Agricultural Prices

BY

HENRY A. WALLACE

Associate Editor of Wallaces’ Farmer

WALLACE PUBLISHING COMPANY

Eleventh and Walnut Sts.

Des Moines, Iowa

Publishers of Wallaces’ Farmer

This book is written for all those who may be interested in the matter of prices of agricultural products, but more especially for the farmers of the corn belt states, students of agricultural colleges, county agricultural agents, and leaders of farm organizations. Its purpose is to promote a better understanding of the factors which influence prices of farm products and stimulate an intelligent interest in statistical economics.

Aside from a rather small number of specialists at the larger terminal markets, few of the people who buy or sell farm products have any very definite ideas concerning the legitimate price-making forces. A better understanding of such forces by farmers generally should in itself gradually bring about prices which will approach more nearly cost of production, and tend to reduce the violent fluctuations above and below the compensatory average.

A careful study of the facts herein set forth should aid leaders of farm organizations to avoid costly mistakes which too often result from hasty and ill-considered action.

While not written primarily for economists, I trust many of them may find something of practical value in the matter herein. They may, perhaps, feel that at times I have not been as respectful as they would like toward many of the ideas of the classical school, but I have no apologies to offer on this score. In anticipation of possible criticism of my treatment of cost of production, I shall ask them to remember that I use “cost of production” as a ratio concept (if need be, a shifting ratio) and not as a cost-accounting concept. I may say, also, that I hold to no particular philosophy of economics unless a very firm belief in the utility of thoro mathematical price studies might be considered as constituting the basis of a philosophy.

While the book is frankly written from the farmer’s point of view, there is no bias whatsoever to the mathematics used, and it is believed that so far as it may influence opinion and practice, the results will in the long run benefit both farm producer and city consumer.

Students who may take up this book for serious study will get the greatest good from it by following prices of agricultural products 4from day to day and month to month, and noting when the relationship is normal and when abnormal. In this way they will acquire habits of intelligent observation of price trends that should prove of very great value to them when they get into business for themselves.

If this book is used as a college text, it is hoped that it will be by classes which are especially concerned in applying statistical laws to agricultural prices. Such classes should have free access to calculating machines, multiplying tables, etc., and should make a serious effort to work out various ratios and also to work out supply and demand laws for various farm products by means of correlation coefficients, lines of regression, etc. The tables given in the appendix should be of some value as a source of raw material. For further material, it is suggested that the Year Books of the United States Department of Agriculture, the Monthly Crop Reporters of the Bureau of Crop Estimates, and the Reports of the Chicago Board of Trade be consulted. A good book on correlation coefficients, etc., is Yule’s Theory of Statistics. The teacher of the suggested class in agricultural price statistics should simplify the mathematics to mere method, not concerning himself or his pupils with the theory back of it all. Wherever possible, the teacher should study very carefully the January and April, 1919, volumes of The Review of Economic Statistics, published by the Harvard University Press. The methods as exemplified in these volumes can very profitably be applied to the field of agricultural prices.

Acknowledgement is made to Professors J. M. Evvard and E. G. Nourse, of the Iowa State College, and to Professor F. A. Pearson, of the University of Illinois, for criticisms and helpful suggestions.

5

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 8net 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 9July 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 10system. 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 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 12crop 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 13tremendously in defiance of any mathematical expression of supply and demand.

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.

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 14preceding 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.

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:

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 16a 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 17deal, 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. 18But 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 19when 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.

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 21the 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 22take 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.

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 24constant 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.”

25Prices 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?

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 27embark 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 28his 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. 29At 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.

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:

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.

32While 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.

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, 33163.9 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 34had 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 35Food 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.

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 37price. 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 38co-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.

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 40at 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.

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.

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 42period, whereas packers’ manufacturing costs were probably not in excess of 170 per cent of the ten-year period.

It is conceivable that as the packing business becomes even more 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.

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 43the 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.

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 45$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 46according 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:

“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 47figure, 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.”

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 48were 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.

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, 5010 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 51cost 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.

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. 53This 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.

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.

54The 1907–1916 ratio between Dun’s index number and wholesale prices of certain farm products is given in the following table:

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 55represented the price of sirloin steak in cents per pound. For other commodities sold at retail the ratio factors were:

TABLE 1.

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.

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 56than 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.

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.

58As 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 59bushel, 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.

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. 61In 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.

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 63larger 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.

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.

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. 65Exports 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.

66

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. 67The 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.

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 68squarely 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. 69In 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 70not 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 71to 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.

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 73wage, 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.

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 75of 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:

76Note 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 77not 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.

Mathematical formulation of price-making factors is necessary in order to know when extraordinary or strategic considerations are influencing the market. The mathematical methods are highly technical, and in order to explain most clearly we shall follow a specific problem thru from beginning to end.

The problem is to determine the price of hogs from hog receipts (supply) and from business conditions (demand). To represent business conditions, we are using bank clearings outside of New York City. The actual figures for heavy hog prices at Chicago are given in the Appendix. Hog receipts at Chicago and bank clearings outside of New York City are given on pages 81 and 82. The problem is to evolve from these figures the law of hog prices.

The first step is to determine the secular or long-time trend of these figures. Find, for example, the secular trend of such a series as:

From looking at these figures, we know that the secular trend slopes upward, starting with about 2 in 1901, reaching 3 or 4 by 1905, and 5 or 6 by 1909. To express the matter with mathematical accuracy, the method as applied to this series is as follows: First add all the figures together. Answer in this case, 36. Then divide by the number of figures—in this case 9. Thirty-six divided by 9 gives 4, which is the value of the secular trend for 1905, which is the central year.

The year 1904 is the −1 year, 1903 the −2 year, 1902 the −3 year, 1901 the −4 year, and in like manner 1906 is the +1 year, 1907 the +2 year, 1908 the +3 year and 1909 the +4 year. Multiply the minus years by their respective values: −1 by 5, −2 by 2, −3 by 3 and −4 by 2, and also the plus years, +1 by 6, +2 by 4, +3 by 6 and +4 by 6. The totals are −26 and +56, or a net of +30. Now the sum of the squares of −1, −2, −3, −4, +1, +2, +3 and +4 is 60. Sixty divided into 30 gives .5, which is the rate of movement of the secular trend each year, or if, as we found, 4 is the secular trend value for 1905, then 3.5 is the value for 1904, 3.0 for 1903, 2.5 for 1902, and 2.0 for 1901, and in like manner 4.5 for 1906, 5.0 for 1907, 5.5 for 1908 and 6 for 1909. The secular trend is a straight line, and the actual goes above and below the secular trend in more or less wave-like fashion. In Chart I, the straight line is the secular trend of heavy hog prices at Chicago for 1903–1916, and the irregular line fluctuating above and below is the actual price of heavy hogs.

84The next problem is to eliminate the normal seasonal variation. For example, hog prices have a normal tendency to go down in the fall of the year, whereas bank clearings have an equally normal tendency to go up. Obviously, seasonal trends must be eliminated if such series as hog prices and bank clearings are to be compared.

As an average of the fourteen years from 1903 to 1916, inclusive, heavy hog prices at Chicago averaged in January, $6.54; February, $6.83; March, $7.22; April, $7.30; May, $7.10; June, $7.10; July, $7.18; August, $7.14; September, $7.29; October, $7.08; November, $6.65; December, $6.55; average for the entire year, $7. On this basis, January is 93 per cent of the yearly average; February, 98 per cent; March, 103 per cent; April, 104 per cent; May, 101 per cent; June, 101 per cent; July, 103 per cent; August, 102 per cent; September, 104 per cent; October, 101 per cent; November, 95 per cent, and December, 94 per cent. The December average for 1902–1915 is $6.30, or 90 per cent. Obviously, the seasonal variation as just stated in percentages is affected to some extent by the secular trend, for the Decembers of 1902–1915 average 90 per cent, and those of 1903–1916 average 94 per cent. Taking the secular trend out of our seasonal, or adding 2 points to the early months of the year and subtracting 2 points from the last months of the year, we get approximately: January, 95; February, 99; March, 104; April, 105; May, 102; June, 101; July, 103; August, 102; September, 103; October, 100; November, 94, and December, 92.^[6]

Hog receipts at Chicago, in the same manner, have a modified seasonal factor of January, 132 per cent; February, 117 per cent; March, 102 per cent; April, 85 per cent; May, 99 per cent; June, 99 per cent; July, 87 per cent; August, 87 per cent; September, 74 per cent; October, 86 per cent; November, 103 per cent; December, 129 per cent.

For bank clearings outside of New York City, the modified seasonal factors are: January, 109; February, 93; March, 104; 85April, 100; May, 99; June, 97; July, 98; August, 90; September, 93; October, 108; November, 103, and December, 106.

After securing normal seasonal variation, the next step is to modify secular trend for seasonal variation. Secular trend of hog prices, as modified seasonally, is portrayed in Chart II. The secular trend price of hogs in January, 1903, is $5.19, which sum, multiplied by the seasonal factor 96, gives $4.98 as the secular price of hogs modified seasonally for January, 1903. The actual price was $6.60, or $1.62 above the secular modified seasonally, or 31 per cent greater than the secular price of $5.19. In this way the percentage of departure for each month from 1903 thru 1916 may be figured. This has been done for hog prices, hog receipts and bank clearings outside of New York City.^[7]

Now, as it happens, hog receipts are a much more violently fluctuating series than bank clearings outside of New York City. To put the series on an even footing, resort is made to what is known as the standard deviation. To secure the standard deviation of hog price percentage departures, add up the squares of these departures. The total for the 168 months from 1903 thru 1916 is 31,894, or, dividing by 168, we get 190. The square root of 190 is 13.8, which is the standard deviation of hog prices. Standard deviation means that the probabilities are that on the average not more than one out of three of the series of figures under consideration will exceed the standard deviation. Standard deviation for hog receipts is 15, and for bank clearings 8.7. This indicates that hog receipts depart from the secular trend as modified seasonally with nearly twice as great violence as do bank clearings.

To put all three series on the same footing, we divide the percentage departures by the standard deviation, 13.8 in the case of hog prices, 15 in the case of hog receipts, and 8.7 in the case of bank clearings. In January of 1903, for example, hog prices were greater than the secular modified seasonally by 2.3 times the standard deviation; hog receipts were less by .3 of the standard deviation, and bank clearings were over by .9 of the standard deviation. The cycles of the hog prices, hog receipts and bank clearings, as secured in this way by reducing for standard deviation, are comparable. The results are charted in Charts III, IV, V.

86

Chart I—Irregular line represents actual Chicago hog prices. Straight line represents secular trend.

87

Chart II is identical with Chart I except that the dotted line has been added, which represents the secular trend as corrected seasonally.

88It may be seen from examining these charts that hog prices seem to be related directly to bank clearings and inversely to hog receipts. The problem is: Blend hog receipts and bank clearings together in such a way as to secure hog prices. The mathematical method of approach is by correlation coefficients and lines of regression.

First, a simple illustration of the method of securing correlation coefficients:

Take the two series, A and B, which deviate from their respective means by the amounts stated in Columns 2 and 3. In Column 1 is the year, which has nothing to do with the mathematics of the case. Column 4 is A squared, Column 5 is B squared, and Column 6 is A multiplied by B.

The standard deviation of A is the square root of the sum of the A squares, or 18, divided by 4. The square root of 18 divided by 4 is 2.1. Standard deviation of B, in like manner, is 3. The sum of AB divided by 4, or +22 divided by 4, equals +5.5. The correlation coefficient is +5.5 divided by the standard deviation of A multiplied by the standard deviation of B, or 5.5 divided by 6.3, which gives +.87. A correlation coefficient of .87 is very high, perfect correlation being 1. Correlation over .5 is considered fairly good, especially if there is a long list (fifty or more) of figures in each series.

The formula for determining A in terms of B is:

A equals r(σ_a
σ_b)B

89In this formula, r is the correlation coefficient and σa is the standard deviation of A, and σb is the standard deviation of B. Substituting for the specific problem, we get:

A equals .87(2.1
3.0)B or

A equals .609 B

When B is −5 we would expect A to be 3.05; when B is +1 we would expect A to be +.609; when B is +3, we would expect A to be 1.827.

Suppose now, in addition, that there are three series: A, B and C, and that the object is to determine A in terms of B and C. The three series stand:

We already know that the standard deviation of A is 2.1, and of B is 3.0, and that the correlation coefficient between A and B is +.87. Using the customary method, we find that the standard deviation of C is 2.55 and that the correlation coefficient of A and C is −.89, and of B and C −.59. To find A in terms of B and C, we use the following formula:

A equals (r_ab − r_acr_bc
1 − r²_bc)(σ_a
σ_b)B + (r_ac − r_abr_bc
1 − r²_bc)(σ_a
σ_c)C

In this formula r_ab means correlation coefficient between A and B, etc.; σ_a means standard deviation of A.

Substituting, we get:

A equals (+.87 − .53
.65)(2.1
3.0)B − (−.89 + .51
.65)(2.1
2.55)C or, A equals .37B − .49C

90

Chart III. Cycles of hog prices secured by dividing the percentage deviation of actual prices from the secular corrected seasonally, by the standard deviation.

91

Chart IV—Cycles of hog receipts, secured by dividing the percentage deviation from secular trend corrected seasonally, by the standard deviation.

92

Chart V—Cycles of bank clearings outside of New York City, secured by dividing the percentage deviation from the secular trend corrected seasonally, by the standard deviation.

93Applying this formula, we find that when C is +2 and B is −5, as in the year 1901, we would expect A to be −2.83, and when C is +3 and B is +1, as in 1902, we would expect A to be −1.1. In like manner, in 1903, we would expect A to be +2.60 and in 1904 +1.35.

The results expressed in a table are:

The practical problem is to express hog prices in terms of hog receipts and bank clearings. Practically the same method is used with the 168 months from 1903 thru 1916, as with the four years which have just been used for illustration.

The standard deviations are 10.1 for hog receipts, 10.5 for hog prices and 9.8 for bank clearings. The correlation coefficients are +.39 between hog prices and bank clearings, +.26 between hog receipts and bank clearings, and −.4 between hog receipts and hog prices.

Using the formula:

A equals r(σ_a
σ_b)B

and allowing A to represent hog prices and B to represent bank clearings, we get:

Hog prices equal .39(10.5
0.8) bank clearings, or

Hog prices equal .417 bank clearings

This formula is converted back into percentage departures from secular trend modified seasonally, and finally into hog prices as affected by bank clearings. The demand, or bank clearing, price, of hogs as compared with the actual is shown in Chart VI.

In like manner we get:

Hog prices equal −.4(10.5
10.1) hog receipts, or

Hog prices equal −.426 hog receipts

This formula is converted back into percentage departures from the secular trend modified seasonally, and finally into hog prices as affected by hog receipts. The supply price of hogs as compared with the actual is shown in Chart VII.

94

Chart VI—Dotted line is the demand price of hogs, based on bank clearings. Irregular solid line is actual price, and straight line is secular trend.

95

Chart VII—Dotted line is supply price of hogs, based on receipts at Chicago. Irregular solid line is actual price, and straight line is secular trend.

96

Chart VIII—Dotted line is supply-and-demand price of hogs, based on bank clearings and hog receipts. Irregular solid line is actual price.

97Using the longer formula on page 89, we get: Hog prices equal .56 bank clearings minus .56 hog receipts. Or converted into percentage departures from the secular trend corrected seasonally: .90 of bank clearings in percentage departures minus .51 of hog receipts in percentage departures equals the percentage which hog prices depart from their secular corrected seasonally. For instance, in January, 1903, bank clearings were 8 per cent above the secular corrected seasonally, and hog receipts were 5 per cent below. Eight times .90 plus 5 times .51 gives 9.7 as the percentage which we would expect hog prices to be over their secular corrected seasonally. The secular for January, 1903, was $5.19; 9.7 per cent of $5.19 gives 50 cents. The secular corrected seasonally for January, 1903, is $4.98. Add 50 cents to $4.98 and we get $5.48 as the price which we would have expected heavy hogs to sell at Chicago in January, 1903, on the basis of good business and small hog receipts. Actually, hogs sold for $6.60, or $1.12 over the price predicted by formula.

This is done for all the months from 1903 to 1916, and the supply-and-demand price of hogs, as derived from hog receipts at Chicago and bank clearings outside of New York is charted in Chart VIII, in comparison with the actual prices.

We assume that at the present time, and probably for some time to come, we are on a basis of 90 per cent above 1913 for hog prices, and 100 per cent over 1913 in bank clearings. This conclusion is based to some extent on the reasoning presented in the June monthly supplement of the Harvard Review of Economic Statistics for the year 1919.

On this basis, the secular trend of heavy hog prices at Chicago, modified seasonally, should be roughly as follows for the several years beginning with 1919: January, $14.35; February, $15.07; March, $15.82; April, $15.67; May, $15.22; June, $15.22; July, $15.52; August, $15.22; September, $15.52; October, $15.07; November, $14.16, and December, $13.86.^[8] This is on the assumption that hog prices and prices generally will have for their normal mean a level 90 per cent above the 1913 level. It is expected that in a rough way hog prices will depart from this level according to the size of hog receipts and the condition of general business as expressed by bank clearings. (During 1920, and possibly 1921, heavy exports will doubtless have influence.)

The secular trend of bank clearings outside New York, modified seasonally, for the year beginning with 1919, is taken as: January, $13,952,000,000; February, $11,648,000,000; March, $13,056,000,000; April, $12,800,000,000; May, $12,416,000,000; June, $12,416,000,000; July, $12,544,000,000; August, $11,648,000,000; September, $12,032,000; October, $13,824,000,000; November, $13,440,000,000, and December, $13,824,000,000.

The secular trend of hog receipts at Chicago in millions of pounds, modified seasonally, for the period beginning with 1919, is taken as: January, 184; February, 163; March, 143; April, 118; May, 139; June, 139; July, 121; August, 121; September, 103; October, 120; November, 144, and December, 180.

Based on the formula as secured in the preceding chapter (hog price equals .56 bank clearings minus .56 hog receipts), we would expect the following scale of hog prices in January, when receipts 99follow the secular trend (184,000,000 pounds at Chicago), but bank clearings are variable:

In like manner, tables may be made up for each month of the year, the idea being that for each $500,000,000 the bank clearings outside of New York are above or below the secular trend seasonally modified, fifty cents is added to or subtracted from the secular trend hog price seasonally modified. Thus for April the tables would be:

Taking the tables as worked out for bank clearings and hog prices, we next modify for hog receipts. An excess of 33,000,000 pounds of hog receipts at Chicago in a month means on the average $1.80 lower prices, and vice versa. Thus, in January, with bank clearings at $13,952,000,000, we would expect the following prices with various sizes of hog receipts:

The tables herewith give this problem worked out in detail for the various months. It is realized that at this writing, in early 1920, financial matters are still so deranged by the great war that our secular trend for bank clearings may be wide of the mark. This is the best prediction we can offer at this writing, and we are offering it fully aware of its weakness, but fully believing that predictions of this sort will stimulate more thoro research. It is believed that better measures of demand may eventually be found than bank clearings outside of New York City, and that better measures of supply may be found than receipts at Chicago. Also there is a possibility that the varying size of exports of hog products should be taken into account.

JANUARY.

FEBRUARY.

MARCH.

APRIL.

JUNE.

JULY.

AUGUST.

OCTOBER.

NOVEMBER.

DECEMBER.

Such a mathematical formula as: Hog prices equal .56 bank clearings—.56 hog receipts must always be applied with common sense. In November of 1914, for instance, hog receipts at Chicago were abnormally small on account of foot-and-mouth disease, and in December of the same year they were abnormally large for the same reason. Judging from receipts, we might have expected heavy hogs to sell for $8.83 in November and $6.44 in December. As a matter of fact, the actual price was $7.50 in November and $7.10 in December. It was commonly recognized by the trade that hog receipts at Chicago in November and December of 1914 were abnormal, and not representative of the potential supply in the country at large.

Occasionally, as in November of 1907, falling prices act to curtail receipts. The small receipts in November, 1907, would have indicated a price of $6.75, whereas the actual price was $4.90. As a matter of fact, there was a large number of hogs that year, and the actual price reflected the potential supply rather than the temporary supply.

It is possible to refine the method considerably. For instance, it may be worth while to proceed on the assumption that the relation between hog prices and hog receipts is best expressed by an equation representative of a hyperbola or skew curve instead of a straight line. The straight line equation, based on the years 1903 to 1915, inclusive, is:

The hyperbola equation for these years is:

The skew or cubic curve equation is:

Using these more complex mathematical methods, it is often possible to express the relationships more exactly. But no method, however far refined, will take the place of common sense market judgment. Nevertheless, it may be decidedly helpful to a better understanding of the normal working of supply and demand to use both hyperbolas and cubic curves on occasion.

104

Chart illustrating the straight line as compared with the skew curve, for purposes of expressing the relation between hog receipts at Chicago and hog prices at Chicago. On the basis of the curve when the receipts are 45 per cent less than the secular trend corrected seasonally, the price should be 38 per cent over, and when the receipts are 42 per cent over the secular trend corrected seasonally, the price should be 33 per cent under.

105Other refinements of the mathematical study of hog prices may consist in working out the correlation coefficients between hog prices and receipts at six markets or eleven markets instead of using Chicago receipts alone. Work may be done looking into the relation between hog prices and potential supply as contrasted with the temporary or month-by-month supply. So far as the relation between hog prices and business conditions is concerned, it should be worth while to work out correlation coefficients between hog prices and the amount of new building, or hog prices and Dun’s index number. In fact, there are a great many measures of business activities which may possibly measure the demand for hogs better than bank clearings outside of New York City.^[9]

Some people may think it advisable to work out a correlation and line of regression illustrating the relation between hog prices and corn prices. This has been attempted, but it has been found that after the secular and seasonal trends are taken out of both corn prices and hog prices there is practically no relation between them. It is a curious commentary on our present marketing systems that corn prices and hog prices, while very closely related decade by decade, have very little influence on each other month by month. In other words, changing costs of production can have practically nothing to do with the month-by-month changes in the market price under our present economic system. Unusually high corn prices today are more likely to influence the hog prices of next year than the hog prices of today.

After everything has been done which can be done by mathematical method, there will still be room for common sense judgment. But such judgment is best applied by men wise in market lore, men familiar with the technique of production, and who also are familiar with such mathematical methods as are here described.

By means of corn-hog ratios, it is possible to determine with great accuracy month by month the production cost of one hundred pounds of hog flesh. The actual price, however, has been quite different from the cost-of-production price, except as an average of long periods of time. This is indicated by the profit and loss chart on page 32, the black areas above and below the zero line indicating the departure of the actual price from the ratio or cost of production price.

The actual price heretofore has been determined chiefly by the action of supply and demand and not by cost of production. The close agreement between actual price and the supply-and-demand price as based on a formula derived from bank clearings and hog receipts is shown on page 96. In the chart on page 107 are presented the cost-of-production price based on ratios and the supply-and-demand price as based on bank clearings and hog receipts.

The ratio or cost-of-production price is much steadier than the supply-and-demand price. If the farmers could arrange with the packers for a price more nearly representing the cost-of-production or ratio price, it is obvious that the supply of hogs might be considerably steadied. Once farmers realize that neither excessive profits nor excessive losses are to be expected in the hog business, they will steady down to producing about the same number of hogs each year, and they will send them to market in a uniform stream, instead of in irregular spurts.

Of course, there are always uncertainties in the way of weather, disease, etc. Hot, dry weather in July and August may curtail the corn crop and shoot up the price of corn and the cost of producing hogs. Such hot, dry weather immediately increases the cost of producing hogs. The packers, heretofore, have been either unable or unwilling to pay a price for hogs sufficient to cover the increased cost of production caused by the hot, dry weather, and as a result they have been compelled to pay more than cost of production a year or so later. Why shouldn’t the packers and farmers constantly educate the public to pay the cost-of-production price? Tell the public that the drouth and high corn prices have increased the cost of producing hogs, and the price must be increased to prevent a shortage next year. Why shouldn’t the farmers try to find a way to regulate the supply with an iron hand, in an endeavor to maintain approximately the cost-of-production price at all times? This means willingness to lower the price of hogs in years when the corn crop is large, as well as ability to raise the price in years of a short corn crop.

107

Dotted line represents the supply-and-demand price of hogs as derived from bank clearings and hog receipts. Solid line represents cost of producing hogs, based on corn-hog ratios.

108Unquestionably there are vagaries in the consuming demand for pork which might make the payment of a cost-of-production price difficult for a time. It is believed, however, that powerful corn belt farmers’ organizations working in co-operation with the packers should be able to educate consumers to the cost-of-production idea, and so far as seasonal vagaries in the demand are concerned, the farmers and packers should be able to come to an agreement providing for paying rather more than the demand price for hogs in times of poor demand and rather less than the demand price for hogs in times of good demand, in an effort to make price meet cost of production rather than temporary demand idiosyncrasies.

It is realized that the difficulties in the way of paying cost of production at all times are even greater than here indicated. The idea, in fact, runs counter to the laissez faire, competitive price system under which business is conducted today. It is believed, however, that in the future more and more attention must be paid to production and less and less to price manipulation. To this end, products must be sold at all times as nearly as possible at the cost-of-production price. There must be no prospect of unusual profit or unusual loss in the production of staple products. We are now referring to industries as a whole. It is inevitable, of course, that certain individuals will make great profits and others will incur losses, even in years when the cost-of-production or ratio price is paid. Full consideration must always be given to the physical facts and to special emergencies as they arise. Standard ratios representing cost of production for an industry may suddenly be rendered out-of-date by a new invention. New situations must be recognized frankly, but at all times the guiding motive should be to pay the cost-of-production price, in order that supply and demand may operate more smoothly.

To give the cost of production price broader sway in our price system does not necessarily involve governmental control. The first step is education in price judging. Even in the grade schools and country schools, ratio methods of price judgment should be taught. In high schools the matter may be carried farther, and it is suggested that not only should the ratio method of price judging be taught in high school, but also the practical use of correlation 109coefficients and lines of regression in determining prices from business conditions and the supply. In college (and the colleges have been most neglectful in this matter) specific problems should be worked out in great detail. Students in such classes should have access to adding machines, calculating machines, rechentaffels, and other modern devices for making calculations easy and accurate. But the most important thing of all just now is adequate research by colleges, by experiment stations, and by governmental departments. The government and market agencies must continue to improve their statistical records, and research students must study these records with all the refinements of statistical method.

An excellent start along this line has been made by the Harvard University Committee on Economic Research. This committee seems to be concerned altogether with the industrial world. It is essential that the agricultural world be given similar service.

The object of it all is to discover the best possible kind of machinery thru which the law of supply and demand may work to the end that violent fluctuations in supply and demand may be reduced to the lowest possible point consistent with changing weather and unforeseeable accidents. The present price system is not perfect; it can be improved. But before improvements can be made, the present system must be studied with the greatest thoroness. The great weakness of the present price system is that the men who operate it are concerned chiefly with making the greatest possible profit, and not at all with making the law of supply and demand operate smoothly on a price level roughly equivalent to cost of production.

The highest purpose of our price system should be to tell producers truthfully what to do in the future, instead of capitalizing a temporary supply and demand situation to the advantage of certain bright speculators. The $4.50 price for hogs in January of 1908 was a lie so far as it guided the future action of hog producers. So also was the $11 price in March of 1910. Both prices told the approximate truth about a temporary supply-and-demand situation. But both were fundamentally lies. Our whole laissez faire system is full of lies of this sort. Surely we have enough in the way of legitimate physical handicaps such as weather and pests so that we should be willing to run our price system more truthfully.

So far as farmers are concerned, the object of studies of this kind is, first, to play the price game as well as capital and labor; and, second, to co-operate with capital and labor to enforce prices 110roughly equivalent to cost of production, to the end that supply and demand may operate more smoothly.

It is anticipated that greater emphasis on “cost-of-production price” and less emphasis on “supply-and-demand price” will result in gradually replacing most business men with production engineers and statistical economists. Business men have had profit as their sole motive. What we need is production engineers whose chief concern is production methods, and statistical economists who are able to understand the delicate inter-relations of different industries. It is believed that there is in most men a desire to do their work well, and that this desire will find more complete expression, to the benefit of the bulk of the people, under the guidance of men whose supreme motive is not profit but technical understanding and love of the work to be done. All this concerns the farmer, to the extent that when the industrial world shifts to this kind of basis, he may be more certain of a stable price for his products.

Substituting production engineers and statistical economists for business men means doing away with the chance of excessive gains and excessive losses. And this is proper so far as production of and trade in staple products is concerned.

The only place where the commercial imagination of the old-fashioned risk-taking business men has legitimate place is in working with things which are not staple, such as theaters, luxuries, newspapers, etc.

The man who studies the figures as to receipts, prices, etc., as they unroll day by day and month by month in the great central markets gradually develops market judgment. Of course, there is more in the market than figures, but a thoro understanding of statistical relationships, of normal seasonal trends, etc., is necessary before one can fully appreciate the extraordinary or strategical considerations which are occasionally involved.

It is suggested that those who are really interested in prices should fill in month by month in the blank tables the figures as they become available. Sources of current figures are the Market Reporter, published weekly by the United States Department of Agriculture; the daily live stock papers published at the great central markets; the Monthly Crop Reporters, published by the United States Department of Agriculture, and, so far as retail prices are concerned, the monthly publications of the Bureau of Labor Statistics. It is hoped that eventually the Bureau of Markets of the United States Department of Agriculture will have available exceedingly valuable figures. At present, however, the Bureau of Markets figures are practically worthless because they have not been continued long enough to have sufficient background to enable anyone to judge them properly.

The effort has been made in the prices here collected to cover the period immediately preceding the war quite thoroly, in order that those who are interested may work out normal pre-war relationships.

In all price questions, the problem of grade is involved. Gradually the grade classifications have been made more and more scientific, but even to this day there is haziness in certain products, notably cattle. It is believed, therefore, that the cattle prices are more unreliable than any other. Scientific grading of cattle is possible, and will be adopted as soon as the producers are in position to demand it.

Market figures furnish the laboratory of economics. It is believed that it is as essential for students at agricultural colleges to do laboratory work in economics as it is for them to spend such a large part of their time in the chemical, zoological or botanical laboratories. When the agricultural students judge marketable live stock, it is suggested that they be required to estimate the 114weight, grade, dressing percentage and probable Chicago price. An ingenious teacher, who is familiar with economics and market grades of grain and live stock, can think of many devices to bring home to his students the fact that the market is a living thing, yet subject to certain laws which are almost as exact as Mendel’s law of inheritance.

The author will appreciate being informed of any mistakes in the figures. Great pains have been taken to make them accurate, but it is inevitable that a few mistakes will creep in.

The following gives a description of grades and sources of information for some of the products for which figures are given in the tables of the Appendix:

HEAVY HOG PRICES AT CHICAGO.

From 1896 to date, heavy hog prices, as compiled by Chas. A. S. McCracken for the Chicago Drovers’ Journal Year Book, have been used. From 1881 to 1895, inclusive, the average of the range of Chicago hog prices, as compiled by the Cincinnati Price Current, has been used. Properly speaking, these prices refer more nearly to average hogs than to heavy hogs. Previous to 1881, prices have been compiled from the Chicago Board of Trade Reports, the grade known as heavy packers and shippers being used so far as possible.

CORN PRICES AT CHICAGO.

No. 2 mixed has been used thruout. From 1880 to 1916, inclusive, the average of the high and low for the month has been taken. Since January, 1917, each day of the month has been averaged. Previous to 1880, averages were taken either weekly or semi-monthly. All figures are derived either from the Howard-Bartels Red Book or the Chicago Board of Trade Reports. The two sources generally agree.

OATS PRICES AT CHICAGO.

Previous to 1876, the grade known as No. 1 was chiefly used. Since 1876, No. 2, Standard or Contract oats has been used. Previous to 1881, averages were taken weekly or semi-monthly. Since 1881, the high and low for the month have been averaged. Previous to 1881, Chicago Board of Trade Reports were used. Since 1881, the Howard-Bartels Red Books have been used, which quote practically the same figures as the Board of Trade.

WHEAT PRICES AT CHICAGO.

Previous to 1883, the grade known as No. 2 Spring was used, weekly or semi-monthly averages being taken from the Chicago Board of Trade Reports. From 1883 to 1903, inclusive, there is a slight confusion in grades, but the No. 2 Spring is used chiefly, averages of high and low for the month being taken from the Howard-Bartels Red Book.

From 1904 to 1913, inclusive, prices are based on No. 2 Red and No. 1 Northern, the high of the one and the low of the other being used. From 1914 on, prices are based on No. 2 Red, No. 2 Hard and No. 1 Northern, 115the highest of the highest-priced grade and the lowest of the lowest-priced grade being averaged.

LIVE STOCK PRICES AND RECEIPTS.

Practically all of the live stock figures since 1903 have been compiled from the Chicago Drovers’ Journal Year Books. Mr. Chas. A. S. McCracken has compiled the price figures from actual transactions day by day in the stockyards for the past thirty years, and is still with the Drovers’ Journal. The original source for live stock receipts is the stock yards companies, but we have used the reports of the Drovers’ Journal. For the years 1903, 1904 and 1905, for receipts at six markets, we have used figures furnished by Mr. M. F. Horine, statistician for the Chicago Union Stock Yards. These figures seem to be comparable with the figures for the later years, except in the case of cattle, where there is evidently some confusion in the counting of calves. The cattle receipts at six markets, as published by 1903, 1904 and 1905 reports, are about 8 per cent too large to be truly comparable with the later years.

RETAIL PRICES.

Retail price figures are taken from the publications of the Bureau of Labor Statistics. Concerning the significance of these figures, the following statement of Royal Meeker, Commissioner of Labor Statistics, is of value: “We secure retail prices of 44 articles of food from 50 cities on the 15th of each month. The stores selected are those patronized by wage-earners. The goods carried are standard grades and brands. The Bureau requests that these grades and brands be uniform thruout the year, as nearly as possible. Some of these stores are ‘cash-and-carry,’ and some of them deliver, depending on the locality in which they are situated. The Bureau makes every effort to have each city represented by a sufficient number of stores so the prices published for that city will represent the average prices charged to the wage-earner. Of course, the chances are that there will be differences, as we do not carry either the high-class stores or the cut-rate stores.”