Module 4 · The buyers and the market
How wood is priced
Level 3 · Specialist 11 min read 4 questions
Four price bases, two different market structures for softwood and hardwood, one futures contract, and a trade dispute that has run for decades.
Lesson 8 introduced the four price bases - stumpage, delivered log, mill and wholesale. This lesson is about how each is discovered and reported, and why the softwood and hardwood markets behave so differently.
Softwood: a commodity market
Structural softwood lumber is close to a true commodity. The product is standardised by grade and dimension, the species groups are interchangeable within limits, and a large volume trades continuously. That supports three things hardwood does not have: published price composites compiled from transaction reporting, a liquid futures contract, and genuine price transparency.
- Framing lumber composites
- Weighted averages of transaction prices for the main framing items across regions, published weekly by specialist price reporting services. These are the numbers quoted when the news says lumber prices rose.
- Random Lengths and similar services
- Price reporting for a wide range of items by species, grade, dimension and region. 'Random length' is also a product description: lumber sold in mixed lengths rather than a single specified one.
- Futures
- Exchange-traded contracts that allow mills, dealers and builders to fix a price forward.
| Term | Specification |
|---|---|
| Contract size | 27,500 board feet |
| Product | Random Lengths No. 2 and Better 2x4s |
| Deliverable species | SPF (stamped SPF), Douglas Fir, Fir Larch, Hem Fir |
| Delivery | Physically delivered to the Chicago Switching District |
| Delivery mechanism | By rail, in increments of four contracts |
| Delivery tolerance | 26,000 to 29,000 board feet against a 27,500 bf contract |
| Tick size | $0.50 per MBF, or $13.75 per contract |
| Contract months | January, March, May, July, September, November |
| Product code | LBR |
Current contract specification · CME Group, Lumber futures contract specifications
Contract terms change. Anyone trading checks the current specification and rulebook rather than a course table. The point here is what the contract physically obliges: a specific grade, in specific species, delivered by rail to one place.
Hardwood: a graded, negotiated market
Hardwood does not work like that. The product is a natural material graded for appearance, in dozens of species, in random widths and lengths, with wide grade spreads and no interchangeability between species. There is no futures contract because there is nothing standard enough to deliver. Prices are discovered through specialist trade price reporting by species, grade and thickness, and through negotiation.
Hardwood demand also has different drivers. Where softwood follows housing starts, hardwood follows furniture, cabinets, flooring, exports and the industrial pallet market - so the two can move in opposite directions for extended periods, and a headline about 'lumber prices' usually tells a hardwood producer nothing at all.
The units trap, again
- Sawtimber is priced per MBF - and only means something once you know the log rule, from lesson 3.
- Pulpwood and residuals are priced per ton - and only mean something once you know green or dry.
- Stumpage is per MBF or per ton or per acre depending on region and product.
- Export log prices are commonly per cubic metre.
- Nothing in this list is interchangeable without an explicit conversion, and every conversion has an assumption inside it.
Trade policy
Softwood lumber trade between Canada and the United States has been the subject of recurring trade disputes for decades, centred on whether timber harvested from Canadian public land at administratively set stumpage rates is subsidised relative to US private timber sold at auction. The dispute has produced successive rounds of duties, agreements, litigation and expiry.
For this course the details matter less than the mechanism: duties on imported lumber raise delivered cost in the importing market, and that cost passes through to construction. It is the clearest illustration in the wood chain of a point this site makes repeatedly - that policy acting at one handover reprices everything downstream of it, without any physical change to the commodity.
- Softwood is standardised enough to support composites and a futures contract; hardwood is not.
- The lumber futures contract hedges one grade, four species and one delivery point - everything else is basis risk.
- Softwood follows housing; hardwood follows furniture, flooring and pallets, and the two can diverge for years.
- Framing composite
- A weighted average of transaction prices for the main framing items.
- Random length
- Lumber sold in mixed lengths rather than one specified length.
- Basis risk
- The risk that the thing you hedged with moves differently from the thing you hold.
- CME lumber contract specificationsprimary source
- Futures and hedging, in the oil courseanother lesson
- How metals are pricedon this site
Check yourself
1. The CME lumber futures contract covers 27,500 board feet of:
It is a framing lumber contract, deliverable in SPF, Douglas Fir, Fir Larch and Hem Fir by rail to the Chicago Switching District.
2. Why is there no comparable futures contract for hardwood lumber?
A futures contract needs a deliverable standard. Hardwood's species, grade and dimension variability defeats that.
3. A hardwood sawmill owner reads that 'lumber prices' have fallen 30%. The correct inference is:
The two markets have different products, different buyers and different drivers, and can move in opposite directions for years.
4. Softwood lumber price volatility is amplified by distribution because dealers:
Inventory behaviour through the chain adds to the swing in both directions on top of fixed short-run mill capacity.