MARKETING                                                PIH-119


            Understanding Hog Production and Price Cycles

Gene A. Futrell, Iowa State University
Allan G. Mueller, University of Illinois
Glenn Grimes, University of Missouri

John Dunbar, University of California
Larry and Mary Metz, London, Arkansas
W. Randy Walker, University of Florida
Richard L. Trimble, University of Kentucky

     Hog production and price cycles have been a part of the U.S.
hog  industry  ever  since hogs became a major enterprise in U.S.
agriculture. Hog  cycles  are  recurring  changes  in  production
and/or  prices  which  are  a  year or more in length. A complete
cycle includes successive  years  of  increase  and  decrease  in
either  hog production or prices extending from one peak (or val-
ley) to the next peak (or valley). This is in  contrast  to  sea-
sonal  patterns,  which are recurring production or price changes
that take place within a year.

Hog Production Cycles

     Hog production cycles exist primarily because hog  producers
respond to changing economic conditions in the hog business. When
hogs have been profitable for awhile, producers as a group  begin
to  expand  production  to  take advantage of the expected profit
opportunity. In the very early stages of expansion, the  increase
in gilt holdback may further reduce slaughter temporarily and add
to the price strength. Expansion typically continues until larger
supplies  cause  prices  to  drop to unprofitable levels for most
producers. Some producers respond by either cutting back on their
production  or  by  leaving the hog business. Liquidation of sows
and smaller gilt retention  add  to  slaughter  supplies  as  the
expansion  phase of the cycle ends. As a smaller breeding herd is
later reflected in smaller  supplies  of  pork,  prices  normally
trend  higher  again,  profits  improve  and the stage is set for
another period of cyclical expansion.

     Hog prices are not the only  determinant  of  profitability.
Changes  in  production  costs, particularly of feed, also affect
profitability and can contribute to cyclical production trends.

     Usually, there is a considerable time lag from when hog pro-
ducers  begin  to  respond  to changes in hog profitability until
there are actual changes in the  level  of  pork  production.  It
takes  nine  to  ten months after breeding before additional hogs
can be put on the market.  Prior  to  that,  additional  time  is
required  for  a  producer  to obtain more breeding stock after a
decision to increase farrowings has been made. And a decision  to
expand  or  to enter the hog business is not usually made immedi-
ately when hog returns become favorable.  Three to six months  of
favorable  profits are normally required before general expansion
of the breeding herd takes place.

     Decreases in hog production can potentially take place  more
rapidly  than expansion. And the cyclical downtrend in production
is usually shorter than the expansion phase. But as in  the  case
of expansion, hog producers are often reluctant to quickly reduce
their breeding herds, particularly when there is a major  commit-
ment to hog production through facility investment and enterprise
specialization. It may take several months of unfavorable returns
before  there  is  an  industry-wide reduction in sow farrowings.
Then it is an additional five or six months before  pork  produc-
tion turns down.

     Figure 1 illustrates the cyclical patterns of U.S. hog  pro-
duction  and  sow farrowings since 1949. The cycles have not been
highly consistent in terms of length and magnitude, but a  cycli-
cal pattern has continued to be characteristic of the industry.

     Table 1 and Figures 2a and 2b provide a closer look  at  the
individual  production  cycles  since 1950, based on annual live-
weight production.  Figure  2a  includes  the  cycles  from  1950
through 1965 and Figure 2b shows the cycles since 1965. From 1950
to 1987, there were either  eight  or  nine  complete  production
cycles,  depending  upon whether the 1975-82 period is considered
one cycle or two cycles.  Sow  farrowings  declined  slightly  in
1978,  indicating  the  bottom of a three-year cycle. Hog produc-
tion, however, increased slightly in 1978 continuing  the  expan-
sion  started in 1976. In Figure 2b, the period is plotted as one
long cycle, based on pork production, but it might also  be  con-
sidered  essentially  a  three-year cycle from 1975 to 1978 and a

 Table 1. Hog Production Cycles.                                    
                                  Number of           Number of     
 Years      Length of Cycle    Years Increased     Years Decreased  
 1950-53           3                  1                   2         
 1953-57           4                  2                   2         
 1957-60           3                  2                   1         
 1960-65           5                  3                   2         
 1965-69           4                  3                   1         
 1969-75           6                  2                   4         
 1975-82           7                  5                   2         
 1982-86           4                  1                   3         
 Average length of production cycles, 1950-86: 4.5 yrs.             
 Average length of increased production, 1950-86: 2.4 yrs.          

     The average length of the cycles in this period was 4 years,
including  both  expansion  and  cutback  phases.  The production
cycles have varied in length from three to as many as seven years
for  a  full  cycle. The most frequent cycle length has been four
years, with three of this duration since 1950.  There  have  been
two production cycles of three years in length and one cycle each
of five, six and seven years.

     The expansion phase of the cycle has varied more  in  length
than  the  contraction  or cutback phase (Table 1). The expansion
phase of production cycles from 1950 through 1986 varied from one
to five years, with two years the most frequent length. The aver-
age length of the expansion phase was 2.4 years and  the  average
length of the cutback phase was 2.1 years.

     An important characteristic  of  the  hog  production  cycle
since  1950  is that only two cutback phases lasted more than two
years. Four of the cycles had two years of  declining  production
and two had only one year of downtrend.

Hog-Corn Ratio

     Since feed is a major cost  of  production,  one  historical
indicator  of hog profitability and of cyclical change in produc-
tion and price is the hog-corn ratio. This measures the relation-
ship  between hog and corn prices and is the number of bushels of
corn that it takes to equal the value of 100 pounds of live  hog.
Specifically, it is the price of hogs ($ per cwt.) divided by the
price of corn ($ per bushel).

     When the hog-corn ratio is higher  than  average,  producers
tend  to  respond  by breeding more sows and producing more hogs.
When the ratio is lower than average, producers  usually  respond
by cutting back hog production.

     In the 1950's and early 1960's, the hog-corn ratio  averaged
around 14.0 to 1.  When the ratio was above this level, producers
tended to expand production; and when it  was  lower,  production
decreased.  From the late 1960's to mid-1980's, however, the hog-
corn ratio averaged around 18 to 1. This now appears  to  be  the
pivotal  level  for  either  expansion or production cutback. The
historical relationship between the hog-corn ratio and the subse-
quent change in sow farrowings is shown in Figure 3.

     In 1986 and 1987, the hog-corn ratio  reached  new  historic
highs in the 35 to 43 to 1 range at times, as corn prices dropped
sharply and hog prices were at historically  high  levels.  These
ratios,  however,  did  not represent the actual value of corn to
many hog producers who participated in the government feed  grain
program.  Market prices were lowered by ``pik and roll'' transac-
tions with Payment-In-Commodity Certificates,  often  called  PIK
certificates. The value of corn to most producers was raised sub-
stantially by PIK returns and deficiency payments.

     The main reason that the  hog-corn  ratio  has  moved  to  a
higher  level  in  more recent years is because of changes in the
cost structure of hog production, i.e. the relative cost  of  the
major  items  that  go  into  hog production. The cost of corn is
relatively less than it  used  to  be,  with  protein  feeds  and
nonfeed  costs  such as buildings, equipment, and labor making up
more of the total costs than  during  earlier  years.  Since  the
ratio  reflects  only  the price of one input (corn), it fails to
reflect the price changes in other inputs and a  higher  hog-corn
ratio is needed to cover other costs of production.

     A major limitation of the hog-corn ratio as a profit indica-
tor  is that the price ratio that will cover all production costs
varies with the price of corn.  In general,  it  takes  a  higher
hog-corn  ratio  to  represent  a  profitable situation when corn
prices are low than when they are high. It may take  a  ratio  of
only  17 to 1 to be profitable when corn is $3.00 per bushel; but
at $1.50 per bushel, a ratio of 19 or 20 to 1 may  be  needed  to
indicate  similar profitability-assuming nonfeed costs, including
fixed costs, have remained fairly stable. With greater corn price
variability  since  the early 1970's, the hog-corn ratio does not
measure hog profitability as well as during earlier years.

Hog Price Cycles

     Hog price cycles are defined in the same general way as pro-
duction  cycles,  but  they illustrate uptrends and downtrends in
price. At the beginning of a cycle, hog prices begin to rise  and
the  cycle  continues  until  the  price peaks and the subsequent
price decline ends. Price cycles are almost the exact opposite of
the  production cycles. When hog production is rising, hog prices
are normally trending down; and when hog production is declining,
hog  prices  are  usually  trending up. This general relationship
between hog production and price cycles is illustrated in  Figure


Table 2. Hog Price Cycles.

Years      Length of Cycle    Years Increased     Years Decreased
1950-52           2                  1                   1
1952-56           4                  2                   2
1956-59           3                  2                   1
1959-64           5                  2                   3
1964-67           3                  1                   2
1967-69           2                  1                   1
1969-71           2                  1                   1
1971-74           3                  2                   1
1974-77           3                  2                   1
1977-80           3                  1                   2
1980-83           3                  2                   1
1983-85           2                  1                   1

Average length of price cycles, 1950-85: 2.9 yrs.
Average length of price increase, 1950-83: 1.5 yrs.
Average length of price decrease, 1950-83: 1.4 yrs.

     Table 2, Figures 5a, and 5b provide a detailed look  at  the
hog  price  cycles  since  1950. In general, price cycles in this
period have been shorter than the production cycles.  While  pro-
duction  cycles  from  1950  through  1985  averaged 4.5 years in
length, the average length of price cycles was only three years.

     There were 12 price cycles from 1950 to 1985,  with  another
cycle  still in progress in 1988. The length of the cycles varied
from two to five  years,  with  three  years  the  most  frequent
length.  There  were  six  cycles  of  three years, four two-year
cycles, and one each of four  and  five  years.  There  were  six
cycles  when  the  uptrend  phase lasted two years, with one-year
uptrends in the other cycles. The downtrend phase  of  the  price
cycles varied in length from one to three years, lasting only one
year in eight of the cycles.

Profit Variability

     Although the hog-corn ratio is often used as an indicator of
hog   profitability,   producers  likely  base  their  production
response on their perception of recent and expected actual profi-
tability.  Consistent  monthly  or  quarterly data on hog returns
over a long period of time are  not  widely  available,  however,
this  kind  of  data series has been developed at some land-grant

     The profitability of farrow/finish hog operations has  fluc-
tuated a great deal over the past 20 years. The pattern of profit
variability, however, has not been very consistent, as  shown  by
Iowa  estimates  of  profitability  in Figure 6.  There have been
several periods of extended profits since 1970 and three  periods
when losses were general for from 9 to 12 months. There have also
been numerous shorter periods of profit or loss. The period  from
early  1984  through  early 1986 was characterized by alternating
short periods of profit and loss, that was  followed  by  a  pro-
longed period of profitability from the spring of 1986 into 1988.

Will Hog Cycles Continue?

     For many years there have  been  forecasts  that  structural
changes  in the hog industry would cause the hog production cycle
to largely disappear. The average size of hog operations has con-
tinued  to increase. And there are more high-investment, special-
ized hog operations. These operations may have  less  flexibility
in  making  production  changes and are more likely to maintain a
fairly stable output, except when major  facility  additions  are
made  or prolonged poor returns cause them to discontinue produc-
tion. But despite larger size units and increasing specialization
and commercialization of hog production, sow farrowings have con-
tinued to show quite a bit of year to year variation. The  indus-
try  still appears to be responsive to changes in either hog pro-
fitability  or  to  profit  opportunities  from  other  uses   of
resources.   This  ability  to  vary  production significantly is
illustrated in Figure 7, which shows percentage changes in  quar-
terly sow farrowings from year earlier quarters.

     The trend to larger hog operations and to some  increase  in
contract  production of hogs should add some stability to the hog
industry. However, a significant proportion of total  hog  output
still  comes from small and moderate sized operations. Most of it
comes from independent operations rather than from integrated and
contract  production units. And many of the large operations have
flexibility for moderate variations in facility  utilization  and
production levels.

     Cycles may become somewhat longer, with  cutbacks  occurring
only  after  prolonged  periods  of  very poor returns. And major
expansions may take place only after extended periods  of  favor-
able  profits,  as  in  1986-87. Over time, changes in production
technology and the pork industry structure may change the  nature
of  the  hog  production  cycle.  But  for the next few years, it
appears likely that the industry will continue to show  at  least
moderate production and price cycles of somewhat variable length.

Using Price and Production Cycles in Marketing and Planning

     Cyclical price patterns can be used to help  determine  when
to market or to price hogs. During the declining phase of the hog
price cycle, a producer should consider marketing hogs at lighter
than normal weights, since any delay in marketing may result in a
lower price. Therefore, a tendency to earlier marketing  of  hogs
should  improve  returns.  In  the uptrend phase of the hog price
cycle, hogs can often be profitably marketed at  heavier  weights
or  marketing  delayed longer than normal. Not only will the hogs
tend to bring higher prices, but usually when hog prices are ris-
ing  as  a  result  of  reduced  pork supply, price discounts for
heavier weights become smaller or begin at heavier weights.

     The phase of production and price cycles should also be con-
sidered  in developing forward pricing strategies for use of cash
contracts, futures, or option contracts.  Early  anticipation  of
the  general  trend in prices can be a guide to appropriate price
risk management strategies and decisions.  Thus,  downside  price
protection may be especially important when a cyclical uptrend in
production (price downtrend) is developing. If  a  price  uptrend
seems  to be developing, cash or option pricing strategies may be
more appropriate.

     The price cycle should not be used  in  isolation  from  the
seasonal hog-price pattern. Obviously, when both the seasonal and
cyclical patterns  indicate  declining  prices,  marketing  at  a
lighter weight is important. Also when both the cyclical and sea-
sonal price patterns indicate rising prices, marketing at heavier
weights can increase net returns.

     Production and price cycles can also be used  as  guidelines
for  annual production decisions of individual producers. Indivi-
dual producers, for example,  may  decide  to  moderately  reduce
their  production  level  when  production is expanding industry-
wide. And they may prepare to expand, within the limits of facil-
ity constraints, when industry production is trending down cycli-
cally.  In a similar way, production and price cycles can  be  an
important  consideration  in  the timing of decisions on facility
improvements, new facility construction, or general expansion  of
the  hog  operation.  Investment in new facilities or in facility
expansion, for example, might be planned so that the initial  new
output  flow  coincides  as  closely  as possible with the upturn
phase of the price cycle.

NEW 6/89 (5M)

Figure 1. Annual Farrowings and Pork Production in the U.S.

Figure 2a. Hog Production Cycles (Liveweight Pork Production).

Figure 2b. Hog Production Cycles (Liveweight Pork Production).

Figure 3. Farrowing Change and Hog/Corn Price Ratio.

Figure 4. Changes in Hog Prices and Pork Production.

Figure 5a. Hog Price Cycles (Barrows & Gilts Seven Markets).

Figure 5b. Hog Price Cycles (Barrows & Gilts Seven Markets).

Figure 6. Profit/Loss For Iowa Farrow/Finish Hog Operations.

Figure 7. Sow Farrowings by Quarters.   

% Figures are available in hard copy.

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