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Long-term grain price cycles

Before I even started my presentation at a seminar last winter, a young farmer came up to the podium and quietly asked, “How much lower can it go? Will it ever come back?” He was very nervous that day. He was asking these questions just as the grain markets were collapsing.

We talked a little more, and it became clear he didn’t have his 2012 crop sold or any of his 2013 crop forward-sold. We had a few minutes before my presentation started, so I pulled out my long-term charts, and I showed him what I was thinking.

Secret weapon

Charting is my secret weapon. I began learning about charting, trading, and long-term grain cycles in the early 1970s, just as grain market volatility began to increase.

Initially, I was skeptical that the long-term grain price cycles would work. However, as I watched these cyclical patterns and I started to make money using them, I became a believer.

I have now watched these long-term cycles repeat themselves over the last 30 years. I know how important they are in making long-term marketing decisions. I also watch some short cycles – as short as 10 or 21 days. However, I have discovered that the shorter the cycle, the less reliable it is.

The longest-term cyclic pattern I watch is the 30-year cycle in commodity prices. This is one of the most reliable. This 30-year pattern shows major lows in commodity and land prices in 1939, 1969, and 1999. I look forward to helping farmers get through the next one in 2029!

Two cycles are unfolding now: the 68-month low-to-low cycle for corn and the 39-month low-to-low cycle for soybeans.

Here are three things that I look at closely when I am studying grain-price cycles.

  1. Patterns that work within 30% of when they are due. If you look at the 68-month corn cycle, you can see that some of the lows are just over four years apart (50 months or 27% shorter than 68 months), and some of the lows stretch out to almost 7½ years (90 months or 32% longer than 68 months). This is not perfect, but it is very good.
  2. The right low. The low that is flagged as the beginning or end of a cycle is not always the lowest price in that year. Instead, it is the low that precedes a significant rally.
  3. The first month up. I flag the first month that prices close above the two previous months’ high. This result confirms a long-term low. Knowing the first month up doesn’t let you get long at the very bottom, but it can help keep you on the right side of the longer-term trend.

A look at the corn cycle

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The CBOT monthly corn chart on this page shows the cyclical lows from 1972 till 1997. Notice how consistent this pattern has been. The most useful part of this chart is observing the lows in the last 10 to 13 years. A major low came in June 2001, followed by the low in November 2005 when farmers locked in large LDP payments. This was followed by the low in September 2009.

Reading these lows together, this chart projected a low for June 2012. This worked, as corn put in a major low the last week of June 2012 at $5.51.

The question is, will this low hold?

I have several shorter-term cycles I also work with that project a low in corn prices this fall. I am waiting and watching to see if the 2013 harvest low can hold above $5.51. If the harvest low in 2013 is above $5.51, that suggests the next cycle has begun, and we’ll see higher corn prices until 2015 or 2016.

However, if prices drop below $5.51, the longer cycle isn’t done yet. In that case, odds are good that the low in the fall of 2013 will be the major low and the end of the current cycle.

A look at the bean cycle

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The soybean cycle has not been as consistent as the corn pattern. But you do still want to keep an eye on it and make sure you stay on the right side of it.

The CBOT monthly soybean chart was very consistent from 1969 through 1994. The grain and commodity markets all put in a major low in July 1999. In early July 1999, soybean futures bottomed out at $4.01 per bushel, and cash soybeans hit a low of $3.80.

I wrote in my newsletter that month (July 1999) that it was likely the last time cash soybeans would trade below $4. I was aware of the 30-year cycle and the 39-month cycle when I wrote that. Now, 14 years later, it looks like that long-term forecast was right.

The first major low in the 39-month cycle came in December 2009, when nearby soybean futures dropped to $7.77 per bushel. If that was the beginning of the cycle, the next 39-month deadline (and timing for a major low) would be between January and June 2013.

I hope this isn’t right. I am concerned because I also have several other chart patterns that project a low in the fall of 2013. Watch for the first month that soybean prices close above the two previous months’ high. That will tell you the new cycle has begun.

How to use these cycles

I encourage you to use these cycles to guide your decision-making. When you anticipate a major low, position yourself so you won’t have to sell during that time. (On the other hand, if you’re a livestock feeder or other end-user, plan to buy at the bargain-basement sale!) Coach yourself to be patient during those times and do not panic. One thing that I’ve learned from watching patterns is that the tide will always turn and prices will go up again.

Note: Trading of futures and options has substantial financial risk of loss and is not for all investors.

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