The hog-corn price ratio is a time-honored measure of pork production profitability, and it has been a good predictor of future production levels for many years. The reason it works is because feed represents 65 to 70 percent of the cost of producing a pig, while corn or a close substitute, such as grain sorghum or barley, makes up about 60 percent of total feed costs.
The hog-corn price ratio is the ratio of the market hog price in dollars per 100 pounds (cwt) live weight to the price of corn in dollars per bushel. So, if hogs are selling for $70 per cwt and corn is $3.50 per bushel, the hog-corn price ratio is 20.
Historically, a hog-corn price ratio of 20 or greater suggested that pork production would exceed year-earlier levels 12 to 18 months later. Conversely, a hog-corn price ratio of 16 or less suggested that pork production would fall below year-earlier levels in 12 to 18 months.
This lead-lag relationship was once a function of grain producers’ decisions on whether to sell corn or feed it to livestock. In this age of specialized production, many pork producers do not raise their own grain. However, the potential profitability indicated by the hog-corn price ratio is still a good indicator of the incentives that the marketplace provides producers to either expand or cut back production.
It is clear from the chart here that higher corn values beginning in 2007 have changed the critical level of the hog-corn price ratio. A ratio of 10:1 now appears to be the demarcation between expansion and contraction of pork supplies. Whether the extreme swing of the hog-corn ratio in 2014 and the subsequent extreme swing in year-on-year production increase in 2015 are part of a return to the old relationships remains to be seen.
The 2014 increases were caused primarily by piglet losses to porcine epidemic diarrhea virus (PEDV) and the subsequent fear of pork shortages. Lower piglet losses as the U.S. herd developed immunities to PEDV were a major reason for large year-on-year production increase in 2015. Both are likely unique, one-off occurrences. Market participants and observers will be watching these relationships closely over the next few years to see if a new normal once again appears for this key relationship.
Finally, prior to 2014, the reaction time of pork producers grew closer to two years. This is likely the result of the move to modern facilities that cannot be built quickly and are usually slow to be emptied in times of financial losses. The 2014-2015 price and quantity swings are contrary to the longer reaction times. However, as pointed out above, the swings are very likely unique, leading most to discount their long-run meaningfulness.