Corn/Hog Ratio
Categories: Metrics, Derivatives
There are some really arcane financial ratios out there.
When you’re looking for the ones only a few people can use, look no further than the agricultural commodity markets.
You know what people in New York think about a lot? The corn/hog ratio. However, it's a pretty important figure to a select few traders in Chicago and pig farmers across the U.S. who are keeping an eye on their costs. In fact, it’s a key indicator on profitability in the pork production markets.
The corn/hog ratio is basically the cost of feeding a pig, and it measures production changes in the business. Here we’re looking at the relationship between the price of hogs and the price of corn.
Take the price of 100 pounds per live hog and divide if by the price of a corn bushel. The general rule is that, when this ratio is below 20, hog production will fall due to the rise of corn prices. That “20” level was historically viewed as the line between black ink and red ink for the pig farm. However, changes to technology, vertical pig farming (which does not feature bipedal pigs), and industry consolidation have altered the way some traders view this ratio.