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Long-term grain price cycles

Al Kluis 05/08/2013 @ 11:50am

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

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.

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