Keeping in mind that most people, even professional investors, usually know little about the forest/timber/lumber markets, the Smart Forest team decided to highlight its main features. The analysis below is just a small window to the world of trees/forest investments, but we hope to convince you to have a closer look at these wonderful green assets.
Before we will immerse ourselves into the world of numbers, let us explain a couple of points.
1) 1) You might be wondering where we get the data from. The USA market is one of the largest and most liquid in the world, meaning other markets follow its lead. Therefore, we take information from CME Group Inc. - the largest North American financial derivatives market that is built by combining the leading exchanges in Chicago and New York. Therefore we take information from CME Group Inc. - the largest North American financial derivatives market, built by combining the leading exchanges in Chicago and New York.
2) The subjects of our analysis are futures (contract for future delivery) on lumber, over the past 50 years (1972-2021).
Check the free online chart here: https://www.tradingview.com/chart/?symbol=CME%3ALBS1!
3) Reading the data from the chart might be tricky, so here is some guidance.
1 lot of the futures/contract = 100,000 footboards = ~2.36 m3 of lumber.
So, for example, 100$/83€ for 1 lot corresponds to ~42$/35€ for 1 m3,
4) This futures/contract is about the CHEAPEST LUMBER on the market, or literally - the price bottom. Why?
Firstly, RANDOM LENGTH (not the firewood, but the lowest size/production classes), and
For example, the elite hardwood of Paulownia, hard and light, usually is being sold at 3-10 times higher price than softwood, depending on the class, length, and volume.
So... Now we are ready to start our journey! Let's dive in!
The red line on the chart is the lower level of the price band.
In a sense, this is a line below which the value never goes.
The exception - between red points 6 and 7 - appeared during the 2008 crisis, but it is clear that the fall was at about zero volumes.
In general, with a 99.9% probability, the price of timber will not go below this level in the coming decades.
Now it is the level of 250$ per lot (~90€/m3) of cheap softwood of random length.
The green line on the chart is the key level of 400$ per lot (~142€/m3).
We can see that over the past 30 years there have been 10+ peaks exceeding this price.
On average, twice every 5 years. The exception - again - is the 2008 crisis.
We also see that about half of the period is above 350$, and the other half of the period is below 350$.
Thus, we can roughly determine the median price for a 30-year period at 350$ (~125€/m3).
The blue line on the chart is the most interesting phenomenon.
In spring/summer 2018, even the cost of cheap softwood set records, reaching 650$/lot (232€/m3).
In a sense, it is a payback for the 2008 crisis, for small sales/felling/planting volumes.
Then, the volume of selling is influenced by the COVID19 restrictions (and mortgage construction boom), and from the summer of 2020 - present, it’s beating its own records.
By the moment, maximum has been above 1000$/lot (354€/m3), but who knows what will happen next?
This analysis shows that lumber/timber is a highly demanded material and for a couple of months the demand has been extremely increasing.
Generally, its price over the last fifty years is increasing.
Keep in mind that here we analyzed just the cheapest softwood - pine and spruce.
Higher quality lumber/timber (like Paulownia) reaches 3x-10x higher prices.
We hope that this article helped you understand the basic principles of the lumber/timber market as well as its hidden potential for profit.
Be aware that "futures" are just one way to enter into forest investment - they are very speculative and not the best way.
With Smart Forest, you can buy & own trees and start a great forest investment adventure in an easy, secure and transparent way.
Check our investment trees offer here.