Understanding the Lumber futures delivery process

The Lumber futures contract from CME Group is an effective risk management tool for market participants, partly due to the ability to make and take physical delivery of wood. Let’s review the delivery process for those interested in carrying the contract through its expiry.

Physical delivery of lumber takes place in the Chicago Switching District, which is accessible from both western and eastern sawmills. Many species can be delivered through the futures contract – SPF, Douglas Fir, Fir Larch, and Hem Fir. All deliveries must be made after expiry of a contract from a producing mill.

The seller of an Exchange contract, the party responsible for arranging the physical transit of lumber, does not need to be a sawmill, but the lumber needs to originate from a mill after the counterparties are matched.

Though each futures contract represents a truckload of lumber at 27,500 board feet, delivery must occur via rail and in increments of four contracts.

Once the futures contract stops trading on the business day prior to the sixteenth calendar day of the contract month, participants with remaining open positions have until two business days prior to the twenty-sixth calendar day of the contract month to exchange for physical (EFP) out of those positions prior to being matched for Exchange delivery.

The business day prior to the twenty-sixth calendar day of the contract month is known as Single Position Day,  Intent Day, or Notice Day.

All participants with remaining long and short positions will be matched with an emphasis on keeping size together for Exchange delivery. Once matches are made, the party providing shipping instructions has two business days to do so.

Deliveries need to be made to facilities within the Chicago Switching District. The seller then has ten business days to load and ship the lumber in accordance with rules defined in CME Rulebook chapter 63.

The delivery will be considered complete once the buyer provides the Exchange with proof of receipt into the facility within the Chicago Switching District.

There are penalties for not following Exchange delivery rules. For example, missing key deadlines or engaging in the delivery process with contracts outside of 4-lot increments will be subject to penalties. These rules and monetary penalties are written in CME Rulebook Chapter 63.

If both the buyer and the seller would prefer to follow a different delivery timeline, or otherwise change some aspects of the delivery, the two parties can agree to an Alternative Delivery Process (ADP). They just need to fill out paperwork with CME Clearing and the delivery will be taken off Exchange.

Although delivery of lumber through the Exchange is rare, the physical movement of wood from sellers to buyers at the expiry of the contract is critical to the convergence of futures prices and cash prices.