Through the Rear View
Of all the lumber folk I know, I am the self-proclaimed King of checkers of rear view mirrors. I use the accuracy of frequency of past repeating patterns to give me confidence in making forecasts for the future. The FDP’s have been fine tuned year over year for 30 years in search of the Lumber Market’s Forecasting Holy Grail, and even this year I have made improvements. With the FDP’s, we can identify the beginnings and endings of the lumber cycle’s peaks and troughs.
Today I want to emphasize the “Inventory Cushion.” When there is an approaching FDP is decision time. Do we build inventory, liquidate, or sit tight? FDP reversal lows, like the one coming at week #28, are target areas to make preparatory buys. It is vitally important that buyers consider never letting inventory drop below your company’s minimum operating product on hand. For most, that is about 3–4 weeks’ supply. Consequently, the time it takes for new prices to filter in. Even then, only the percentage of replaced inventory is affected. (That is why builders never see immediate $ for $ weekly changes or maximum high or low mill prices to suppliers.)
Based upon the accuracy of the previous Forecasted Decision Points, I have great confidence that week #28 will be a pivotal area. Current strategy is to be wrapping up May/June liquidation with some weak inventory spots.
It is best to begin inventory accumulation a week or two before the projected FDP for two reasons:
- Inventory is already dangerously low.
- Best buying times are when the market is at, or just past, peak vulnerability; mill supply is abundant, prices are most negotiable. All we have to do is determine when momentum will shift.
This particular FDP is unique in that it occurs at a time when volatility is at all-time extremes. In the rear view, we recall $100 per week rising prices and as of late $200–300 per week price cuts. From those observations, we should expect violent recoil or upwards whiplash in a small window. Specifically, this coming week is time to scale-in buy.
Through the Telescope
Sometimes the Obvious is so clear it gets overlooked. For example, in January we made a definitive projection that big box home centers would mistakenly over buy, expecting 2020 DIY would repeat in 2021. From there we projected that pressure treated SYP would lead that species in the unraveling of the bull lumber market.
Other times the obvious is not so easily recognized. Example, our entire lumber market overlooked the possibility that home buyers would give builders a 12-month order file who would in turn pressure contractor yards to buy 3-month forward inventory needs. We did however forecast that builders would reduce that order file and the media would pounce on that as housing weakness. That is why LLG PROJECTS TIME NOT PRICE. Our entire lumber industry has been sucked into the price rabbit hole.
Now let’s look through the telescope. Builders are wrapping up Q1 starts. The next demand event will be fill-in buying this week ahead of the largest vacation week of the year and July summer mill maintenance.
Prices are back in a range where there is no consumer price resistance. The issue is, prices have fallen so quickly that only one round of replenishment has been bought and lower prices are just this week starting to ship and that wood is still two weeks behind today’s price where the deepest cuts have been.
Just as expected, Mr. & Mrs. home buyer are tapping the brakes to see how lumber’s decline impacts new home prices. They will not. Demand is still strong and supply short. Analysts are blowing around a 4mm new home supply shortage.
There are lots of supply challenges to meet worldwide before the US can produce 2mm starts. Educated work force and less government financial incentives to NOT work top the list. I see a lumber market that can currently supply 1.5 mm starts, 1 mm of them single family. Its problem is misdistribution of mill production. Mills must be prepared to allocate contracts on an “as needed” basis, allow contracts to be seasonal and protect against a few companies manipulating price through possession. Q3 will be very volatile. Buy now to cover THRU week #46.
Looking Forward...ML
CMs, Turnkey Framers:
Does your buying program need a tune up...or a complete overhaul? Here is a test. What are the two months every year that you never want to buy? If you need help, ask your suppliers. Odds are they do not know either. If they do know, why have they not told you?
Are you buying mill direct? Why not? If you can, you should. Everyone that handles the lumber between you and the mill adds to your cost. Do you know how the lumber market “really” operates? There is indeed a pecking order, a good old boys’ network. LLG is the ONLY source that instructs buyers “How to beat the lumber market.”
There are two options. LLG LUMBER PHD 12-week course or one on one, virtual and on-site personal consultations. Call me. 336.516.6684