Selective Cuttings
Are lumber futures prices a helpful guide to future market prices?
May 3, 2013
Fluctuations in lumber futures prices, particularly when market prices are high, tend to be given significant weight in media commentary as a sign that a market price decline is imminent. However, recent history suggests that lumber futures prices are a no more accurate predictor of future market prices than the current market price. For example, by comparing the average weekly settle price for front contracts to the market price when the front contract closes, since March 2003 the average discrepancy is 7.9%. Using the current market price as a predictor of future market prices has a lower average discrepancy: 6.9%. Unsurprisingly, the closer the front contract comes to closure, the more accurate both approaches become (see Table 1).
| Weeks until contract closure | Average error (futures) | Average error (market price) |
|---|---|---|
| 8 | 11% | 10% |
| 7 | 10% | 9% |
| 6 | 9% | 8% |
| 5 | 8% | 7% |
| 4 | 8% | 7% |
| 3 | 7% | 6% |
| 2 | 5% | 4% |
| 1 | 4% | 3% |
Indeed, analysis (using one-sided t-tests) demonstrates that current market price is a superior predictor to futures market prices to a statistically significant degree (p-values between 0.04 and 0.06) for the three weeks leading up to contract closure. This is essentially the same observation as noting that for many types of climates the most accurate prediction of tomorrow’s weather is to simply forecast that it will be the same as it is today. It may only be when a big storm is coming that the nuance involved in a meteorological forecast provides is more accurate than simply projecting forward today’s weather. All of which is to say that while it is worth paying attention to what is happening in the lumber futures market, its weekly fluctuations should not be used as the primary basis for predictions of future market prices.