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Corn+Soybean Digest

Soybean Cycles Signal Higher Prices

Soybean prices have increased in the last two years, but hold onto your hat! Prices and price volatility are likely to increase substantially during the next two years.

This forecast is based on some reliable long-term price cycles for soybeans that show major price-cycle lows coming in periodically. Prices appear to have put in a major low and are now poised to move higher, possibly sharply higher.

This prediction is based on two dominant price cycles that bottom every three and five years. I feel that we are now in a period similar to 1980 or 1986.

In 1986, both of the price cycles turned up together with the real price explosion occurring in 1988. It took a while, but soybean prices rallied $6.32 a bushel, from a September 1986 low at $4.67 to a June 1988 high at $10.99.

The previous time that the two cycles worked together was in 1980, when soybeans rallied from $5.75 to $9.56 in just over three months. Now, with a higher base to work from, a rally equal to the one in 1980 would take prices up to $10.01, and a rally like 1986-1988 would project a high of $12.52 in 1998 or 1999.

As someone who has studied time cycles, I'm very aware that these studies are not an exact science. But the studies mentioned suggest an increased probability of higher prices over the next six to 24 months.

Understanding time cycles is difficult because so many short- and long-term cycles are intertwined. The long-term, dominant price cycle for commodities is the 54-year Kondratieff-Wave, with lows every 50-55 years.

For corn, soybean and wheat prices, the major lows came in 1932 and 1986. Since the major low in 1986, U.S. corn and soybean prices have consistently held higher lows even though the U.S. has harvested record crops in recent years.

For the first time since 1986, the three- and five-year price cycles are in synch, projecting higher prices.

The long-term commodity-price cycle and dominant soybean-price cycles both suggest that the recent pattern of price congestion is over and that a sustained rally is ready to begin.

To me, the question is not if prices will move sharply higher, but when!

A review of the longer-term five-year cycles shows major lows coming in 1970, 1975, 1980, 1986, 1991 and, most recently, in September of 1997.

Like any price cycle, this is not a perfect pattern. These cycles do show a low-to-low pattern averaging five years with a bottom coming in as early as 36 months or as late as 60 months.

>From the major lows, prices have rallied a minimum of six months and as long as 24 months. A lot depends on the interaction of shorter-term price cycles.

This, then, suggests a rally that will last at least until May of 1998, and possibly a rally that takes prices higher in a sustained rally into the spring and summer of 1999.

The three-year low-to-low pattern has had lows come in as early as 24 months and as late as 47 months. This pattern shows lows in 1970, 1973, 1975, 1977, 1980, 1982, 1986, 1989, 1992, 1994 and September of 1997.

An orderly market that moves gradually higher over time is much more likely to result in new all-time highs than a market that starts to gap, with daily trading ranges of 40ยข or more.

Remember the corn bull run from the fall of 1994 to July 1996? The first 18 months were a steady, orderly march higher, but during the last three months price volatility exploded and prices peaked.

For this bullish scenario to unfold, certain fundamental factors and technical signals are needed.

Since the first week of October this year, there has been amazing price performance. Futures showed impressive strength by holding above $6 into the harvest lows while a record 2.7-billion-bushel crop was being harvested.

Now, it is important that weekly exports and crush figures show usage at or above the pace needed to hit the USDA targets.

If either crush or exports slow, the fundamentals will not be in place to sustain a bull run. The initial technical signals are also very bullish.

CBOT monthly soybean charts show that, in October, nearby soybean futures closed above the September high. This has happened just five times since 1970, and prices moved higher every time. The average up move has been $3.97/bu. If you exclude the $9.54 up move in 1973, the average up move is still over $2. Now, with nearby soybean futures trading above $7, the next major resistance is at $8.15 (the September 1997 high), with more major resistance at $9.03 (the May 1997 high).

In order for soybeans to reach $10 or higher, these two major resistance levels need to be taken out during the January-May period. If prices do not hit those targets in 1998, there is still a good chance that a major rally will occur in 1999.

How can you benefit from these higher prices and still stick with a marketing plan?

I have talked with very few farmers who made huge profits in 1996, when corn rallied to over $5/bu. I did talk to a lot of producers who held too much corn for too long this year.

Farmers I work with who did make good profit in 1996 have some common characteristics.

First, and foremost, they made incremental scale-up sales. They didn't hold the whole corn crop for $5/bu, but had 20-30% left to sell in the high-profit zone. Some farmers who made the most money ignored the day-to-day gyrations and stuck with a time plan of selling 10-20% of their cash crop each month during the April-July period.

Another alternative is to use any pullback into early 1998 to buy some out-of-the-money July soybean calls.

Scale up your cash sales and hold onto the calls. If you do not make money using this strategy in 1998, be prepared to do it again in 1999. Odds are very good that, in one of the next two years, soybean prices will trade at new all-time highs.

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