The all-time-high price for U.S. lumber futures, $493.50, was set in March of 1993. Since then, prices have made it into the $400s only a handful of times including January 1997 ($440), February 2005 ($420), and February 2013 ($400). Will the current lumber rally break the $400 price level in 2017? And if so, can it be sustained?
Technical analysis of recent price action suggests that the $400 price level could be breached in the near-term. Historically, when lumber prices make it into the $400s they quickly reverse. Is this time different? There are several fundamental reasons that one could argue, yes, this time is different.
From our perspective, there seems to be an unusual number of market fundamentals lining up that favor an abnormally strong U.S. lumber market. Briefly:
- Demand for new housing continues to surprise to the upside.
- Deregulation making it less burdensome to build new homes.
- Protectionist trade policies that could limit supply being imported.
- Continued growth in emerging market demand.
- Monetary and fiscal policies that appear to favor cheap money and an inflationary environment.
- Speculative investment in timber as an inflation hedge.
Given this backdrop, we think there is a higher probability than usual that U.S. lumber futures will break $400. And although, historically, this level has not been sustained, we also think that there is a greater probability of prices holding elevated levels for a longer period than has been the norm. Should this scenario of elevated lumber prices play out, it will likely be unusually volatile as well.
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