Todd's Take

By Todd Hultman
DTN Lead Analyst

Two weeks ago, this column talked about the history of corn prices and showed how low corn prices at the start of the year tend to have bullish outcomes and vice versa. (Read "Corn, an Acquaintance Worth Remembering" here: https://www.dtnpf.com/….) It's fair to wonder if corn prices were unique in that regard, and I had one reader ask me if I had done a similar study on soybeans.

Not one to pass up a good opportunity for research, I ran spot soybean prices through the same test. Similar to corn, I used annual data back to 1960 and found that even though soybean prices gained $6.70 a bushel over the time period, spot prices finished the year higher in 30 out of the past 59 years. The performance of annual soybean prices was even closer to a true corn flip than corn's results.

Sorting through the years that started with prices in the top 25% and the bottom 25% of the five-year ranges yielded results similar to what was seen in corn. Only three of the past 59 years started in the top 25% of the five-year price range, and the results leaned clearly bearish. One year finished nearly 6% higher, but two years finished lower with losses of 19% and 14%.

Like corn, soybean prices showed more years that started in the bottom 25% than the top 25%, and we had 10 of those year to look at. Again, the results were overwhelmingly bullish with eight of the years ending higher with an average gain of 28%. The two losing years averaged 15% each.

I also stretched the parameters, comparing the top and bottom thirds of soybeans' five-year ranges and found the tendency for bullish outcomes stayed strong among the lower group. Out of 22 years that spot soybean prices started in the bottom third of their five-year range, 14 of the years ended higher with average gains of 23% each. The eight years that prices ended lower posted average losses of 9% each.

OK, we can say the bullish tendencies of low prices hold up for corn and soybeans, but what about other commodities? I have not tested all commodities, but I thought it would be interesting to take this study to the world of cattle prices for something different.

Looking at spot cattle prices from the start of 1970 through 2018, we see a 426% increase from start to finish, similar to the percentage gain in soybean prices from 1960 to 2018. However, the past 49 years of spot cattle prices showed 29 years of annual gains and 20 years of annual losses -- more bullish gambles than the coin flip results that corn and soybean prices showed.

The bullish advantage did not end there. After sorting the data, 21 of the 49 years started with spot cattle prices in the upper one-third of their five-year span, and 11 of those 21 years ended with annual gains. Not only that, the 11 gains averaged 12.3%, more than the average loss of 5.9% for the 10 losing years.

Turning to the six years when spot prices started in the lower third of the five-year range, we see a strong bullish tendency with five of the six years ending higher by a little more than 14% each. The lower group of prices also posted one loss of 2.2%.

For corn and soybeans, the old adage of "buy low, sell high" proved out. For cattle, we have to adjust the saying to "buy low, but don't necessarily sell high."

For our most practical purposes, the lessons for corn, soybeans and cattle confirm that spot prices that begin the year in the lower third of the five-year range have better-than-average odds of bullish outcomes. Since the seasonal influence of prices points up for corn until early June, and also up for soybeans until late June, this seems to be a good time of year to ignore the bearish views that tend to accompany low prices.

History cannot guarantee corn and soybean prices will close higher in 2019, and especially in the case of soybeans, 2019 is looking like a big gamble based on the outcome of trade talks with China.

However, we can say that, over the past 50 years, a buy-low-sell-high approach for corn and soybeans that ignored market opinion has proved profitable. For cattle, the buy-low part of the equation has also worked.

Todd Hultman can be reached at Todd.Hultman@dtn.com

Follow him on Twitter @ToddHultman

(BE/AG)