TECHNIQUE OF THE RATIO METHOD 



THE fundamental idea of the ratio method is that the price of 

 every product is determined in the long run by the price of 

 some other product or products. The price of hogs is determined 

 in the long run by the price of corn. The price of corn is deter- 

 mined in the long run by the price of land, labor, farm machinery 

 and horse feed.* 



In its simplest form, the ratio method deals with only two prod- 

 ucts, as for example, with hogs and corn. As an average of the 

 ten Januarys extending from 1907 to 1916, No. 2 corn on the Chi- 

 cago market sold for 59.9 cents a bushel, and heavy hogs on the 

 same market sold for $7 per hundredweight. In other words, as 

 an average of this ten-year period, it has required the value of 

 11.7 bushels of corn to equal in value one hundred pounds of heavy 

 hog flesh. In the specific month of January, 1907, corn was 41.6 

 cents per bushel. The corn price of hogs was 11.7 times 41.6 

 cents, or $4.87. The actual price of hogs in January, 1907, was 

 $6.60. Actual hogs sold for $1.73 above the customary corn-hog 

 ratio. In January of 1908, with corn at 58.5 cents a bushel, the 

 corn price of hogs would be 11.7 times 58.5, or $6.84. The actual 

 price was $4.45, or $2.39 below the ratio price. The ratio for 

 February is different from the ratio for January, but once a set 

 of ratios is secured for each of the twelve months of the year, it 

 is easily possible to work out charts showing month by month the 

 periods of time when hogs were selling relatively higher than their 

 customary ratio to corn, and when they were selling relatively 

 lower. 



It is absolutely necessary to work ratios month by month, or 

 week by week, in the case of all products which have a seasonal 

 swing. Nearly all agricultural products are cheap in the fall of 

 the year. Some products begin weakening sooner than others ; for 

 instance, oats and wheat weaken sooner than corn or hogs. 



A genuinely scientific method of applying the ratio method to 

 hog prices would also take into consideration that hogs are to some 

 extent made out of tankage, pasture and labor, as well as corn. Of 

 course, these things vary in value in a rough way, in just about 

 the same way as corn prices, and for practical purposes, the ratio 

 between hogs and corn is probably exact enough. 



*It may be argued that the price of hogs determines the price of corn, 

 and that the price of corn determines the price of land. This to a large 

 extent may be true, and yet not interfere with the usefulness of the ratio 

 method for purposes of price judging. 



