Commodities & Futures: Lumber traders woken from their slumbers

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PITY the lumber futures traders on the Chicago Mercantile Exchange. Not long ago their two-by- four, spruce-pine-fir contract was so quiet that the 20 or so regulars had time to do the crossword during the trading session.

But in the past month prices have risen so sharply and relentlessly that the local, or independent, traders are having trouble seeing the wood for the trees. Some may be in danger of being felled by the explosive, record- breaking market.

Lumber is the term used in America to describe timber sawn into planks, mostly used in construction. After five years of sleepy trading and low prices, US and Canadian sawmill prices began to climb in the autumn.

Since January the price of wood has rocketed, and the futures market has been struggling frantically to keep up.

Legislation to save the endangered spotted owl; the lowest US mortgage rates in 20 years; seasonal factors; Bill Clinton; and a nascent recovery in the US housebuilding market have limited supply and stimulated demand.

Lumber futures have reached the upper daily trading limit nearly every business day since Monday, 25 January - 19 sessions. The trigger was a monthly US government report on housing starts estimating 1.3 million new houses in America this year.

On many of the 19 days, the price locked at the upper limit shortly after opening and closed 'limit up,' because there have been no sellers and a growing pool of buyers. The trading limit was dollars 5 until repeated limit moves caused the exchange to expand it to dollars 10, in line with CME rules.

Today the daily limit will be expanded to dollars 15 as the rally continues. Prices for the futures contract, which is for 1,000 board feet, have almost doubled since November to dollars 425.70 on Friday.

Investment houses are comparing the run with gold and silver bull markets of 15 years ago, and retail investors are piling in.

Paul Court, a timber wholesaler who runs the brokerage Pacific Futures Trading Company in Southfield, Michigan, says dealers are frantically buying wood, fearing supplies will run short.

Environmental concerns have severely shrunk log supplies in the North-west and caused an uproar in the courts. The US Endangered Species Act has closed millions of hectares to logging to save the spotted owl and other animals, and timber supplies have been slashed.

Around 300 sawmills and plants in the Pacific Northwest have closed since 1980, with many job losses.

US lumber prices traditionally cool off every year at the end of February, but analysts think this year is different.

Under a CME rule, the daily trading limits on the March contract will be lifted on 1 March for 15 days until the contract expires, leaving the price to shoot up.

Mr Court of Pacific Futures says higher trading ranges and volatile markets in lumber are here to stay. 'I think the public will be trying for months to pick the top in this market.' But let's hope they remember the old saw: what goes up must come down.