The Golden Grain Cycle

Teucrium | July 20, 2021

corn weat soyb Blog Newsletter 2021

The Golden Grain Cycle

Grain Market Supply and Demand & Potential Investment Opportunities

“Grains tend to trade at or near their cost of production until there is a supply disruption at which point prices historically have moved dramatically higher. Over time as production increases and/or demand decreases, inventories are rebuilt and prices trend back toward the cost of production once again.”

 – Sal Gilbertie 

The Golden Grain Cycle in grain markets is, at its core, cosmic. Consider that growing seasons are dictated by the tilting of the Earth’s axis in proximity to the sun. As such, in North America, there is only one harvest per year.

There are years when production exceeds demand, and prices are low. Alternatively, there are years when production lags demand, and prices are elevated. The variability of production in the face of steady, and often growing demand, sets the stage for the grain market cycle. This cycle has repeated throughout history, offering those who recognize the cycle an opportunity for potential profit. Hence, we refer to the cycle as the Golden Grain Cycle.  

Observing The Golden Grain Cycle

Typically, grain production exceeds demand. The excess is held in storage as inventory to be drawn down in years when demand exceeds production (as has been the case for corn and soybeans over the last two years).[1] When production exceeds demand, market prices will gravitate toward the cost of production effectively squeezing a farmer’s profit margins.[2] Lower profit margins can (and often do) result in fewer acres planted. Historically, we have seen that as market conditions change and prices rise, farmers reverse course and plant more acres.

This cycle played out in textbook fashion over the previous decade (2010-2019)

In 2010 – 2012 a La Nina weather pattern led to poor growing conditions in key areas across the globe. As such, corn production lagged relative to demand and prices moved significantly higher advancing from around $3.50 per bushel to more than $8.00 per bushel at the highs (see graph below).  Higher prices provided US farmers the incentive needed to plant more acres. Between 2010 and 2012 the US farmers dedicated an additional 9.1 million acres to corn production (an increase of more than 10% over two crop years).[3] 

The additional plantings led to increased harvest and US corn inventories started to grow. By 2016, front-month corn futures were back trading near production costs which we estimate to be approximately $3.50 per bushel. 

Corn continued to trade at or near the cost of production for the rest of the decade.

This chart is for illustrative purposes only and not indicative of any investment. Past performance does not guarantee future results.

For this purpose, corn commodity values are representative of the futures (generic first corn futures contract - <C 1 Comdty>) spot continuation chart as defined by and sourced on Bloomberg: Generic contracts, such as C 1, C 2, C 3, ..., are constructed by pasting together "rolling" contracts, according to the pre-selected roll types on the commodity default page. The generic contract uses the value of a particular contract month until it "rolls" to the next month in the series. You can access a generic contract by replacing the month/year code with the number 1, i.e. C 1<CMDTY>. Replacing the month/year code with the number 1 will yield the spot contract.”

Will The Cycle Repeat?

The golden grain cycle has repeated time and time again. Still, the historical repetitive nature of this cycle does not guarantee that it will continue indefinitely. New technologies can lead to increased yields and more consistent production. Demand may fluctuate as consumer trends shift (increased use for biofuels versus animal feed for example). Still, the law of supply and demand all but guarantees that as supplies shrink or grow relative to demand prices will advance or decline.

We have shared this message repeatedly over the years, so much so that you who have been following us closely, are certainly tired of hearing it. We repeat it now, recognizing that prices are at a historically elevated level. As such, it is likely that production will increase over the next 1 – 2 crop years helping to rebuild supplies thereby pressuring prices back toward the cost of production. That is not to say that we have seen the highs, though we very well might have. This is to say, however, that at some point we believe prices will head lower back toward the cost of production.

We have spoken with investors who were fortunate enough to participate in the rally that began last summer. We have also spoken with some investors who missed the rally. 

Those who have not participated might opt to add CORN, WEAT, SOYB, and/or TAGS tickers to their “watch lists.” If the golden cycle described above continues then we would expect investors will have another opportunity to take positions when prices are back near the cost of production. 

Timing versus Time In

To be certain, prices can (and historically have) move sideways for significant periods of time. In fact, front-month corn futures largely traded between $3.00 and $4.00 per bushel for 6 years before sustaining a breakout above $4.00 in December 2020. In absence of price appreciation, investors have pointed to the low historical correlations between grains and stock prices as a compelling reason to maintain a position.[4] Investors who stuck with the trade were likely pleased as front-month corn futures prices more than doubled between April 2020 and April 2021.

This is for illustrative purposes only and not indicative of any investment. Past performance does not guarantee future results.

Analysis and corresponding graphics were prepared by Teucrium Trading, LLC, using Bloomberg Financial L.P., January 1, 2021

Note: Commodities values are from futures (generic first) spot continuation charts. See Appendices for more details on Commodities used in this comparison.

S&P 500 Index taken from Bloomberg: SPX Index – An investment cannot be made directly in an index.

Where To From Here

As of the date of this publication, front-month futures prices for corn, soybeans, and wheat are all more than 10% off their respective recent highs. The recent price retreat has largely been blamed on weather systems that have provided much-needed rains in critical growing areas. The ultimate impact of those rains however remains unknown. What’s more, the current near-term forecast is calling for dryness and heat in the very areas that can least afford it. 

Over the short term, it truly is anyone’s guess as to where prices are headed. It is possible that corn and soybean prices head higher and “re-test” recent highs. It is also possible that the highs are in, and the rebuilding of the global balance sheets has begun. This would suggest that prices head back toward the cost of production. The trades’ focus will likely remain on weather in the near term. Downward revisions to USDA production estimates would likely provide fuel for bulls to advance prices back toward the highs. Likewise, timely rains and favorable weather would likely act as a headwind for prices. Either way, it is likely that the markets will remain volatile for some time much to the delight of tactical traders. 

Strategic investors however might focus on the longer-term and the bull/bear grain market cycle. We believe that eventually, prices will trend back toward the cost of production, which may be an appealing time for allocators to start building a position. 

Please note that options are available on CORN, SOYB, and WEAT. Please discuss with your broker or financial advisor for more information. 

[1] USDA July 2021 World Agricultural Supply and Demand Estimates (WASDE) Report

[2] USDA Historical WASDE Tables available at

[3] USDA Historical WASDE Tables available at         

[4] Grant Engelbart CFA Sr. Portfolio Manager Brinker Capital