The hog cycle is a long-standing phenomenon in the United States market, and the basic precepts of the hog cycle remain in force today.
Hogs are by no means unique in their embodiment of a production cycle, as production of effectively every agricultural commodity is based on decisions made by many individuals and organizations.
However, this structure is changing quite rapidly. Even though there are over 64,000 hog farms in the United States, about 60% of the hogs are produced by 156 firms. This concentration is expected to continue and is likely to change future hog cycles.
Almost all agricultural products follow the same reasonable, predictable pattern of increases in aggregate production when prices are good, leading to price declines, resulting in production cutbacks and increases in prices.
The response of an industry composed of thousands of producers to the signals of the market can never be precise or entirely timely; but, in the long run, changes are made so that supply approximates anticipated demand.
It is the nature of the hog cycle that supply and demand will be out of sync for certain periods of time. Consequently, prices are always changing. Pork producers must be able to live with uncertainty and risk. They are constantly reminded that prices and profit are not directly determining their individual actions but, ultimately, are set by forces beyond their control.
Pork producers are aware that some periods of losses are to be expected because the profitable periods will, they hope, more than compensate for those losses in the longer term.
Production vs. Price Cycles
The U.S. pork production cycle in Figure 1 shows commercial pork production for the last 50 years. The price cycle is a consequence of the changes in pork production and is shown in Figure 2.
We have had about 12 production and price cycles in the past 50 years. In the '70s, production cycles showed quite wide fluctuations, which were precipitated by big changes in feed prices caused by drought and world trade as well as an inflationary increase in hog prices (Fig. 2).
In the years, before the mid '90s, price flexibility — the percent of price change divided by the percent of production change — was about -2. Note the fluctuation in supply and prices in Figures 1 and 2 before the mid '90s. In the past decade, the price flexibility has averaged between -5 and -6.
For some reason, the demand for live hogs has become more inelastic. A 1% change in production has created a larger change in price.
Note the changes in production in the last 10 years have been quite small with the exception of two years (Fig. 1). But the changes in the prices of live hogs since the mid-'90s have been larger than in previous years (Fig. 2).
In fact, the last two years' increase in prices occurred even though production increased. The upward leg on the current price cycle is due to a growth in live hogs. This demand growth is due to strong pork and low-carb diets.
The price cycle appears to be alive and well, but the future of the production cycle is less clear. We will probably continue to have some fluctuations in supply (fluctuations need to be kept quite small due to the more inelastic demand), but whether they will continue the regular four-year cycle is yet to be determined.