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Two New Bullish Signs for Lumber Emerge

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Back in June, we took a look at the lumber market with Shawn Hackett, president and CEO of Hackett Financial Advisors, a Florida-based money management firm with a focus on agricultural commodities.

At the time, British Columbia was (and still is) experiencing "a Mountain Pine Beetle outbreak beyond any bark beetle epidemic recorded in North American history, causing a widespread kill-off of the lodgepole pine forests--the province’s most abundant commercial tree species." 80% of the mature pine is expected to be dead by 2013, leading to consequences to be "felt for decades."

“The pine beetle issue is an incredibly bullish long-term factor. With the crashing lumber market, I’d be buying lumber even without the infestation. But this is an additional reason why lumber prices are going to skyrocket," Hackett told us. "The weather has created an unprecedented situation; we’ve never seen this kind of thing in Canada before. The pine-beetle crisis is an extenuating long-term supply issue and should create a record bull-market move for a long, long time."

We caught up with Hackett this morning for an update, and it appears that two more bullish factors for the lumber market have emerged:

1) More pine beetles.

Thousands of acres of pine trees in South Dakota have now been killed by mountain pine beetles, centered around Mount Rushmore.

"It's a matter of controlling the exponential growth of this pine beetle," Bruce Weisman, of the National Park Service, tells NPR. "We've seen this explosion and it's coming over the ridgeline directly at us right now."

But, what of lumber demand? The United States hit a trough of existing new-home construction of 500,000 in 2009, a level not seen in 40 years.

Hackett pointed out:

"It can hardly get much lower. Worst case scenario, we’ll hang around that level; it likely will no longer be falling like it did in 2007 and 2008. At some point in the future, we’ll see an increase in construction, and eventually, we’ll get back up to a million or a million-and-a-half, and any kind of growth like that that will require lumber supply. However, the pine beetles will have substantially reduced capacity from Canada at a time when we’ll be seeing growth in the industry. Probably not this year, but I’m looking a few years out. Canadian sawmills will reduce supply further, either by closing or reducing hours, which will contract the amount of lumber being produced. Given the barriers to entry, those mills that got out will take some time to get back in. And that’s when lumber prices go into hypermode."

2) China.

Last week, in a letter to clients, Hackett wrote:

"The elephant in the room from a demand side perspective in the lumber market is China. I have spent some time going over this factor and why it should provide a huge spike in demand in the years ahead against a very constrained supply as North American sawmill capacity contraction, mountain pine beetle infestation tree killing effects and depleting global natural forest reserves meet head on with insufficient long term timber investments to spur sustainable replacement supply."

Then, yesterday, this popped up via the Dow Jones newswire:

"CME lumber futures prices Wednesday bounced higher amid talk that Chinese buyers had booked some product from a British Columbia spruce-pine-fir producer. Traders said the talk was accurate, but that mill orders may not be particularly deep after the sales. Mills stopped accepting lower bids from domestic buyers, however, so the effective cash price went up by about $5 per 1,000 board feet. Futures traders also hoped that the export sales and the sudden jump in prices would spur some domestic buying in the next few days, and buying in the Globex market continued after the close of pit trading, a broker said. After a two-week decline in prices, futures traders were primed for something bullish to trade on, and they got it with the export
sale, a broker said. The Nov contract settled up $4.00, or 1.85%, at $220.80 while Jan ended $3.40, or 1.42%, higher at $242.20, and Mar closed $4.70, or 1.85%, higher at $258.70."

"I'm looking at lumber as a long-term play," Hackett said today. "This is a situation where lumber supplies are going to be squeezed for a long, long time. The damage has already been done."

Hackett cautions that timing an entry into lumber will be a key factor in the equation.

"You will be hearing a lot about this Mountain Pine Beetle infestation issue in the years to come, and I can tell you that when the media starts telling you how bad the situation is for future lumber supply, prices will likely be many times higher than they are today. I expect new all-time highs above $500/1000 bd. ft. to be achieved sometime over the next five years."

He recommends “waiting for signs that lumber prices are beginning to make a definitive turn higher” to define your point of entry.

“When you see everyone and their mother talking about needing to buy lumber, it will have doubled or tripled in price,” he says. “And that’s precisely when I’ll be getting out."
POSITION:  No positions in stocks mentioned.