On today's show we are taking a look at what is happening in the world of softwood lumber and lumber futures. The entire construction industry for new homes and for many multifamily apartment developments is heavily influenced by lumber futures pricing.
There's a fundamental change taking place in the way that lumber futures are sold. But first we need to look at the two different types of futures contracts. The first type of futures contract is to purchase a single railcar worth of softwood lumber. That futures contract is an obligation to take delivery of a railcar worth of lumber. The second type of contract is an option contract which gives the buyer the option but not the obligation to purchase a railcar worth of softwood lumber. This distinction is important since it would intuitively makes sense that you would pay a different price for the option versus the price you would pay to fulfill an order.
Futures contracts are being cut in size by 75%. Builders have been struggling with gaining control over their cost structure over the past couple of years with the wild price swings we have experienced. By accessing the futures market, builders will be able to control their cost structure in ways that had been previously impossible.
For those who are developing multi family apartments, this can be a game changer. The smaller options contract also means that the cost of hedging for a single project is much lower.
Host: Victor Menasce