UPDATE 2-Lumber futures bound higher on production cuts

(Recasts, updates prices, market activity; adds analyst comment and home sales data)

CHICAGO, March 3 (Reuters) - Lumber futures posted limit gains at the Chicago Mercantile Exchange on Tuesday and were the highest in a month after lumber producer West Fraser Timber Co WFT.TO said it will cut production.

While there were doubts that the production cuts will offset declines in demand caused by record drops in U.S. home building, traders aggressively bought lumber contracts.

The limitless CME March lumber LBH9 closed $15.90 higher at $165.40 per thousand board feet and May LBK9 was up the $10.00 daily limit at $168.20.

West Fraser, a leading North American lumber producer, said on Monday it was cutting production in reaction to weak demand.

Reactions were mixed on the benefits of West Fraser’s action, with some talk that more cuts are needed to better match supply with the reduced demand. However, with spring building season approaching, there was speculation that West Fraser’s action may have some long-term price benefits.

By idling the seven mills for two weeks, West Fraser said it take about 44 million board feet off the market.

“I don’t think 44 million board off of the market will offset the weakness in demand,” said Curt Cunningham, president of Pacific Futures Trading.

Cunningham estimated lumber futures will trade in a range of $140 to $170 per tbf.

West Fraser's action follows production cuts by some other lumber producers. In February, Canfor Corp CFP.TO cut lumber production for two weeks in reaction to poor demand.

With spring building season approaching, analyst Ashley Boeckholt was optimistic production cuts by key producers could have lumber prices stair-stepping higher.

“I think at this point, you have to be a little bit optimistic,” said Boeckholt, analyst at Bloch Lumber.

While spring home building may lag the pace of previous years, it will still be an improvement, said Brian Leonard, analyst with Rosenthal Collins.

“You are still going to be building something, because you are not building anything now,” said Leonard, who also expected lumber prices to trend higher.

The slowdown in U.S. home building and home sales has been blamed for much of the country’s economic and credit problems, as mortgage defaults mounted and home buying tumbled.

Pending sales of existing U.S. homes fell to a record low in January, the National Association of Realtors said.

U.S. housing starts dropped 16.8 percent in January to an annualized pace of 466,000 units, government data showed. That is the lowest pace since the U.S. Commerce Department started keeping records in 1959, the Department said.

Additional reporting by Karl Plume