A fellow lumberman asked me to describe my ideal style of inventory management, or buying strategies. So, here it is. The best way to describe it is “elasticity.”
Imagine the lumber market like the waves and tides of the sea. The tide is predictable...it ebbs and flows with the moon's cycles and position in relation to the sea. The variable is the size of the waves which can be influenced and estimated by weather.
Likewise, the lumber market has predictable tides. The greatest influence on our lumber market is weather and the cycles of longer and shorter days. Shorter days have less favorable weather for lumber demand. Longer days have more favorable weather. We know when periods of expansion and contraction will occur...i.e. the TIDE.
The tides of the lumber market can be seen on the graph below by the green and red shadings. Green is rising tide, (lengthening daylight), red is falling tide (shortening daylight). Clearly we can conclude that the tide does not determine lumber price cycles or movement.
What then creates price movement? Simple. The motor is buyers’ anticipation of how large or small and frequent the waves will be during each high or low tide.
During falling tide (red zone) we expect demand disruptions. Lower waves of demand disruptions strengthen prices. Higher waves of disruption weaken prices. During rising tide (green zone) we expect demand accelerators. Higher waves of additional demand accelerators strengthen prices. Conversely, lower waves of demand accelerators weaken prices.
Obviously, in both situations, more than expected favorable conditions are bullish. More than expected unfavorable conditions are bearish.
It is the preparation for the expected and unexpected that creates volatility. The goal is to establish a base inventory around the expected. Higher inventory during rising tide, lower inventory during falling tide. Then, adjust the near-term position elastically, expand or contract, depending on the unexpected influences. Nasty freezing winter, scorching hot summer, prolonged wet spring...thin it out. Warm winter, dry spring, mild summer...beef it up.
The most effective way to manage inventory is to expand at FTP reversal lows and reduce as we approach FTP reversal highs, riding the big waves on the tide. In between, week to week, ride the small waves. Buy early in the week in rising markets. Delay purchases until late in the week during price weakness.
The absolute worse strategy is just-in-time buying, being totally oblivious to the wave motions.
The key is elasticity, and your most powerful secret weapon…unpredictability.
Looking Forward...ML
A veteran lumberman, Matt Layman publishes Layman's Lumber Guide, the weekly forecasts and buying advisories that help component manufacturers save money on lumber purchases every day. You can reach Matt at 336-516-6684 or matt@laymansguide.org.