Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Wisenthal and I'm Tracy Alloway. So, Tracy, I'm guessing there is a much construction of new homes anymore in Hong Kong? Is there? Um, there's always some, but we definitely aren't having a housing boom like the US is now. It is absolutely crazy what's going on here. There is a housing boom here, there is a renovation boom. People are buying existing houses, driving the prices up. People are starting new homes like it's super it's super wild. What's going on here in real estate? Yeah, So I've seen a lot of stories on this. And then of course one of the things I've seen that's been really striking is the price chart of lumber, and that's just has been absolutely soaring. And it's actually like I see it mentioned in the pantheon of meme stocks nowadays, but of course, you know, lumber is an actual thing that people use to build homes and other important structures. No, it literally is like kind of becoming a meme stock, like lumber itself. Like there's like meme stocks and crypto and now people are making TikTok's about the price of lumber, and the line literally is just a straight up for days we're recording, there's April one, and actually the last two days, I think lumber actually sold off a bit. So maybe I don't know, maybe there's some sort of peak. I have no idea, but the point for like days and days in a row, the lumber futures market went up, limit up every single day as absolutely wild and it's like becoming a cultural thing. How much would cost right now? Yeah? Um. It's also sort of becoming a moment for I guess lumber Twitter, which is a really interesting community, as I think you recently discovered, right there's a really vibrant conversation around the lumber industry and lumber trading, construction, things like that. Online lumbers having its moment in the sun, and I just have to say, this is our chance to dive into lumber market structure. I've been doing a little bit of research. It is an absolutely delightful market, like just some of the terms that they use, like stumpage feet that is such a great word. No, it's great. There's so much good stuff here because it's got its own market structure, there's the futures market, there's the cash market. There's all these different entities. There's the lumber yards, the sawmills, the forests, the timber where they sell timber or turned into lumber. There's the home builders. Everything. Just a super interesting market that up until very recently, probably very few people other than people in the industry, had thought about. But now everyone wants to learn. And you mentioned lumber Twitter, it's kind of taking over everything. And the guests we're going to have on today, Um, we recently had him on TV to talk about the lumber market and I've never posted a clip that got so many views. I think it was literally one of the biggest views ever. Everyone wanted to hear more from the guest, so we had to get him, get him on the podcast to really do a true, uh deep dive into what's going on right now and how lumber market structure actually works. For sure, let's do it all right, So I'm very excited. Together we're gonna go deep on the lumber market. We're gonna be speaking with Stinson Dean. He is the CEO and founder of Deacon Trading, which is a lumber trading shop that operates all over the country. He's at lumber trading on Twitter, so he's sort of like become one of the pre eminent lumber Twitter experts blowing up now here. Everyone wanted to hear him on nod lots and now he's here. Uh, Stinson, thank you so much for uh for coming on the show. Yeah, thanks for having me. I'm excited to talk uck potentially endlessly about all the nuances of lumber. We're gonna go super deep on a lumber We're gonna go beyond just the church. But you know, like, so I have this idea I'm an expert on lumber now because I've been paying attention to it for two weeks. Um, I have this idea that there's you know, there's the home builders and they buy from the lumber yard, and the lumber yards buy from the sawmills, and the sawmills have a lot of pricing power these days, and they so forth, Well, why don't you give us the sort of like very high level overview of the different players in this market and also specifically what Deacon Trading does and how it fits into the sort of the lumber trading ecosystem. Sure, so the players in the supply chain. There's the producers on one end and the end users, which would be the home builders on the far end, and the it's easier to kind of start with the home builders. So the home builders is going to buy from what we call lumber dealers commonly commonly called lumber yards, those little lumber yards that you and I aren't allowed to walk into. They've got the high fences, they're big, there's a lot of activity going on, and they sell only two commercial accounts home builders in large contractors, and they sell them framing packages. So it has the OSB and other sheathing and panel goods. It has the framing lumber OH oriented strand board, that's the sheathing that goes underneath like your roofing shingles. Okay, and that, for the record, is even worse of a shortage, or at least from a pricing perspective, than than lumber. It's really insane. But it's like the most common kind of forbright sheet you see on the in cap at lows when you walk in. The point being the lumber dealer buys in bulk all of these of front products that go to build a house, and then they put them together in smaller housing packages a little bit of each and deliver it to pads and job sites. Right, So the lumber dealer buys in bulk all these building materials, and the bigger the lumber dealer, the more likely they buy direct from the producer. So I would say most of the lumber that goes into a home was produced at a sawmill and sold directly to a lumber dealer and then put on a flatbed truck for a framing package to the to the home builder. So it's pretty efficient in that way, but it's a highly volatile commodity where there's frantic scrambles for supply, there's scrambles of oversupply where you're scrambling just to get rid of whatever products you have, and there's all sorts of breakdowns in the supply chain. So it sounds easy, Hey, Canada, Canadian sawmill to lumber dealer in Houston, Texas to homebuilder. But the reality is that lumber purchased in Canada had to You had to make that purchasing decision eight weeks before you actually get to get the lumber, and so you're having to anticipate what are my lumber needs two months from now, and when the market gets really hot, it's like you're twelve weeks out and these lumber dealers and the buyers that work for them are often in a really impossible decision to forecast, and they all get their heads together and they try to forecast how much how much lumber do we need? So in between the sawmill and the lumber dealer, there's several different types of wholesalers and or middle middleman type folks, and that's where I fit in. And I said on the show, I look at myself as a liquidity provider because the market is ill liquid as a physical market and the futures market, so it just gets scarce very fast or oversupplied very fast. So I can stand in the middle and provide liquidity to sawmills that have a backlog of inventory, or I can provide liquidity to a lumber yard that misbudgeted ten weeks ago and needs prompt wood tomorrow. Because where I sit, I buy lumber from Canada and you know, eight weeks later, I have it an anticipation of someone needing it over the next thirty days because they miss forecast eight weeks prior. Okay, So that's where I sit, and there's not a lot of us, because I take a tremendous priced risk. The second I agree to buy lumber, I have risked on it won't ship to me for two to three weeks if the mills are shipping on time, and they'll take three weeks if the rail lines aren't running slow to actually get it, and then another thirty days to market it. So I'm I have risk on for a significant amount of time. The other type of wholesaler at our supply chain, and this kind of rounds it out. We call them a transit wholesaler, where they buy the rail car and they immediately try to sell it to a lumber dealer before it ships, and they'll you know, typically like right now, mills are selling for June production, so a wholesaler could buy a handful of cars for June and then they have six weeks to find a destination for it. And that's that's kind of the and that's more common. There's less risk. They try to kind of sell it before they pay for it, and that's that's more or less their their model. So you've laid out the ecosystem really well for us. Talk to us about how I don't want to say how bad things are at the moment, but um, you know how intense the price surge has been, what the scramble for wood is actually like, and where in the ecosystem those pressure points are coming from. It's a short squeeze. It's from the dynamic of the sales model that lumber dealers. I think. I don't know really how they did it before the recession, but coming out of the recession, they'll commit to deliver lumber um days out sometimes. Sorry, just to be clear, would you say the recession? Do you mean the last recession? Right? Yeah? The great one? Yeah, you're right, Sorry, keep going no, no, Well, which was which was the center of the housing crept? And since then the model has been and maybe this was model before I wasn't in the industry, but they commit to these sales. Let's just say ninety days worth of sales. The most inventory these folks can holds forty five days because of cash constraints and kind of how they manage manager inventory. When they're bullish, they'll they'll go forty five to fifty five days. When they're barished, they'll work their inventory down to thirty days. And if you think about that, you're fift covered, and you've got ninety days worth of commitments and forty five days worth inventory. So they're buying on the open market. You know, they have their average cost of forty five days worth the inventory. But then they got to cover the next ninety days or excuse me, the next forty five days. And when they don't cover that aggressively, maybe they they dial it back to thirty days worth of inventory, anticipating a dip. Well, the dip doesn't come. Didn't come, which we were all anticipating, me included um in Q one. We we stayed kind of flat at a thousand dollars for six weeks, and it felt like things were going to crack to the downside. But the mills were able to hold out. I think they were able to sell the Canadian market. They were able to say sell to Asia and this kind of standoff the mills one. So now you've got ninety days and commitments, thirty days worth inventory. You've got a lot of ground to make up with your purchases. And I think that's what's happening. That's what's happening right now is you've got to get you gotta cover your commitments. Eventually they're going to get covered. Eventually, they're going to buy enough wood cover, get the lumber out the door. They're gonna have made a ton of money on the inventory they had on the ground. They're not going to make as much money on these open market purchases where they're scrambling the cover, and those two dynamics, or those two profit margins will average out, and I think ultimately they'll be okay. But what's happening right now is there's commitments that need to be covered, and we've all waited too long to get those covered. So basically, you have the lumber yards and they you know, if they don't deliver the lumber they've promise, they you know, they've defaulted. So to avoid that, they have to cover those shorts. Let's talk about the um the mentality, you know, like coming out of the Great Financial Crisis, I have to imagine that just sort of like numerous players in the industry got totally wrecked. And I remember for years people talked about housing is never really gonna come back the way it did, And then of course we had the crash last March and a lot of people got DejaVu. But then we saw, okay, we got some people started renovating their homes and that called people by surprise. But people didn't think that would last and then okay, the winter is gonna come. Then didn't slow down. So talk to us about like the role that essentially diminished expectations, permanent pessimism and fears of the ongoing, fears of another shoe dropping. How that contributed to the yards, uh, not caring that much inventory. Yes, So it's such a great point. And I can speak confidently about my market, and I think I can say that we're more conservative than others because of what we went through in two thousands six, seven and eight and what we ignored in two thousands six and seven and paid the piper in two thousand and eight, and we we really were one of the sectors that really never still haven't reached an eclipsed our peak. You know, if you just look at housing starts, and it was pretty devastating, as you can imagine if for everyone involved, and so a lot of people got cleaned out. And if you survived and you're still around today, and you you survived twelve years ago, it's because you're extremely conservative, right, You hold a lot of cash, you don't put your neck out too much. You don't. You're you're you're slow to reinvest, you're slow to hire, you're slow to expand, your slow to buy more trucks because what if? Right, it's it's such a year. And ultimately you're also slow to buy a bunch of inventory. You want as little inventory as possible in case the bottom falls out. So that's that's very fresh, even all this time later in everyone's mind. And again, the names that are around right now are around because they were able to scrap, scrape and survive being the epicenter of the great financial meltdown. And so there's just a characteristic of these legacy names and the folks who run them that they're just conservative. And the same with the home builders. You listen to the home builders. They're paying down debt and they're not aggressively going after land and they're playing it safe, and it's like, what are we doing here? We have this massive housing shortage, but you can just feel how hesitant everyone is to believe it. So me included last March, I was like depression, this is bad stock market sell off, lumber future sell off. And I mean I was quote in the Wall Street Journal that April saying, no one's thinking thinking about buying a new home. It's the last thing on anyone's mind. And so we all de risked. We sold on our inventories to almost nothing. The sawmills, if they had any extra inventory on the ground, which they typically operate with to fill in the gaps and smooth out the supply chain in case there's a weird production run glitch, they can pull from the inventory, fill the car and get it gone. They sold those stacks down to pavement. Lumber dealers went sold their their inventory down to nothing. Middlemen and liquidity providers same thing. Like none of us wanted to risk gone. So then you know, we started the rebound. And the short of it is, prices went from to fifty on the future screen to four fifty to five hundred, and we're all thinking, oh, this is the top, like historically a great price us. And in two thousand eighteen we went to six fifty five and that was the top. So we get to six fifties sift five, like this is it, there's no way, and then hundred thousand by September, and those last three for just backbreaking for the industry. High prices cure high prices. But in our industry, high prices raise concern and people get really scared that it's just going to crash. So everyone was slow to believe in the recovery, so no one and no one invested in inventories. Effectively, the mills didn't invest in inventories, lumber dealers didn't invest in inventories. Prices are too high and go to wait for them to come down just can't possibly last. So that hesitation to lean in and to put risk on perpetuated the situation that we're in. That's that has been such an acute run up. We'll talk about larger structural issues supporting the price of lumber, but what happened and is happening right now, I think is ultimately from the scars of the Great Recession and the conservative nature of our industry not wanting to put risk on via lumber inventories. Well, so what would it take to actually change that conservative mindset? Or maybe another way of putting it is what would it take to make the industry more flexible and better able to respond to change. Is it just a function of you know, trees taking a long time to grow and taking a while to transport. That means you have this sort of like longer lead times um that feeds into that forward planning. I don't know the answer to that question that I hinted at the largest actual problems. The Canadian forests are where their problems are. The Canadian government a few years ago decided we are logging these two fast and that we're just not going to have the forest if we keep going at this pace. So they reduced what they call the annual allowable cut a C annual allowable cut before they had expanded that a C. Because there was a bunch of what we call beat beetle kill trees out there from this pinewood beetle infestation that it's most folks have heard of it, but it was devastating, it was. It was ravaging forests up there. So they opened up the force for logging to get those trees cut while they're still harvest the bowl. You can still use them for lumber. You still find blue blue stain lumber in the stores. Some people use that for decorative reasons, but a lot of houses built in the two thowenty have blue stain studs on them, and the those are beetle kill logs, which is also a thing in the US. So they opened they opened up logging to a much faster pace to harvest the trees before they rotted and that you couldn't harvest them in the lumber, and also reducing the fire risk of having dead trees in your forest. Right. And you know, there's a long discussion about why is their pine beetle infestation is it so bad? Um? A lot of that points to the winters not being as cold for as long to kill those beetles off, But ultimately it leaves the forest vulnerable the fire. So they wanted to get in there and coal as much of those as they could. So if you look at lumber prices pretty flat, and you look at lumber stop, the publicly traded lumber sawmill companies, pretty flat pricing, not a lot of dividends, um, really low returns over over ten years on just their their stock price, it was not a great business to be in. We're just flooded with lumber, partially because we were overproducing, because we've got these beetle kill trees We've got to take care of. That changed in two thousand and fifteen or sixteen, they reduced the a c and that that's set by the Canadian government who they called the Crown. Crown Land, they own the forests up there. And I am not a deep expert in these licenses and tenure, but the mills and logging companies are allotted timberland to the harvest. They control basically the paste of what they can harvest, so they just cut what you're allowed to cut. So the mills they're they're just there's these mills all over in the bushop in Canada, and if there aren't enough logs to keep them going, and then lumber prices were low and the returns were low, like these these mills started getting shut down. And that was mostly two thousand nineteen. Lumber prices were very low. Housing market was mediocre second half of eighteen and the nineteen, and it just devastated the industry, like it was really sad, Like main employers lumber towns just like devastated. The main source of employment in this tiny town is shuttered. Now, of course we're missing that supply. I don't think all of them would still be here. I think the log supply was going to ultimately shut down several of those mills anyway. But now here we are less logs to cut, a harvest, less mills to do it with. And you have an industry, a sawmill industry that really has had mediocre returns for ten years and now that here's their their moment to maximize. There's so many different strands on and pull on, but let's keep talking about this sort of the relationship between the sawmills and the tree growers the forests. Some reports have said, uh, oh, there, so there's plenty of trees. The real issues at the the just the saw mill capacity as you just described. I've seen others say, actually, there isn't as many trees as people think because a lot of the trees that are available there in the South, and those trees aren't really great for building homes. Maybe they're like better for cardboard boxes of the e commerce industry or something like that. So are there a lot of trees available? And then also like how do the Trump teariffs play into it? Um, No, there's not a lot of trees available to build. To build homes as we build them today, the plate material, which is kind of the horizontal laying lumber and the studs in between them behind your dry wall is is most likely a Canadian specie piece of wood, and that's how we build homes. There's there's certainly a lot of production in the US and the Pacific Northwest that is interchangeable with Canadian spruce, but they don't they don't produce as much as the Canadian lumber mills do. And um, that is the way we build the homes. We don't build up. We don't build homes with southern yellow pine from the US South. You could, and I guess you can, but it's it's a different stick. Um, it's heavy, wet, dense, crooked, twists, a lot of waste on the job site. You can't store it. So it's like we'd have to change what we do. So, yes, there's a ton of trees in the US South, but we don't build houses with trees from the US South. We build houses from trees from the Pacific Northwest. In Canada and particularly Canada, as we just talked about, they're getting more and more scarce because they just made the decision. And you talk to most Canadians, they don't disagree with this decision. It's like you've got to stop logging at this pace where the forest won't won't be here, So it's not really a point of contention up there. It's taken as factum, and I'm not gonna argue with them, So I don't you know, I don't want the force to go away and go away. And they told me. I thought it was thirty years. It takes eighty years to grow a Canadian lumber tree. Okay, So they gotta they had a hard decision to make, and they made it, and we're all going to have to adjust. So given that long lead in time, I mean eighty years to grow a tree, is the solution to the squeeze on the demand side rather than the supply side, because it feels like you can't fix the supply issue anytime soon. Yeah. Amen, I've been saying that. That's kind of been my narrative. Once prices went the seven hundred and they kept going, I goes. I was like, something's wrong here because these mills have never seen seven dollars in their life and we still couldn't find lumber, Like, why why aren't they producing more? And there used to be an old adage when I was taught in the lumber industry the sawmills can always outproduce the market and then I had a bad habit of doing so. So when returns got good, they turned the switch on and they produced a ton of lumber and crushed price. And I'm like kept waiting, kept looking around, like where, why why aren't they doing this? Where's like this hidden inventory? I keep hearing about seven Why aren't they selling futures? You know, they're not showing up as as headers in the CFTC report, Like something's wrong, and clearly the supply side can't fix this. Clearly they just can't. Like they would. It would be criminal of them. I mean, like maybe fiduciary wise if they were like secretly not producing as much as they could when lumber hits seven eight nine, Um, it's just folks were like, oh, they're hiding it, and there's more that we don't know about. But I like, they're publicly traded. They can't do that, and it would be complete shifting from all their past behaviors. So it is not a supply side fix, not in the near term. So yeah, it's a demand side, and it's high prices cure high prices. And we have not found that equilibrium or that tipping point where we start slowing demand because the high lumber prices and it's astonishing and it makes you think maybe lumber should have been more expensive for a lot longer. So I'm glad you mentioned the futures market because we haven't really gotten into that, but it's something. You know, we had this long streak of like limit up, limit up every day. Talk to us a little bit about the relationship between the futures market and the cash market and how you use both and how they slip, but how tightly a line they are, Like, give us a little overview of m the future market. Yeah, and it's relationship to the whole thing. So I'm like, full disclosure, highly dependent and a huge user of lumber futures. That's how we run my business. And I don't care if they go up or down. I care that it's easy to execute and get in and out, so I care about liquidity. The lumber futures is one rail car of lumber priced Prince George, British Columbia in US dollars. So the number you see on the screen is per thousand board foot, which is a volume measurement, and the two by four eight I think there's like six board feet in a two eight stick you can build like four to five houses out of one futures contract worth of product. It's a it's a large volume, but that's how our industry traits lumber by railcar, especially out of the Pacific north western Canada. Being a cash and futures trader, I I can tell you that it's highly effective, highly correlated. But convergence and which would be the cash or spot price converging with the futures price of expiration. It happens every contract. It's a physically delivered contract, so it has to happen, and the correlations are really high. The problem when you look at it, you know, people see the volume and or the open interest. So when we were going locked limit up on this run, there'll be a hundred and fifty trades on the screen on the front rount and people would point that out and I would say, that's about a hundred and thirty more trades than what was happening in the cash markets. The cash markets were there was no market, There was no market for wood. There was no wood to be found, so the only alternative was to buy lumber features for your purchase. Because again these folks are making purchasing decisions today for wood, they're going to need eight to ten weeks out, so buying a May futures contract in March like that aligns with what they would be doing in the cash markets. So the cash markets and the future markets are are really marry each other really well in that they're highly i liquid, highly volatile. One of my observations has been the consolidation of our industry from sawmills to lumber dealers. Um not so much homebuilders because they're not buying real cars with lumber from sawmills. That's not how they operate. So lumber dealers and sawmills make the market. They're they're the ones moving rail cars all all across the country. They've been consolidating since the Great Recession to the point where there's basically four or five major Canadian producers and there's basically three or four, maybe five major US lumber dealers, and so that's five asks and five bids, and they always get these massive standoffs. And you can imagine if your bid asked is hundreds of dollars apart, well, when someone blinks, the whole market makes this hundred dollar move because you heard this rumor that's so and so made a block purchase, and now the mills are off the market and there's no more open market would to buy and it's because there's not a lot of bids and asks in the cash markets and the futures markets kind of represent the same thing where the folks who taught me lumber cash markets. When they started, there was a bunch of independent, mom and pop lumber yards and there's a bunch of family owned legacy sawmills dotted all around Canada and Pacific Northwest. So you could information arbitrage just by working the phones and find a sawmill that that is behind the market pricing, find a buyer that didn't understand the market has moved because you're just making thirty calls to the buy side, thirty calls to the seal side of every single day trying to find the market. So you could just do this information arbitrage, and like you just make a killing and you're back to backing most of it, so you're not even taking the price risk. Well, now there's five and there is no information or arbitrage, Like you can't find an inefficiency in pricing because there's only five of them and same on the buy side, Like you can't find anyone sleeping there. All know exactly where they're at. They all know exactly where the mills stand. So there's no way to to to find a busy lumber yard owner who's worried about a truck that's late, you know, not paying attentional lumber prices, and you can goose them for ten or twenty bucks per thousand because they're not paying attention. Like that doesn't happen anymore. We have professional, extremely sophisticated and very smart centralized buying floors at these dealers that buy at their corporate headquarters for all their their locations across the country, and they're extremely smart and savvy and crafty. Like these guys are very very good at what they do, so it's hard to understand what decisions they're going to make because they represent hundreds of yards where twenty years ago hundreds of yards represented hundreds of yards. So there's just all sorts of different inefficiencies. So that dynamic, that consolidation dynamic, has made it harder to trade lumber because there's just these massive moves and it makes futures mirror what's happening in the cash markets. I'll often say, if you think futures is crazy right now. You should see what's happening in cash markets. There. There are days, there have been days during this run. You call the sawmill, they don't answer the phone. It's like we've got nothing to sell, Like there's nothing for sale. So what are you gonna do. You gotta buy lumber futures to at least get something on so you can get a delivery in June. It will ship to you in mid May. It'll take a few weeks to get to you. And that's so that's why we see these squeezes and the big limit moves at the open of the market, because they called the sawmills five minutes before and they're what we call off the market. They're not even showing any inventory to sell. This is a really dumb question, but what's the normal state of the lumber futures curve? Is it contango or backwardation? It's um typically in contango, yes, um. I did a study when I was launching the business over twenty years. It's there's typically a five dollar carry five dollar contango in the market on average, and the highest backwardation we've ever seen was in two thousand eighteen. I think it was forty bucks or something like that, and that was crazy crazy at the time. And the biggest carry we've seen was later the same year. It was a forty five dollar carry or contango um where the front month was fort discount to the next contract six days out. You know, it only takes twelve bucks per thousand to store it, and the market was paying you forty five dollars to store it in the second half of eighteen and now we have a hundred and thirty dollar invert. Last contract we went up over two hundred. The biggest one was in September when this whole thing got kicked off, we had a three d dollar invert. So um it it is way out of whack, but representative of the cash market. So you talk about how like there it's hard to get an informational edge in the market. You talk about how sophistic catered these sort of big players are. So I have like sort of two related questions. One, what is your edge? I mean like essentially like where does your alpha is the term? Where does your premium come from into such an efficient market? And be what is the role now of relationships in the industry data you as a trader might have your relationship to the sawmills, to the lumber yard. How important is that in this sort of the current structure of the market. So for me, I talked about being a liquidity provider. If you can manage your risk and provide liquidity in an illiquid market, there's a lot of reward there and if you could, if you can reduce the risk compared to the reward um, you can do pretty well. I just take on a lot of physical lumber risk where I'm buying real cars a lumber, I get them unloaded, I put them on the ground in different markets across the country for someone to need something right away because they their blumber budget was off on their inventory. And I'll use futures to manage to downside risk. So when futures go up, like I have massive margin calls. But the way it works, hopefully is your cash value is moving up faster and further than your future's losses. And you can imagine if there's a scramble for wood and the mills will get you would in eight weeks, and I can get you would tomorrow. Folks pay a premium for that to get it tomorrow and get it in I also sell in truckload quantities, so I'll charge a higher price, but they're not committing to a car load. There's four trucks for everyone car load, so they can swallow one higher price truck, get it in, get it out, and kind of go hand to mouth in that fashion. Um. So I'll I'll be able to provide just in time inventory at a higher price, but it may not move their average costs that much because it's one truck versus a carload. That's something I learned from grain traders. I basically use a grain elevator business model with risk management basis seasonality. Um. And it's pretty basic and agg like. You won't find folks who quote you flat price corn. They're going to tell you it's twenty over des Moines or something, or twenty over Chicago Futures because everyone's hedged, because they're not crazy and and Lumberd's, it's just different. Folks use futures as a physical proxy. They use features to speculate even if they're in the physical marketplace. So that causes a lot of inefficiencies and futures which allowed me to arbitrage, you know, the cash value versus a hedge. I can get off and that those those windows were open and closed, and it works both ways. So we had this massive sell off yesterday in futures, and that was beautiful for me because nothing changed in the cash markets at all. In fact, cash went up eighty dollars and futures went down forty five dollars forty eight dollars from the day before, and so like that was a weird speculative move that did not match fundamentals, and I was able to arbitrage that and and make good money. And you know, it goes against you too. Sometimes it will make a speculative, non fundamental move to the upside and I'm kind of locked out of the market. I could buy more. Typically that would be a recipe. Futures are up and the cash market didn't go up with it. Then cash is cheap and futures is expensive. I'll sell the expensive thing and buy the cheap thing. But don't always work that way, so often I just kind of get locked out. I can't price competitively because I have hedges that are working against me. But that's the life of a hedger. And I just make modest, and I mean modest, at least consistent margins and up and down markets. I don't really care if the market goes up or down. I just care that there are spikes in demand and scarcity in my markets that I can fill. You get my hedges off and then wait for another opportunity to restop. So yes, we're where is the edge now? And it's not making sixty phone calls a day. It's being big. It's it's having access to the mills, it's having access to that information at the middle level, and it's being a big customer that an already big producer wants to pay attention to. You have to be big. The producers won't pay attention to you. You're not You're not worth their time. And it's not like personal, but like they got to move a bunch of wood. They're massive company and they got to face another massive company. So if you're big and you move a lot of wood, that's the edge. And if you are small, you've got to go through a buying group or buy on the secondary market from from folks like me. So that that now is the edge, and I think that's what you're seeing in consolidation. One of the motivations was for the buy side, but another factor of consolidating. Another benefit is I think you're going to see pricing power facing the home builders. That power dynamic is going to change because all of a sudden, these vendors are getting big enough to say, we're not gonna do ninety day pricing. Because the homebuilder used to be used to say, okay, you won't this other lumber yard, they'll do it, and they would do it and they wouldn't care if they lost money. They just got a huge home builder as a customer. Right now, it's now the homebuilders going to start seeing there's less options and if they're not going to give me ninety day pricing, there might not be another lumber yard to give me ninety day because now those lumber yards on each other and there's gonna be a power shift and how that risk is managed. And just today we saw some comments from home builders via Ali wolf On on Twitter. She said they're no longer locking in prices when there's just dirt. They're they're offering homes for sale once they got the lumber literally on site, so then know what the cost is and then they can mark it up. That used to not be the case. Homebuilders had a pretty good run where they did not have price risk, and I think you know these contracts and how they're priced. I don't have visibility to them and their proprietary but I think we're seeing a risk transfer back to the home builders because they're losing supplier options, so that the size now is where the edge is. I want to ask you about the home builder response, but before I do, you mentioned this idea of moving lumber just then, and I imagine that when you're dealing with, you know, big amounts of a physical commodity, whether it's fogs or sheets of wood or whatever. UM transport costs can be pretty high. And one of my pet themes for the year is this idea that economics doesn't actually do a great job of appreciating transport costs and UH and taking into account shocks to those. And we've seen a lot of shocks in transportation this year, so I'm just wondering how that has affected the business, if at all. Are you seeing UM gridlock or shortage of truckers things like that. You know, there there was a big pinch and truck truck drivers truck availability and it made a lot of headlines. I think it does an eighteen nineteen like with assigning bonuses, and they're trying to recruit long haul truck drivers because a lot of lumber is moved. Like I move all of my lumber from my storage facility to my customer via a flatbed that I go find an open on the open market, the trucking market, on the quote board, the load boards that have online, and tell them what I'm going to pay for lumber. It lays shipment prices have gone up. I'd say from two years ago, from from typical lanes that I would sell consistently, Prices are now higher than they were a year ago. You're a pre COVID, but the liquidity of trucks has has vastly improved. I think that push for hiring drivers and investing in more trucks. You're able to get trucks more easily than you were a year and a half ago. Two years ago. Now that's just me and my little niche, and I'm sure there's there's data that at my point otherwise, but in my experience, there's more trucks two move loads. I I get all my loads moved in one or two three days. It's pretty rare that I get stuck a week out but that was happening all the time, and I'm remembering in two thousand eighteen massive logistics issues with trucking. The other element for lumber is and this it's the biggest transportation costs is the rail freight from the Pacific Northwest to Atlanta. So the futures contract is priced FOB Canada British Columbia hundred and twenty dollars per thousand board feet gets it to Atlanta. Hut. If you're in Atlanta and you look, you want to do the math. You're not paying the futures price. You're paying the futures price plus a hundred and twenty to to get it there, plus the handling to get it undone. And then if it's got to move from distribution facility to a store, you know that's that's another twenty to thirty bucks per thousand board feet. And what we've experienced in lumber is the c N and the CP rail lines obviously dominate original rail origination out of Canada, and the c N is the biggest mover of lumber out of Canada, and the sawmills or the seller controls freight, so I'm always buying delivered Atlanta delivered Dallas, delivered Baltimore. That's my price. I don't face the rail line. I don't pay them, I don't book rail cars. I pay a delivered price. And the sawmills have contracts with the rail lines. None of us are privy to to have a certain amount of cars, you know, each week, each month, depending on what they think their needs will be, because they don't want to have more cars contracted than they need. So you can imagine sometimes they under budget how many rail cars they need and we'll get bottlenecked and there's not enough rail cars moving across the country. Because I'm making this up, but because two months ago they miss interpreted, they miss forecasted how many rail cars they're going to need in June. This is the one thing that strikes me is there's only one national price as you describe it. Like when I think about the oil market. Obviously we talked about like West Texas Intermediate, but I can like go on the Bloomberg and there's like there's dozens, I don't know, like dozens of actual oil prices everywhere around the country, and they tend to correlate, but they're all slightly different because it's slightly grade, or it's a different logistical network to get there. But as you describe it, there's like one price of national price of lumber, and then you add on a cost of transportation depending on how far it has to go, whether it's to Dallas or Baltimore, in Atlanta or whatever. So how does that change the lumber trading game? The singularity of their just being the one price you know, to me, it makes it easier and less there's less arbitrage opportunities because I know in grains and an energy, when I was around those traders local basis, that was an information arbitrage and you could point the market would get so inefficient that you could rail it to Kansas City and then truck grain to Tulsa instead of railing at to Tulsa because the rail to Tulsa there's a spike in rail freight. Right, we don't experience that and lumber because the sawmills control the freight, which for me is kind of a nice perk that I don't have to deal with that and I don't have to have a logistics person manage all those things. But it's interesting because if Phoenix is blowing up, the sawmills and buying a bunch of lumber, they're driving up that fob Prince George price. So if you're in Dallas or Atlanta, you're kind of at the mercy of how busy is it in Phoenix because they're bumping up everyone else's price, and that that dynamic is unique, I think to lumber. And that's because the shipper controls freight. And that's also because because the shipper controls freight, they are the importer of records, so they're actually paying the tariff instead of the by side, which I think is unique for for imports. You know, it's hard for me. I haven't don't have a ton of experience in other commodities, but in a way, I think it makes it more efficient and I know for me running my business, um, it really simplifies things. The other side of that sword is some of those situations where I was talking about you cannot bid up freight to get the product because you need it so badly, like it is a very finite, like there is no price you can pay because you don't control the rail cars. You can't tell the c N I will pay two, three, four x whatever it is because I gotta have the product. So it causes major issues and peak lumber season shipping seasons. And if you look at lumber shipment seasonality, it's it's big and January and February and then there's another bulge in the fall. And if there's a shortage of rail cars, there is no open market wholesaler of rail cars that you can go to to get your lumber for me to be like your ap the mercy of the sawmills contract with the rail cars, so that will drive out price in the on the futures contract. But more than anything, it drives up prices for local basis for someone like me who has it so so lumber yards have learned this over the years and they try to anticipate and buy before there's a rail shortage um and load up on inventory ahead of time so they so they don't get starved out from lack of contracted rail supply UM. And I think that was from the traders that have been doing this longer than me. That transition happened about twenty years ago UM And I imagine it's because the rail lines just wanted to face a bigger player who they could just deal do volumes with versus onesie tuesies, little lumber yards. So I have a really basic question, but, um, who is making money from the price rise in lumber? Because I get the sense from this conversation that even though we've had this big surge, it's sort of made things difficult for everyone, and there's no one in the lumber ecosystem who's like making out like a bandit at this moment in time. Yeah, that is very true. The sawmills are doing great, I mean unbelievably great, and it's long overdue, and I'm happy for him. I think we were going to grind higher to a price like this eventually, but COVID, you know, did its thing, and and we did it all at once. And the reason I think that was because that's what the Canadian experts that I work with and the folks who cover that sector have been telling me for a while, like it's coming, it's coming, We're reducing the cut, and um, eventually prices are going to be astronomically high. It just happened very quickly, and it also happened after it sell off the two fifty dollar low and now were at basically twelve months later. So the mills, for sure, easy answer after that because it's the rise has been so sharp, it's going to compress margins for under lumber dealers and homebuilders that kind of have that forward price lock dynamic. But prices have been this high for six plus months. We know then that these prices have been able to been marked up and sold over the past couple of quarters. So higher prices generally are more profitable, and we love it as an industry. How we got there is not ideal, But if we stay here, everyone's gonna make a lot more money everybody, just because gross margin for a lumber dealer, according to publicly traded financials on lumbers is a lot better than six lumber, right, So if we're higher for longer, everyone's going to do very well. This transition into it is fairly painful, but I am of the belief that the floor for this market, because the market's going to stay volaible. It hasn't been volatile. If it only goes up, that's not volatility. That's just one direction you needed to go up and down. Eventually, folks will get covered and they'll get the lumber they need and will roll over. But if they've been selling forward nine thousand lumber purchases are extremely profitable for them, and this idea of am I going to get caught in a short squeeze again, shame on me. So I think you're gonna see bigger lumber purchases on these dips so they can be well supplied and have the product, because that's ultimately driving this behavior. It's not the price, it's it's having the product on hand to fulfil your commitment to the builder. So higher for longer means these prices get normalized. A gross margin on a higher price is I deal for everybody involved the transition to get there. Obviously it's painful, but I think at the end of the day, for this housing cycle, it's a great thing for the industry. Stinson, this was fantastic. I loved learning about this totally new market structure and hearing your perspective on it. Really appreciate you coming on a lot. Yeah, Hey, I appreciate it. Folks learn something and uh happy to contribute. Thanks so much. Yeah, I think they definitely will. Thank you so much. Tracy. Remember a recent episode with um Sam Bankman Freed the Cryptoga. Yeah, sure, I kind of been thinking about that a lot actually, with like the with the Lumbar conversation, and his whole story is about No, I'm serious, like his whole stories, it's like okay, like you bought this and then like you sold it, transferred it to someone in Japan and stuff like that. Like I feel like all the interesting markets essentially involve they guess they involved legwork, like they involved of like putting in the work to like, well, this sells for this and this place, and this sells for this in another place, that you have a relationship with this and you get to some size that you can do it. And it feels like even though like we kind of joked at the beginning, like lumber is kind of a meme stock or it's kind of a crypto, Like they're kind of are similarities in market structure, I feel like, is that contrived? No? I mean, I think it makes sense that markets with arbitrage opportunities are more interesting, and certainly they're going to attract people who are quite keen on making money. But again, like making that money does involve having some sort of edge or informational advantage or some sort of ability, for instance, to arbitrage the price of bitcoin in South Korea versus somewhere else in the world. So there is that. The other thing that this reminded me of is our conversations around COVID and just this idea that the coronavirus sort of accelerated all these previous trends that were already underway. And if you think about lumber Stinson was describing the supply issues in Canada, the pine beetle infestation and the fact that Canada was sort of becoming more conservative about how much would it was actually chopping down. That seems to have gotten worse, um over the past year or so, and so it feels like a lot of this was on its way, but because of COVID, the impact has just sort of, um, you know, multiplied. Yeah, And that's the other thing, Like, you know, the population of the United States has grown a lot, because that's what populations do. The home buying population has grown, and like people have like talked for a long time about how the US was just like under housed and the scars And I love that point you made about the scars of two seven eight continuing to link over the industry, linker over the industry. So it's kind of like we're getting this like shock therapy for the housing market overall, where we knew we've been under housed for years, and suddenly we're like trying to like make up for that under housedness in like the span of like a year or two. And so you get you get these like you know, super like painful periods like we're seeing right now. Yeah, it also makes you wonder if we're going to flip from being super conservative in the aftermath of the two eight financial crisis to everyone being scarred by the undersupply issues in one like for the next decade, is lumber just going to be this huge market and everyone's ramping up production. Well that's what he kind of was hinting. Yet at the end, right because you're like, well, no one wants, you know, no one wants to get short anymore. Like if you basically if you think of all the lumber yards, is having just been like brutalize in the short squeeze, and now that becomes the new thing that scars them, then maybe you start to get this other correction. You have to start to get like more building and more investment and more capacity to probably ultimately good for the economy rather than rather than shrinking. Yeah, more houses at least. Okay, shall we leave it there? Yeah, let's leave it there. Okay, this has been another episode of the Albots podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway and I'm Joe wisn't Thal. You can follow me on Twitter at the Stalwart. Be sure to follow our guests on Twitter Stinson Dean. He is under the handle at lumber Trading. You really want to check out all of lumber Twitter. It's a really good spot. Follow our it really is. It's great. Follow our producer on Twitter, Laura Carlson. She's at Laura M. Carlson. Follow the Bloomberg head of podcast, Francesca Levi at Francesca Today, and check out all of our podcasts at the handle at podcasts. Thanks for listening.