THREE PRICE-MAKING FORCES 



THREE forces are prominent in making agricultural prices 

 cost of production, supply and demand, and strategic consid- 

 erations. Farmers and laborers believe that cost of production 

 should be the chief consideration. Business men preach "supply 

 and demand" as the great price-making force, and in addition use 

 strategic propaganda when it is to their advantage to do so. 



Cost of production in the long run is on the average practically 

 identical with both the supply-and-demand price and the actual 

 price. It is in the very nature of things that those producers 

 who can not on the average get cost of production will go out of 

 business. In the case of the hog business, it takes about three 

 years for the average man to get in and out. Ten years, which 

 is fully three times the "in and out" cycle, is "long run" in the hog 

 business. A ten-year average of actual hog prices should there- 

 fore be approximately equal to a ten-year average of the cost-of- 

 production price of hogs. As a matter of fact, we find that the 

 cost of production, as shown by the corn-hog ratio, is practically 

 the same from one decade to the next. Decade after decade, the 

 corn-hog ratio has remained constant at eleven to twelve bushels 

 of Chicago corn per hundred pounds of Chicago hog ever since 

 the Civil war. Farm management investigations indicate that 

 for the average farmer this ratio represents approximately cost 

 of production. As a matter of fact, this ratio is "cost of produc- 

 tion" in the very truest sense of the term. This ratio represents 

 the reward necessary to keep enough farmers producing hogs to 

 satisfy the consuming demand, year in and year out. Stated thus 

 baldly and simply, we see how the cost of producing a hundred 

 pounds of hog weight must in the long run average the same as the 

 "actual" price and also the "supply and demand" price. And yet 

 hogs may sell for a year or so for the value of fifteen bushels of 

 corn, as they did in 1866 and 1910, or they may sell for a year or 

 so for the value of nine bushels of corn, as they did in 1908 and 

 1917. At any given time, the cost-of-p reduction price is likely 

 to be decidedly lower or higher than the actual price or the supply- 

 and-demand price. It is only on the average that cost of produc- 

 tion becomes identical with the actual price. 



Supply-and-demand price departs from the cost-of-production 

 price at any given time because of such things as unusual weather, 

 accidents, etc. Dry weather in July and August may cut the corn 



