to the Chicago Mercantile Exchange, Chicago Board of Trade, and New York Mercantile Exchange, was soon to bring a new lumber contract product to market. This new product would enable the trading of lumber options in truckload, rather than railcar, quantities.

It would also include more species of lumber, ending the exclusive use of only Western species of wood. The smaller size of this new trading option was expected to increase the number of contracts executed and bring more users to the exchange. These changes were expected to more accurately gauge the market, and thus the price, for lumber.

In its initial months of trading, CME’s new lumber futures (ticker “LBR”) market has managed to capture a significant slowdown in lumber demand. January 2023 lumber futures, as of January 4, 2023, were quoted at $475, a decline of more than 26% from a late October high of $643.50. The current price is the result of a slow and steady decline in the January contract price and marks a nadir over the four-month listing period of the contract. January futures contracts expire on January 16, 2023.

It is unlikely a coincidence that this decline aligns closely with the recent and significant weakening in both new single-family housing permits and home purchase mortgage applications. While this recent decline is almost certainly reflective of the slowing of the residential construction market, it is important to note that lumber is consumed in other market verticals, including paper making, flooring, wall paneling, and furniture, among others.

More distant future contracts suggest that demand may continue to struggle through much of 2023. Both May and July futures data were reporting recent pricing weakness as of the time this piece went to press.