Explain why Retail Lumber Increases When CME Lumber Downward?

2 years ago

Been watching retail lumber prices and lumber commodity prices (tracked by LBS) for about 18 months. When LBS goes up - retail in my area (central TX) follows within about 2 weeks. When LBS goes down, LBS follows albeit a little slower - about 3, maybe 4 weeks behind. That behavior has been pretty consistent and is what I would consider correlated.

On 1/13/22, LBS hit a peak after which it has been on a slight downward albeit somewhat volatility trend thru to the present.

However this time, 5 weeks since the peak, local retail lumber prices did not even flatten after the usual delay - they've in fact continued to climb. Steeply.

I realize there's a LOT of info these days on various factors affecting lumber. I'm asking about the recent split in retail pricing and the underlying commodity pricing which had previously been roughly correlated. (and maybe this is just local to my area)

thanks,

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Jeffrey R. Grenz, General Contractor

2 years ago

last modified: 2 years ago

Futures is wholesale board feet of cut lumber at box car quantity (approx 6 2000sf homes). A home lumber pack includes composite lumber - plywood, OSB, laminated beams and composite joists that have a different make of of costs due to more processing and resins added to the products. These were expected to rise 25-35% this month. Likely also included are trusses, which are lumber, nail plates (in short supply) and manufacturing/assembly of trusses. More labor & transportation impacts included in these items. If you're trying to time a purchase, you may incur costs of holding your project longer, delaying move in and incurring added rent, or other items that increase during that time. Its a difficult balance.

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Jeffrey R. Grenz, General Contractor
2 years ago
LBS is wholesale spot lumber pricing for those who need to complete a short order or sell an overage. Lots of speculation until the contract expires, then you have to take possession or sell b4. Need a box car load?

Lumber yards buy on longer contracts direct from mills. They sell at retail, buy via box car.

There is a lag. Slower on the downside until they replace higher priced inventory depending on retailer.
HU-528228756
Original Author
2 years ago
I think (and I may have this wrong) that LBS tracks the aggregated CME contracts in their respective final spot pricing periods (e.g. last 2 months of a 12 month window) - e.g. fairly close to contract close and is not influenced by early non-spot pricing for given specific contract periods.

I don't know what % of lumber that makes it to yards gets there thru other means or via CME. But if CMEs ratio in that supply chain has changed recently, that might explain the non-correlated data we started seeing 5 weeks ago vs the correlated behavior of the past 18 months (even the crazy LBS spike in May 2021 was very accurately correlated to retail).

The blue line represents a generic home lumber package at retail. The red line represents LBS closing prices for random boards. There are 2 vertical Y axis with a common date.

(Don't get caught up in the exact total retail price of the home lumber pack - the important point on the blue line is it's the same package and how it behaves relative to LBS)

We can see the 2-ish week retail delay on LBS upticks and the 3-4-ish week retail delay on LBS downturns. That's to be expected and rational. That is until the 2nd week in January when the 2 went separate directions...
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Naomi
2 years ago
We went under contract in December at 46k for our lumber package. Just got quoted today at 28k higher. Is a 60% increase reasonable? It’s seems quite off from how much the futures have increased.
Quite worried as we are just starting….but we’re stuck as construction loan requires completion in 12 months.
HU-528228756
Original Author
2 years ago
last modified: 2 years ago
Naomi,

Retail prices in my area are up about 100% since Dec 1 for a lumber package. LBS lumber commodity pricing is up about 25% since Dec 1. If you shift a month to the left to roughly account for supply chain lab, LBS is up from Nov to Jan by about 80%. At the end of the day the retail price is what counts and 60% seems a lot better than 100%.

There may be enough slack in your project schedule to allow for a pause of a month or two *if* it's a lower risk project and could still be constructed within a 1 year window. But it may incur other costs to pause (loan interest, fees on dumpster, etc.). And it's an uninformed 'bet' on retail prices being lower in another month or 2 which of course nobody knows. In more Northern locales, lumber demand will start picking up this Spring.
HU-528228756
Original Author
2 years ago
@Jeffrey R. Grenz

Good points - A house lumber package is pretty diverse including OSB, wrap, tape, maybe ZIP siding, Hardie, etc.

I don't have enough broken down data but yeah, there could be a large portion of the sustained growth in retail pricing may be beyond traditional 'boards'.
Naomi
2 years ago
Whoa….100%….that’s crazy. My builder said the lumber yard will adjust down at delivery if prices are lower. We’ve for this quote for 2 weeks, to decide what to do. But builder just said lumber is taking longer now, so we might not have the wiggle room.
PRO
Jeffrey R. Grenz, General Contractor
2 years ago
last modified: 2 years ago
OP - What is your source for the retail lumber pack cost?

@Naomi yes, that is possible. I don't have bids that match your dates but seeing

Numbers without trusses:

+33% 12/27/21-1/26/22

+88% Aug to Feb (there was a dip in August)

+19% July to Feb

Not surprised to see the margin increase from retail to wholesale with current mill production issues. Also a federal doubling of tariffs Nov 24 last year.

We have a ground breaking early April and another about June. My expectations is lumber will drop some by then but we pass through lumber costs..
Naomi
2 years ago
@jeffrey thank you for sharing your recent numbers. I am hoping the lumber is the worst of our problems…but I’m not optimistic as we’re only 2 weeks into the build. Sigh.
Amr
2 years ago
@Naomi - your $46K quote above was for how many sq feet home?
Naomi
2 years ago
@Amr A single story home of 2235 sq ft. 10' ceilings. Board & batten on the front (brick sides/back) with some cedar posts/beams. I still have no update on final pricing as we are awaiting delivery.

Explain why Retail Lumber Increases When CME Lumber Downward?

Jeffrey R. Grenz, General Contractor

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Explain why Retail Lumber Increases When CME Lumber Downward?

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