I track inflows into the distribution chain from daily reports on Canadian exports into the U.S. and by projecting U.S. lumber shipments using proxies from weekly WWPA shipment data and rail traffic. The import estimates have an error range of less than 0.5% while the shipment variability, as compared to final WWPA tallies, is +/- 2.5%. Validation of the estimates of the flux in stocks cannot be made since there is no systematic collection of such data. I have no illusions that the numbers would match point estimates from a comprehensive census if such were made but I believe they track the general trend in inventory changes. They have been helpful to me to gain insight into aggregate inventory fluctuations and certainly more useful than the repertoire of adjectives used by market journalists to describe the state of inventories as “lean” or “flush”, “tight” or “adequate” etc.
The chart above borrows the technique from the Energy Information Agency to depict these derived inventory estimates in a historical context. The data represent inventories-to-end use (equivalent to inventory in terms of months of current sales). The recent year’s data are placed within the historical range of high and lows experienced for the series represented by the shaded portion.
It illustrates a bulge in field inventories that began in late 2014 and continued into the first quarter which offers insight for the market swoon in the first third of the year. It also shows that if the recent trend of production restraint is maintained and the housing recovery proceeds as we expect, then by June the inventory overhang will have corrected and returned to well within its historical range. I will reproduce updates of this chart monthly in future issues.
Bottom Line:
High lumber inventories in early 2015 led to weak pricing through April. Recent production curtailments and increased consumption has pushed inventories back to more “normal” levels. Consequently, we expect rising pressure on prices in the third quarter.
This article by Paul Jannke was excerpted with permission from Henry Spelter’s Lumber Market Status and Trends (LMST ), a weekly publication which describes how FEA estimates inventories, a very important indicator for market direction.