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How to trade lumber futures contracts and the risks


How to Trade Lumber Futures: Costs and Different Brokers

You can trade futures by opening a trading account with a trusted broker who handles futures trading. CME Globex, CME Clear Port, AmeriTrade and Etrade are some well known online platforms for trading futures.

Most brokerages will charge the National Futures Association fees, which is roughly around $0.02 per side, along with a commission (which can range from $0.025 to $3 and more, per contract per side). You will also have to pay an exchange fee, which will vary depending on the exchange and the specific contract you are trading. Be sure to look at the fine print and add up all the fees into your cost.

Lumber Futures Contracts

Random Length Lumber futures trade on the Chicago Mercantile Exchange under the symbol “LB” electronically and through the open outcry method. The standard contract size consists of 110,000 board feet (around 260 cubic meters) of lumber, in dimensions of 2-inch by 4-inch, 8-20 feet long. These contracts are prices in dollars per 1,000 board feet (mbf) and the minimum price fluctuation is of $0.10 per mbf. The contract is traded in January, March, May, July, September and November.

CME also trades futures for Softwood Pulp and Hardwood Pulp, but these are very thinly traded futures.

Risks

Price movements in the Lumber futures market are sometimes unpredictable and erratic, and offer traders an opportunity to cash in on the volatility.

Lumber futures trading is accompanied by several risks affecting the underlying commodity.

U.S. Lumber prices are most affected by the demand from the home construction sector. At any time, the need for lumber is determined by the number of new homes under construction. The demand also moves rapidly if interest rates and other economic parameters change and affect housing starts.

Supply of lumber can be affected by mills shutting down, stricter environmental regulations and competition from Canadian-government owned lumber lands.

The Lumber industry also notoriously suffers from hold ups caused by labor disputes and import-export regulations. It is also affected by weather conditions. Extremely dry weather can cause forest fires and destroy the lumber in a region. Extremely wet weather can disrupt the felling of trees and hamper production.

Any changes in the exchange rate between the U.S. and Canadian dollars will impact the price of the lumber exports and imports between these two countries and will affect the demand as well.

There is a time lag between the purchase and final sale of lumber, and any changes in economic conditions during the movement of lumber from forest to mill to wholesaler to end-user can cause lumber prices to shoot up or down. This can result in millions of dollars being lost or gained.

There are also the risks typical to financial trading. Lumber futures have a lot of leverage, which allows traders to control a large amount of commodities for a small amount of investment. However, it also means that even a small, unfavorable change in the prices of Lumber can dramatically impact a traders’ entire equity.

Traders who manage these risks wisely and track the construction industry closely will be able to profit a great deal from lumber futures.

 

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