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The Corn Hog Cycle:

What's Happening to Pig Prices?:

What is the corn-hog cycle?

The Corn-Hog cycle or 'The Cobweb' is an economic theory modelling a special problem in the pig industry, which was identified as early as the early nineteenth century. In this model 'hog' means pigs and 'corn' means maize or Indian corn (the main feedstuff).

MaizeThe cycle consists of massive fluctuations in pig numbers caused by overreactions to changes in market prices of pigs and feedstuff. When the price of feedstuff rises (Stage I), the financial position of most pig farmers goes sharply negative and they cut the number of pigs they rear. In the next stage (II), the large fall in pork and bacon availability leads to price rises, which restore the viability of pig breeding and rearing. In Stage III, improved profitability leads to a large jump in pig numbers, causing prices to moderate or fall. Stages IV-onwards, either consist of continual yo-yoing of prices and pork supply (let's call this stable instability) or everybody learning from recent experience, the fluctuations becoming smaller and increasingly the industry achieves greater degrees of price stability and stable supply (let's call this incremental stability through learning).

The Cobweb theory as taught to generations of economics students may also theoretically demonstrate larger and larger amounts of instability caused by ever greater fluctuations in prices and supply. This may be theoretically correct, but there is no evidence for such dynamic exploding instability. However, the Australian Treasury seems to be sufficiently interested in Cobweb theory to provide some background at: http://www.treasury.gov.au/documents/1042/HTML/docshell.asp?URL=02_Resource_commodities.asp

Why is the pig industry so different from butter?

Butter comes from cows. Cows eat grass. For farmers raising dairy herds, the cost of specially-purchased feed is normally a smallish proportion of total feed costs for the cows (except during the winter months). It takes nine months to produce a calf and about two years before she can produce milk, so there is a long lag in supply in response to price changes.

In pig rearing, feedstuffs are a large proportion of the economic market cost of a pig, so a change in feedstuff price has an immediate effect on profits. In American mythology a hog was 'nothing more than fifteen to twenty bushels of corn' (Holt and Craig, 2006). The pig gestation period is 3.6 months (3 months, 3 weeks, 3 days) and, depending on whether they are destined for pork or bacon, may be brought to market fairly quickly between 13 weeks to 28 weeks. A large increase in feed prices may result in a rapid reduction of pig numbers raised and selling pigs prematurely rather than keeping them until a particular weight is achieved. And if farmers want to increase their pig numbers as a result of subsequent pigmeat price increases, then, in view of the fact that a sow can bear 9-14 piglets each time, there could be a rapid rise in pig numbers over a six to 12 month period.

In 2008, we are currently in Stage I of the Corn-hog cycle.

Why Have Pig Feedstuffs Risen in Price?

More on this in Coase and Fowler (1937) and Ezekiel (1938). Coase, R.H. and Fowler, R.F. (1937) 'The Pig-Cycle in Great Britain: An Explanation', Economica, 4, pp.55-82. Ezekiel, M. (1938) 'The Cobweb Theorem', QJE, 53, pp.255-80. Holt, M.T. and Craig, L. E. (2006) 'A Non-Linear Model of The U.S. Corn-Hog Cycle' in Holt, M. T. and Chavas, J.-P. (eds) Essays in Honor of Stanley R Johnson, Berkley: Berkley Electronic Press found at http://www.bepress.com/cgi/viewcontent.cgi?article=1015&context=sjohnson

So, Will This Crisis in Feed Prices Go On For Ever?

No.

The Cobweb and Corn-hog cycle is demonstrated here ........
http://william-king.www.drexel.edu/top/prin/txt/eqapps/cob1.html


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