Volatility in Lumber Futures Markets

Lumber plays an important role in new residential construction. Because of its reliability and safety, more than 90 percent of homes in the United States are built with lumber. However, lumber prices fluctuate over time, causing firms engaged in producing, processing, marketing, or using lumber and lumber products to face price risk. To help to manage this risk due to spot price volatility, the Chicago Mercantile Exchange (CME) launched lumber futures contracts in 1969. Futures markets provide information on future cash price expectations of traders on a daily basis and are found to be the primary center of price discovery for the underlying cash commodity. So lumber futures prices are forecasts of future lumber cash prices, adjusted for storage costs and anticipated supply and demand conditions. A UGA agricultural and applied economist studies the response of lumber futures prices to unobserved information flows. He hypothesizes that the price response to unobserved information flows depends on inventories and time to delivery. Further, the research compares daily lumber futures volatility across different periods of the U.S.-Canada softwood lumber dispute. Specifically, the scientist analyzes daily lumber futures prices from the Chicago Mercantile Exchange from 1992 to 2005. The price the forest owners receive from their sale of standing timber depends on several factors, including the current state of the economy, market cycles and lumber prices. The value of timber, in fact, changes frequently with changes in lumber prices. Any event that changes the demand for and supply of lumber, such as housing starts, tariffs, and other shifts in international trade conditions, causes fluctuation in lumber prices, which in turn results in fluctuations in prices received for standing timber. Therefore, a forest owner should keep a close eye on lumber price volatility to determine the best time to sell timber.