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Because there are so many variables in supply and demand for ag commodities globally, it’s no easy task for the laws of economics to precisely balance supply and demand from year to year. Instead, mankind relies on market signals to either slow usage and stimulate production via higher prices or encourage consumption and discourage production via lower prices.
Throughout nature and human history, we have observed cycles, or the tendency of certain events to repeat themselves at regular, fairly predictable intervals. There’s the 24-hour day/ night cycle; the monthly moon cycle, the yearly changing of the seasons, and the ebb and flow of tides.
When it comes to grains, the fundamental "thermostat" guiding traders is typically the projected ending stocks for a given commodity in days of supply at the current rate of usage. This is a good proxy for the risk of running out before the next crop is available. When projected stocks fall below minimum pipeline requirements, the risk of running out rises and prices rise with it to slow the rate of usage.
When projected stocks increase well beyond pipeline requirements, prices fall by default to what economists call market clearing levels. It’s little different than what retailers may do when grossly overstocked on inventory – they have a clearance sale. It’s just the same principle when you’re overstocked on a major ag commodity, and the clearance sale becomes global in scope.
The length of commodity cycles is always measured from major low to major low, not from cycle high to cycle high. Why? See #2...
The highs in any commodity cycle rarely occur at the midpoint between major lows. If they do, it’s called a symmetrical”cycle. But in the vast majority, cycle highs either come early (called “left translation”) or late (called “right translation”). The length of time between cycle highs is quite random, while the length of time between the lows doesn’t vary more than 10% either side of the predicted timing for the next cycle low.
Knowing where the market is in a long-term cycle can help better determine whether or not to maintain a bias towards reluctant, cautious selling (such as shortly after a cycle low or very near a next “scheduled” cycle low), or aggressive selling somewhere in the middle third of the time between the last low and the next “scheduled” low.
These characteristics were identified in a 1982 classic by Jake Bernstein: The Handbook of Commodity Cycles, a Window on Time:
THE CYCLE PERIOD is the length of time from low to low, give or take a 10 percent margin of error. In other words, if the dominant cycle is 60 months from low to low, the next low may come as early as month 54 or as late as month 66.
CYCLE RELIABILITY is measured by how often the cycle has repeated within its 10 percent margin of error over time. Some long-term cycles have repeated dozens of times if price history goes back far enough.
CYCLE SYNCHRONICITY pertains to the tendency of some commodities to have cycles of similar length, but in alternation with each other. It’s most common among crops that have similar growing seasons and compete for the same acreage, such as corn and soybeans in the Midwest.
CYCLE HARMONICS references the fact that some very long cycles can have sub-cycles of shorter length from low to low. Wheat, for example, has a dominant 9-year cycle often broken into two four-and-a-half-year cycles within each one.
CYCLE INTERRELATIONSHIPS makes reference to tendencies for obviously-related commodities to either cycle together (such as soybeans, soybean meal and soybean oil), or to cycle just opposite each other, such as cycle lows in corn often coming a year or two ahead of long-term cycle lows in hogs (because cheap corn can lead to increased hog production).
CYCLE MAGNITUDE references the price range from high to low rather than the length of time between the lows. For some commodities, such as corn, the magnitude is surprisingly uniform; the range from low to high is never less than 50 percent. And if it exceeds 50 percent, it typically doubles in price. If it more than doubles, it usually goes to two-and-a-half to three times the previous cycle low before peaking.
INDEPENDENCE FROM FUNDAMENTALS is best explained as the reality that markets often make their highs when the fundamental news seemingly could not be more bullish, and their lows when the fundamental situation seemingly could not be more bearish. It’s a truth that has led to time-honored market axioms, such as “the time to get in is when everybody wants out, and the time to get out is when everybody wants in.” Another adage says that, “a market that fails to go up on new bullish news is a market topping out, while a market that fails to go down on new bearish news is a market that’s bottoming out."
CYCLE PERSISTENCE is the tendency for dominant cycles to correct themselves if a major global event such as war or major drought in a key producing country throws them off outside the normal 10% margin of error. In such cases, the next cycle low will often come early or late to put timing for the next low back on track.
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The information and insight provided in this handbook is based on independent research and consultation conducted by Dan Manternach. We thank him for his time and contribution.