Lumber Monthly

Commodity is a very interesting trading vehicle because it has intrinsic value. Of course there are no intrinsic value on stock indexes or currencies etc, but when we talk about commodities that can be physically delivered have intrinsic values. Where are the intrinsic values coming from? Cost of production. There are cost of production when you produce, for example, crude oil, soybeans, cattle etc. If you were a farmer and you're raising lean hogs, you are there to many money so you will be selling your hogs more than you invested.

If you watched futures options long enough, you know premiums are skewed to call side. Why? Will orange juice ever go to zero? There's no way it'll go to zero. It might get cheaper though. It could go below cost of production. If that happens, OJ farmers will grow something else than OJ. Now there are not enough OJ farmers. What will happen is OJ price will start heading higher (remember supply / demand curve?). This cycles happen over and over again. As a trader, I would like to take advantage of it.

This is the monthly chart of Lumber. The lowest point in last 90 years is 220 level and we're now about 250 level. This is where you can start getting positioned. This doesn't mean that we should just go out and buy futures contract outright. There are a lot more about this type of trading. Unless you do your homework, you'll get hit badly, but its reward is very significant.