The unpredictable nature of lumber prices has given rise to confusion amongst buyers and sellers who have been forced to navigate their businesses amidst extreme volatility. Fortunately for traders, the Chicago Mercantile Exchange (CME) Group has recently launched updates to the lumber futures & options on a futures contract to reduce price volatility in the market.
The first trade date when the updated contract came into effect, replacing the existing contract, was 8th August 2022. With this contract, CME has introduced several features that reflect the changing production patterns, making it an even better & effective risk management tool.
Benefits & Features of the New CME Lumber Futures Contract (LBR)
A single contract refers to:
- 27,500 board feet (1 truckload, physically deliverable to the Chicago Switching District). Previously, it was 110,000 mbf, fit for 1 railcar deliverable to the FOB Mill Prince George.
- Prices are USD per 1,000 board feet (mbf) with no changes from the previous version.
- Minimum price fluctuation of $0.50 per mbf = $13.75 (futures) and $0.10 per mbf = $2.75 (options). Previously, it was $0.10 per mbf for futures.
Currently, the last listed contract is the May 2023 contract. The price limits for the futures contract are to be adjusted daily based on the 10% up or down of the prior day’s settlement for the contract month. There will also be circuit breakers established at 5% determined by the % move during a rolling window of 60-minutes. The market will pause for 2 minutes before trading is again resumed if the market moves 5% within that window.
The new contract specifically boosts 2x4 trading in a global market and enables tailored risk management strategies by introducing smaller loads and a central delivery point. Some of the main features of the contract include:
- Reduced minimum order size of lumber by 75% so that even trucks can transport instead of only railcars. Smaller quantities would mean that lumber yards and home builders can also participate, thereby democratizing access.
- Delivery of the purchased lumber to Chicago instead of Canada so that buyers have a central trade destination that is easily accessible.
- Allowing Eastern SPF (Spruce, Pine & Fir) trade, along with the varieties that grow in the West.
- The EFP (Exchange of Futures for Physicals) Window changed to two business days before the 26th day of the contract month.
With these changes, the hope is to increase the trading volume, thereby decreasing the price volatility of lumber. While the lumber price will continue to rise & fall periodically, hopefully, it will become less erratic in the long run. Some of the core benefits that these new features can bring to the trade include:
- Precise Hedging: This allows traders to manage risk to Chicago-delivered lumber with the help of a futures contract that reflects prices specifically for the location, one truckload at a time.
- Market Integrity: CME Clearing protects market integrity and mitigates the risk of default by behaving as a counterparty to every trade.
- Flexible Execution: The CME Globex platform makes electronic trading of contracts possible. CME ClearPort, on the other hand, allows traders to negotiate and execute block trade on the platform as well. The futures and options contracts can also be privately negotiated as block trade with the help of brokers, based on requirements such as minimum size and eligibility, and submitted for clearing to CME ClearPort.
The changes made in the new seller’s choice contract are to draw sawmills, lumber yards, speculators, and home builders into a market with limited participation but one which acts as a reliable barometer for the housing market and building costs.
Based on CME’s theory behind coming up with the updated contract, a futures contract meant for one-quarter of the wood amount will result in almost four times the volume of futures contracts required to meet the current demand. It is the hope for traders that 75% of cheaper futures contracts will add liquidity to the market and invite speculators.
Timber Exchange has a monthly updated global Market Data Hub that offers production, consumption, inventory and export-import levels of main lumber markets like the USA, China, Sweden, Japan, Finland, and France, amongst others, along with a global price index. By subscribing to the Market Data Hub by Timber Exchange, you can keep track of the global markets while you invest in lumber futures. For more information, visit https://www.timber.exchange/market-data-hub.