Congratulations to our new retail partner, Southern States in Winchester, for making their local newspaper. Full article here.
Frederick County Fair board member Matt Moulden, of Clear Brook, guided a truck driver Monday who delivered more than 50 cubic yards of mulch donated by Southern States in Winchester to the Frederick County Fairgrounds. The mulch will be used for animal bedding during the fair, which runs July 30-Aug. 4.
Full article available here.
This idea was discussed in more depth with members of my private investing community, Hecht Commodity Report.
Lumber is an essential ingredient when it comes to construction. Lumber is one of many industrial commodities that reflect economic conditions, and the price of wood can be highly volatile. While many speculators trade other raw materials in liquid futures markets, lumber is another story.
While lumber is not a popular trading market in the world of futures, the price is a significant barometer for the strength of industrial commodities. Over recent years, the price action in the wood market has been signaling that economic growth is rising and the demand for raw materials and the building blocks of construction is booming.
Lumber has tripled since September 2015
While I never trade the lumber futures market, I watch the price action like a hawk for clues about how the overall economic conditions are impacting the demand for a key industrial commodity. The ascent of the price of lumber over the past two years and eight months has been nothing short of astounding.
We've talked about the shortage of lumber for months here on the PRB Blog, but now everyone else is starting to catch on to the severity of the shortage.
Full article below and available here, courtesy of CNBC.
In the woods of central Maine, trees are gaining value by the minute, and lumber producers aren’t waiting a second. They are scrambling to expand production, build new facilities and hire more workers.
Lumber prices soared over sixty percent since early 2017, thanks to a perfect storm that hit Canadian supply. First tree-eating beetles, then forest fires, transportation issues involving a shortage of trucking and rail cars, and finally, last fall, U.S. duties imposed on Canadian lumber that amount to a 20 percent tax on the commodity.
It all adds up to opportunity in the eyes of Jason Brochu, co-president of Pleasant River Lumber, which operates two mills in Maine, employing 300 workers.
“I think with the duties that are in place, that’s given us a level of confidence that we didn’t have before, and with a level playing field, looking ahead, the confidence we’re at, we’re able to expand and produce more lumber,” said Brochu.
The plan, he said, is to invest $20 million in the company over the next two years, increase production by 50 percent and add up to 40 new jobs. A large dirt pit is already forming near the current mill in Dover-Foxcroft, as workers blast open new ground for additional equipment and machinery.
“You’re seeing it throughout the country where mills are expanding, or building new mills, and our industry is starting to grow to meet the increase in the demand,” said Brochu.
Demand for lumber is rising as the housing market continues on its slow recovery. Housing starts were up over 18 percent in May year-over-year, according to the U.S. Census.
Canadian lumber currently supplies about a third of all U.S. demand, and while U.S. producers are planning to expand, there are plenty of roadblocks on the way to new mills.
“We're going to need more land that you can harvest lumber on,” said Robert Dietz, chief economist for the National Association of Home Builders. “We're going to need more mills in terms of increasing the production capacity, and that requires materials, it requires regulatory approvals, permits, and hiring, and let's keep in mind the labor shortage has been affecting the housing market from a builder perspective. It's also going to limit the uptake of sawmill producers and transportation to increase that domestic supply.“
Brochu admits it is hard to find enough workers in today’s competitive market, and wages are therefore going up. It also takes steel and aluminum and machine parts to build new lumber production facilities, and the U.S. just levied heavy tariffs on Chinese imports of these products. Brochu said on that front, he is not concerned.
“It's not a factor in our decision-making. We're not looking ahead saying, Oh Jeez, stuff might be more expensive so we'd better hold back,” said Brochu. “We feel confident that we'll be able to put in the equipment we need at the price we need to put it in and expand and grow and we're gonna do well.”
But so far this year employment in the lumber industry has been flat, and production has not increased by very much. The cost of lumber has come off its record high in March but is still elevated substantially. That increases homebuilder costs, and builders are thus passing those costs on to buyers.
“In 2017 we were expecting the tariffs to increase home prices by about $1,300, $1,400, It's gone way beyond that, and currently the impact is about $7,500,” said Dietz.
Lumber supply is not keeping up with demand, so prices are unlikely to lose much ground in the short term. Producers still have a long runway ahead, which may be why they’re not concerned about the cost of expansion.
“We know there are going to be highs, we know there are going to be lows,” added Brochu. “What we try to react to is confidence. Things that are longer term give us confidence to spend money to improve the mill or expand the mill.”
An interesting article from MarketWatch today. Full article available here.
Lumber prices have rallied more than 30% this year to reach their highest level on record, as U.S. duties on imports of the commodity from Canada have contributed to tighter supplies and soaring home-construction costs. But analysts are growing wary of tall timber prices.
Among the possible threats is the World Trade Organization’s recent compliance with Canada’s request to examine the dispute by establishing two panels to rule on higher U.S. lumber duties. Technical analysts claim lumber prices are vulnerable because they’ve gotten above their fundamental value.
The most recent impetus to higher prices came last year, when the U.S. Commerce Department announced antidumping and antisubsidy duties on lumber imports from Canada. The duties were implemented in January and average 20.23% for most Canadian lumber producers.
July lumber LBN8, +0.66% settled at $602.70 per 1,000 board feet on Friday—a record high based on the most-active contracts, according to FactSet data going as far back as early November 1984. Prices trade nearly 35% higher year to date.
“The Canadian situation is clearly a factor here,” says Walter Zimmermann, chief technical analyst at ICAP, the world’s largest interdealer broker. He recalls that in 1996, the Softwood Lumber Agreement between the U.S. and Canada created a comparable spike in prices, to $488 per 1,000 board feet from $346, a roughly 41% gain. The higher price was “sufficient to fully discount that factor.”
That spike marked a double top, he says, against what he refers to as the “Spotted Owl Spike” of 1993. A double top is defined as a chart pattern with two consecutive price peaks, which signals a potential bearish reversal. Prices in 1993 spiked amid logging restrictions to protect the northern spotted owl.
Lumber futures trade at their highest levels on record.The current price situation in lumber, however, is more extreme, says Zimmermann.
The WTO has given no indication of when it might rule on the U.S. duties, he says, and lumber prices have already rallied 34.5% from their January lows. Data also show sharp gains in each of the last two years, with 2017 boasting a nearly 42% surge from the end of 2016.
The lumber market has “all the hallmarks of an unsustainable bubble,” says Zimmermann.
And “in line with the bursting of bubbles in the financial markets,” lumber prices may peak by midyear, then drop over the next few years and on into 2021-22, he says. Based on technical analysis, larger patterns “suggest a retest of the 2016 lows is a realistic target” by then, he says. Lumber futures fell to a low near $233 in January 2016. That would mark a drop of more than 50% from current prices.
At the same time, U.S. average home prices have reached all-time highs, with a long-term chart also suggesting “an unsustainable super bubble,” he says. “Issues of affordability will arise. And rising interest rates will already be a factor for 2019.”
There’s no sign of immediate problems in housing. CoreLogic says its latest home-price index reading revealed national yearly price growth of 7% in March. The real estate data provider had forecast a year ago that home prices would rise only 4.9% on a year-over-year basis from March 2017 to March 2018. The strong growth backs a strong outlook for lumber demand.
Investors are positive. Portfolio manager Matt Kennedy says his Angel Oak High Yield Opportunities fund ANHAX, -0.17% is “positive on the outlook for the economy and the housing market in particular.” The fund is overweight in basic-materials and capital-goods bonds and owns the debt of several home builders, suppliers, and distributors of home-building materials.
“We look to capitalize on the demand for housing as well as the potential for increased infrastructure spending,” he says.
“The economy is doing well, unemployment has improved to less than 4%, and aggregate wages are increasing around 2.6% year over year,” says Kennedy. “Combined with what are still historically low interest rates, and millennials entering their prime household-formation years, demand for housing is very strong, contributing to the demand for lumber and building materials.”
From our family to yours, Happy 4th of July!
"That these united colonies are, and of right ought to be, free and independent states; that they are absolved from all allegiance to the British crown; and that all political connection between them and the State of Great Britain is, and ought to be, totally dissolved."
Richard Henry Lee (1732–1794)
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