Lumber prices have bottomed out, but are likely to stay double the historical average for at least the next 5 years, trader says
- Lumber has probably found a bottom at current levels, but prices will remain over double the average for the next few years, Stinson Dean told Insider.
- The Deacon Trading founder expects lumber to trade above $1,000 for potentially the next three to five years.
- He added that the current state of the lumber futures curve confirms that lumber prices have bottomed.
Lumber price have probably found a bottom at current levels, but will remain higher than average for the next few years, a lumber trader told Insider.
Stinson Dean, CEO and founder of Deacon Trading, expects lumber to trade above $1000 for potentially the next three to five years. The historical average is around $400, he said.
"My argument is the new normal is going to be significantly higher than the old normal while others think we're going to go back to pre-COVID price ranges," Dean said.
After an intense run-up in the beginning of the year, Lumber has fallen nearly 50% from May's record high of over $1,700 per thousand board feet.
"Business has slowed dramatically. There's ample supply. So there's just not pressure on buyers to cover those needs...they've bought enough to cover whatever needs they do have," Dean said.
He added that the current state of the lumber futures curve confirms his take that lumber prices have bottomed out. The curve can give an indication of the health of the underlying supply and demand market, he said.
Lumber futures recently began trading in contango - a situation in commodities wherein the future price is higher than the spot price. For the past year, the futures curve was inverted and in backwardation, where the future price is cheaper.
The backwardation and subsequent premium on front-month futures occurred because everyone needed lumber as soon as possible, and they were willing to pay whatever price for it, said Dean.
"People didn't care about two months down the road, they only cared about right now because they were in the middle of a short squeeze. They had to get covered," he added.
Now, that dynamic has changed and supply is ample. Dean explained that the futures curve in contango isn't bearish for lumber, but it's not necessarily bullish. It means that supply and demand are normalizing, and an equilibrium is being found.
He expects lumber prices to average around $900, but remain volatile.
Over the next five years, he sees lumber trading around $1000.
"For the rest of 2021, the phrase I would use is grind higher," Dean added. "I think we'll start trading around above $1000 this fall and stay there."
Before this fall, he sees prices staying muted until homebuilders begin to expand production and deliver more homes in the next quarter. What partly caused the prices to fall from the peak was that homebuilders began to slow down and lumberyards grew hesitant to lock in future business. Now that homebuilders' near-term needs have been covered, there's less of a scramble for wood.