Hog Market Cycles

EC-1101,January 1996

Larry D. Stearns, Research Associate, Agricultural Economics
Timothy A. Petry, Associate Professor, Agricultural Economics

Future Cycles

The U.S. hog industry has historically been characterized by cyclical variations in hog inventories, pork production, and hog and pork prices. A cycle is defined as a production or price movement that tends to last a certain number of years and repeats that pattern over a long period of years. Inventory cycles typically experience periods of increasing numbers called accumulation phases and periods of declining numbers called liquidation phases. Price cycles are typified by periods of increasing prices called increasing phases and decreasing prices called decreasing phases. Price cycles tend to be the opposite of production cycles, but turning points may not occur at identical times.

Hog cycles are caused by factors that occur both within and outside the industry. Underlying reasons include the reproductive biology of hogs and time lags in the adjustment of production levels to price changes. Modifying factors include variations in feed grain production, supplies of competitive meats, and economic, social, and political factors that affect the demand for pork.

Hog production in the United States includes a wide range of sizes and kinds of production units. Factors such as age and degree of mechanization of facilities, single or multiple enterprise production units, kinds of feed grown or purchased, and geographic location affect cost of production and the willingness of individual producers to vary production. Hog production units range in size from only a few sows to large units selling tens of thousands of head annually. Larger units have high capital/labor ratios, total confinement and highly mechanized facilities, and tend to be less willing to adjust production -- especially downward -- hen prices decline.

Hog inventory numbers (USDA December 1, U.S. hog inventory numbers) increased steadily from the mid-30 million head range when records were first kept in 1867 to the mid-60 millions in the 1920s. Since the 1920s the long-term trend has been level at about 55 million head, but there have been significant cyclical swings above and below the trend. The all-time high in hog numbers occurred during World War II at over 80 million head (Figure 1). Hog numbers in December 1994 were 59.6 million head.

Figure 1. U.S. Hog Inventory and Pork Production, 1930-1994.
Source: Agricultural Statistics, various issues.

Per capita consumption of pork has remained stable, because the increasing human population in the United States has absorbed increased production. This production increase is due to improved breeding, feeding, and management factors that have allowed heavily muscled, leaner hogs to be marketed at higher market weights (Figure 1).

Over the years, hog inventories, slaughter and prices have followed definite cyclical patterns. Hog producers make production decisions before fundamental supply and demand factors influencing prices for subsequent periods are known.

The reproductive biology of hogs causes a lag time between the time when prices are reflected to producers from consumers and when production adjustments can be made. The time period involved between breeding a sow and the slaughter of offspring is about 10 months. Since individual hog producers may not know the decisions being made by other producers, cumulative overreactions to good times and bad have resulted in the cyclical pattern of production and prices.

A theoretical four-year hog inventory, pork production, and hog price cycle with two-year accumulation, liquidation, increasing, and decreasing phases is illustrated in Figure 2. Assume in year one that prices go above costs of production and there is an ample supply of corn, so producers decide to increase inventories. Retaining more gilts for breeding purposes causes prices to go even higher due to decreasing pork production. In year two, increasing production from the now larger breeding herd forces prices to decline. By year three, production has increased to the level where prices go below all costs of production and some producers decide to reduce herds. Fewer gilts are retained and more sows are sold, which causes increased pork production and even lower prices. During year four, production declines and prices increase to the break-even point where the cycle began.

Figure 2. Theoretical Four-Year Hog Price, Inventory and Production Cycles.

Obviously, the actual hog cycle does not behave as consistently as the theoretical one, but similarities certainly exist (Figure 3). During the past 50 years, 12 cycles have occurred averaging 4.08 years in length, with a range of two to six years. It is not uncommon to have phases of one to three years instead of two. The 1989-1992 inventory cycle consisted of one year of liquidation in 1989 (54 million head) and three years of accumulation in 1990, 91, and 92 (54.5 million, 57.7 million, and 58 million). The current cycle began with liquidation in 1993 (57 million). Theoretically, liquidation should have continued into 1994 with accumulation in 1995 and 96. However, expanding hog production in North Carolina, Missouri, Oklahoma, Tennessee, Mississippi, and Colorado caused a higher inventory on December 1, 1994 (Figure 4). Hog inventories did decline, as expected, in the Corn Belt states of Iowa, Illinois, Kansas, and South Dakota.

Figure 3. Hog Inventory Cycle, United States, 1940-1994.

Figure 4. Quarterly U.S. Hog Inventory, Average West Fargo Hog Prices, and U.S. Pork Production, 1989-1994.

Average annual hog prices during the 1989-1992 inventory cycle are shown in Table 1. In 1989, the end of the liquidation phase, the average price was $43.17/cwt. The three-year accumulation phase was triggered by profitable prices beginning in mid 1989, through 1990, and three-quarters of 1991. Prices then declined through 1992, following an average annual high of $53.56/cwt. in 1990, as inventory increased.

Hog numbers in North Dakota have followed the same general trend as in the United States with high numbers of over one million head during World War II, falling to a relatively stable trend at just over 300 thousand head for the last 40 years (Figure 5). North Dakota ranks 24th in hog production and produced 1 percent of U.S. pork in 1993 (ND Agricultural Statistics 1994). Cyclical variations in North Dakota inventories have also followed U.S. cycles, but the phases have not been exactly parallel due to unique conditions such as feed availability in North Dakota versus the entire United States. The North Dakota hog inventory on December 1, 1993 was 320 thousand head but followed the Corn Belt states and fell to 245 thousand in 1994.

Figure 5. U.S. and N.D. Hog Inventories, December 1, 1930-1994.
Source: Agricultural Statistics and North Dakota Agricultural Statistics, various issues.