A contract, for the purposes of this discussion is an agreement to sell or buy a predetermined quantity,size and grade of lumber or panels, typically between a consumer and a producer...priced at current market value, "Friday Prior to Shipment." The buyer is assured of receiving product on a reliable, timely basis and the seller is assured of a non-negotiable sale...regardless of market conditions.
Contracts are good for the buyer when supply is tight, demand is strong and prices are typically rising. (2400 MSR is a good example of an item that might be contracted for availability.) Not so good when supply is abundant, prices are weak, flat or even volatile, like now. Prolonged, sustained rising prices are the only time when contracts are advantageous for the buyer. Ironically, that is when the contract is least desirable for the supplier/mill. It follows that the supplier of the contract is most satisfied when the deal is not good for the buyer. Therefore, when suppliers want to keep the contract it in place, buyers should get out.
The best measure of the value of a contract is to consider price volatility. The more volatile and frequent the price fluctuations, the contractor yard, wood preserver, component manufacturer or distributor to should NOT have a contract. Why? Volatility is an opportunity for buyers to out perform contract prices. Frequent directional changes, periods of no price change, or short runs in one direction are evidence of ample supply. Advantage buyer. Disadvantage producer. Why? Because without a contract, buyers control when the P.O.'s are given. In falling markets, delay purchases until after weekly prices are published. In rising market, be proactive, buying before the next price increase. Short term, week-to-week evaluation is all that is needed to out perform contract pricing.
Each truckload of 2x4#2 SYP has had $3488 of price volatility per week over the first six months this year with twelve directional changes. 2x4#2 Canadian SPF has had $4750 of price volatility with ten directional changes. OSB...$3300 with 13 directional changes. Just one contracted truckload of each per week is on track to potentially cost you $22,000 this year. Stop the bleeding!!!
Twice weekly, Layman's Lumber Guide (Forecasts & Briefings) provides market analyses, forecasts, and buying strategies to profit from price volatility. Ditch the contracts. Trust your skill and mine. Let's trade this lumber market sensibly...together.
Happy Trading,