Acting as a farmer with spider web and pig cycle

It may not be the time of year, but we had to talk about cobwebs. The reason is the pig price, which has been considerably higher in recent months than a year ago. The pig cycle is moving upwards.

The pig cycle is over 100 years old, at least for economists, because the 'Schweinezyklus' was first described in 1911 by the German Gerlich. He partly used data from the 19th century, so you can assume that in reality the cycle has existed for as long as there have been mature markets. Gerlich noted that not only did the price go up and down over time, and inversely so did the volume traded, but also that there seemed to be a certain four-year top-to-top cycle. He also found that on an annual basis there is only a weak relationship between yields and profitability, and that the fluctuating feed costs also play a role in this.

Cycle of the margin is central
The price fluctuations remain a phenomenon that econometricians indulge in to this day. The cycle of the margin, the pig price minus the feed price, is often central. It soon became apparent that many agricultural markets are characterized by such cycles. And so the more common name cobweb cycle, or the cobweb theorem, arose from America. The explanation for that name is clear if you draw the price movement in the figure with a supply and demand curve, especially if the fluctuations become stronger or less strong over time.

The explanation for the cycle is obvious: high prices encourage more supply, while demand decreases as consumers switch to other products. Rising supply and moderate demand are driving down prices. As a result, supply decreases and demand recovers. Specialized farmers and others sometimes question this explanation: there is no specialized pig farmer who raises fewer piglets and leaves a shed for a quarter empty when prices are low. That would also be unwise.

Stronger price fluctuations in specialized productions
However, production is indeed adapting. To begin with, there are farmers who stop or, on the contrary, expand on the basis of available liquidity. These decisions are much more influenced by prices. You can well imagine that an older farmer without a successor who thinks he is going to quit, still does another round when the prices are good and gives Maarten the pipe when prices fall. Switching is also sometimes easier on mixed farms. And in other productions, there is sometimes a little play with less concentrate for dairy cattle or less irrigation or fertilizer in vegetable production, and the acreage is expanded somewhat more easily. But you can therefore expect price fluctuations to become stronger if production becomes more specialized and mainly consists of fixed costs, as well as if consumers become less price sensitive, for example due to higher incomes. On the centenary of Gerlich's original work, his successors at the University of Giessen, Parker and Shonkwiler, wrote a review article and concluded that the cycle is still very much alive.

Badly timed action can be a costly mistake
The question remains whether smart farmers can earn money by behaving anti-cyclically: planting more potatoes after a year with low prices or laying down more piglets when they are cheap and pork prices are approaching the lowest point. Or vice versa: after a round with high prices, half a year on vacation. In 1911 Gerlich already thought this was a theoretically interesting option. But, he wrote, in practice such farmers are exceptions. Reacting to short-term prices apparently has more appeal than long-term strategic planning. The researchers have now come to the conclusion that this is not stupidity or too much short-term orientation. In reality, the cycles are not perfect and show many fluctuations due to unexpected events: crop fluctuations in animal feed, exchange rates, animal diseases, war, extra demand from the barbecue or from China, etc. This means that a badly timed action by the entrepreneur to try to market can be a costly mistake that puts a company years behind. And now, through futures markets, there are also other opportunities to try to trade countercyclically and for the risk management needed to deal with the cobwebs.

Krijn J. Poppe

Krijn Poppe worked for almost 40 years as an economist at LEI and Wageningen UR and now holds a number of advisory and management positions. For Boerenbusiness he dives into his bookcase and discusses current developments on the basis of studies that have become classic.

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