centralized and further improvements in the use of by-products are
discovered, it may be possible for packers to sell short-ribs, as an
average of a ten-year period, for a price no more than the cost to them
of 133 pounds of hog flesh. Under conditions as they prevail at present,
however, the 135-pound ratio is approximately correct.
[Illustration:
Illustrating when short-rib sides have been above and below their
ten-year average ratio to live hog prices.
]
The ratio method of determining profits and losses in the manufacture of
various packers’ products is not put forward as an aid in any method of
packing house accounting. It is, however, put forward as a method by
which the consumer and the farmer can discover in a rough way when the
packers are absorbing more than their customary share.
A similar chart worked out for lard gives much the same results, altho
at times the profit and loss of the two products do not always coincide
exactly. For instance, in 1914, lard sold for far less than its normal
ratio during the entire year, whereas ribs sold for slightly more than
their normal ratio. In 1919, lard sold far above its normal ratio and
ribs were below. Similar ratios might be worked out for all the various
hog meats, and also for cattle and the various cuts of beef. What
examination we have made of some of these ratios indicates that the
packers, in their buying of live stock and selling of products, regard
each product as a law unto itself. If there is a large amount of stored
lard on the market, on account of the shutting off of the German demand,
lard prices may be reduced, even tho hog prices are such as to warrant
lard selling at a dollar or two more per hundredweight. On the other
hand, if the Allies at the same time are in the market for ribs, the
prices will be advanced, even tho ribs may be made from hogs at a dollar
or two less per hundredweight. The problem of the packers is to buy as
cheaply as possible and sell as high as possible, in the knowledge that
too wide a spread will invite competition. In the case of hog products,
a loss may be withstood on a rapidly rising market, because the
manufacturing loss will be compensated for by the speculative profit.
This was illustrated during a considerable part of the year 1917, when
most hog products sold at considerably less than their normal ratio, but
when the packers actually made splendid profits, owing to the continual
advance of prices and speculative gain on products on hand.
In normal times we regard charts based on principles as stated in this
chapter as approximately accurate in measuring packers’ profits and
losses in the manufacture of given products.
It is conceivable that the normal lard ratios may go lower in the near
future. Corn oil, cocoanut oil, cottonseed oil and other tropical
vegetable fats are being used as lard substitutes, and as a result lard
may sell decidedly below its normal pre-war ratio to hogs. However, in
this case the bacon hog will gain in popularity and the supply of lard
will be curtailed to a point which will justify a ratio almost as great
as existed before the war.
MILK PRICE DETERMINATION
Just what price farmers should get for their milk has been a peculiarly
vexing question. Before the war, farmers selling milk to city dealers
were in an unusually weak bargaining position. When their position
became intolerable, they organized into powerful bargaining
associations, many of which were said to be illegal under strict
interpretation of the law.
One of the earliest formed and most powerful of these producers’
associations has been the Chicago Milk Producers’ Association, numbering
16,000 members and controlling most of the milk that is shipped into
Chicago or manufactured in the district immediately around Chicago.
During the years immediately preceding the entry of the United States
into the great war, this association bargained directly with the Chicago
milk dealers as to what prices the farmer members of the association
could get for their milk. They held a successful strike in April of
1916, and thereafter the Chicago milk dealers seemed to regard the
association with considerable respect. The city press and the city
politicians, however, felt that the farmers were too high-handed in
their disregard of certain laws, and forthwith began agitation which
finally resulted in indictments against the leaders in the Producers’
Association.
In the fall of 1917, the milk producers adopted as their guide in
arriving at milk prices what has been called Pearson’s formula.
According to this formula, the cost of producing a hundred pounds of
milk in the Chicago milk district is equal to the cost of 44 pounds of
grain, plus 188 pounds of silage, plus 50 pounds of hay, plus 39 pounds
of bedding, plus 2.42 man hours of labor. To the valuation thus secured,
certain differentials were to be applied to each month of the year, the
widest differential being 120.3 per cent, in December, and the narrowest
70.6 per cent, in June. This formula was devised by Professor F. A.
Pearson, of the Dairy Economics Division of the University of Illinois,
after several years of actual cost-accounting work in the Chicago milk
district. It really represents actual cost of production on a large
number of farms in certain specific years. Using Pearson’s formula as a
guide, the Chicago milk producers asked the dealers $3.71 per
hundredweight for their milk in November, 1917. The dealers refused, and
a strike was declared. The Food Administration intervened in an
unofficial way and induced the producers to agree to a price of $3.22
per hundredweight, pending an investigation by the federal government as
to a price which should cover cost of production and a reasonable
profit.
The Food Administration appointed as a committee to determine cost of
producing milk plus a reasonable profit, six people of essentially city
interests and three people of essentially agricultural interests. This
committee took testimony during the months of December and January, and
in their report took as a guiding principle in determining the cost of
producing milk the ratio method. Early in December, the author was asked
to present to the commission a profit and loss chart on milk produced in
the Chicago district since January, 1907, the profits and losses being
based on ratios between milk prices per hundredweight on the one hand,
and a composite of corn, oats, bran, cottonseed meal, gluten feed, hay,
and labor prices on the other hand. These latter ingredients were
weighted roughly as in the Pearson formula, but corn was given greater
emphasis. Incidentally, it is interesting to note as corroborative both
of the ratio method and the cost-of-production method as employed by
Professor Pearson, that the two methods give very similar results. Of
course, it is conceivable that if Professor Pearson had made his
cost-accounting investigation in a year either of extremely good pasture
or extremely poor pasture, the two methods would not agree. But taking
as he did fairly average years, the results check very closely.
While the Chicago Milk Commission adopted the principle of the ratio
method, it did so with certain modifications. To illustrate the method
as adopted by the Chicago Milk Commission, we quote from the report as
follows:
“The commission has therefore selected as a base, representing cost of
production and a fair profit, the average sale price per one hundred
(100) pounds over the years 1908 to 1915, inclusive. The result of
course does not represent present value, due to the large advance in
cost of feed and labor since that time. The quantity of feed and labor
per one hundred (100) pounds of milk, however, is the same in both
periods. Considering the eight-year period as a base and distributing
feed and labor on a basis of 100 per cent total, the commission
developed the following ratio: Nineteen per cent home-grown grains, 19
per cent mill-feeds (wheat, bran, wheat middlings, hominy, cottonseed
meal, oil meal, gluten feed, dry salt), 35 per cent hay (including
silage valued at the ratio of three tons of silage to one ton of hay),
27 per cent labor.
“It was agreed by the commission that variations in the prices of those
four units represent with sufficient accuracy, when applied according to
the above ratio, the increase or decrease in the cost of production of
milk. The only criticism made to this base or this plan was by a
minority of the members of the commission, that the price to the
producer during the eight-year period referred to was not satisfactory
to them.
“From the monthly price reports issued by the Department of Agriculture,
the farm prices of home-grown grains and hay are obtainable, and from a
reliable trade journal published in Milwaukee the wholesale prices of
mill-feeds are obtainable. The average over the eight-year period from
these records is as follows: Corn, $1.107 per hundred pounds;
mill-feeds, $1.306 per hundred pounds; hay, 55.7 cents per hundred
pounds.
“It appears fair to the industry that it is entitled to the same
proportionate increase in the price of its product as has occurred in
the elements which make up the product. From the records of the
Department for November, 1917, the beginning of the period under
consideration, the following prices prevailed, obtained from the same
sources: Corn, $3.089 per hundred pounds; mill-feeds, $2.3655 per
hundred pounds; hay, 78 cents per hundred pounds.
“The commission has considered from the evidence and such information as
was obtainable that the price of labor in November represents 50 per
cent advance over the average for the eight-year period. Using the
proportion of feed and labor and prices over the eight-year period, and
comparing with November prices from the same source of information and
on the same products, we find the following ratio of increase:
═══════════╤═══════════╤═══════════╤═══════════╤═══════════╤═══════════
│ Basic │Eight-year │ November, │ Pct. │New Index.
│ Index. │ period │ 1917, │ increase │
│ │ average. │ price. │Nov., 1917,│
│ │ │ │over 8-year│
│ │ │ │ period. │
───────────┼───────────┼───────────┼───────────┼───────────┼───────────
Corn │ 19│ $1.107│ $3.089│ 179│ 53.01
Mill-feeds │ 19│ 1.306│ 2.3655│ 81.1│ 34.41
Hay │ 35│ .557│ .780│ 40│ 49.00
Labor │ 27│ │ │ 50│ 40.50
───────────┼───────────┼───────────┼───────────┼───────────┼───────────
│ 100│ │ │ │ 177
───────────┴───────────┴───────────┴───────────┴───────────┴───────────
“The average price of milk per one hundred (100) pounds for the month of
November, from 1908 to 1915, inclusive, was $1.768. Applying the new
index ratio of 1.77, the November, 1917, price would be, therefore,
$3.13. In the same manner, the price for any month may be determined by
taking the average price over the eight-year period for that month and
multiplying it by the index figure, 1.77. It will be noted that by the
use of this method the _ratio_ of the costs of feed and labor between
the average of the eight-year period and the November, 1917, period, is
used rather than the actual prices of the commodities.
“The average monthly prices of milk per hundred pounds over the
eight-year period were as follows: November, $1.768; December, $1.812;
January, $1.781; February, $1.737; March, $1.60; April, $1.406; May,
$1.15; June, $1.017. Applying this index, 1.77 November price, to these
figures: November, $3.13; December, $3.20; January, $3.15; February,
$3.07; March, $2.83; April, $2.49; May, $2.04; June, $1.80.”
[Illustration:
Illustrating when Chicago milk prices have been above and below their
ten-year average ratio to feed and labor prices.
]
This report was signed only by the city members of the commission. The
agriculturally-minded members and the Chicago milk producers knew that
the prices secured by the ratio method as advocated by the commission
were not high enough to cover cost of production. The fault was in the
method of application. Hay and labor between them were made to
represent, according to the commission, 62 per cent of the total cost of
producing milk, which is altogether too high a weighting. This bad
weighting was made worse because of the fact that thoroly up-to-date
figures on hay and labor were not available, and the figures which were
taken were far lower than those existing at the time when the report was
actually published. The converting of silage into terms of hay instead
of into terms of corn is a matter open to grave question in view of the
fact that silage production costs are almost identical with corn
production costs, and the alternative market for silage is the corn
market and not the hay market. Several other mistakes were made which
might have been avoided if the method had been applied by a thoroly
impartial body well versed in the technique of dairying as well as the
weighting of agricultural index numbers. The unjust prices secured by
the commission should not be blamed on the ratio method, but on the way
in which it was applied. The finest scales are not dependable in the
hands of an ignorant or a dishonest man.
We present herewith a historical milk chart indicating profits and
losses from January, 1908.
A full description of the derivation of the Pearson formula is to be
found in Bulletin No. 216 of the Illinois Experiment Station.
COST OF PRODUCING CROPS
There are two methods of determining the cost of producing crops—the
cost-accounting method and the ratio method. The common method is the
cost-accounting system, as employed by farm management investigators.
For example, it has been found that the average farmer in the corn belt
puts about twenty hours of man labor and fifty hours of horse labor on
the average acre of corn. This divides up roughly into three hours of
man labor and twelve hours of horse labor for plowing, three hours of
man labor and twelve hours of horse labor for disking and harrowing,
three-fourths of an hour of man labor and one and one-half hours of
horse labor for planting, six hours of man labor and twelve hours of
horse labor for cultivating, six hours of man labor and twelve hours of
horse labor for husking, two hours of man labor and five hours of horse
labor for manuring and miscellaneous. In addition to the man and horse
labor charges are machinery expense, seed, manure or fertilizer,
insurance and depreciation on the general overhead charges, and the rent
of land. With man labor at 35 cents an hour, horse labor at 18 cents an
hour, land rent at $12 an acre, and machinery and miscellaneous expenses
at $4 an acre, the total cost of producing an acre of corn in 1919 was
about $32. On extra good land, the rent was as high as $18 or $20 an
acre, and the cost of an acre was increased accordingly. However, on
extra good land the yield was decidedly above the average. The average
acre yield in Iowa in 1919 was forty bushels, or the cost of producing a
bushel of corn was roughly 80 cents on the farm in the month of
December. The 1919 crop was decidedly above the average; with an average
crop it would have cost the Iowa farmer right around 90 cents a bushel
in such a year as 1919.
The ratio method when applied to corn corroborates the farm management
investigational method. The ratio method is based on the supposition
that the cost of producing corn varies with the cost of man labor, horse
labor and machinery. For the sake of convenience, it is taken that the
cost of horse labor varies with the price of corn, oats and hay, and
that the price of agricultural machinery varies with that part of Dun’s
index known as metals. Roughly, it is figured that of the cost of
producing corn in Iowa, 35 per cent is represented by land charge, 20
per cent by man labor, 15 per cent by corn (used either as seed or fed
to horses), 10 per cent by hay fed to horses, 5 per cent by oats fed to
horses, 10 per cent by Dun’s metals, and 5 per cent by Dun’s
miscellaneous. Dun’s metals are given a lag of two years, and Dun’s
miscellaneous of one year, owing to the fact that machinery and the
miscellaneous overhead expenses entering into the cost of corn
production become felt rather slowly.
Applying the ratio method, we will take as our base the ten-year period
from 1897 to 1906. During this period Iowa land averaged about $50 an
acre; harvest labor, without board, $2 a day; corn, 29.4 cents a bushel;
hay, $5.47 a ton; oats, 23 cents a bushel; Dun’s metals, about $14, and
Dun’s miscellaneous, about $15. The average acre of Iowa corn during
this ten-year period was worth on a December 1st farm basis $10.
Now, in 1919, Iowa land was worth about $192 an acre, or 384 per cent of
the basic ten-year period; man labor, without board, at harvest time was
around $5.20 a day, or approximately 260 per cent of this ten-year basic
period. In like manner, corn was 410 per cent; oats, 280 per cent; hay,
330 per cent; Dun’s metals, 230 per cent, and Dun’s miscellaneous, 230
per cent. If land is allowed a weighting of 35 per cent; man labor, 20
per cent; corn, 15 per cent; hay, 10 per cent; oats, 5 per cent; Dun’s
metals, 10 per cent, and Dun’s miscellaneous, 5 per cent, we arrive at
329 per cent as the cost of producing an acre of corn in 1919, as
compared with 100 per cent for the basic ten-year period. In the basic
ten-year period, an acre of corn actually sold for $10. In 1919, in
order to come as near breaking even as in the basic ten-year period, an
acre of corn should sell for $32.90. The ratio method gives almost
identically the same results as the farm management method. Both
indicate that it cost the average Iowa farmer in 1919 about 80 cents to
produce a bushel of corn on a basis of December 1st farm values.[4]
The ratio method may be applied to other crops by using a somewhat
different weighting of the production factors. In the case of oats in
Iowa, for instance, land may be given a weighting of about 35 per cent;
man labor, 15 per cent; corn, 10 per cent; hay, 10 per cent; oats, 15
per cent; Dun’s metals, 10 per cent, and Dun’s miscellaneous, 5 per
cent. This would indicate that oats in Iowa in 1919 cost about 324 per
cent as much as in the basic ten years. In the basic ten-year period,
the average acre of oats in Iowa sold for $8. We may therefore conclude
that the cost of producing oats in 1919 was 324 per cent of $8, or
$25.92. With an average yield of thirty-three bushels per acre, the cost
per bushel was about 78 cents on a December 1st farm basis.
Manifestly, the weak point in the ratio method of determining cost of
producing crops is the character of the basic period. Did the crops
actually sell during the basic ten-year period for cost of production?
Manifestly, in some years they sold for less, and in some years they
sold for more. As an average of the entire ten-year period, they must
have sold for at least cost of production, or farmers would gradually
have reduced their acreage of the particular crop under consideration,
or else gone out of business entirely. As a matter of fact, in the
ten-year period under consideration, 1897–1906, land values were
constantly advancing. It would seem, on the whole that this particular
ten-year period is a fair one to use, and that as an average of these
ten years crops sold for approximately cost of production, no more, no
less.
It is always conceivable that over long periods of time there might have
occurred changes in supply or demand conditions that would make the
basic ten-year period altogether false for the purpose of comparison.
For example, in the case of oats, it is conceivable that tractors,
trucks and automobiles might so displace horses as to make the city
demand for oats decidedly less than during the ten-year period extending
from 1897 to 1906. The oats acreage might therefore be considerably
decreased, and oats be produced in large quantities only in those
sections especially adapted to growing oats. It is conceivable,
therefore, that the ratio method may possibly give the cost of oats
production at rather too high a figure, a figure impossible of
realization, one year with another. In the case of standard crops,
however, there is remarkably little change in either supply conditions
or demand conditions. Methods of producing corn are pretty well
standardized. The market for corn is almost equally stable. It is
believed that the ratio method of determining cost of corn production
will be approximately accurate for the next fifty years.
CONSUMERS’ RATIOS
During the past fifty years, a number of people have set themselves to
work to measure the shifting economic tides with index numbers. The more
complete of these index numbers really undertake to measure the changing
value of the dollar. In July of 1914, for instance, Dun’s index number
was $119.71, which meant that it required $119.71 to buy a certain given
amount of wheat, corn, oats, pork, beef, butter, eggs, wool, hides, pig
iron, lumber, petroleum, etc. On September 1, 1919, it required $238.34
to buy these same goods. The dollar of July of 1914 had become worth
about 50 cents in September of 1919, in its ability to buy wholesale
products. The consumer, in his buying, has certain choices. The man who
thinks pork is too high in price can shift to beef or mutton; or he can
leave meat altogether out of his ration and secure the needed nutrients
in dairy or poultry products.
The producers’ ratios, as described in preceding chapters, have to do
fundamentally with supply conditions. They deal with the relation
between a raw product and a more finished product. They are concerned,
but not immediately, with demand conditions. The attempt in this chapter
is to develop a ratio which gives more particular weight to demand
conditions. Therefore, ratios are developed between a standard index
number on the one hand and a given commodity on the other. However,
because index numbers include some of the items of expense entering into
the production of any commodity, such a ratio also represents to a
considerable extent a producers’ ratio.
To understand the matter more definitely, we shall look into the ratio
actually prevailing between Dun’s index number and Chicago hog prices.
As an average of the ten-year period, 1907–1916, Dun’s index number in
January has averaged $120.16, whereas hogs during the same period have
averaged $6.99 per hundredweight. In other words, live hogs have sold
per hundredweight for about one-seventeenth of the value of Dun’s index
number. On this basis, in January of 1907, the index price of hogs was
$6.24, whereas the actual price was $6.60, or 36 cents higher. In
January of 1908, the index price of hogs was $6.59, whereas the actual
price was $4.45, or $2.14 lower. And so it goes. For the period of a
year or two, hogs will sell proportionately higher than other
commodities, and then for a like length of time they will sell lower.
This is graphically illustrated in the accompanying chart. This chart,
it will be noted, is very similar in appearance to the corn-hog ratio
chart. The chief point of difference is in 1917 and 1918, during which
time hogs sold relatively higher than an average of other commodities,
as indicated by Dun’s index number, whereas they were relatively lower
than corn. War conditions, creating an unprecedented demand for
breadstuffs, raised grain prices out of all proportion to other
commodities. On studying this chart closely, it will be noticed that
there is a tendency, generally speaking, for hogs to sell relatively
cheap to other commodities a few months in advance of the time that they
sell relatively cheap to corn, and vice versa. In other words, the
variations shown on the chart as given in this chapter are often two or
three months ahead of the chart as given in the chapter on corn-hog
ratios.
[Illustration:
Illustrating the departure of Chicago hog prices from the ten-year
ratio between hog prices and Dun’s index number.
]
A historical study of the ratio between index numbers and Chicago steer
prices indicates that steer prices swing first above and then below
their index number value in periods of from five to nine years each way,
with an average of around seven years.
The 1907–1916 ratio between Dun’s index number and wholesale prices of
certain farm products is given in the following table:
═════════╤══════════════╤═══════════════╤══════════════╤═══════════════
│Heavy hogs at │ 1,200 to │Butter extras │ No. 2 corn at
│ Chicago, per │ 1,500-lb. │ at Elgin, │Chicago, cents
│ cwt. │ steers at │ cents per │ per bushel.
│ │ Chicago per │ pound. │
│ │ cwt. │ │
─────────┼──────────────┼───────────────┼──────────────┼───────────────
January │ .0583│ .0597│ .263│ .499
February │ .0604│ .0593│ .255│ .503
March │ .0638│ .0620│ .251│ .514
April │ .0652│ .0631│ .241│ .537
May │ .0631│ .0636│ .215│ .555
June │ .0632│ .0655│ .212│ .551
July │ .0638│ .0659│ .212│ .572
August │ .0638│ .0670│ .219│ .602
September│ .0642│ .0665│ .233│ .582
October │ .0620│ .0656│ .242│ .559
November │ .0578│ .0634│ .254│ .537
December │ .0568│ .0621│ .264│ .518
─────────┴──────────────┴───────────────┴──────────────┴───────────────
With Dun’s index number at $245 for December of 1919, the method of
finding the index price of hogs is to multiply $245 by .0568, which
gives $13.92.
It is not claimed that the ratio between Dun’s index number and hogs,
for instance, is as constant as the ratio between hogs and corn. In the
decade of the ’60’s, hogs sold for one-third lower in relation to Dun’s
index number than in the decade ending in 1916. There has been a
constant tendency for farm products to sell constantly higher in
relation to Dun’s index number. And this tendency doubtless will
continue until population becomes stationary, altho there may be several
years at a time when the tendency is apparently halted because of
improvements in agricultural efficiency. In the main, the possibility of
improvements in industrial efficiency is so much greater than in
agriculture that we may expect that agricultural prices will stand in
constantly higher ratio to other prices, until finally the increase in
population is checked.
Working out ratios between Dun’s index number and retail prices as
reported by the Bureau of Labor Statistics, we find that as an average
of the 1907–1916 period, .183 of Dun’s index number represented the
price of sirloin steak in cents per pound. For other commodities sold at
retail the ratio factors were:
TABLE 1.
Round steak, per pound $.159
Rib roast, per pound .148
Pork chops, per pound .157
Bacon, per pound .206
Ham, per pound .199
Lard, per pound .122
Hens, per pound .165
Eggs, per dozen .267
Butter, per pound .294
Milk, per quart .071
Flour, per bag of 24.5 pounds .722
Corn meal, per pound .023
Potatoes, per peck .243
Sugar, per pound .051
It is interesting to note that in September of 1919, when there was a
universal outcry against retail prices, an outcry vigorously encouraged
by notoriety-seeking politicians, that retail prices were about as might
have been expected from Dun’s index number. Dun’s index number was
$238.34 on September 1, 1919, and the first column of Table 2 gives the
retail price which we might expect by applying the standard ratios. The
second column gives actual prices on September 15th, as reported by the
Bureau of Labor Statistics:
TABLE 2.
Sirloin steak, per pound $.436 $.409
Round steak, per pound .379 .379
Rib roast, per pound .352 .312
Pork chops, per pound .374 .460
Bacon, per pound .490 .556
Ham, per pound .474 .552
Lard, per pound .291 .382
Hens, per pound .393 .414
Eggs, per dozen .636 .632
Butter, per pound .701 .657
Milk, per quart .169 .157
Flour, per bag of 24.5 pounds 1.721 1.790
Corn meal, per pound .055 .067
Potatoes, per peck .579 .645
Sugar, per pound .122 .110
The factors as worked out in Table 1 are ratios between yearly average
retail prices and yearly average Dun’s index numbers. Even retail
prices, however, have some seasonal swing. For instance, meats tend to
be cheaper in the winter than in the summer, whereas butter and eggs
tend to be cheaper in the summer than in the winter. Because of the
seasonal swing, the first column of Table 2 is not absolutely accurate.
For instance, the retail price of sirloin steak in September is usually
about 2 per cent higher than the yearly average, and, corrected for the
month of September, the price should have been 44.5 cents, instead of
43.6 cents. On the same basis, the seasonally corrected price for butter
for September, 1919, was 68.6 cents, instead of 70.1 cents.
In the main, however, Table 2 is fairly accurate as it stands. It will
be noted that with the exception of hog products, wheat and potatoes,
retail prices in September of 1919 tended to be lower than their normal
ratio to Dun’s index number.
Possibly a consumers’ attack on the price of pork products, wheat and
potatoes was warranted in September of 1919. It must be remembered,
however, that there was supposedly a world need for hog products and
wheat at that time, and that potatoes were unduly high on account of a
short crop.
Consumers should be educated in the use of index numbers and to an
understanding of normal ratios between index numbers and the various
commodities which they buy. In times of violent price fluctuations they
should know just what is the index price of the commodities whose prices
are acting in a questionable way. At the same time they should realize
that the index price is not necessarily the just price. However, the
index price gives a basis upon which the consumer may work. He may then
inquire why it is that the actual price departs from the index price. In
May of 1918, for instance, the index price of corn in Chicago was $1.25,
whereas the actual price was $1.60. The actual price was above the index
price partly because of a poor quality corn crop in 1917, but
particularly because of an unprecedented demand for breadstuffs.
Nevertheless, everything considered, the consumer may have had some
basis for resentment against the high price of corn and corn products,
whereas if he had studied the milk and butter situation, he would have
seen that the dairy products were being sold at a real bargain. Strange
to say, consumers kicked vigorously against milk prices, but had nothing
to say about corn prices. Consumers are always concerned with
superficial appearances, never with fundamental causes. And this
characteristic of city consumers, combined with an unscrupulous,
ignorant city press, is a grave menace to our civilization.
TECHNIQUE OF THE RATIO METHOD
The fundamental idea of the ratio method is that the price of every
product is determined in the long run by the price of some other product
or products. The price of hogs is determined in the long run by the
price of corn. The price of corn is determined in the long run by the
price of land, labor, farm machinery and horse feed.[5]
In its simplest form, the ratio method deals with only two products, as
for example, with hogs and corn. As an average of the ten Januarys
extending from 1907 to 1916, No. 2 corn on the Chicago market sold for
59.9 cents a bushel, and heavy hogs on the same market sold for $7 per
hundredweight. In other words, as an average of this ten-year period, it
has required the value of 11.7 bushels of corn to equal in value one
hundred pounds of heavy hog flesh. In the specific month of January,
1907, corn was 41.6 cents per bushel. The corn price of hogs was 11.7
times 41.6 cents, or $4.87. The actual price of hogs in January, 1907,
was $6.60. Actual hogs sold for $1.73 above the customary corn-hog
ratio. In January of 1908, with corn at 58.5 cents a bushel, the corn
price of hogs would be 11.7 times 58.5, or $6.84. The actual price was
$4.45, or $2.39 below the ratio price. The ratio for February is
different from the ratio for January, but once a set of ratios is
secured for each of the twelve months of the year, it is easily possible
to work out charts showing month by month the periods of time when hogs
were selling relatively higher than their customary ratio to corn, and
when they were selling relatively lower.
It is absolutely necessary to work ratios month by month, or week by
week, in the case of all products which have a seasonal swing. Nearly
all agricultural products are cheap in the fall of the year. Some
products begin weakening sooner than others; for instance, oats and
wheat weaken sooner than corn or hogs.
A genuinely scientific method of applying the ratio method to hog prices
would also take into consideration that hogs are to some extent made out
of tankage, pasture and labor, as well as corn. Of course, these things
vary in value in a rough way, in just about the same way as corn prices,
and for practical purposes, the ratio between hogs and corn is probably
exact enough.
As an example of a more complex application of the ratio method, assume
that after thoro investigation by the farm management people, it is
found that on typical farms 70 per cent of the cost of producing hogs is
represented by corn, 5 per cent by tankage, 3 per cent by oats, 3 per
cent by pasture, 2 per cent by middlings, 6 per cent by man labor, and
11 per cent by miscellaneous items, such as risk, interest, etc., all of
which vary in about the same ratio as the other items already
enumerated. Spreading the 11 per cent of miscellaneous items over the
other items, we find that of the cost of producing hogs, 78 per cent is
represented by corn, 3 per cent by oats, 6 per cent by tankage, 4 per
cent by pasture, 2 per cent by middlings, and 7 per cent by man labor.
Now, as an average of the ten-year period, 1907 to 1916, the value in
the month of January, at Chicago, was 59.9 cents for corn and 43.4 cents
for oats. The value of middlings on a Milwaukee basis was $22.77 per
ton. The value of tankage (this is a rough estimate) was $46 per ton;
the value of pasture land, $66 per acre, and the value of an hour of man
labor 14.6 cents. Hogs averaged $7 per hundredweight.
According to the ratio theory, this ten-year average price of $7 per
hundredweight for hogs must represent approximately cost of production.
Seventy-eight per cent of $7 gives $5.46 as the share of corn in the
production cost, and in like manner 21 cents is the value of the oats,
42 cents the value of the tankage, 28 cents the value of the pasture, 14
cents the value of the middlings, and 49 cents the value of the man
labor. With corn at 79.9 cents a bushel, as it was during this ten-year
period, and other feeds at prices as mentioned in the foregoing, it is
obvious that it required, to equal one hundred pounds of hog weight, the
value of 9.1 bushels of corn, one-half bushel of oats, one-two hundred
and fiftieth of the value of an acre of ordinary rough pasture land,
twelve pounds of middlings, eighteen pounds of tankage, and 3.4 hours of
man labor. In the specific month of January, 1907, corn was worth 41.6
cents; oats, 35.4 cents; middlings, $18.37; ordinary rough pasture land,
$51 per acre; tankage, $40 a ton, and man labor, 13 cents an hour. Nine
bushels of corn at 41.6 cents gives $3.78; half a bushel of oats at 35.4
cents gives 18 cents; twelve pounds of middlings at $18.37 per ton gives
10 cents; one-two hundred and fiftieth of the value of an acre of
ordinary pasture land, at $51 per acre, gives 20 cents; eighteen pounds
of tankage at $40 per ton gives 36 cents, and 3.4 hours of man labor at
13 cents gives 44 cents. Adding, we get $5.06 as the cost of producing
hogs in January, 1907. In January, 1908, with corn at 58.5 cents per
bushel, oats at 49.9 cents, middlings at $22.62 per ton, tankage at $40
per ton, pasture at $51 per acre, and man labor at 13 cents an hour, we
find, by applying the same formula, that the cost of producing one
hundred pounds of hogs was $6.69. The straight corn ratio method gave
$4.87 for January of 1907, and $6.84 for January of 1908, departing from
the more complex ratio on the minus side by 19 cents in 1907 and on the
plus side by 15 cents in 1908. The results are so nearly alike that in
the case of hogs we think that it is ordinarily satisfactory to depend
on corn ratios alone, altho in the case of such products as milk and
butter it is well to include feeds other than corn and to use a method
similar to that just outlined.
In order to allow the general public to judge of the merits of wage
increases, strikes and price advances, it would be well if the ratio
method might be applied to manufacturing and mining industries; for
instance, in the case of coal, it might be shown (these figures are
purely illustrative and possibly are wide of the facts) that 40 per cent
of the cost of producing coal is labor, 20 per cent machinery charge,
and 40 per cent risk, interest on investment and similar factors, which
vary in just about the same ratio as the other two factors already
mentioned. Distributing this 40 per cent miscellaneous charge, we get 67
per cent of the cost of producing coal represented by labor and 33 per
cent by machinery charge. Now, assume that, in 1920 the labor charge has
advanced over the ten-year base by 90 per cent, and the machinery charge
by 110 per cent. Multiplying 67 by 190 and 33 by 210 and adding, we find
that on this basis coal in 1920 should be about 94 per cent above the
ten-year base. If the ten-year base is $3.50 per ton, the proper price
for coal in 1920 should evidently be somewhere around $6.80 per ton.
Of course, it is obvious that anyone applying the ratio method must be
thoroly familiar with the industry under consideration. There should be,
however, competent experts in whom the public has confidence, to express
for the benefit of the public, in ratio form, the cost-of-production
price of all staple products, and possibly labor as well.
Our grade schools and our high schools should train their students to
have an appreciation of the ratio method of determining prices. An
appreciation of this sort developed in the minds of the bulk of our
people would do much to stabilize the price system, preventing undue
excesses, and yet allowing prices which cover in a fair way cost of
production.
LIMITATIONS OF THE RATIO METHOD
The ratio method, while astonishingly accurate as a method for
ascertaining production costs, is not infallible. In the case of hogs
and corn, for example, the ratio has remained constant, decade by
decade, for sixty years. It is always conceivable, however, that a
change in production methods will come which will enable farmers to
produce hogs for less than the 11.5-bushel ratio. It is also conceivable
that as population increases, there will be a smaller premium put on
meat and a greater premium put on grain, with the result that the
standard ratio will fall below eleven bushels. But in any event the
change will be slow, and in all probability the ratio of the fifty years
from 1925 to 1975 will not fall below 11 bushels.
In the case of such products as butter, where improvements in method
count for more than in the case of hogs, there is more likelihood of the
standard ratio changing as time goes on. In the case of such standard
crops as corn and wheat, there is small probability of great change in
the standard ratios. Any undue and prolonged profit will be promptly
absorbed by land values and labor wages.
About the only technological improvement which would throw the standard
ratios altogether out of line would be the discovery of how to make food
out of air and water by manufacturing processes.
The ratio method, when used in price fixing, rather than in price
judging, is open to several objections. Under a _laissez faire_ system
it may be necessary for months at a time to cater to the consumers by
selling food at below the ratio or cost-of-production price. And again
it is possible for months at a time to gouge the consumer by selling
food above the ratio or cost-of-production price. It is only as farmers,
consumers and business men become educated to the desirability of prices
more nearly approximating cost of production that the ratio system can
be used extensively in actual price fixing. When it is so used, there
will be less likelihood of over-production on the one hand and
under-production on the other hand.
Wherever the ratio system comes to be used in actual price fixing, it
will be open to the criticism that prices will start pyramiding. For
example, in the case of hogs and corn, a guaranteed ratio may increase
the price of corn, and this in turn the price of hogs, and so on in a
never-ending climb. The reverse is also imaginable. In the case of
fixing crop prices by ratio, it is imaginable that land values would
constantly increase, and this would increase the price of crops, which
again will be reflected back into land, and so on in a never-ending
cycle. Economists like to dwell on situations of this kind. They are to
a large extent purely imaginary. To stop a vicious rise under the ratio
system, a rise which would bring about an over-production, all that
would be necessary would be to very slightly lower the standard ratio.
In the case of hogs, for example, it might be necessary to lower the
ratio from 11.5 bushels to 11.2 bushels.
However, in all that is said concerning the ratio method of judging
prices, there is no intention to prescribe any definite method of using
the system. The chief function of ratios will doubtless continue to be
educational. It is hoped that a knowledge of standard ratios by large
numbers of people will suffice to stabilize prices at more nearly cost
of production and to stabilize production at a point more nearly
identical with normal demand.
RETAIL AND WHOLESALE PRICES
There has been much outcry in recent years against the retailer.
Unquestionably, the retailer is working under a cumbersome distributive
system which burdens the consumer with prices fully 20 per cent too
high. It is commonly recognized that this extra 20 per cent does not
represent retailers’ profits, but that it is used simply to perpetuate a
system which will cater most effectively to the whims of indolent
housewives. The cure for the system is for consumers to organize
themselves into co-operative buying associations. When consumers are
willing to band themselves together in such associations, to anticipate
their needs of staple products by ordering ahead, it will be possible to
furnish such products at very little above wholesale prices. In fact, it
is conceivable that under such a regime co-operative consumers might buy
of co-operative producers. All this, however, involves infinitely more
foresight than the average citizen or his wife cares to exercise. Also
it involves putting a vast number of small grocerymen out of business.
In the long run, this will be a good thing for every one, but the
immediate effect will be a great outcry against interfering with
legitimate business, and the issue will be obscured by the customary
smoke screen used by scared business men.
As long as we cling to our present retail system, it is worth while to
know the standard differential between retail prices on the one hand and
wholesale prices and farmers’ prices on the other hand. For instance, in
1913, ham quite customarily retailed at around 26 or 27 cents a pound,
whereas the wholesale price at the same time was around 16 or 17 cents a
pound, and farmers were selling their hogs at around 8 cents a pound. It
was a fairly normal state of affairs, previous to the war, for ham to
sell retail at 10 cents a pound above the wholesale price, or 18 cents
or 19 cents a pound above the price of hogs. Just what the normal
differential will be, now that the war is over, can not be foretold with
accuracy. As long as we are on a price level twice as high as in 1914,
it is obvious that the differential between retail and wholesale prices
will be just about twice as great. The retailer may not pay quite twice
as much to his labor, and he may not pay quite twice as much rent, but
he will have to have twice as much operating capital, and his bad debts
will probably be twice as great. At this writing, early in 1920, it
seems obvious that the retailers should be allowed to have a
differential fully 80 per cent larger than before the war, if they are
to fare as well as most other classes. As a matter of fact, the
retailers now seem to be selling ham at a differential of about 18 cents
a pound over the wholesale price and about 36 cents a pound over the
price of hogs. In the case of ham, the retailers began demanding an
increased margin in May of 1917, the month after the war broke out. They
kept increasing the margin as opportunity presented itself, but not till
the summer of 1919 were the retailers able to widen out the differential
between retail and wholesale prices sufficiently to cover the cost of
doing business on a price level twice as high as in 1914.
[Illustration:
Illustrating how the differential between farmers’ price and wholesale
and retail price widens in proportion to the higher price level.
]
The facts concerning the retail price of ham, wholesale price of ham,
and price of hogs, are presented in the accompanying chart. Other retail
prices are given in the appendix, and it is possible from the figures
there presented to work out normal differentials for such products as
wheat and wheat flour, corn and corn meal, sirloin steak and cattle,
etc.
PORK EXPORTS THE BAROMETER OF CORN BELT PROSPERITY
For years we have exported from the United States more corn in the form
of pork than in the form of shelled corn or corn meal. In recent years
we have been exporting an average of about 40,000,000 bushels of corn in
the form of corn and corn meal, whereas we have been exporting the
equivalent of about 130,000,000 bushels of corn in the form of pork
products. And for the year 1919 we exported the equivalent of about
350,000,000 bushels of corn in the form of pork.
There is an extraordinary sympathy between the corn and hog industries.
True it is that we feed almost as much corn to our horses as we do to
our hogs, but the corn which we feed to horses is for the purpose of
keeping the farm plant running. The corn fed to horses does not bring in
direct cash returns in the same way as the corn fed to hogs. Nearly
one-third of all our corn is fed to hogs, and from the standpoint of
market strategy, this third which is fed to hogs counts more than the
other two-thirds. The demand for the other two-thirds by horses and
cattle and by the grist mills of the towns and cities is practically
stationary from one year to the next. It is the corn which is fed to
hogs that varies so greatly from one year to the next.
For the first ten months of 1919, the value of the pork products
exported from the United States was $778,000,000, or about one-eighth of
the value of all the exports from the United States for this period. The
only other product of practically equal magnitude with pork products was
cotton, with a total value of $775,000,000 for the first ten months of
1919. Wheat and wheat flour, which most people think rank decidedly
above the value of pork products, totaled during this period
$556,000,000. Corn and corn meal exports during this period were worth
an insignificant $15,000,000. Of course we are now exporting more pork
products than ever before in history, but even before the war the corn
belt expressed itself in international trade pre-eminently thru its
exports of pork products. The ham, bacon and lard of the corn belt are
comparable with the wheat of the northwest and the cotton of the south.
Before the war, we exported every year the equivalent of about five or
six million hogs. Last year we exported the equivalent of thirteen or
fourteen million hogs, nearly one-fifth of our total production. Exports
dropped off during September, October and November, but this is a
customary seasonal occurrence, and there is now the prospect of a
resumption of a tremendous exportation of hog products during the winter
and early summer.
The two charts printed herewith indicate the very close connection
between pork exports and profits in corn raising. The chart giving the
profits and losses on the average acre of corn for the past forty-five
years is re-published from Wallaces’ Farmer of May 17, 1918, the profits
for the years 1918 and 1919 having been added since. It will be noted
that the other chart gives the exports of hog products in pounds from
the United States year by year. The exports are in fiscal years, ending
on June 30th. It will be noted that in a broad, general way, there is a
considerable relationship between the two charts. When pork exports have
been less than normal for a year or two, there is a decided tendency for
corn to become unprofitable, and vice versa. Note how the big hog
exports, starting in 1877 and continuing thru 1881, were accompanied by
a period of unusual corn profits. Note how the falling off in hog
exports, starting with 1882 and continuing until 1890, was also
accompanied by unprofitable corn crops. Then there was a temporary turn
for the better in both corn and hog exports in 1890 and 1891, and a sag
in both until 1897, when hog exports picked up and continued to pick up
to a very marked degree for several years, the change in hog exports
being slowly reflected in corn profits. Generally speaking, pork exports
seem to lead the way, and corn tags along behind. During the war years,
however, corn seemed to move just about as fast as hog exports. The
first year of really heavy hog exports was the year ending June 30,
1916, and the first corn crop to sell unusually high was that harvested
in the fall of 1916. The corn crops of 1916, 1917, 1918 and 1919 have
all been extraordinarily profitable, and the pork exports during these
same years have been unusually heavy. Unquestionably, there is a very
close relationship between hog exports and the general level of corn
prices. We do not mean to say that there is a month-by-month
relationship, or even a year-by-year relationship. We do mean to say,
however, that it is impossible for the United States to export an
unusual volume of hog products without sooner or later raising corn
prices. It may take a year or two for the effect to be felt by corn, but
sooner or later the influence seems to be inevitable.
[Illustration:
Curved line indicates the normal trend of pork exports from the United
States. When the irregular line is above the curved line, pork
exports are unusually large. Large pork exports beginning with 1877
caused the corn belt prosperity beginning with 1879. Large pork
exports beginning with 1898 initiated the corn belt prosperity
beginning with 1920. The 1920 figure is a preliminary estimate.
]
Heavy hog exports make for higher corn prices, and higher corn prices
make for higher values in corn belt farm land. Without much question,
the fundamental cause of corn land rising so much more rapidly than land
in other sections is the unusual volume of pork products starting with
the year 1916. It would have been impossible for the corn market to have
reached or sustained its high altitude without the prop of such
tremendous hog exports. In view of the evidence presented, we make bold
to say that hog exports furnish a most delicate barometer of corn belt
prosperity. The huge volume of pork exports during the past three years
is the explanation of corn belt land rising faster than in other
sections. Iowa raises twice as many hogs as any other state, and this
doubtless is the reason why land in Iowa has risen faster than in any
other state.
[Illustration:
Corn profits and losses in the twelve north central states, as
determined by the ratio method described in the chapter on “Cost of
Producing Crops.”
]
What of the future? Is there any chance that pork exports will maintain
their present volume? We may as well face the issue squarely and come to
the conclusion that in all probability pork exports, within three or
four years, will decline to about one-third their present volume. For
four or five years previous to the war, the tendency of pork exports was
somewhat downward. It is reported that at that time Great Britain was
buying less and less of her hog products from the United States, and
that she was thinking of buying more and more of her coarser quality of
hog products from China. At the present time there is considerable
Chinese bacon on the English market. It is also worth while to note in
this connection that the English consumption of meat is now 1,200,000
tons, which is 600,000 tons less than her pre-war consumption of meat.
If England has cut down on her meat consumption one-third, the
probabilities are that the continent of Europe has cut down on its meat
consumption one-half. Probably never again will the world eat as much
meat per capita as it did before the war. Whether we like it or not, we
may as well face the probability that our pork exports are on the
decline, and will not stop declining until they are down to about
one-third of the 1919 volume.
And we may expect that this decline in pork exports will have some
influence on corn prices, and therefore on corn land prices. The future
situation is of course considerably different than that which has
existed at any time during the past forty-five years. The volume of
money in circulation may be such that there will be no actual decline in
corn prices or in corn land prices. Just the same, we may expect that
the unusually favorable position which has been enjoyed by the corn belt
during the past three years will disappear with the decline in pork
exports.
Previous to the war, Great Britain and Germany absorbed more of our pork
exports than any other nations. Great Britain took 73 per cent of our
pork exports, 86 per cent of our exports of hams and shoulders, and 36
per cent of our lard exports. Germany took 30 per cent of our lard
exports and practically nothing in the way of bacon, hams or shoulders.
Cuba, Holland and Belgium were the other large importers of American hog
products, but these three nations together required only about one-tenth
as much as Great Britain. If Great Britain cuts down her consumption of
meat to two-thirds what it was before the war, she will be much more
nearly self-supporting from a meat standpoint than she is now, and
probably will not import from the United States more than one-half as
much meat as she did before the war. Great Britain owes considerable
money to the United States, and, moreover, in the future she will not
get from the United States in such large measure ocean freight charges
on the British merchant marine. In the old days, Great Britain had a
considerable credit balance coming to her every year from the United
States, and she took a large part of this in the form of pork products.
Now that the situation is reversed, it is difficult to see how Great
Britain can import as much in the way of hog products from the United
States as she did before the war. True it is that for the year 1919 she
has imported about three times as much from the United States as before
the war, but once the present emergency is past, it seems obvious that
Great Britain will cut her pork imports down to the minimum.
In the case of Germany, the situation is even worse. Germany, which
normally took 150,000,000 pounds of lard from us every year before the
war, must now pay the allied nations an indemnity every year of at least
$600,000,000. In order to pay this huge sum, Germany must cut her
imports down to the absolute minimum, and become extraordinarily
efficient in exporting. For the next two or three years, Germany may
perhaps import more lard from us than she did before the war, but, as
rapidly as possible, Germany will re-establish her swine industry and
reduce the imports of American lard.
We may be painting the situation too black, but we can not see how our
pork exports, by the year 1925, can total to more than 800,000,000 or
possibly 900,000,000 pounds, which is less than one-third the 1919
volume of exports. Of course, another war may break out in the meantime,
or some other extraordinary thing may happen, but in the ordinary course
of events, it would seem that our pork exports must inevitably decrease
until they are considerably less than the pre-war normal. And it would
seem that this decrease in pork exports will have a very considerable
bearing on corn prices, which will in turn have a bearing on corn land
prices. Again, we wish to say, however, that we do not necessarily
believe that corn land in 1925 or 1930 will be selling cheaper than it
is today. Prices of all kinds doubtless will continue to be high in 1925
and 1930, for the simple reason that inflated currency the world over
will still continue. The point we are trying to make is that once hog
exports decline to the pre-war normal, or less, corn belt farming will
cease to enjoy the unusual advantage which it had during the war. It may
for a time be relatively less profitable than farming in certain other
sections of the United States.
There are many curious paradoxes in the hog export trade in the United
States. While a heavy export of hog products sooner or later means high
corn prices, high hog prices and corn belt prosperity generally, yet as
a usual proposition, heavy hog exports do not start except in times of
unusually low hog prices. The heavy exports of 1877–1881 did not start
till hogs had declined below $5 a hundred, and reached their height
while hogs were $3 to $4 a hundred. In 1882, when hog prices climbed to
over $8 per hundred on the Chicago market, hog exports promptly fell
off, and did not climb again until hog prices again went below $4 a
hundred, in 1890. In early 1893, when hog prices on the Chicago market
climbed up to nearly $8 a hundred again, hog exports dropped off very
suddenly. They did not pick up at once in 1896, when hog prices went
under $4 again, but did pick up very rapidly in 1897 and 1898, during
both of which years hog prices on the Chicago market were under $4 a
hundred most of the time. In 1902, there were heavy exports, in spite of
the fact that hog prices were relatively high, but by 1903 the British
apparently had had enough of buying high-priced pork on the American
market, and they curtailed their importations very decidedly. Again, in
1910, the exceedingly high prices stopped the export demand. During the
past three years there have been unprecedented exports in spite of
unusually high prices. But as a matter of fact, hog prices in the United
States have been cheaper during the past three years than any place else
in the world. We have been selling hogs at a great bargain, or Great
Britain would not have bought such tremendous quantities from us.
A thoro study of the exports of the United States month by month from
January, 1903, thru the year 1914, indicates that there is a continual
tendency for hog exports to be large when hog prices are low, and vice
versa. The correlation coefficient between hog prices and hog exports is
minus .52. There seems to be a closer correlation between hog exports
and hog prices than between receipts of hogs at central markets and hog
prices. The tendency has been for hog exports to be 40 per cent above
normal when hog prices are 15 per cent below normal; for hog exports to
be 20 per cent above normal when hog prices are 8 per cent below normal,
etc. In November of 1919, when hog exports were about 40 per cent above
normal, it would have appeared, therefore, that hog prices were about 15
per cent below normal. This is a long-swing tendency, and of course
there are occasional exceptions. This part of the problem may be summed
up to the effect that big exports start in times of low hog prices, and
that these exports after a time stimulate both corn and hog prices, with
the result that after a time both corn and hogs become so high in price
that exports dry up, and then corn and hog prices weaken, and the whole
thing starts over again. There was a continuous series of these cycles
previous to the war, and it is to be expected, now that the war is over,
that the phenomena will repeat themselves, altho with some added
variations.
One thing we must remember is that very possibly the export trade of the
United States will not count so big in the future as it has in the past.
The United States has loaned something like $10,000,000,000 to foreign
countries, and every year she will have hundreds of millions of dollars
in interest coming her way, instead of owing hundreds of millions of
dollars to countries across the water, as was the case before the war.
And as long as the United States has so much money coming to her in
interest charges, we must expect that eventually the United States must
import more goods than she exports. This does not necessarily mean the
destruction of the hog industry in the corn belt, but it may mean that
it will have to shift onto a somewhat different basis. It may be that in
the future we must plan on growing enough hogs only to satisfy the needs
of the United States, carefully avoiding a glut which will make it
essential to export any large quantity. Or it may be that the American
farmer is so exceedingly efficient in the business of producing hogs
that the United States will always export large quantities of pork
products, even tho the balance of trade otherwise is against the United
States. If we approach the problem from the standpoint of going after a
large trade in hog products with foreign countries, we must put
ourselves in position to produce with the utmost economy possible.
“Price” talks in the export business, and we shall export large
quantities of hog products whenever we are selling hogs decidedly
cheaper than the rest of the world.
Just what kind of a whistle do we want, and what price are we willing to
pay for it? Here is a problem which we commend to the earnest study of
the research department which the National Farm Bureau Federation may
some day possess.
CORN BELT LAND VALUES IN RELATION TO COST OF PRODUCING CORN
Rent or interest on the money invested in land is a legitimate item in
cost of production—so far as the individual farmer is concerned. But
society is likely to reach a time when it will assert the right to
object to paying a price for corn which will permit of paying a very
high rent, which in turn is used to support very high land values.
Society may say, in effect: Your high land values are just as vicious as
watered railway stock, and you have no more right to expect a five per
cent return on the inflated value than the railroads have to expect such
a return on their watered stock.
Society may be expected to pay a price for corn which is established by
competition between farmers in this country and in the Argentine, and by
the need of Europe for our pork products. This price doubtless will bear
much the same relation to the general price level as before the war. It
may be high enough to permit of corn belt land values as they existed in
1920, or even higher values. Or it may be low enough to compel a
reduction in corn belt values and farm-hand wages.
In the case of a severe drop in corn prices, it is conceivable but not
probable that corn belt farmers will organize sufficiently to compel the
return to a price high enough to maintain 1920 land values and farm-hand
wages.
It is believed that under conditions of free competition it will be
necessary for corn to sell for about 85 cents a bushel, on a basis of
December 1st farm valuations in the corn belt in the ordinary crop year,
in order to maintain land values as they existed in 1920. This means
that prices might go as low as 70 cents a bushel in years of big crops,
or as high as $1 in years of small crops. It is also assumed that labor
at harvest, without board, will settle down to about $4.25 a day, which
was the 1918 level. If labor at harvest, without board, continues at $5
a day, which was the 1919 level, it will be necessary for corn to sell
for about 88 cents a bushel, on a December 1st farm basis, in order to
maintain the 1920 level of land values and farm-hand wages.
It is recognized that this prediction may be wide of the mark in case
farmers are able to organize themselves for selfish purposes as
effectively as capital and union labor. For forty years preceding the
war, the farmer paid his regular monthly labor a sweated wage, and, in
effect, sold his own labor just as cheaply. During the war, the farmer
had a taste of a higher standard of living, and, having had this taste,
he will be loath to let farm product prices slip back to a point where
he will be reduced to his former state or even lower.
It is suggested as the only effective way out of the difficulty that
farmers organize into powerful bargaining organizations, which, on
occasion, can practice sabotage as skillfully as capital or union labor.
But, in addition, and above all, it is absolutely necessary to become
extraordinarily efficient. We must continue to apply our best brains to
production problems, perfecting methods which will enable us to produce
corn 10 cents a bushel cheaper in Iowa than in Argentina.
PRICE STABILITY AND SOIL FERTILITY
One of the strongest arguments for more stable prices is the effect on
soil fertility. While the best farmers will try to maintain the
fertility of their land, no matter what may be the economic outlook, the
bulk of our farming population will not make any serious efforts along
this line as long as the price outlook is uncertain. When prices are
advancing, the tendency is for millions of acres of farm land to find
their way into the hands of speculators and investors, who hold for a
rise, and who take no interest whatever in the application of lime and
phosphate or the growing of clover. When prices are tending downward,
there is a tendency to economize to the limit. Even those farmers who
normally use fertilizers are likely to postpone purchases until next
year or the year after, in the hope of lower prices. It is only under a
system of relatively stable prices that we may expect really effective
attention to be given to soil fertility problems by the bulk of our
farmers. The quicker we can get onto a stable price level, the more
effectively will the fertility of our soil be conserved.
It is common observation that live stock farming maintains the fertility
of the soil more effectively than grain farming. In the corn belt, live
stock farms ordinarily produce five bushels more corn per acre than
grain farms. Two great obstacles to live stock farming are tenancy and
price uncertainty. The man of small means who has been farming for
himself for only a few years can not afford to take a chance. He does
not know whether or not hogs will be at a price next year which will
furnish a good market for corn, and he therefore plays safe by breeding
only three or four sows, instead of the five or six which he might very
well handle. Unquestionably, the farmers in the corn belt would be
justified in keeping more live stock if the price of live stock should
represent cost of production day by day and month by month. In fact,
corn belt farmers, as an average of a five-year period, could probably
afford to produce both hogs and cattle at lower relative prices than
were customary before the war, if only prices were more nearly stable,
if they could feel reasonably sure of getting a price more nearly
representing production cost.
The maintenance of the fertility of our soil is a matter of national
concern. In the long run, it is of more vital interest to the people of
the cities than to the farmer. Men engaged in industrial enterprises
should do what they can to favor such adjustment of prices as will make
it to the advantage of the farmer to keep his land in good heart,
because that will make for larger production and more economical
production.
MEASURING TOTAL CROP PRODUCTION
This chapter does not follow the same line of thought as the other
chapters. It has an indirect bearing, however, and we believe the
suggested method of measuring total crop production to be of some value.
Small crops ordinarily bring the farming class more money than large
crops. Nevertheless, in the long run big crops mean prosperity to the
country as a whole. To judge just when crops as a whole are large and
when they are small, a method has been devised, which may be illustrated
as follows:
In 1918, the United States produced 2,582,814,000 bushels of corn,
917,100,000 bushels of wheat, 89,833,000 tons of hay, 11,700,000 bales
of cotton, etc. Now, to ascertain total crop production, it is obviously
impossible to add together bushels, tons, bales, etc. We can add
together the value of the crops, but the price level shifts from year to
year, and this method is not satisfactory.
Now, the 1907–1916 ten-year average price of corn was 61 cents, of wheat
96.2 cents, of hay $11.49 a ton, of cotton $59 a bale, etc. A ten-year
average illustrates the relative economic emphasis. These prices are
therefore used as constant factors, applicable to any crop year.
The 1918 corn crop of 2,582,814,000 bushels, converted into economic
crop units by multiplying by 61, equals 157,500,000,000. The 1918 wheat
crop of 917,100,000 bushels, multiplied by 96.2, equals 63,600,000,000.
The same thing done with the thirteen leading crops gives
559,900,000,000 crop units produced by the United States in 1918, or
5,270 crop units per capita.
The per capita production of crop units since 1880 has been as follows:
══════════════════════╤═══════════╤═══════════╤═══════════
1880 5,360│1890 4,720│1900 5,820│1910 5,320
1881 4,280│1891 5,820│1901 4,470│1911 4,850
1882 5,330│1892 4,840│1902 5,480│1912 5,690
1883 5,120│1893 4,710│1903 4,930│1913 4,950
1884 5,560│1894 4,030│1904 5,220│1914 5,410
1885 5,250│1895 4,980│1905 5,200│1915 5,770
1886 4,970│1896 5,170│1906 5,560│1916 4,940
1887 4,690│1897 5,070│1907 4,940│1917 5,530
1888 5,240│1898 5,360│1908 5,220│1918 5,270
1889 5,910│1899 5,760│1909 5,100│1919 5,400
──────────────────────┼───────────┼───────────┼───────────
Decade Averages, 5,171│ 5,046│ 5,194│ 5,313
──────────────────────┴───────────┴───────────┴───────────
Note how constant has been the productive power of the United States in
economic crop units per capita, decade by decade, since 1880. Note that
since 1910 crop production has more than kept pace with the increase in
population.
In the ’80’s we exported the equivalent of about 650 economic crop units
per capita (in this we convert pork exports into corn), which left,
roughly, 4,500 economic crop units per capita for home consumption. In
the fiscal year ending June 30, 1919, we exported about 750 economic
crop units per capita, which left, roughly, 4,500 economic crop units of
the 1918 crop for home consumption. During the decade ending 1919 there
has been an average of about 4,800 economic crop units per capita left
for home consumption. It was probably necessary to retain more economic
crop units per capita at home during the last decade than during the
’80’s, because of the smaller live stock production per capita.
From the standpoint of production per farm, there has been a tremendous
increase every decade. As an average of 1880–1889, the production per
farm was 66,420 units, as compared with 67,990 units for the 1890–1899
decade, 71,600 units for the 1900–1909 decade, and 81,000 units for the
1910–1919 decade. In response to the higher price level, the
productivity of the average farm has constantly been increasing. If both
the general price level and the price of farm crops had been the same in
the 1910–1919 decade as in the 1900–1909 decade, the probabilities are
that the average production per farm would have been about 73,000
economic crop units instead of 81,000. If by the 1940–1949 decade we
have a population of 150,000,000, and if Dun’s index number at that time
is $170, it will be necessary to pay at Chicago an average of about
$1.80 for wheat, $1.15 for corn, and 65 cents for oats, in order to call
forth as much production per capita as was called forth by the prices
paid during the past forty years. When Dun’s index number is as low as
$170 (at this writing, in early 1920, it is $244), $1.80 for wheat,
etc., will be very high relatively. Rather than pay such a high relative
price, the consumers of the United States will probably turn to
Argentina and other countries where farmers produce food cheaply by
living on a lower standard. The position of the United States, rising
out of the world war, whereby she is the creditor nation of the world,
will favor food importations.
It is a commonplace among business men that good crops mean good
business. The effect, however, is not as close as they imagine. The
short crop of 1901 did not affect the business world till 1903 and 1904.
The short crops of 1892, 1893 and 1894 did not have full effect till
1895 and 1896. A single crop year which is only slightly below average
may have no effect whatever on business. But when three crop years
average below normal, there is almost certain to be some effect on
business. From 1903 to 1919, the correlation between crops and the price
of securities on the stock exchange was about .53. Professor H. L.
Moore, in his book on “Economic Cycles,” finds between crop yields per
acre and pig iron production a correlation coefficient of .72, pig iron
production lagging about a year behind crops.
Big crops do mean good business, altho they mean prosperity to the
farming class chiefly in an indirect way. A small crop generally brings
farmers more money than a large crop, but small crops over a period of
two or three years cause business depression and this reacts on farmers.
The problem of both business men and farmers is to devise some means of
giving farmers as a class a financial interest in producing big crops
rather than small crops.