1. Introduction to Commodities
  2. Commodities: Cocoa
  3. Commodities: Coffee
  4. Commodities: Copper
  5. Commodities: Corn
  6. Commodities: Cotton
  7. Commodities: Crude Oil
  8. Commodities: Feeder Cattle
  9. Commodities: Gold
  10. Commodities: Heating Oil
  11. Commodities: Live Cattle
  12. Commodities: Lumber
  13. Commodities: Natural Gas
  14. Commodities: Oats
  15. Commodities: Orange Juice
  16. Commodities: Platinum
  17. Commodities: Pork Bellies
  18. Commodities: Rough Rice
  19. Commodities: Silver
  20. Commodities: Soybeans
  21. Commodities: Sugar
  22. Commodities: Conclusion

By Noble Drakoln

The standardization of lumber in the U.S. can be directly traced back to the first and second World Wars. While logging had endured for centuries, it was not until World War I that standard lumber sizes were instituted. The significant amount of lumber that was required during World War II solidified the acceptance of standardized sizes because it provided an efficient way for mills and lumber purchasers to meet each other's needs while being separated by thousands of miles.

Although lumber has many versatile uses, it is constantly subjected to changing consumer interests, shifts in manufacturing facilities and housing downturns. This leaves the industry in a constant state of panic because it is forced to be reactionary to various factors outside of its control. To protect the lumber industry from the volatile price swings that this uncertainty brings, the Chicago Mercantile Exchange (CME) developed the first lumber commodities contract in 1969. (Timber's low correlation to other asset classes can enhance your portfolio's growth. Read more in Timber Investments Cut Down Portfolio Risk.)

A sample commodity futures contract for lumber is shown in the following table.

Lumber Contract Specifications
Ticker Symbol Open Outcry: LB (CME)
Contract Size 110,000 bd. ft. of random lengths 2x4s (8\' to 20\')
Deliverable Grades Each delivery unit shall consist of nominal 2x4s of random lengths from eight feet to 20 feet. Each delivery unit shall consist of and be grade stamped No.1 or No.2 AND BETTER.
Contract Months Jan, March, May, July, Sept, Nov
Trading Hours Open Outcry: Monday-Friday
Last Trading Day On the business day immediately preceding the 16th calendar day of the contract month.
Last Delivery Day Last business day of the contract month.
Price Quote Cents per board foot
Tick Size 1 point = 10 cents per 1,000 bd. ft. = $11 per contract
Daily Price Limit
(Not applicable in electronic markets)
$10 per thousand board feet above or below the previous day\'s settlement price.

Understanding Lumber Contracts
Like every commodity lumber has its own ticker symbol, contract value and margin requirements. To successfully trade a commodity, you must be aware of these key components and understand how to use them to calculate your potential profits and loss.

For instance, if you buy or sell a lumber futures contract, you will see a ticker tape handle that looks like this:

LB8X @ 262.50

This is just like saying "Lumber (LB) 2008 (8) November (X) at $262.50/1000 bd. ft. (262.50)." A trader buys or sells a lumber contract according to this type of quotation.

Depending on the quoted price, the value of a commodities contract is based on the current price of the market multiplied by the actual value of the contract itself. In this instance, the lumber contract equals the equivalent of 110 (1,000 bd. ft) multiplied by our hypothetical price of $262.50, as in:

$262.50 x 110 (1,000 bd. ft.) = $28,875

Commodities are traded based on margin, and the margin changes based on market volatility and the current face value of the contract. To trade a lumber contract on CME requires a margin of $1,650, which is approximately 6% of the face value.

Calculating a Change in Price
Because commodity contracts are customized, every price movement has its own distinct value. In a lumber contract, a .10 cent move is equal to $11. When determining CME's lumber profit and loss figures, you calculate the difference between the contract price and the exit price, and then multiply the result by $11. For example, if prices move from $262.50 to $290.10, you multiply the difference, which is $27.60, by $11 to yield a contract value change of $3,036.

- Buy Sell Total Value
Lumber Contract Price (.10 cent move = $11) $262.50 $290.10 27.60 cents or $3,036

Lumber Exchanges
The futures contract for lumber is traded at the Chicago Mercantile Exchange (CME).

Facts About Production
Wood takes the form of either softwood or hardwood. Softwood trees include spruce, pine, fir, cypress, redwood and various conifer trees. Softwood is an essential component for buildings, furniture and paper. Hardwood is wood from broad-leaved (mostly deciduous) or angiosperm trees (plants that produce seeds with some sort of covering). Hardwoods are used in a range of applications such as construction, furniture, flooring and utensils.

The U.S. set the standard for lumber sizes, and these sizes have become essential parts of all wood-related construction. This country also leads the world in softwood lumber production. In 2006, it produced 66.5 million cubic meters of lumber and imported 60 million cubic meters, almost the same amount. China was a distant second in lumber production and imports, coming in at 9.25 million cubic meters and 2.06 million cubic meters respectively. Lumber is considered to be one of Canada's largest exports to the U.S. In 2005, it exported 21.5 billion board feet of lumber across the border.

Factors That Influence Lumber's Price
The price of lumber is influenced by the following factors:

  • The number of new homes under construction at any time impacts the need for lumber. In 1999, hardwood production was 12.6 billion board feet; by 2005, it had dropped to 10.7 billion board feet.
  • Traditionally, lumber has been treated with pesticides to repel insects and fungus. Unfortunately, these pesticides are considered harmful to humans and the environment, yet switching to alternatives or eliminating the pesticides altogether could potentially increase costs, either by way of lost lumber or via more expensive alternatives.
  • The U.S. is faced with a growing number of manufacturing plants overseas that are in need of raw logs, as opposed to finished lumber. Unfinished wood is less valuable than finished wood and commands a cheaper price in the marketplace. This leads to a loss of jobs in the finished lumber sector and a shrinking of the logging-to-lumber industry.
  • Logging has always played an active role in environmental debate. Cutting down large swathes of forests has irreversibly altered various species, ecosystems and plants. The long-term consequences of this cannot be foreseen, particularly in a world that is increasingly affected by global warming. It has been estimated that deforestation is responsible for 17% of annual global carbon, a level higher than that of emissions from transportation.
  • U.S. loggers have experienced difficulty competing directly with Canadian wood. Both countries have fought for decades to find equal footing regarding lumber pricing and subsidies. Because various Canadian governments own timber land, a prevailing assumption is that an unfair advantage exists in sale prices compared to the privately owned timber lands in the U.S. Both parties have made multiple agreements to resolve this issue, but it may take some time before a sufficient arrangement can be found.
Lumber is an essential part of our modern world, and of any industrial economy. Nevertheless, many factors are increasing pressure on the logging industry to adapt, such as global warming, foreign exports, domestic needs and others. How these issues will ultimately impact the industry once they are resolved is still open to debate, yet the fact remains that definite change will come at some point.

Commodities: Natural Gas
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