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Three signals grain lows are in

The long-term grain price cycles I work with and my analysis of grain fundamentals both suggest major lows in the fourth quarter of 2013 or the first quarter of 2014. Let me explain.

I have charted and watched grain price cycles for the last 38 years. I was initially skeptical that long-term cycles would work. My early mentor, a retired grain analyst, told me the key to understanding grain fundamentals was to know that they always look the most bearish when prices are low. In other words, when the USDA reports are negative (and everyone is bearish) and the headlines are doom and gloom, get ready for a rebound!

That’s because everyone has already gotten the message to sell; there aren’t any sellers left. That’s when the buyers step in and prices start to rise.

The opposite is also true. When the grain fundamentals are really positive and the grain trade is bullish, watch for a high to develop and prices to start moving down. The extreme version of this is what I call the “taxi driver” signal. That’s when you are in a big city and the taxi driver says, “How about that corn market?” It’s time to sell corn futures.

I listened to my mentor and began trading using these concepts. It worked. I was seeing consistent profits.

I became an avid student of long-term chart patterns and long-term cycles. Anyone who has done a chart by hand understands there is something special that happens when you use this old-school approach and chart with pen and paper, rather than looking at a computer monitor. Every hour I spend actively creating and annotating my charts (and there have been thousands of hours in 38 years), I “see” the markets with a part of my brain I don’t believe I reach by passively watching an electronic screen.

My favorite charts

For corn, you can see how reliable the long-term 68-month low-to-low price cycle has been since 1972. The last major low came in late 2008 and the first quarter of 2009. The next major 68-month low is due between December 2013 and March 2014. I have several other shorter-term cycles that all project a low in November or December 2013. These long-term cycles and other indicators are the main reason I look for major lows later this year.

For soybeans, the long-term cycle I have watched since 1969 predicts lows to  come in every 39 months. The last major low came in mid-2011. If you count out the months from the last low in 2011, then the ideal time for the next low is in mid-2014. The earliest I can project the next 39-month low is in the fourth quarter of 2013. However, I work with several other shorter-term cycles, as well, and they all come together to project a low in October or November 2013.  

Three chart signals tell me when prices have bottomed.

  1. If the USDA comes out with a negative crop production or supply/demand report, but prices still open lower and close higher. This has happened many times in the last 38 years.

  2. The first week that prices close above the two previous weeks’ high on the weekly continuation charts. This is an old mechanical indicator, but it works. This is one of the main reasons I keep up with my hand-drawn weekly charts.

  3. The first week that prices close above the two previous months’ high on the monthly continuation chart. This may end up being quite a ways above the low, but it is a good and reliable signal to watch. This also shows the importance of having patience and a good long-term plan.

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One more signal

Another important signal to watch is the alignment of the futures market. For most of the last nine months, the nearby futures have been trading at a premium to the deferred futures. In the industry, it’s called an inverse, and it develops when cash grain is wanted and it’s wanted now. With the September contracts going off, this large inverse has now disappeared. The corn market now shows March 2014 corn futures are trading at a 13¢ carry to the December 2013 corn chart. Unless March corn drops down to fill the December-to-March continuation gap, odds are good the long-term corn chart will show a possible spike low in the October-to-December time period.  

The soybean market now shows January 2014 soybean futures are trading at a 5¢ premium to the November 2013 soybean contract. This carrying charge will create  a potential long-term low. The key to watch will be if the January 2014 contract drops down to a lower price level than the November 2013 contract in the November-to-January time period.

From 2010 through the fall of 2012, the world was using more grain than it was producing. This meant we dug further into our global grain reserves. In 2013, good crops in South America, Europe, and North America are building reserves and dropping global grain prices lower.

I don’t think this will last, however. The odds of having good crops around the world in 2014 are very slim. That is one reason why I look for major lows this fall, followed by a rise in grain prices.

Watch these dates

There are three important days to watch how the market is reacting. In particular, look for a spike low in the corn and soybean markets. All of these important days are when big USDA reports are released.

  • November 8, Crop Production (monthly report)

  • December 10, Crop Production (monthly report)

  • January 10, 2014*, Grain Stocks and Crop Production Annual Summary (annual report) * This is an approximation, as 2014 dates have not been set yet.

I encourage you to closely watch the markets. Farmers who take time to study the markets, watch long-term charts and grain cycles, and understand fundamentals tend to make the right decisions.

In 2011 and 2012, farmers who got the small crop sold early made the right marketing and financial decisions.

For 2013, I believe if you store the large crop and are able to keep storing throughout the major lows that are due this fall, you will have the opportunity to sell at higher prices next year and make good operating profits on your 2013 crops.

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