Yellow Series is Corn Prices; Green Series Hog Prices
If you believe markets work and in agricultural commodity markets we have the closest thing to competitive market structure that is likely to be found, you believe that sustained higher corn prices due to Ethanol production will eventually work their way not only into food prices but into higher live hog prices.
We have previously talked about his and how our commodity industries at the production level act like "margin" industries. That is, if no fundamental factor effecting the normal return to these industries change (like sustained increased risk, new technology, or new barriers to entry or exit etc.), then input price changes will wind up initally lowering profits but then through a rather predictable set of economic adjustments, return the participants to approximately the same profit level before the change took place. There are all kinds of things which might make the new profit level a little more or less than the past but essentially we are beginning already to see this phenonmenon working its way through corn markets where seed costs, fertilizer costs, fuel costs, equipment costs and soaring land rental and purchase costs are returning the margins to pre-ethanol levels for corn producers.
What about poultry, beef and pork producers profit impacts due to higher corn prices? Take a look at the graph above to see how hog prices have changed historically when various factors created high (though transitory) corn prices. Keep in mind that as much as we like to make our points with "all things being equal", there are alot of influences on hog prices other than corn prices so these are obviously mixed into the hogs prices above. The prices used here are nearby futures prices for corn and hogs which roll to the next month as the futures expire. The black and red lines trace the parallel run ups.
