The Lumber-Futures Contract Has Been Replaced…with a New Lumber-Futures Contract

It had been the standard for the lumber business for years and now it’s gone. A new lumber-futures contract has been created, designed to help reduce price volatility…a good thing.

During much of the pandemic years when supply chain issues coupled with big demand drove lumber prices sky-high – only to fall again as supply and demand levels evened out. And the lumber-futures contract, created by exchange operator CME Group, reflected those wild swings.

But CME has just replaced its previous contract, started in 1969 which was based on a train car of 110,000 board feet of lumber sent to a British Columbia location. It said this measure created a situation where buying and selling was nearly impossible some days.

The new contract, which went into effect last summer but with the ending of the previous one in mid-May is now the standard, is based on a truckload of two-by-fours delivered to Chicago, representing 27,500 board feet, or roughly enough to build a single-family house. According to the Wall Street Journal, which reported on the change, “Chicago is much closer to booming housing markets than Canada’s inland rainforest and as a delivery point much better approximates freight costs.

“A greater number of smaller contracts makes the market more inviting to speculators, whose presence lumber traders say would help to smooth out the choppy trading.” It added that it also allows for eastern species and fulfillment from more sawmills than the outgoing contract, which could only be satisfied with spruce, pine or fir from a shrinking number of mills in the Pacific Northwest.

“The changes are meant to make trading in two-by-four derivatives a more useful tool for sawmills, builders, and lumber yards to manage the risks involved in trading actual wood.”

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