Seasonality is a never-ending fact of life for pork producers. Virtually everything that happens on a hog farm varies according to the time of year.
As an economist, I am most interested in seasonal price patterns. A good way to measure those is to compute monthly price indexes as shown in Figure 1. These indexes, computed by the Livestock Marketing Information Center (LMIC) of Lakewood, CO, show each month's price as a percentage of the annual average.
The method used by LMIC allows them to only publish indexes 12 months after the date in question, so they only update this series at the end of each calendar year. Indexes representing 1996-2005 will be published at the end of 2006, so we must still use the 1995-2004 indexes shown in Figure 1.
Indexes are a good tool for seasonality because they keep the level of price at any given time from confounding our analysis. The four-year hog cycle can make a big difference in the level of price from year to year, but seasonal variation in any year may be about normal.
For example, the hog price for last week in our North American Pork Industry Data table (see attached) is about 10% lower than the price for the same week last year. But this year's price will probably have a seasonal relationship to prices at other times this year that may well be very normal. A seasonal index shows these time period-to-time period relationships regardless of the level of prices.
So how can this be used? The seasonal index graph says that May prices are usually about 110% of the annual average price. It also says that November prices are usually about 88% of the annual average. We can use last week's price and these two indexes to compute a "seasonally-expected" price for November as follows:
|Seasonally-Expected November Price||= May Price x November Index |
|Seasonally-Expected November Price||= $64.84 x [0.88/1.10]|
|= $64.84 x 0.80|
Does this always hold true? Of course not.
We are using the average index for all Novembers from 1995-2004. Actual indexes for November during those 10 years ranged from 0.67 (no doubt in 1998) to 1.06. Cyclical changes, competition from other meats, shifts in consumer preferences, and packing capacity restrictions -- all can cause variation.
Still, using historical seasonal price relationships are a good place to start when one considers prices into the future. They've been around a long time and are likely to be a factor for a long time to come.
What causes such seasonality? The main driver is pig biology and seasonal supply variation. Pigs just don't breed well in hot weather. They don't eat well either, and that means they don't grow well. In addition, hot weather means we are using corn that has been stored for at least eight months and that sometimes confounds the feed intake problem.
Cooler weather seems to mean hog heaven. Pigs eat better, breed better.
All of these factors conspire to push hog supplies out of the summer months and into the fall -- and that pattern is not changing much at all. Figure 2 shows average quarterly hog slaughter by decade since the 1950s.
Quarterly variation changed dramatically from the '50s to the '60s, then shifted again, though less dramatically, in the '70s. The only real change since then was a change between the second and third quarters in the 1990s.
The shifts in the '50s, '60s and '70s were no doubt driven by the shift away from pasture farrowing. A move to more confined feeding and far more tightly controlled production systems in the '90s probably drove the Q2 to Q3 change. But regardless of what has happened, we still slaughter only 24% of the year's total hog supply in the second quarter and nearly 27% of it in the fourth quarter.
Is that really so bad? Good question.
If the seasonal pattern for consumer pork demand looks just like the lines in Figure 2, then no, it's not bad at all. Some empirical research suggests that pork demand is, in fact, higher in the fourth quarter of the year. But it's not that much higher and, thus, we usually build stocks even when prices are low near the end of each year.
Regardless of what consumer demand looks like, this seasonal variation causes some over-investment in slaughter facilities. They have to be large enough to handle the fourth quarter glut, and the idle capacity this investment creates becomes an economic negative for the other three quarters of the year. Thus, variation leaves pork prices higher than they would be if we could somehow just keep output steady.
But, in the end, we are finding that it is very difficult to fool Mother Nature.
Click to view graphs.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.