If you laid all of the 2×4s that make up a railcar full of lumber end to end, they would stretch 32 miles.

I know this oddball fact because I want a railcar full of lumber.

You see, I’m planning to buy a lumber futures contract. The standard contract of lumber on the Chicago Mercantile Exchange is 110,000 board feet. This is the capacity of a standard lumber centerbeam railcar. (I traveled on top of a lumber car once… out of the BNSF Spokane yard… but that’s a story for another day.)

I’d love to have this wood in my front yard. But I don’t have a warehouse, and I don’t have a railroad spur to my door. That’s what’s great about the futures market. I can buy lumber now for delivery in the future.
A railcar of lumber sells for $20,000. A November delivery of lumber, however, costs about $27,000 today. I’m okay with the extra cost (the $7,000 over the current spot price). Lumber spoils. Storage is expensive. I’ll pay the premium for a future delivery.

And in fact, I won’t take delivery of my lumber. What would I do with 32 miles of lumber, anyway? I’ll sell it to someone else before the delivery date in November.

I want to buy this lumber because, in my opinion, it’s too cheap. As a long-time lumber broker and trader told me on the phone just now, prices are “economically unsustainable.”

Let me explain:

Even the largest, most efficient producers of lumber in North America cannot fill a railcar full of 2×4s for $20,000.

Take Canfor for example. Canfor is the largest producer of lumber in Canada. It made a profit in 2006 and a loss in 2007.

These numbers are very rough, buy they imply that for Canfor to break even, the company needs to sell a railcar of lumber for around $30,000. It’s nowhere near that now.

With the market price for a railcar of lumber at $20,000, every lumber producer in Canada is slowly going bankrupt, including Canfor. The Vancouver Sun did a survey. It found the Canadian logging industry shut down 34 lumber mills and fired 10,000 workers in 2007.

Lumber is down in part because the housing industry is in a slump – homebuilding and remodeling make up two-thirds of U.S. lumber consumption. Right now, the major Canadian producers are trying to raise cash and ward off bankruptcy, so they’re dumping their inventories on the market. That’s pushed lumber prices even lower. But soon, there’s going to be a shortage of lumber.

Contractors will notice how cheap lumber is and will decide to start building houses again. But they’ll find the forest industry has shuttered all the mills, fired all their workers, and sold all their lumber.

This will cause lumber prices to rise. I expect they will double within two years… to around $40,000 a railroad car. I plan to buy my lumber with 50% borrowed money, so I’ll double my money if I’m right. The risk is if prices stay low longer than I expect, I lose $7,000 in storage costs.

If you want to play this idea without using futures, consider buying stock in one of the large Canadian forest-products companies like Canfor (Toronto: CFP) or Western Forest products (Toronto: WEF). But there’s risk here, too. These companies have enormous debts and are at a high risk of bankruptcy…

So what’s holding me up right now? As much as I’d like to buy, lumber is still in a downtrend. I’m waiting for the price to turn around and prove my thesis. So before I buy my railcar of lumber, I’ll wait for a 10% rally in lumber prices.

More to come when I see that rally…