- CME Group is launching a new timber futures contract that could dampen price volatility and increase trading volume.
- From next month, new contracts will offer a quarter of the amount of wood.
- This will allow trucks to make deliveries, instead of just wagons, opening up the possibility for more trades.
Lumber prices have been on a meteoric rise over the past few years, but may soon become less volatile, although trading volumes are expected to soar.
Like other commodities, timber prices have fluctuated wildly since the pandemic. They crashed below $300 per thousand board feet in early 2020, jumped to $1,000 later that year, crashed again, topped $1,700 in May 2021, fell back , rebounded to near $1,500 in March this year, plunged further and are now below $600 as the housing market slows.
Earlier this year, major lumber futures were so wild that they regularly hit their daily price triggers, freezing trades for the rest of the session and prompting the industry to look for ways to make the market more liquid.
Today, CME Group is launching a new timber futures contract August 8 which aims to make deliveries easier and attract more participants, potentially smoothing prices with a number of changes.
Among them, allowing trucks to fulfill contracts, instead of just wagons. For reference, a truck can carry enough lumber for two houses, while a wagon can carry enough for eight, lumber dealer Stinson Dean told Insider.
Since the trucks carry about a quarter of the amount of timber, the new futures contract gives more buyers the opportunity to cover small projects that did not match the size of the old contract, he said. he stated by e-mail.
A contract for a quarter of the amount of timber, in theory, should quadruple the volume of trade. But Dean said that’s likely just the baseline, and projected volumes could grow eight or tenfold “as more timber futures watchers become confident traders on timber futures”.
Additionally, lumber purchased through the new contracts will arrive in Chicago rather than a remote Canadian outpost, providing a more central trading destination accessible to a wider range of buyers.
And CME’s new specifications will also allow for new types of wood, including eastern species of spruce, pine and fir, rather than just timber harvested in the West.
Dean expects lumber to become less volatile and trade sideways the rest of the year. But the new futures contract is perfectly suited to a slowing real estate market, he added.
“As the price and activity go down, people will want to buy as little as possible, and the new contract allows them to buy a quarter of the amount in one contract compared to the old contract,” he said. he declares.