How and Where To Trade Lumber: A 2020 Guide to Timber Trading

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Lumber is a commodity with countless uses as a fuel, as well as a raw building material in Real Estate and Construction. Traders can speculate on wood prices in several ways, including:

  • Stocks & ETFs of lumber-related companies
  • Derivatives like Futures, Forwards, CFDs and Options
  • Raw lumber

We have compiled a list of brokers who offer lumber trading instruments along with a guide on what the differences are between these instruments.

3 Reasons You Might Trade Lumber

Investors purchase commodities such as lumber for many reasons, but the most important ones include:

  1. Inflation and Weak US Dollar Hedge
  2. Bet on Demand Growth
  3. Portfolio Diversification

Inflation and Weak US Dollar Hedge

Investing in lumber is a way to bet on a weak US dollar and higher inflation.

Commodities such as lumber are priced in US dollars, so the performance of the world’s largest economy plays a crucial role in their pricing. The US Federal Reserve Bank has kept interest rates low and the US dollar weak for many years.

US central bankers are likely to continue these policies to support consumer borrowing and consumer spending. These conditions are likely to be very beneficial for lumber prices.

A weak dollar could stoke inflation concerns. Since there are a limited supply of trees, the price of lumber would likely benefit from fears of inflation.

Bet on Demand Growth

A low interest rate environment combined with a rebounding housing market is likely to be a very beneficial environment for lumber prices. Housing prices are very sensitive to interest rates since interest rates determine mortgage rates.

As long as rates remain near historically low levels, demand for housing, and therefore lumber, should continue to remain strong.

Portfolio Diversification

Most traders have the vast majority of their assets in stocks and bonds. Commodities such as lumber provide traders with a great way to diversify and reduce the overall risk of their portfolios.

How Can I Invest in Lumber?

Investors have several ways to gain exposure to lumber prices:

Lumber Futures

The Chicago Mercantile Exchange (CME) offers a contract on Random Length Lumber Futures. Each contract represents 110,000 board feet. The underlying product is two-inch by four-inch lumber that is between eight and 20 feet long.

The contract trades globally on the CME Globex electronic trading platform and has expiration months of January, March, May, July, September and November.

Futures are a derivative instrument through which traders make leveraged bets on commodity prices. If prices decline, traders must deposit additional margin in order to maintain their positions.

At expiration, the contracts are physically settled by the delivery of lumber.

Investing in futures requires a high level of sophistication since factors such as storage costs and interest rates affect pricing.

Lumber Options on Futures

The CME offers an options contract on Random Length Lumber Futures.
Options are also a derivative instrument that employs leverage to invest in commodities. As with futures, options have an expiration date. However, options also have a strike price, which is the price above which the option finishes in the money.

Options buyers pay a price known as a premium to purchase contract.

An options bet succeeds only if the price of lumber futures rises above the strike price by an amount greater than the premium paid for the contract. Therefore, options traders must be right about the size and timing of the move in lumber futures to profit from their trades.

Lumber ETFs

These financial instruments trade as shares on exchanges in the same way that stocks do.

There is no ETF that offers pure-play exposure to lumber prices.

However, there are two ETFs that invest in companies that have exposure to the lumber industry:

iShares Global Timber & Forestry ETFGuggenheim MSCI Global Timber ETF

Shares of Lumber Companies

There are no public companies that are a pure-play investment in lumber.

However, traders that want exposure to lumber prices may want to consider buying shares in three companies that own and manage timberlands used to produce lumber:

CompanyCurrent PriceDescriptionExchange
Rayonier Inc.
Global company that engages in the management, sale and development of timberland properties and wood products.New York (NYSE)
West Fraser Timber

Company that produces and sells lumber, panels and pulp paper in Canada and the United StatesToronto (TSX)
Weyerhaeuser
Real estate investment trust that operates timberlands, wood products, cellulose fibers and real estate businessesNew York (NYSE)

CFDs

Another way to invest in lumber is through the use of a contract for difference (CFD) derivative instrument.

CFDs allow traders to speculate on the price of lumber.

The value of a CFD is the difference between the price of lumber at the time of purchase and its current price.

Some regulated brokers worldwide offer CFDs on lumber. Customers deposit funds with the broker, which serve as margin. The advantage of CFDs is that investor can have exposure to lumber prices without having to purchase shares, ETFs, futures or options.

Lumber Trading Methods Compared

If you are looking to trade lumber or wood instruments, here are the similarities and differences between various instruments.

Method of InvestingStorage CostsSecurity CostsExpiration DateManagement CostLeverageRegulated
Buy LumberYESYESNONONONO
CFDsNONONONOYESYES
FuturesNONOYESNOYESYES
OptionsNONOYESNOYESYES
ETFsYESYESNOYESNOYES
SharesNONONONOYESYES

Where Can I Trade Random Length Lumber?

If you are looking to start trading lumber and other agricultural commodities, here's a list of regulated brokers available in to consider.

Top Brokers Available in

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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 73.0%-89.0% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Should I Invest in Lumber?

Traders who want exposure to lumber prices should consider purchasing lumber along with a basket of other commodities that includes agricultural commodities (i.e., dairy, meats and grains), as well as metals and energy.

Purchasing a basket of commodities helps protect traders from the volatility of any individual commodity.

It also adds overall diversification to a stock and bond portfolio.
There are two specific trends that could raise lumber prices in the years ahead:

Housing Demand: Demand for housing is likely to rise worldwide in the years ahead. Emerging market countries such as China and India are building more wealth and creating rising middle classes.

Demand for lumber products to construct and furnish homes should continue to grow as a result of housing demand.

Deforestation: There is a limited amount of land, and many industries such as livestock and farming compete with loggers for land.

This competition has the potential to create lumber shortages.

However, traders should also consider the risks of investing in lumber:

  1. A global spike in interest rates could weaken housing demand and depress lumber prices.
  2. Overproduction by large lumber companies could depress prices.
  3. Global economic or political turmoil could weaken demand for commodities in general.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 73.0%-89.0% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Credits: Original article written by Lawrence Pines. Major updates and additions in August 2020 by Marko Csokasi with contributions from the Commodity.com editorial team.

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