Mathematical Study of Supply and Demand in the Hog Market 81
Predicting the Future of Hog Prices 98
Limitations of the Mathematical Method 103
Conclusions Based on Ratios and Mathematics of Supply and Demand 106
Appendix 113
OUR PRESENT PRICE-REGISTERING SYSTEM[1]
Prices of corn belt food staples are registered more promptly and more
delicately on the Chicago Board of Trade than anywhere else in the
world. The farmer visitor in Chicago, who has a few minutes to spare,
finds it very interesting to look down from the Chicago Board of Trade
galleries on the corn pit. For several minutes, the pit may be the
dullest thing imaginable, and suddenly news will “break.” Perhaps it is
the month of August, and it has begun to rain in Nebraska. As a result,
certain operators are anxious to dispose of the corn for which they had
contracted. Perhaps it is 9:30 on another August morning, and the
temperature, even this early in the day, is 85 degrees, and the
prospects are for hot winds sweeping Kansas and southwestern Iowa. Men
who have sold corn “short” a few days before, on the strength of local
rains, are now thoroly scared, and rush into the pit to buy back before
the price runs up more than three or four cents.
The farmers sitting in the gallery, watching the speculators buy and
sell “paper” corn, by shaking their fists and nodding their heads, feel
that the Board of Trade is a gambling institution. So firm is this
conviction that several of our largest farmers’ organizations have gone
on record as being opposed to the speculative system as a method for
registering prices of farm products.
So far as the business world is concerned, the system of buying and
selling future contracts employed by the Board of Trade is in the nature
of risk insurance. A feed concern may have sold to farmers twenty
carloads of their feed at a price based on $1.20 corn. They have not
bought this corn as yet, and do not have room to store it. They
therefore buy a contract for future delivery at $1.20, in order to
protect themselves against corn going up in the meantime. This feed
concern is in the manufacturing game; it can not afford to take a risk,
and for that reason buys a future on the Board of Trade. When this feed
concern accepts the actual corn, it sells the contract. It may make or
lose money on the purchase and sale of the contract, but in either event
the net result is that the actual corn cost $1.20 per bushel plus the
commission charge of a fraction of a cent per bushel.
The speculator takes the risk, and the spirit in which he approaches the
game is often the gambling spirit, pure and simple. But, like all shrewd
gamblers, he takes his risks as shrewdly as possible, and after a time
becomes expert in judging the probable effects of weather, political
news, transportation difficulties, etc., on corn prices. And these
factors are more real than some of our agitators would have us believe.
But while speculators perform a real service to society, there is
nothing angelic about them. They are concerned with a profit, not with
service. The professional speculator is generally either “long” or
“short” of the market; that is, he has corn bought or sold for future
delivery. The man who has December corn bought for future delivery at
$1.20 per bushel is hoping with all his energy that the corn crop is
short and price will therefore advance, that transportation difficulties
will materialize, that an unusual demand will spring up from Europe for
foodstuffs, that something will happen to send up the price. He is
favorable to the promulgation of any kind of news which will help him to
sell his corn at a profit. While the Board of Trade has regulations
against the dissemination of false news, nevertheless these men at times
seem to be able to color the crop news very effectively. Situations
develop where most of the professional speculators are on one side of
the market, and where they are apparently able to use propaganda to
force prices very rapidly either up or down, at the expense of the
amateur speculators.
The products most traded in on the Board of Trade are wheat, corn and
oats, and to a lesser extent the cured hog products, rib sides, lard,
and mess pork. The smallest units traded in are 5,000 bushels of grain
and 50,000 pounds of provisions. In the case of the grains, the
contracts most commonly traded in are contracts for delivery in
December, May, July and September. In the case of the pork products, the
contracts most traded in are contracts for delivery in January, May,
July and September. Before the war, trading in December corn customarily
opened in the month of May. The price of December corn as quoted in May
was necessarily based on the supposition that the ensuing crop would be
a normal crop, neither greater nor less than the average. If there was
cold, wet weather in May or June, the price advanced. If the weather was
warm and rather dry, the price declined slightly. However, as a general
proposition, before the war, the price held practically steady during
the months of May and June. During July and August, however, corn values
on the Chicago market oscillated back and forth with rainfall and
drouth, registering the changes in marvelously delicate fashion.
Customarily, before the war, it took an average rainfall, in the seven
great corn states, of about one and a quarter inches during ten days, to
hold the price of December corn futures practically stationary. A
rainfall of as much as one and three-quarters inches in a ten-day period
during July and August would ordinarily depress the price by several
cents a bushel, whereas a ten-day period with no rainfall at all would
customarily advance the price by eight or nine cents a bushel or even
more if the temperature was high.
Anyone who studies these things is surprised at the accuracy with which
the market price before the war actually reflected crop conditions as
they changed from day to day. Since the war, it has been more difficult
to measure the price-making forces. Political conditions in Europe even
during the months of July and August often have had as much influence as
the weather in determining the price of corn.
The Board of Trade has to do with both cash grain and future trading. So
far as prices are concerned, the cash market is supposed to be less
sensitive than the market for futures. The business of the future market
is to register changing conditions as promptly and accurately as
possible. Occasionally, however, artificial situations develop. For
instance, in a year of a very good corn crop, a large number of
speculators may have sold December corn “short” at around $1.20 a
bushel. At the time of the sale, they may have had every reason to
believe that they could eventually buy the actual grain for less than
this price when the month of December finally arrived. Then gradually
transportation difficulties began to grow and bad weather came on, and
altho there might be an enormous crop in the country, there would be
very little corn in Chicago. Then certain other speculators might go to
work buying large quantities of December corn futures, knowing that
other men were “short” a long line of December corn at $1.20. These
speculators might not actually want the corn, but nevertheless, by
playing the technique of the market, might be able to create a “squeeze”
and force the price of corn up to $1.50 a bushel before permitting the
“shorts” to settle. And this might happen in spite of the fact that by
January 2d there might be enough actual corn coming into Chicago to
enable cash corn to be sold as low as $1.20.
The object of this book is neither to praise nor condemn the speculative
system as a method for registering prices of farm products. We are
pointing out the strong points in the present system. Idealistic social
workers, representatives of organized labor, and many farmers, would
like to do away with the speculative system of registering prices. They
would like to substitute therefor price-fixing legislation. These
people, as a rule, are densely ignorant of the legitimate price-making
forces, and it is impossible that they should be able to shape a
price-registering machinery superior to that which we now have.[2]
One reason for the writing of this book is the belief that organized
farmers and organized labor, working in conjunction with certain
idealists, will make an effort to modify our present price-registering
system. We are heartily in sympathy with such an effort, for the
speculative system is far from perfect. But it is such a delicate system
of registering prices that we believe that even the most virulent
opponents should allow the system to run unchecked for a good many years
yet, in order that they may study its functions more carefully. Here is
a great field of research for the economists, who for some unknown
reason have failed to study Board of Trade prices during the past fifty
years as closely as they should.
Improvement on our present system can be made only after a thoroly
scientific and dispassionate study of its strength and weakness.
THREE PRICE-MAKING FORCES
Three forces are prominent in making agricultural prices—cost of
production, supply and demand, and strategic considerations. Farmers and
laborers believe that cost of production should be the chief
consideration. Business men preach “supply and demand” as the great
price-making force, and in addition use strategic propaganda when it is
to their advantage to do so.
Cost of production in the long run is on the average practically
identical with both the supply-and-demand price and the actual price. It
is in the very nature of things that those producers who can not on the
average get cost of production will go out of business. In the case of
the hog business, it takes about three years for the average man to get
in and out. Ten years, which is fully three times the “in and out”
cycle, is “long run” in the hog business. A ten-year average of actual
hog prices should therefore be approximately equal to a ten-year average
of the cost-of-production price of hogs. As a matter of fact, we find
that the cost of production, as shown by the corn-hog ratio, is
practically the same from one decade to the next. Decade after decade,
the corn-hog ratio has remained constant at eleven to twelve bushels of
Chicago corn per hundred pounds of Chicago hog ever since the Civil war.
Farm management investigations indicate that for the average farmer this
ratio represents approximately cost of production. As a matter of fact,
this ratio is “cost of production” in the very truest sense of the term.
This ratio represents the reward necessary to keep enough farmers
producing hogs to satisfy the consuming demand, year in and year out.
Stated thus baldly and simply, we see how the cost of producing a
hundred pounds of hog weight must in the long run average the same as
the “actual” price and also the “supply and demand” price. And yet hogs
may sell for a year or so for the value of fifteen bushels of corn, as
they did in 1866 and 1910, or they may sell for a year or so for the
value of nine bushels of corn, as they did in 1908 and 1917. At any
given time, the cost-of-production price is likely to be decidedly lower
or higher than the actual price or the supply-and-demand price. It is
only on the average that cost of production becomes identical with the
actual price.
Supply-and-demand price departs from the cost-of-production price at any
given time because of such things as unusual weather, accidents, etc.
Dry weather in July and August may cut the corn crop short, and as a
result temporarily increase the number of hogs marketed. Under such
conditions, the packer buyers make no attempt to pay for the hogs the
increased price which the higher price of corn would warrant, but
instead buy as cheaply as they can, quoting in defense, “supply and
demand.”
A business panic may come on, as in October of 1907, and as a result the
demand for meats of all kinds may shrink. Corn prices, the cost of
producing hogs, may stay up, as was the case in 1907–1908, but hog
prices nevertheless are reduced. A study of the hog market for many
years past reveals the fact that the immediate price-making force is
“supply and demand,” and that “cost of production” has no influence
whatever on prices except in the long swings.
The supply-and-demand theory of prices is well understood by nearly
every one. Supposedly, actual prices at any given moment represent an
equilibrium of supply and demand. The next day larger supplies come in,
and the demand remains unchanged; naturally the price declines to a
point where supply and demand are again equal. There is a presumption in
the minds of many people that supply and demand interact with almost
mathematical accuracy to determine prices. In the long run, possibly
this is true. The day-by-day price, however, is as much a matter of
psychology as mathematics.
This brings us to a consideration of those more intangible price forces
which may be grouped together under the head of strategy. In January and
in August of 1919, we had excellent examples of the use of strategy as a
price-making force. In both months, certain powerful interests worked in
conjunction with the newspapers to modify public psychology in the
interests of lower prices. Day after day, the lower price bombardment
was directed against the farmers by the daily press and the politicians.
Prices declined in spite of the fact that the supply was greatly
curtailed and the potential demand was as great as ever. In the corn
market, receipts were exceedingly light at Chicago during both price
raids. Hog receipts in August of 1919, when prices dropped $5 per
hundredweight, were the smallest of the year. But government officials
constantly talked about the vast army supply of bacon. As a matter of
fact, the quantity of pork products put on the market by the government
was not enough to account for much of a drop in hog prices. But the
publicity which went with the government announcements, combined with
determined pressure on the speculative markets in this country and
abroad, sufficed to lower prices tremendously in defiance of any
mathematical expression of supply and demand.
[Illustration:
Solid line shows exports from U. S. Dotted line, ocean freights from
New York to Liverpool. Ocean freights are low in summer when exports
are low, and high in the fall when exports are heavy.
]
There is a strategy to the timing of a determined price drive. All
farmers know that such a drive may be expected in the fall of the year.
A drive in the fall is partly normal as a result of the increased supply
at that time, but oftentimes strategic. In the fall of 1865, following
the Civil war, there was a determined price drive, roughly corresponding
to the price drive initiated in August of 1919. In both cases, strategic
factors were apparently paramount. Certainly, no mathematical
formulation of the law of supply and demand could account for the price
changes which took place in 1865 and 1919.
[Illustration:
Solid line, U. S. exports; dotted line, British exchange in U. S.
Dotted line is inverted to show how heavy exports and weak exchange
go together. Chart
is based on 1903–1913 conditions.
]
Farmers have discovered since 1914 that such disturbances as
foot-and-mouth disease, interrupted railroad service, and falling
foreign exchange may influence prices without changing either potential
supply or potential demand. They have suspected the “interests” of
manipulating foreign exchange in the fall of the year to make lower
price for farm products. They have known that ocean freights have
generally advanced in the fall of the year, to the detriment of farm
product prices in the United States, and they have suspected that part
of this advance in ocean freight rates was due to England trying to get
a large return on her shipping and at the same time buy her food more
cheaply.
The two charts presented herewith indicate the normal seasonal trends,
during the decade preceding the war, of exports from the United States
as related to British exchange, and to ocean freights from New York to
Liverpool. It will be noted that United States prices must necessarily
be weakened in the fall of the year by weak British exchange and high
ocean freights.
The speculative price as set from day to day is sometimes a result of
technical situations altogether apart from supply and demand.
Ordinarily, the speculative price as represented by “futures” and the
cash price move in sympathy, but occasionally a scared “short” finds the
market oversold and bids up prices unduly in an effort to cover, or a
tired “long” finds the market overbought and sends prices down unduly in
an effort to sell. And occasionally there is manipulation—interests
working together to make the price temporarily higher or lower than a
normal working of supply and demand would justify. Sometimes the cash
markets, following the lead of the speculative markets, may get out of
line with ultimate supply-and-demand conditions for several months at a
time.
CRITICISM OF OUR PRICE-MAKING SYSTEM
Prices of corn, hogs, etc., are determined chiefly by supply and demand,
together with the occasional influence of strategic manipulation. The
system as operated by the packers and Board of Trade speculators really
reflected conditions before the war with remarkable accuracy. During the
war, so many extraordinary conditions were at work that it was
impossible to measure supply-and-demand conditions at all accurately,
and it is impossible to say how efficiently the speculators did their
work.
But speculators and packers, in so far as they set prices, are concerned
solely in making a profit for themselves. If, by manipulating the
market, they can make a bigger profit than by trying to express
supply-and-demand conditions with mathematical exactitude, then they may
be expected to manipulate. The violence with which hog prices swing
above and below cost of production would suggest that the packers are
consciously endeavoring to send prices too low for a year or two, in
order later to send them too high. They go into the low-price period
with a small amount of high-priced products on hand, and come out into
the higher level with a large quantity of low-price products. It would
seem that by laying in a stock of hog products at the low point, they
hope to profit later by an advance in price.
It is typical of supply and demand, as it makes prices of standard farm
products, that a small crop sells for more than a large crop. A twenty
per cent decrease in the supply raises the price more than twenty per
cent, possibly thirty per cent, or even fifty per cent. Old Gregory
King, in the latter part of the Seventeenth century, recognized this
principle when he stated:
“We take it a defect in the harvest may raise the price of corn [wheat]
in the following proportions:
Defect. Above the common rate.
1 tenth raises the price 3 tenths
2 tenths raises the price 8 tenths
3 tenths raises the price 16 tenths
4 tenths raises the price 28 tenths
Modern statistical study indicates that this statement of King’s is
somewhat exaggerated, but undeniably the tendency exists among standard
agricultural products for small crops to bring in a greater return than
large crops. In other words, the demand for farm products is inelastic.
The ultimate consumer wants just so much of staple foods, no more, no
less. If farmers raise more than so much, they must accept a
considerable reduction in price; if they raise less, they can command an
advance out of all proportion to the shortage. The law of demand for
staple farm products being inelastic, small crops bring in a greater
return than large crops.[3]
The classical economists, the people of _laissez faire_ persuasion,
accept this condition as natural, as inevitable, and therefore
desirable. But is it desirable? The sharp price rise which comes as a
shortage becomes apparent benefits those lucky producers who have
supplies on hand, and especially those keen speculators who first saw
the oncoming shortage and bought in anticipation. This sharp price rise
may overstimulate production. The high hog prices in 1909–1910
stimulated the production of too many hogs, and when this increased
production reached market, the price was $6.50 instead of the expected
$8 to $10. And the low prices of 1911–1912 in turn begat the high prices
of 1913–1914.
The question comes, Would it not be to the public interest if, in price
making, more emphasis could be placed on cost of production and less on
the short-time working of the law of supply and demand? Prices should
rise with a short crop, but not to such an extent as to make a short
crop more profitable than a normal crop. If a moderate rise in prices
will not sufficiently curtail demand, then the public should be educated
to the fact that there has been a drouth, and that unless they curtail
their demand, there will not be enough to go around. Of course, under
our present _laissez faire_ attitude, every speculative business man
would take such a pronouncement as a “bull” statement, and the demand
would immediately increase instead of decrease. There is danger that any
attempt to make cost of production the guiding factor in price
determination will amount to close government supervision of storage,
speculation and similar market phenomena. The disadvantages of
government supervision are apparent to all who watched the Food
Administration at work during the war. The Food Administration performed
a hard job remarkably well, but farmers found that the officials were
ignorant of agriculture, and that, moreover, agricultural interests
could not expect a square deal except in so far as they were organized
to compel a square deal, or except as the emergency itself compelled a
square deal to insure continued production.
If farmers are to continue under the present _laissez faire_ system with
supply and demand, together with strategic manipulations, as the
price-making force, they must necessarily learn to play the game
themselves. They will find it necessary to practice sabotage in the same
scientific, businesslike way as labor and capital. They will reduce the
size of their crops at strategic moments, because they know that small
crops ordinarily bring in a greater return than large crops. Of course,
if farmers should practice sabotage in the same heartless, efficient way
as labor and capital, our society will be imperiled. The burden of the
sabotage practiced by labor and capital has been borne chiefly by the
farmer. When farmers also practice sabotage, labor and capital will be
forced to come to an agreement with farmers on production and price
matters.
Is there not a possibility that capital, laborers and farmers, by
placing themselves in equally powerful bargaining positions, may come to
see the futility of sabotage as a price-sustaining force? Once farmers
are able to meet the other classes of society on equal terms, all three
classes ought to unite on production as the source of profit, rather
than on clever bargaining. This involves close-knit organizations of
both farmers and laborers under the leadership of men well educated in
general economics, in strategic bargaining, and in production. There
must be men studying the system as a whole, men who perceive the
legitimate physical difficulties which our society faces. The labor
leaders must come to see that there is a point beyond which labor can
not go in raising wages and reducing hours. Farm leaders must come to
see that there is a point beyond which farmers can not go in reducing
acreage and raising prices. Business leaders must come to see that the
common people will not stand for curtailment of production to two-thirds
factory capacity in order to secure abnormal profits, when by running
the factories to full capacity the business will give normal profits.
The best brains of all classes must unite in overcoming legitimate
physical handicaps, not in figuring out ways in which a specific class
may benefit at the expense of other classes. In the meantime, farmers
must learn to use sagacious sabotage as effectively as labor and
capital. Otherwise they will continue to be at the mercy of capital and
labor.
What is the best means of overcoming the food shortage resulting from
drouth? _Laissez faire_ economists and business men say: Let high prices
curtail demand and stimulate production. But this remedy is “locking the
stable after the horse is stolen.” Is it practical to build government
warehouses to store wheat in years when the acre yield is more than
fifteen bushels, and from which wheat may be drawn in years when the
yield is less than thirteen bushels?
No scheme of this sort can be definitely laid out in advance. But
statistical science will soon reach a point where it should be possible
to meet our physical handicaps in the way of drouth, floods and
accident, in the spirit of doing what is best for society, instead of
utilizing the crisis for individual or class profit.
If we are to continue our present complex society, we must educate our
children very thoroly in social mathematics. Our problems are not only
problems of the spirit, but also of exact measurement. What is the fair
price for bacon? This involves the cost-of-production idea. Is bacon
relatively lower or higher than hogs? Are hogs relatively lower or
higher than corn? Is there a normal supply in the country? If bacon were
lower in price, would the future supply be imperiled? Would an injustice
be done to farmers? If bacon were higher in price, would an undue profit
accrue to the packers, or would the farmers be stimulated to produce too
many hogs a year from now?
Possibly it will be wise for the government to provide funds to finance
a Price Publicity Committee, to be made up of economists appointed by
our state universities and agricultural colleges. The duty of this
commission would be to make public week by week the relevant price
facts. They would point out which products are relatively high and which
are relatively low, and issue index numbers of various kinds, in an
endeavor to educate the public to fundamental price facts. The object of
such a Price Publicity Committee will be to furnish such constant
publicity that it will be difficult for any product to sell for any
length of time either above or below cost of production. And in saying
this we define cost-of-production price as that price which is necessary
in the long run to keep enough producers in the business to satisfy the
demand. It is believed that adequate publicity will favor the prevailing
of the long run cost-of-production price as opposed to the short run
supply-and-demand price.
Men in whom the laborers of the country have faith should have an
intimate, statistical knowledge of the supply and demand forces as they
make prices and as they make for the prosperity of laborers and society
as a whole. Men in whom farmers have faith should have an intimate,
statistical knowledge of labor and business problems in order that they
may know approximately when labor and business are charging fair prices
for their services. Business men already have a fair statistical
knowledge of farming and labor conditions, but they need an even more
intimate knowledge, as well as a change of heart. They must learn to
operate their businesses from the standpoint of greatest service and a
fair profit, not from the standpoint of greatest profit. Those
businesses which do not learn this may expect to be taken over either by
the government, organized labor, or organized farmers, if not in one
way, then in another.
SUPPLY AND DEMAND
Both farmers and city consumers have expressed much dissatisfaction in
recent years with the methods of price determination as used by the
boards of trade and packing houses. The representatives of the boards of
trade and packing houses have answered these complaints with the simple
formula, “supply and demand.”
During the war, many people announced that prices in the United States
were no longer the result of supply and demand. For a period of two and
a half years, wheat prices were held at approximately $2.20 a bushel, in
spite of the fact that both supply and demand conditions were varying
constantly during this period, and in spite of the fact that under
supply-and-demand conditions as they ordinarily work, prices might have
been expected to have gone as high as $4 and as low as $1.50, at
different times during this period of two and one-half years. Social
workers and others of idealistic temperament who have always been pained
with the rather heartless way in which the law of supply and demand has
worked, were much pleased with the stabilized wheat price, and referred
to it as an instance of the repeal of the law of supply and demand.
Of course, the law of supply and demand never has been repealed, and
never will be repealed. Instead of trying to repeal it, we should try to
secure the best type of price-fixing machinery thru which this law may
work. Man has not repealed the law of gravitation, but has devised such
machines as automobiles, airplanes, etc., thru which he accomplishes his
purposes notwithstanding.
Our city friends who favor government attempts to repeal the law of
supply and demand and to fix uniform and relatively cheap prices should
direct their efforts toward the search for a new price-fixing machinery.
For arbitrary interference with this law invariably brings penalties in
the form of conditions which often are more severe than the condition
which it was hoped to improve.
What we should strive for rather is a better understanding of the law of
supply and demand, in the hope that we may be able to modify the
severity of its operation and thus avoid periods of feast and famine,
with their unreasonably low prices and unreasonably high prices.
Thousands of men in the corn belt, especially the leaders of the
organized farmers, should be familiar with the normal, mathematical
working of the law of supply and demand. They should know not only when
prices are lower than warranted by the supply, but just how much too
low. Exact measurement is necessary in order to perceive when unusual
factors are at work. The price indicated by a mathematical
interpretation of supply and demand may be $1.25 for corn, whereas the
actual price, because of a purely speculative drive, may be only $1. It
is wise to measure prices to some extent by purely mathematical
considerations, in order that we may perceive more clearly when
extraordinary forces are at work.
After having arrived at a price based on a mathematical interpretation
of supply and demand, the problem is to determine to what extent
extraordinary forces are at work and to what extent it may be worth
while to combat them by extraordinary measures. If corn is 15 cents a
bushel below the mathematically justified price, will it be advisable
for farmers generally to hold their corn and cause a shortage at the
terminal markets? Will it be advisable to put out newspaper propaganda
showing the public how the market price of corn is below cost of
production, or put on an advertising campaign to increase the demand?
These matters of larger policy are mostly outside the field of
mathematics. They are largely matters of strategy. How much bargaining
force do the farmers represent? To what extent will they follow
directions? At what season of the year is it best to strike?
Generally speaking, a farmers’ drive for higher prices would best begin
about January 1st, and should reach its greatest intensity about March
1st. After March 1st, seasonal scarcity begins, and no further
propaganda is needed. A consumers’ drive for lower prices best begins
about August 15th, and reaches its greatest intensity about October
15th. After October 15th the seasonal surplus, especially of corn and
hogs, begins, and there is no further need for consumers to bring
artificial propaganda to bear. It is interesting to note in this
connection that the “bear” campaign engineered by the governments of the
world in 1919 began in late July and continued until about October 15th,
at which time the weight of the season’s marketings was sufficient to
hold prices down without additional use of newspaper space.
After a mathematical study of prices, the leaders of farm organizations,
in so far as they attempt to influence prices, must consider the state
of the export trade, rate of foreign exchange, ocean freights, world
crop conditions, business conditions at home and abroad, and, in fact,
all the factors which the trained speculators take into account on the
Board of Trade. They must take all of these things into account, and yet
be able on occasion to act decisively. They must learn to play the game
in the same fashion as a skillful whist player. They must not “overbid”
their hand, but bid its full worth, and they must take all the tricks
they can.
To have even a fair chance of success in an effort of this sort, farmers
must set up a very strong statistical organization, in charge of a
highly competent staff of thoroly trustworthy experts. For farmers
themselves have neither the time nor the opportunity to secure the
training necessary to enable them to acquire and assimilate the
information needed.
CAN “PRICE” MAKE “SUPPLY AND DEMAND”?
Dissatisfied farmers and city consumers have been told often that
“supply and demand” makes the price. Economists have backed up the Board
of Trade people and the packers in making this assertion.
But is it not almost equally true to say that “price” makes the “supply
and demand”? Is it not possible to set a price which, as can be
demonstrated mathematically, is out of line with the present supply and
demand, and thru this price to create new and unexpected
supply-and-demand conditions?
It is conceivable, for example, that oleomargarine might be sold for
several years at a price below that warranted by supply and demand and
equally below a price warranted by cost of production. It is conceivable
that the abnormally low price, without reducing the supply, would
increase the demand and result in the formation of the oleomargarine
habit among millions of people. And it is equally conceivable that later
on the price of oleomargarine might be increased more nearly to a parity
with butter, and that the oleomargarine eating public might continue the
oleomargarine, even tho it was underselling butter by only 10 cents a
pound, instead of the 15 cents a pound differential which was existing
when the habit was formed.
A low price may be used to create a demand, which will continue even
after the low price no longer exists. In like manner, a low price may be
used to curtail the supply of the competing article. In the
illustration, an artificially low price for oleomargarine might reduce
the demand for butter, thereby reducing the supply, and increase the
demand for oleomargarine, and this situation of a reduced supply of
butter and an increased supply of oleomargarine might continue, even tho
the price of oleomargarine were later raised to its customary
relationship with butter. Price may act as a cause and “supply and
demand” may be a result.
In open, competitive markets, “supply and demand” generally comes first
and price follows after. Before the war, for instance, the dominating
factor in the corn market was the supply of corn, and during the months
of July and August, when the new corn crop was being made, the price of
corn varied with almost mathematical accuracy with the rainfall and
temperature which were making the new corn crop. The demand for corn was
a fairly constant factor. The supply of corn was the price-making force.
Since the war, corn prices have not been the result of “supply and
demand” in the sense that they were before the war. During 1919, price
often came first in the corn market, and supply and demand followed
afterward. For example, in January and February, 1919, corn prices broke
20 cents a bushel, in spite of the fact that receipts at central markets
were decidedly below their customary level. Influential people had
postulated the theory that the war was over, and that supply and demand,
if given an opportunity, would operate to bring about a lower price
level. They set a lower price level, but supply and demand refused to
operate on the new level. The lower corn prices which prevailed during
the spring of 1919, however, probably had a very material effect on the
acreage planted. At any rate, there was about four per cent less corn
planted in 1919 than in 1918.
According to the customary view, when the supply is smaller than usual,
the price should be greater than usual, and vice versa. In the hog
market this does not necessarily hold true. In November of 1907, hog
prices were dropped with a terrific jerk, as a result of certain unusual
conditions. The drop was so great that farmers refused to market their
hogs, and receipts of hogs in November of 1907 were about one-third
smaller than in the ordinary November. The price of hogs was lower than
customary by about one-fourth, and the supply of hogs marketed was less
by about one-third. A similar situation prevailed in August of 1919.
Prices dropped about $5 per hundredweight, or faster than ever before in
history. Receipts also dropped, and much fewer hogs were received than
in the ordinary August.
In both 1907 and 1919, the packers figured that the business world was
so upset that to be on the safe side they would best buy their hogs
cheaper than they had been buying them. Farmers were slow to realize
just how great the disturbances had been in the business world, and
failed to understand that in a situation of this sort the packers could
put thru their program for lower prices, in spite of reduced hog
receipts for a month or two. It is in the very nature of things that the
packers can outlast the farmers at such a game. The packers know more
accurately than the farmers the supply-and-demand conditions, and they
know that after a hog reaches two hundred pounds, it is only a question
of weeks till the farmer will let him go, no matter what the price. It
will take an extraordinarily able farmers’ organization to beat the
packers at this game, an organization which holds as its trump card
“ultimate supply and demand.”
Prices may make supply and demand, and supply and demand may make
prices. First one has the lead, and then the other; they are constantly
acting and reacting. Before the war, the relationship in some
commodities might be expressed with almost mathematical exactness, but
there were constant little departures. Since the war prices have much
more often taken the initiative than they did before the war. The
result, of course, is a more violently fluctuating condition of both
supply and demand.
The problem which farmers and city consumers should put to the Board of
Trade people and the packers is: What are you doing to place prices at a
point which will result in a more uniform supply and a more uniform
demand?
COST OF PRODUCTION
The common man prefers to approach the question of price not from the
standpoint of supply and demand, but from the standpoint of cost of
production. The laboring man says that he has no quarrel with the
farmer, that in fact he is glad to pay the farmer what it costs him to
produce food. Most people take it for granted that the just price is
cost of production. In July of 1917, President Wilson gave his scholarly
definition of a just price: “By a just price I mean a price which will
sustain the industries concerned in a high state of efficiency, provide
a living for those who conduct them, enable them to pay good wages and
make possible the expansion of their enterprises which will, from time
to time, become necessary, as the stupendous undertaking of this great
war develops.”
The idea of a just price, covering cost of production and reasonable
profit, is considerably different from market price or supply-and-demand
price. The market price typically alternates considerably above and
considerably below the production cost of the bulk of the people engaged
in the enterprise. For instance, when prices go up and profits become
larger, new people are attracted into the business and production is
increased until finally there is more supply than there is demand, and
then prices have to go down and profits become losses, and the people
who can not produce except at the high prices must go out of business.
Both the farming world and the business world are composed of a great
many different men, each of whom is chasing a profit in his own way.
Many of these men are very short-sighted and are lured into an
apparently profitable business just at the wrong time, and in like
manner become discouraged with an apparently unprofitable business at
just the wrong time. Under the competitive regime, it is apparent to any
thoughtful business man that both in business and in farming the market
price or supply-and-demand price is almost never the same as cost of
production, but fluctuates in rather rhythmical manner, now above and
then below cost of production, tending to equal almost exactly, over any
long period of years, true production cost.
Under the market price or supply-and-demand price system as it has
prevailed, the constant tendency is for the wealthier people, both among
farmers and among business men, to increase their wealth at the expense
of the poorer people. Poor people who embark in general business or in
farming, no matter how intelligent, are likely to go into and come out
of any particular enterprise at just the wrong time. The average man who
is moderately well fixed and stays by a particular enterprise year in
and year out, manages to secure for himself just a little better than
ordinary wages. The man who is wealthy and expands his operations just
as prices are starting up, and reduces operations just as prices are
starting down, secures large profits.
The fluctuating price system, which means great profits to a wealthy
few, serious losses and wrecked lives for a few, and a bare livelihood
for many, is the natural result of the _laissez faire_ policy of the old
classical economists. Their idea was to let things alone, on the theory
that, let alone, prices would sooner or later adjust themselves to the
proper point. In practice, prices almost never reach a proper point, but
are constantly moving either above or below cost of production. One
hundred years of _laissez faire_ policy have demonstrated beyond a doubt
that under such a system the wealthy few inevitably become richer,
whereas the bulk of the people get just enough to keep them going.
The _laissez faire_, supply and demand, speculative, or market price
system, is condemned by nearly every one except the business men who run
it and believe they understand its beneficent workings, and the
economists of the classical type who, in their careful reasoning, are
unable to think of any other way of determining satisfactory prices over
any period of time. The common people and the lofty idealists were
greatly elated during 1917 and 1918 at the apparently successful working
of fixed prices established more or less in defiance of the speculative
or _laissez faire_ price system.
Those who have given the most thought to price fixing advocate as a
guide “cost of production plus a reasonable profit.” But what is cost of
production? Even in industries so well controlled by man as coal mining,
where the weather does not enter in, there are some mines that can
produce a ton of coal for two or three dollars, while other mines can
not produce a ton of coal for less than six or seven dollars. The North
Dakota wheat farmer, in a year of rust, may produce wheat at a cost of
four or five dollars a bushel, whereas the Kansas farmer the same year
may produce wheat at a cost of only a dollar or a dollar and a half per
bushel. Shall both the Dakota farmer and the Kansas farmer be paid cost
of production plus a reasonable profit for their wheat? From this
standpoint we see that there is no such thing as a standard cost of
production. A single producer may be able to determine his personal cost
of production of a given quantity under a given set of conditions. But
in the general sense, as it is commonly thought of, cost of production
is a will-o’-the-wisp, a creature that seems to exist but really does
not.
Nevertheless, there is a rough-and-ready method of determining cost of
production or just price as distinguished from _laissez faire_ or
supply-and-demand price. We refer to the ratio method of price
determination. Over a long series of years, cost of production plus a
reasonable profit is roughly expressed by the relationship which exists
between a raw product and the finished product. In rough form it may be
most easily grasped in the case of corn and hogs. Over any long period
of years, hogs sell on the Chicago market at a price per hundredweight
equal to the Chicago price of 11.5 bushels of corn. When hogs have sold
for fourteen bushels of corn, they have sold for more than cost of
production plus a reasonable profit, while, on the other hand, when they
have sold for nine bushels of corn, they have sold for less than cost of
production plus a reasonable profit. All this is not saying that certain
producers have not been able to make a profit when hogs have sold for
nine bushels of corn. Neither is it saying that certain producers may
not have been selling at a loss when hogs sold for as much as fourteen
bushels of corn. It is simply saying that it has required the pulling
power of a price for hogs which is equal to the price of 11.5 bushels of
corn to keep enough men in the hog business year in and year out to
supply the demand of this country for hog products during the past sixty
years. This is what we mean by the ratio method of price determination.
It is the only practical method of determining cost of production in
such a business as farming, where there are millions of producers
working under a variety of conditions.
We have the greatest respect for the old _laissez faire_ or speculative
method of price determination. It worked very nicely under competitive
conditions, such as existed before the war. No one knows as to whether
or not times now are right for adopting a different machinery thru which
the law of supply and demand may work. We offer the ratio method as a
method which is probably better adapted to a thoroly democratized
co-operative society than the old-fashioned _laissez faire_ method,
which was adapted primarily to a competitive society.
The spirit of the ratio method is highly technical. The examples given
in this book must necessarily be simple. But in actual practice, the
ratio method would necessarily become quite technical, requiring for its
administration highly specialized statisticians. At the present time
very few men are available for work of this sort. The ordinary man who
tries to fix prices by the ratio method is biased by either personal or
class interests. A notable example of this was the Chicago Milk
Commission, composed of leading citizens of the state of Illinois, which
sat from December, 1917, to February, 1918, and finally offered as a
method of milk price determination the ratio method. The majority of the
members of this Milk Commission were city people, and on that account,
consciously or unconsciously, they twisted the ratio method so as to
bring about a low price for milk. If the majority of the commission had
been farmers, they could have twisted the ratio method to bring about a
much higher price for milk. But there are now, and in the future will be
more, men properly trained in the weighting of agricultural index
numbers, who can look into matters of this sort with a scientific nicety
and determine prices by the ratio method with the greatest accuracy, by
which we mean the minimum of bias toward either producer or consumer.
It is our intention in this book to indicate ways of securing ratio
prices for various agricultural products. The methods outlined in
succeeding chapters are definite and exact; we grant, however, that they
may be made more comprehensive and be further refined so as to cover
their respective fields in more effective fashion.
RATIO METHOD OF DETERMINING COST OF PRODUCING HOGS
The ratio method of price determination was first publicly recognized in
the United States by the Food Administration, in November of 1917. A
commission of seven swine men had been appointed by the Food
Administration to determine the cost of producing hogs, and in
submitting their report the commission adopted practically without
change the ratio method of price determination as advocated in Wallaces’
Farmer during the summer and fall of 1917. The commission, composed of
expert swine men from all over the United States, after a careful
technical survey of the situation and consideration of the figures
submitted by the author, came to the conclusion that the ratio method
actually expressed cost of production more simply and accurately than
any other method.
In its simplest form, the hog producer of fifty years ago grasped the
ratio idea. Without any statistical investigation, the swine growers of
those days came to the conclusion that they could make money when they
sold their hogs for a value per hundredweight of more than the value of
ten bushels of corn. For a generation or two, hog men looked on a ratio
of ten bushels of corn to one hundred pounds of hog flesh as about
right, altho they felt that such a ratio might not cover risk.
From an exact statistical standpoint, take the ten-year period extending
from 1907 to 1916, inclusive. During that time No. 2 Chicago corn
averaged 66.3 cents a bushel, whereas hogs averaged $7.53 per
hundredweight. The ratio for that particular ten-year period was 11.4
bushels of Chicago No. 2 corn to equal in value one hundred pounds of
Chicago hog flesh. How uniform is this ratio between corn and hogs from
decade to decade may be judged from the following table, which gives the
ratios as they have prevailed year by year for the past sixty years, and
the average by decades. The second column shows the number of bushels of
corn required each year to equal in value one hundred pounds of live
hog:
1858–1867.
1858 8.7
1859 7.1
1860 12.4
1861 14.0
1862 10.0
1863 7.0
1868–1877.
1868 9.5
1869 14.0
1870 11.9
1871 10.2
1872 11.1
1873 12.3
1864 7.3
1865 16.3
1866 16.2
1867 7.2
————
Ten-year average 10.6
1874 8.9
1875 11.8
1876 15.3
1877 11.5
————
Ten-year average 11.7
1878–1887.
1878 9.7
1879 10.3
1880 12.3
1881 12.1
1882 10.9
1883 11.3
1884 10.5
1885 9.7
1886 11.1
1887 12.4
————
Ten-year average 11.0
1888–1897.
1888 12.3
1889 12.5
1890 9.9
1891 7.4
1892 11.8
1893 16.5
1894 11.6
1895 10.8
1896 10.7
1897 14.2
————
Ten-year average 11.8
1898–1907.
1898 14.6
1899 12.0
1900 13.2
1901 11.8
1902 11.6
1903 13.0
1904 10.2
1905 10.4
1906 13.4
1907 11.4
————
Ten-year average 12.2
1908–1917.
1908 8.4
1909 11.3
1910 15.2
1911 11.2
1912 10.9
1913 13.2
1914 11.7
1915 9.6
1916 11.5
1917 9.7
————
Ten-year average 11.3
To refine the method to meet market conditions, we need to know the
ratio between corn and hogs at different seasons of the year. There are
seasonal periods of over-supply and scarcity of both corn and hogs. In
November, for instance, the 1907–1916 price of corn was 67.2 cents and
the price of hogs $7.23, or a ratio of 10.6 bushels to one hundred
pounds of hog flesh, while in March of the ten-year period the average
price of corn was 61.7 cents and the price of hogs $7.66, or a ratio of
12.4 bushels of corn for one hundred pounds of hog flesh. In like
manner, there is a fairly normal ratio for each month of the year and
for each week of the year. All this is on the assumption that hogs are
simply condensed corn. It does not take into account the fact that hogs
have been made out of corn at varying values during a period of about a
year preceding time of marketing. Obviously, then, we must have a
composite corn value. In matters of this sort, statisticians know that
it is absolutely impossible to weight matters so as to represent actual
conditions, but at the same time they know that absolute accuracy is not
at all essential, that in fact a difference in weighting will ordinarily
make very little difference in results.
While the author personally recommended to the commission appointed by
the Food Administration to investigate cost of producing hogs, a
slightly different weighting, yet nevertheless we will use here the
weighting recommended by that committee. The committee assumed that the
corn going into the making of a hog was distributed over twelve months;
that during the first month 2 per cent of this corn went into the hog or
its dam; the second month, 2 per cent; third month, 2 per cent; fourth
month, 3 per cent; fifth month, 4 per cent; sixth month, 6 per cent;
seventh month, 5 per cent; eighth month, 9 per cent; ninth month, 15 per
cent; tenth month, 20 per cent; eleventh month, 17 per cent, and twelfth
month, 15 per cent. Securing composite corn values by this kind of
weighting, we find that as an average of the ten-year period, 1907–1916,
the January ratio was 11 bushels; February, 11.6 bushels; March, 12.4
bushels; April, 12.7 bushels; May, 12.3 bushels; June, 12.1 bushels;
July, 12 bushels; August, 11.8 bushels; September, 11.8 bushels;
October, 11.3 bushels; November, 10.6 bushels, and December, 10.4
bushels.
[Illustration:
Illustrating the departure of actual Chicago hog prices from the
ten-year standard ratio, corrected seasonally.
]
For sake of example, determine cost of producing hogs for the Chicago
market for the month of April, 1918. Corn values month by month,
beginning April, 1917, were as follows: 144.9 cents, 163.9 cents, 170.7
cents, 200 cents, 197.2 cents, 208.6 cents, 199.2 cents, 201 cents,
173.2 cents, 180.6 cents, 174.5 cents, and 172.3 cents. Weighting these
on the basis indicated, we get a composite value of corn of 182.5 cents.
The historical ratio for the month of April is 12.7 bushels of such
composite corn. Multiply 182.5 cents by 12.7, and we secure $23.18 as
the cost of producing hogs for the Chicago market in April of 1918,
under the ten-year ratio method. The actual price was $17.45, or a loss
of $5.73 per hundredweight. The chart which is published herewith
illustrates graphically results secured in the same manner for every
month during the ten-year period beginning 1907.
Ordinarily, Chicago No. 2 corn measures very accurately the changes in
corn value on the farm, the corn out of which hogs are actually made.
During part of the winter of 1917–1918, Chicago No. 2 corn ceased to be
quite such an accurate measure as usual, for the reason that the quality
of the crop was so poor that only a small amount of corn graded No. 2,
and for the further reason that there were severe transportation
difficulties.
Some people have urged not using Chicago No. 2 corn values, but corn
values on farms as reported to the United States Department of
Agriculture, monthly, by crop reporters. This price is no doubt compiled
with considerable accuracy, but is open to objection for the reason that
it does not represent a uniform grade. In soft corn years, a bushel of
corn as valued by crop reporters on farms is poor stuff. In such years,
there is always a wider spread between the farm value of corn and the
Chicago No. 2 value than in years when the quality is good. It might do
fairly well to take farm values of corn and farm values of hogs if
definite grades could be established. If they can not be, it is probably
best to take Chicago values of No. 2 corn and heavy hogs as a basis,
making allowance occasionally when exceptional conditions arise in the
way of artificial prices temporarily created by transportation
difficulties, and remembering always that the true point at issue is to
apply a ratio between certain grades of actual feed on the one hand and
a certain grade of hogs on the other. This is a technical matter which
really can not be decided by lawyers or business men, however competent
such men may be to run a food administration or a department of
agriculture, or by farmers, however competent such men may be to feed
hogs. It is a matter which must be handled by men who understand markets
and who have had sufficient economic training so that they understand a
little something of the making of index numbers, and who have had
sufficient touch with agricultural conditions so that they understand a
little something of the technique of feeding hogs.
Soon after the report of the commission on cost of producing hogs, the
Food Administration announced among other things that it would do its
best to pay hog producers, for a hundred pounds of hog flesh, the
equivalent of thirteen bushels of the corn which went into these hogs,
the ratio system to apply to hogs farrowed in the spring of 1918. It was
expected that there would be an urgent need for hog products during
1919, and it has generally been regarded that this announcement of the
Food Administration was wise. The thirteen-bushel ratio was 13 per cent
over the historic ratio, and encouraged the transforming of a larger
amount of corn into hogs than usual.
When it came to putting the thirteen-bushel ratio into effect, in the
fall and winter of 1918–1919, the Food Administration did all in its
power to squirm out of living up to its guarantee. First, the effort was
made, in the month of September, 1918, to make it appear that the
thirteen-bushel ratio was based on a ratio between farm corn prices and
Chicago hog prices, in spite of the fact that the pamphlets originally
issued by the Food Administration to farmers of the corn belt in
November of 1917 explained the ratio on a basis of Chicago corn prices
and Chicago hog prices. By using farm corn prices, the Food
Administration secured a figure of about $2.50 per hundredweight lower
than if the thirteen-bushel ratio had been applied literally as
described in the original pamphlets. The Food Administration, however,
claimed that it could not live up to its original guarantee, because the
export prices of pork would not justify it. In this respect, it is
interesting to note that in August of 1918, just before the Food
Administration took up this matter of carrying out its thirteen-bushel
guarantee, Great Britain reduced its maximum price on American bacon by
about $12 per hundredweight. It is also interesting to note that the
British Food Administration was making money on its handling of pork
products, altho it was losing money on its wheat. Those American
producers who were most familiar with the situation believed that there
was a concerted effort by the American and British food administrations
to buy the large American hog crop, which had been secured by the
thirteen-bushel guarantee, as cheaply as possible, avoiding its
guarantee with such chicanery and deceit as an experienced business man
knows how to use in case of emergency.
The committee of some fifteen men, supposedly representing the American
hog producers, which met with the United States Food Administration in
this matter, were not well educated along statistical or economic lines,
and they went down to defeat in September, 1918, scarcely realizing just
what the Food Administration had done to them. Only two members of this
committee had served on the original commission, and it was impossible
for them to give the other members a full comprehension of what the
ratio meant. When the facts became known, widespread indignation among
the farmers of the corn belt compelled the Food Administration to
abandon the hypocritical pretense of living up to the thirteen-bushel
ratio and come out flatly for a $17.50 minimum, which was really a ratio
of 10.8 bushels. The Food Administration was able to thus repudiate in
part its definite obligation to hog producers, because there were no
thoroly organized farmers with leaders trained to think in terms of
statistics and economics.
The author does not care to create a prejudice against the Food
Administration. It probably did its work as efficiently as any branch of
the government during the war. The sole purpose is to point out to
agricultural students the extreme disadvantage under which farmers labor
in bargaining with other classes of society. It is hoped that as farmers
learn to follow the example of keen business men and employ trained
experts to look after their interests, and as farm leaders become better
trained in statistics, economics and business principles, this
disadvantage will disappear.
SUPPLY AND DEMAND VERSUS COST OF PRODUCTION
What makes hour-by-hour and day-by-day prices under _laissez faire_
conditions is not cost of production, but that brute force which we call
“supply and demand.” In its blind groping, this force necessarily
approximates cost of production as an average of any long period of
time. But it never specifically recognizes cost of production as a
factor which should be considered. It approximates cost of production
because it has to, not because it wants to.
An illustration of the strategy of the hog market is a case in point.
Imagine a Monday hog market in early March, at which season of the year
prices are generally rising. Suppose that instead of the accustomed
40,000 Monday hog run, 60,000 have been received. Suppose that, owing to
car shortage or some other reason, eastern shippers are out of the
market. There is a larger supply than usual and a smaller demand, and
prices decline 15 or 20 cents a hundredweight, perhaps very much more.
“Supply and demand,” say the packers and practical economists, with
unction. But at that very time every one may know that the potential
supply in the country is very small, and the potential demand is very
great. At that very time this wider situation may be taken fully into
account by the packers in the prices which they are charging for their
products to the retailers. The hog market may have broken 15 to 20
cents, but the lard, ham and bacon markets may have held steady or even
advanced.
The packers, in the prices which they pay for live hogs and the prices
which they charge for hog products, are governed chiefly by strategic
considerations. Day by day they change their prices to meet the surface
indications of changing supply and demand conditions. They may sometimes
exercise such poor strategy that they will be compelled to manufacture
hog products at a loss for a time. The prime consideration is to buy as
cheaply as possible and to sell as high as possible and yet meet the
competition, which is rather more active than many farmers have
supposed.
Now it is obvious that a ratio system of hog prices is not compatible
with the system employed by the packers, or by any typical business man,
for that matter. Big business enjoys a speculative profit which comes
with fluctuating prices. But a daily fluctuating price is not consistent
with the idea of a just price or a cost-ofproduction price. If the
packing business were a monopoly under government control, stabilized
prices under the ratio system might be paid with some degree of
satisfaction, provided we assume that the governmental authorities have
a real insight into market conditions and a thoro understanding of the
ratio system of price judgment as related to supply and demand. Under
the present regime, however, it is difficult to see much prospect of hog
prices ever being stabilized, for the reason that under a _laissez
faire_ system business profits result from fluctuating prices, those
businesses profiting most which are best organized and most long-lived,
and are able to take strategic positions over long periods of time.
What would happen if cost of production were to be paid in the hog
market day by day, year in and year out? By cost of production is meant
the 11.5-bushel ratio, modified seasonally. Packers can think of many
objections. For instance, they can conceive of periods of a year or two
at a time when the 11.5-bushel ratio would necessitate paying the
farmers more for their hogs than they could get for the meat. Equally,
they can see how it might be that for periods of a year or two at a
time, they would be able to get out of the consumers a price equivalent
to considerably more than the 11.5-bushel ratio. Admittedly, these
objections are sound under present conditions; supply-and-demand price
is the only price adapted to the _laissez faire_ situation.
If farmers as a class are to secure cost of production for their hogs
month after month and year after year, they must organize into powerful
associations to do business co-operatively. They must control the supply
of hogs with an iron hand and an intelligent head. They must be willing
to play fair with the consumers and not charge more for their hogs than
the ratio of the past sixty years. In fact, it is conceivable that they
might be able to sell their hogs at slightly less than the 11.5-bushel
ratio of the past sixty years. If the organization was really powerful
enough to enforce the cost-of-production ratio over any period of time,
the market risk, which has been a very serious factor in the past, would
disappear. This risk has been such a factor that it is quite possible
that farmers would be willing to produce enough hogs to satisfy the
market at an eleven-bushel ratio if the risk no longer existed. The
author estimates that as an average of the past sixty years the
consuming public has been paying at least 50 cents per hundredweight
more than necessary for its hog products. This extra 50 cents has been
in the nature of risk insurance.
It is conceivable that both farmer producers and city consumers might
organize to carry this risk between them, the city consumer co-operative
organizations agreeing in advance to take a certain number of pounds of
hog products, and the farmer producing organizations agreeing to furnish
such a quantity of hog products on the basis of a corn-hog ratio
representing cost of production.
CATTLE PRICES AND THE RATIO METHOD
A ratio between corn and cattle does not represent cost of production
nearly as accurately as a ratio between corn and hogs. However, such a
ratio, when worked out and applied over a long period of years, reveals
the interesting historical fact that the swings in cattle prices above
and below the ratio line are periods of about seven years each way.
A more accurate method is to take into account the fact that fat cattle
as produced in the corn belt and marketed at Chicago are commonly made
out of feeders which were bought a few months previously, taken to the
farm, and finished chiefly on corn, together with a little in the way of
pasture, hay, silage and concentrated feeds, such as cottonseed meal and
oil meal.
As an average of the ten-year period, 1906–1915, ordinary 1,000-pound
feeders on Chicago, in October, cost $51.20. As an average of the
ten-year period, these same 1,000-pound feeders, as ordinary,
well-finished fat steers weighing 1,300 pounds each, sold the following
April for $98.35. During this ten-year period it seemed to take $47.15
to cover the cost of feed, risk, labor, etc., of bringing a 1,000-pound
feeder to 1,300-pound fat condition. Ordinarily, it is substantially
accurate to measure these things in terms of corn only. During the
ten-year period under consideration, the weighted price of corn was 61.5
cents. Dividing $47.15 by 61.5 cents equals 76.7 bushels. As an average
of the ten-year period it has required the value of 76.7 bushels of
weighted corn to make a 1,000-pound feeder, bought in October,
moderately fat for the Chicago market the following April. The corn is
weighted on the theory that the steers consume 8 per cent of it the
month after they are bought, 15 per cent the second month, 20 per cent
the third month, 20 per cent the fourth, 20 per cent the fifth, and 17
per cent the last month. Applying the ten-year ratio to the specific
month of April, 1918, we find that a 1,000-pound feeder in October,
1917, cost $84, and the value of 76.7 bushels of composite corn was
$139.40, making a total cost of the finished 1,300-pound steer, $223.40.
The actual selling price in the month of April, 1918, was $199.55, or a
loss of about $23.85 per steer. Applying the same method month by month,
we get the chart as herewith published. It expresses profits and losses
with a fair degree of accuracy to the ordinary cattleman who buys
feeders at the central market and feeds them for five to seven months,
largely on corn. During the winter of 1917–1918, the chart was not quite
so accurate as usual, for the reason that the other expenses did not
mount at this time as rapidly as corn. While heavy losses were incurred
by cattle feeders, they were not so great as indicated in the chart.
[Illustration:
Illustrating the departure of prices of 1,300-pound native steers at
Chicago from the ten-year ratio.
]
The profits and losses of the big cattlemen of the far-western and
southwestern states are not to be measured by such a chart. Their chief
expenses are labor and the cost of pasture. Weather conditions affect
them directly, whereas weather conditions in the corn belt affect cattle
profits indirectly, thru the price of corn. During 1917 and 1918, the
western cattle men, with the exception possibly of those in certain
sections of the southwest, which suffered from unprecedented drouth in
1917, made unusually good profits. As a class, their profits were
probably not as large as the profits of the grain-growing farmers of the
middle-west, but were far larger than the profits of the cattle feeders
of the middle-west.
PACKER PRICES AND THE RATIO METHOD
The Chicago packers buy hogs as cheaply as they can and sell the pork as
high as they can. Nevertheless, for months at a time they may sell pork
products at a loss. Over any long period of time there is a fairly
constant ratio between the value of one hundred pounds of live hog flesh
and one hundred pounds of lard, ribs or other standard hog products. To
simplify matters, and for purposes of illustration, we will consider
that standard hog product, dry salt ribs, which makes up about 35 per
cent of the live hog.
* * * * *
As an average of the ten years from 1886 to 1895, dry salt ribs
(low-grade bacon) sold for the value of 136 pounds of live hog. During
the ten-year period from 1896 to 1905, ribs sold for the value of 137
pounds of live hog. During the ten-year period from 1906 to 1915, they
sold for the value of 135 pounds of live hog. But while this ratio is
quite constant over any long period of time, it varies considerably
according to the season of the year. As an average of the ten-year
period of 1907–1916, the ratio was 136 pounds in January, 132 pounds in
February, 127 pounds in March, 126 pounds in April, 133 pounds in May,
137 pounds in June, 137 pounds in July, 137 pounds in August, 135 pounds
in September, 136 pounds in October, 140 pounds in November, and 139
pounds in December. In April of 1918, hogs averaged about $17.45 per
hundredweight. Using the standard ratio for the month of April, of 126
pounds of live hog for one hundred pounds of ribs, we would get as the
hog price of ribs $21.97. The actual price was about $23.21, or the
packers got for the dry salt ribs in the month of April, 1918, about
$1.24 more than the customary ratio. The chart tells the story,
extending from 1905 to 1919. The black area above the line might be
called packers’ profits and the black area below the line packers’
losses on the manufacture of ribs. As a matter of fact, the packers’
profits in the latter part of 1917 and early in 1918 were probably
larger than indicated. This method assumes that the packers’
manufacturing charges rise and fall in the same ratio as hog prices rise
and fall. In the rough way, over any long period of time, this is
approximately true, but it was probably not true in late 1917. Hog
prices at that time were over 200 per cent of the ten-year period,
whereas packers’ manufacturing costs were probably not in excess of 170
per cent of the ten-year period.