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| Feed Ratio |
Feed ratio is the relationship between feeding costs and the dollar value of livestock. It is used in futures market to measure the profitability of feeding and selling animals as commodities. Feed ratio is measured by dividing the price of the animals used as commodity by the price of the grain required to feed them.
Various feed ratios have been used extensively as a proxy for profitability since the first half of twentieth century. Moreover, since producers respond to expected profitability, feed ratio has been used as a predictor for future production levels in the relevant market.
First hog/corn ratio charts, one of the most frequently used feed ratio type and equal to the number of bushels of corn equal in value to 100 lb of live hogs, were devised by Henry A. Wallace in 1915.
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Lower values of hog/corn ratio, high corn prices relative to pork prices, would indicate lower profitability of feeding and selling hogs. Naturally, lower profitability cause a decline in pork supply in near future. Similarly, higher values of hog/corn ratio reveal higher profitability and a rise in pork supply in the future.
Other frequently used feed ratios are as follows: steer/corn ratio, number of bushels of corn equal in value to 100 lb of live cattle; milk/feed ratio, the number of pounds of 16% protein mixed dairy feed equal in value to 1 lb of whole milk; broiler/feed ratio, the number of pounds of broiler feed equal in value to 1 lb of broiler; egg/feed ratio, the number of pounds of laying feed equal in value to one dozen eggs; and turkey/feed ratio, the number of pounds of turkey grower feed equal in value to 1 lb of turkey.
Feed ratios have been used to measure profifitability of feeding and selling animals for a very long time. The reason they work is that feeding cost usually represents more than half of the total production cost.
If nonfeeding costs are relatively stable, livestock producers respond to higher than average feed ratios by increasing supply and respond to lower than average feed ratios by decreasing supply. However, even if we assume nonfeeding costs are stable, which might not be true, there is another major limitation of the feed ratio as a proxy of profitability.
Profitability does not depend only on the feed ratio but also on the price of corn (or other feedstuff). Generally a higher feed ratio is required to represent a profitable situation when corn prices are low than when they are high.
For example, while the level of 20 for hog/corn ratio represents a profitable hog business when the price of corn is $3, the minimum of 25 for hog/corn ratio might be needed for profitability when the price of corn is $2. Thus, although various feed ratios are time-honored measures of livestock production profitability, greater variability in the prices of feedstuff decreases their accuracy.
