MARKETING PIH-119
PURDUE UNIVERSITY. COOPERATIVE EXTENSION SERVICE.
WEST LAFAYETTE, INDIANA
Understanding Hog Production and Price Cycles
Authors
Gene A. Futrell, Iowa State University
Allan G. Mueller, University of Illinois
Glenn Grimes, University of Missouri
Reviewers
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
1986-
__________________________________________________________________
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
4.
_________________________________________________________________
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
1985-
_________________________________________________________________
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
universities.
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.
______________________________________________
Cooperative Extension Work in Agriculture and Home Economics,
State of Indiana, Purdue University and U.S. Department of Agri-
culture Cooperating. H.A. Wadsworth, Director, West Lafayette,
IN. Issued in furtherance of the Acts of May 8 and June 30, 1914.
It is the policy of the Cooperative Extension Service of Purdue
University that all persons shall have equal opportunity and
access to our programs and facilities.
.