Yelling Timber!

While lumber doesn’t get as much attention as its popular cousins oil and gold, it too is a scarce and valuable natural resource. What’s more, I think the secular case for lumber is strong due to how the world is changing. As countries develop and industrialize, they typically follow a pattern of building and resource consumption. It starts with the demand for concrete to lay out a foundation of roads.  Next comes steel demand for more sophisticated infrastructure like bridges and railways. Finally comes the demand for lumber as rising living standards start to desire those white picket fences (houses). With a long line of countries still developing, I think the long-term case for lumber is solid.

With that in mind, it’s worth noting that lumber prices have fallen by more than 20% from their year to date highs. The chart below shows lumber futures prices from February to the end of May, data provided by NAHB .

There are plenty of possible reasons for the sell-off. As the housing market gained steam, suppliers stepped up production to catch up with builder demand. At the time, rising mortgage rates and increasing real estate inventory are giving rise to a wall of worry. Justified or not, the market hasn’t wasted any time “yelling timber” and chopping down lumber prices. From a big-picture perspective, this short-term volatility may be a good opportunity to build on a longer-term position.

One way to gain exposure to this market is through stocks that are likely to be impacted by lumber prices. Of course, the exposure is indirect and imperfect, and you also need to take the details of the company into consideration. Nonetheless, dealing with stocks may be more practical than trading futures or brokering wood logs.  If picking tree-farming stocks isn’t your idea of a good time, then you can consider using one of the various exchange-traded products that have come to market.