Should we use a Hog:DDGS ratio as a proxy for estimating industry profitability?

Beginning today, the Chicago Futures will trade a contract for dried distillers grains with solubles (DDGS). Since the majority of swine producers now include this ingredient in their grow-finish diets the addition of this contract is welcome.

 

Last Thursday and Friday as I worked with a power washing wand in my hand, I got to thinking about this new futures contract. My thinking started first with the ‘old’ hog:corn ratio. Prior to the use of such a large amount of the US corn crop for ethanol, the majority of the corn grown in the US went into livestock feed. An obvious point of interest for industry decision makers was the relative value of corn compared to various livestock commodities that would consume the grain.

 

In the case of pigs the hog:corn ratio was an often quoted term. It reflected the fact that approximately 80% of the feed ingredients consumed by pigs was corn (or it’s equivalent in the case of milo). When the ratio increased beyond some number (often thought to be 15:1) pigs tended to be profitable. If the ratio predicted profitability for several months, or even more than 1 year, producers tended to expand production. If the ratio was less declining, producers cut back on production. In this way, the ratio looked at the relationship of price received to the cost of the major expense in raising the pigs.

 

Beginning in 2006, the ratio became less meaningful. The price of corn is now often closely associated with the price of crude oil and has only a weak relationship with livestock feed demand. In response to higher corn prices, and the relatively location of ethanol plants in traditional hog growing areas, the use of DDGS in pig diets has expanded.

 

As a by-product of ethanol production, the price of DDGS is influenced both by the price of corn and by the livestock demand for use of the product. Almost all of the DDGS produced by US ethanol plants is consumed by livestock, either in the domestic or overseas market. Thus, the value of the product is directly related to livestock demand, and livestock demand is based on a relationship with corn and other ingredients (including synthetic amino acids, phosphorus sources, etc).

 

This leads me to speculate – will a hog:DDGS ratio be more meaning full to those of us involved in pork production?

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