Another Look at the Hog‐Corn Ratio

Abstract

The hog-corn price ratio has long been used as a proxy for profits in the pork sector. This statement remains true even though Blosser pointed out a decade ago that the hog-corn price ratio is deficient on at least two grounds: corn is not as important an input in producing hogs as it once was and the same price ratio implies different levels of profitability depending on the level of corn and hog prices.' Why has the hog-corn ratio remained a widely used measure of profitability? Part of the answer can be found in the simplicity of the ratio. In addition, the stability of corn (feed) prices over much of the past twenty years meant that the price ratio moved directly with hog prices and that an increase in the ratio implied an increase in profitability. Thus, notwithstanding Blosser's concerns about the relative decline of corn as an input, the hog-corn price ratio apparently was an excellent measure of profitability. During 1970-75, corn prices were more volatile and higher (table 1) than in previous years, suggesting the hypothesis that the hog-corn price ratio would be less useful as a predictor of hog supply since the correlation between hog prices and profitability declines as corn prices become more variable.2 In addition, the greater variability may provide more precise estimates of the separate supply inducing effects of corn and hog prices. This note has two objectives: to determine the supply response of U.S. pork producers to changing hog and feed prices over time and to determine if the hog-corn price ratio is an adequate predictor of hog supply when the prices of both hogs and feed are volatile. A polynomial distributed lag model of quarterly U.S. hog supply response is estimated for two different time periods, 1960-69 and 1970-75. For Table 1. Coefficients of Variation for Hog Price, Feed Price, and the Hog-Corn Price Ratio