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Fastmarkets recently partnered with CME Group for the “Hedging Lumber Risk” webinar, where our experts explored the changing dynamics of the North American lumber market and the role of the new CME SYP futures contract. Our senior economist, Dustin Jalbert, along with CME Group’s Alison Coughlin and Tom Crane, shared critical insights into supply shifts, pricing trends and risk management strategies.
Here are seven key takeaways from the discussion.
The US South has been steadily gaining market share for half a century, but this growth has accelerated dramatically since 2017. As Dustin Jalbert noted, “the South has been gaining share of the total North American market for essentially half a century now,” with share gains accelerating “pretty dramatically, let’s call it around 2017-2018, which, to no surprise, coincided with the first big wipeouts of SPF capacity that we saw in Canada around that time.”
As production in British Columbia (BC) has been cut in half – a drop of more than 6 billion board feet – SYP has stepped in to fill the supply gap. Today, the US South is the single largest producing region in North America, and it’s poised to continue its expansion. This makes understanding its unique market dynamics more critical than ever.
Historically, SYP prices have shown a strong correlation with other key framing species. If you were exposed to SYP price risk five or ten years ago, hedging with a broader SPF-based contract might have been sufficient. That is no longer the case. As Jalbert explained, “we are seeing SYP essentially completely decouple, rather than having very high and significant correlation, 80-90% correlations over whatever sample you want to pick, we’re now seeing almost no positive correlation, essentially flat, essentially zero.”
Since January 2023, the pricing correlation between SYP and Western SPF has effectively disappeared. This decoupling is driven by a combination of aggressive SYP capacity growth, regional demand factors and substitution challenges, creating a distinct market that requires its own risk management tools.
North American lumber supply is undergoing a major realignment. BC is facing a structural decline due to depleted timber supply from the pine beetle infestation, unfavorable provincial policies and high production costs. As Jalbert described, “BC production has been cut by more than 6 billion board feet, so essentially cut in half.” He added, “we are not going to see any sort of major increase or recovery in production over that time period. And you can also see that the capacity base continuing to decline going forward.”
This rationalization is creating a supply void that other regions are struggling to fill. The Pacific Northwest has its own fiber challenges and other Canadian regions face constraints. Jalbert explained, “the Pacific Northwest faces its own fiber challenges, you know, that’s a very high-cost jurisdiction market, so the path of least resistance here, in terms of where that incremental stick of lumber is going to come from, is probably going to have to come from the US South.” As a result, the US South has become the path of least resistance for new investment, with its abundant, privately-owned fiber supply attracting significant capital.
The record-high prices seen during the pandemic triggered what Jalbert described as “a pretty big acceleration in southern yellow pine capacity growth in 2023… we think over a billion and a half board feet of operable capacity came into the market.”
This surge in supply, combined with several years of declining softwood lumber demand, has created what Jalbert called “this sort of bullwhip effect.” The result, he emphasized, is “very, very weak market conditions in SYP… So, this is, this sort of bullwhip effect. And meanwhile… demand has been declining for softwood lumber for about four years now and running”. As he also noted: “these huge spreads for SYP that have formed over time… The $200 to $300 per thousand spreads now are staying in a sustained way, which I think is raising some sort of red flags in the market.” This dynamic is driving significant downward pressure on SYP prices and contributing to the record-level discounts seen today compared to SPF.
While SYP is gaining share in markets across the US, its growth is disproportionately dependent on its own backyard. As Jalbert reported, “about 80% of SYP’s growth is accounted for by demand growth in its own backyard… Which sort of makes sense, like, that’s the path of least resistance for it to go to market.” He said that the southeast real estate market is “much weaker right now than the rest of the US market” and added that if this recession continues, it will have a “disproportionate impact on the demand profile of SYP”. This over-leverage to a single regional housing market makes SYP particularly vulnerable to localized economic downturns, further contributing to its price volatility and decoupling from national trends.
The launch of the CME SYP futures contract is a direct response to these market shifts. As Coughlin explained, it provides a standardized, transparent tool for “price discovery” and “risk management”. Crane added that the SYP futures contract is financially settled based on a “15-day average of the Fastmarkets Eastside SYP [price] assessment.”
This approach ensures, as Coughlin noted, that “you can still use a cash-settled contract to inherently, buy or sell physical [commodities], even if it’s not a physically delivered contract.” This gives producers, wholesalers, builders and traders a precise way to manage their price risk in an increasingly distinct SYP market.
Many in the physical market see futures as betting or gambling and think it adds to their risk. But as Coughlin pointed out, “in reality, if you have physical exposure, and you aren’t hedging, you’re speculating on the price of lumber.” She also explained that futures contracts let you take an offsetting position in the futures market to protect risk in the cash market. She described how a sawmill faces the risk that prices could plummet, so they might have to sell lumber for less than it cost to produce. For wholesalers or builders, there is concern that by the time they need to buy lumber for a contracted job, the price could have skyrocketed and margins could shrink or even become negative. With a futures position, participants can mitigate these risks.
Coughlin makes clear that hedging is a way to manage risk, not add to it. She also notes the transparency of the futures market helps all participants discover price, whether they are actively trading or not.
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