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Vol. 11, No. 110 / June 12, 2013 In the June 2012 edition of PorkNetwork (formerly
PORK) magazine, Dr. Ron Plain of the University of Missouri
makes a very interesting observation that piqued our interest.
He wrote:
“The traditional four-year hog cycle is not much evident in
hog production, but it still show up in hog profits.”
As usual, Dr. Plain’s observation is spot on. One of the most
predictable — and thus useful — output cycles in all of agriculture and business and statistics in general has fallen on hard
times in recent years. But the profits generated by that output
appear to be just as cyclical as ever. We thought those two
related but different outcomes deserved a bit of investigation.
The historical hog production cycle can be clearly
seen in the top chart at right. Commercial hog slaughter
has generally trended higher since 1950 with the most severe
interruption occurring in the early 1970s when inflation began
to take hold in the U.S. and hog production costs were exacerbated by the grain price spike in the wake of the 1972 Russian
grain purchase. The output reduction in response to that cost
shock is noted by the circle in the chart. The only other exception to the four-year cycle through 2002 was in 1994 when producers grew right through a price cycle low (see the bottom
chart) as the great structural shift to larger, more technically
advanced enterprises got underway in earnest.
But since 2002,the only deviations of hog slaughter
from a steady upward trend line have been driven by technology and a major increase in costs. The upward spike in 2008
was the result of effective circorvirus vaccines’ enabling more
pigs to reach market weight. The drop in 2009 and 2010 was a
response to HUGE losses in 2008 and 2009 caused by the
quantum increase in feed costs associated with the emergence
of fuel ethanol as a major user of corn.
But, as Dr. Plain points out, the profit cycle continues. The bottom chart presents the familiar monthly profit data
from Iowa State University’s Estimated Costs and Returns series as well as the hog price in dollars per hundred pounds, live
weight. It is clear that a profit cycle is indeed still alive but that
it is arguably longer than the four-year output cycle highlighted
in the top chart. It is also clear that the four-year price cycle
has fallen apart in much the same way of the four-year production cycle. Why the difference?
First, the cycle is longer simply because it takes longer
to react given today’s production technology. Growth involves
large capital investments that will be well thought out and take
time to execute. Reductions involve idling some of these highinvestment facilities, a decision that will be made only if neces-
U.S. COMM ERCIAL HOG SLAUGHTER,
ANNUAL
120
110
d100
a
e
H
n
o
ill 90
i
M
?
80
70
60
PROFIT PER HEAD
IOWA FARROW-TO-FINISH OPERATIONS
ISU Est'd Profit/Loss per Hd.
Forecast Profit/Loss per Hd.
Selling price, $/cwt.
Profit, $/Hd.
Price, $/cwt.
80.00
50
40
70.00
30
60.00
20
10
50.00
0
40.00
-10
-20
30.00
-30
-40
20.00
-50
10.00
-60
-70
0.00
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Source: Estimated Costs and Returns, Dr. John Lawrence, Department of Economics, Iowa State University
sary. When hog sector expansion was executed by breeding
some gilts from the finishing pen and putting a few huts into a
pasture, things could happen quickly. Not any more.
Second, the driver of the profit cycle is no longer simply the price of hogs. Costs were quite steady prior to 2007 so
the four-year production cycle drove a four-year price cycle that
drove a four-year profit cycle that drove the four-year production cycle. Producers appeared to react to prices because prices and profits were highly correlated due to relatively stable
costs. More volatile costs now work with less cyclical prices to
still drive a somewhat cyclical profit picture. Will that profit cycle again drive a hog production cycle? We’ll see.
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